Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions we may take to mitigate our exposure to such changes. Therefore, actual results may differ. See Note 7 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 6 to American’s Consolidated Financial Statements in Part II, Item 8B for additional discussion regarding risk management matters.
Aircraft Fuel
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business. Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of aircraft fuel can have a material effect on our operating results and liquidity. Market prices for aircraft fuel can be volatile, with market spot prices ranging from a low of approximately $0.37 per gallon to a high of approximately $2.35 per gallon during the period from January 1, 2019 to December 31, 2021.
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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. 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. Based on our 2022 forecasted fuel consumption, we estimate that a one cent per gallon increase in the price of aircraft fuel would increase our 2022 annual fuel expense by approximately $40 million.
Foreign Currency
We are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated transactions. Our largest exposure comes from the British pound sterling, Euro, Chinese yuan, Canadian dollar and various Latin American currencies, primarily the Brazilian real. We do not currently have a foreign currency hedge program. We estimate a uniform 10% strengthening in the value of the U.S. dollar from 2021 levels relative to each of the currencies in which we have foreign currency exposure would have resulted in an increase in pre-tax loss of approximately $90 million for the year ended December 31, 2021.
Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition. See Part I, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.
Interest
Our earnings and cash flow are affected by changes in interest rates due to the impact those changes have on our interest expense from variable-rate debt instruments and our interest income from short-term, interest-bearing investments.
Our largest exposure with respect to variable-rate debt comes from changes in LIBOR. We had variable-rate debt instruments representing approximately 30% of our total long-term debt at December 31, 2021. We currently do not have an interest rate hedge program to hedge our exposure to floating interest rates on our variable-rate debt obligations. If annual interest rates increase 100 basis points, based on our December 31, 2021 variable-rate debt and short-term investments balances, annual interest expense on variable-rate debt would increase by approximately $109 million and annual interest income on short-term investments would increase by approximately $124 million. Additionally, the fair value of fixed-rate debt would have decreased by approximately $1.1 billion for AAG and $860 million for American.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has chosen SOFR as the recommended risk-free reference rate for the U.S. (calculated based on repurchase agreements backed by treasury securities), we cannot currently predict the extent to which this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.
We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As of December 31, 2021, we had $10.9 billion of borrowings based on LIBOR. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.
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ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES GROUP INC.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American Airlines Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Airlines Group Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity (deficit), for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Estimate of mileage credits not expected to be redeemed
As discussed in Note 1(l) to the consolidated financial statements, the Company’s loyalty program awards mileage credits to passengers for flights on the Company’s airline, flights on a partner airline, or for using the services of other program participants. The Company uses a statistical model based on historical redemption patterns to develop an estimate of mileage credits not expected to be redeemed. The associated value of mileage credits not expected to be redeemed is recognized as revenue proportionally as the remaining mileage credits are redeemed. The Company’s loyalty program liability was $9.1 billion as of December 31, 2021 and the associated passenger revenue for mileage credits redeemed for travel was $2.2 billion for the year ended December 31, 2021.
We identified the evaluation of the estimation of mileage credits not expected to be redeemed as a critical audit matter. Evaluating the application of the statistical model used to develop the estimate involved complex auditor judgment and the use of actuarial professionals with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s loyalty program accounting process, including a control related to the evaluation of the application of the statistical model used to develop the estimate of mileage credits not expected to be redeemed. We involved actuarial professionals with specialized skills and knowledge, who assisted in developing a statistical model to derive an independent expectation of mileage credits not expected to be redeemed. We compared this independent expectation to the Company’s estimate to evaluate the appropriateness of the amount of the loyalty program liability and associated passenger revenue.
Sufficiency of audit evidence over realizability of tax operating loss and other carryforwards
As discussed in Notes 1(i) and 6 to the consolidated financial statements, the Company had $4.6 billion of tax operating loss and other carryforwards, which are recorded as deferred tax assets at December 31, 2021. Deferred tax assets are recognized related to tax operating loss and other carryforwards that will reduce future taxable income. The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In evaluating the need for a valuation allowance, management considers the weighting of all available positive and negative evidence.
We identified the evaluation of the sufficiency of audit evidence over the realizability of tax operating loss and other carryforwards as a critical audit matter. Evaluating the sufficiency of audit evidence required subjective auditor judgment in order to assess the extent of procedures performed in assessing the realizability of the tax operating loss and other carryforwards.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s deferred tax asset valuation allowance process, including controls related to the realizability of tax operating loss and other carryforwards. We evaluated positive and negative evidence used in assessing whether the tax operating loss and other carryforwards were more likely than not to be realized in the future. We evaluated the reasonableness of management’s projections of future profitability considering historical profitability of the Company, and consistency with industry data and economic trends. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the application of tax law. We assessed the sufficiency of audit evidence obtained over the realizability of the tax operating loss and other carryforwards by evaluating the cumulative results of the audit procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Dallas, Texas
February 22, 2022
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AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share and per share amounts)
Year Ended December 31,
2021 2020 2019
Operating revenues:
Passenger $ 26,063 $ 14,518 $ 42,010
Cargo 1,314 769 863
Other 2,505 2,050 2,895
Total operating revenues 29,882 17,337 45,768
Operating expenses:
Aircraft fuel and related taxes 6,792 3,402 9,395
Salaries, wages and benefits 11,817 11,229 12,895
Regional expenses 3,204 2,962 3,985
Maintenance, materials and repairs 1,979 1,585 2,381
Other rent and landing fees 2,619 2,004 2,672
Aircraft rent 1,425 1,341 1,326
Selling expenses 1,098 666 2,004
Depreciation and amortization 2,019 2,040 1,982
Special items, net ( 4,006 ) ( 657 ) 635
Other 3,994 3,186 5,428
Total operating expenses 30,941 27,758 42,703
Operating income (loss) ( 1,059 ) ( 10,421 ) 3,065
Nonoperating income (expense):
Interest income 18 41 127
Interest expense, net ( 1,800 ) ( 1,227 ) ( 1,095 )
Other income, net 293 154 159
Total nonoperating expense, net ( 1,489 ) ( 1,032 ) ( 809 )
Income (loss) before income taxes ( 2,548 ) ( 11,453 ) 2,256
Income tax provision (benefit) ( 555 ) ( 2,568 ) 570
Net income (loss) $ ( 1,993 ) $ ( 8,885 ) $ 1,686
Earnings (loss) per common share:
Basic $ ( 3.09 ) $ ( 18.36 ) $ 3.80
Diluted $ ( 3.09 ) $ ( 18.36 ) $ 3.79
Weighted average shares outstanding (in thousands):
Basic 644,015 483,888 443,363
Diluted 644,015 483,888 444,269
Cash dividends declared per common share $ — $ 0.10 $ 0.40
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Year Ended December 31,
2021 2020 2019
Net income (loss) $ ( 1,993 ) $ ( 8,885 ) $ 1,686
Other comprehensive income (loss), net of tax:
Pension, retiree medical and other postretirement benefits 1,161 ( 772 ) ( 438 )
Investments — — 3
Total other comprehensive income (loss), net of tax 1,161 ( 772 ) ( 435 )
Total comprehensive income (loss) $ ( 832 ) $ ( 9,657 ) $ 1,251
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value)
December 31,
2021 2020
ASSETS
Current assets
Cash $ 273 $ 245
Short-term investments 12,158 6,619
Restricted cash and short-term investments 990 609
Accounts receivable, net 1,505 1,342
Aircraft fuel, spare parts and supplies, net 1,795 1,614
Prepaid expenses and other 615 666
Total current assets 17,336 11,095
Operating property and equipment
Flight equipment 37,856 37,816
Ground property and equipment 9,335 9,194
Equipment purchase deposits 517 1,446
Total property and equipment, at cost 47,708 48,456
Less accumulated depreciation and amortization ( 18,171 ) ( 16,757 )
Total property and equipment, net 29,537 31,699
Operating lease right-of-use assets 7,850 8,039
Other assets
Goodwill 4,091 4,091
Intangibles, net of accumulated amortization of $ 786 and $ 745 , respectively
1,988 2,029
Deferred tax asset 3,556 3,239
Other assets 2,109 1,816
Total other assets 11,744 11,175
Total assets $ 66,467 $ 62,008
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term debt and finance leases $ 2,489 $ 2,797
Accounts payable 1,772 1,196
Accrued salaries and wages 1,489 1,716
Air traffic liability 6,087 4,757
Loyalty program liability 2,896 2,033
Operating lease liabilities 1,507 1,651
Other accrued liabilities 2,766 2,419
Total current liabilities 19,006 16,569
Noncurrent liabilities
Long-term debt and finance leases, net of current maturities 35,571 29,796
Pension and postretirement benefits 5,053 7,069
Loyalty program liability 6,239 7,162
Operating lease liabilities 6,610 6,777
Other liabilities 1,328 1,502
Total noncurrent liabilities 54,801 52,306
Commitments and contingencies (Note 11)
Stockholders' equity (deficit)
Common stock, $ 0.01 par value; 1,750,000,000 shares authorized, 647,727,595 shares issued and outstanding at December 31, 2021; 621,479,522 shares issued and outstanding at December 31, 2020
6 6
Additional paid-in capital 7,234 6,894
Accumulated other comprehensive loss ( 5,942 ) ( 7,103 )
Retained deficit ( 8,638 ) ( 6,664 )
Total stockholders' deficit ( 7,340 ) ( 6,867 )
Total liabilities and stockholders’ equity (deficit) $ 66,467 $ 62,008
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2021 2020 2019
Cash flows from operating activities:
Net income (loss) $ ( 1,993 ) $ ( 8,885 ) $ 1,686
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 2,335 2,370 2,318
Net gains from sale of property and equipment and sale-leaseback transactions ( 22 ) ( 95 ) ( 112 )
Special items, net non-cash 83 1,599 376
Pension and postretirement ( 321 ) ( 319 ) ( 178 )
Deferred income tax provision (benefit) ( 555 ) ( 2,568 ) 560
Share-based compensation 98 91 94
Other, net 38 47 ( 62 )
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ( 304 ) 538 73
Increase in other assets ( 402 ) ( 38 ) ( 373 )
Increase (decrease) in accounts payable and accrued liabilities 461 ( 626 ) 327
Increase (decrease) in air traffic liability 1,454 ( 51 ) 469
Increase (decrease) in loyalty program liability ( 60 ) 580 76
Contributions to pension plans ( 247 ) ( 9 ) ( 1,230 )
Increase (decrease) in other liabilities 139 823 ( 209 )
Net cash provided by (used in) operating activities 704 ( 6,543 ) 3,815
Cash flows from investing activities:
Capital expenditures, net of aircraft purchase deposit returns ( 208 ) ( 1,958 ) ( 4,268 )
Airport construction projects, net of reimbursements ( 204 ) ( 173 ) ( 98 )
Proceeds from sale of property and equipment 193 351 54
Proceeds from sale-leaseback transactions 181 665 850
Purchases of short-term investments ( 19,454 ) ( 5,873 ) ( 3,184 )
Sales of short-term investments 13,923 2,803 4,144
Increase in restricted short-term investments ( 401 ) ( 308 ) ( 3 )
Purchase of equity investment ( 28 ) — —
Proceeds on sale of equity investment 5 41 —
Proceeds from vendor — 90 250
Other investing activities 10 20 12
Net cash used in investing activities ( 5,983 ) ( 4,342 ) ( 2,243 )
Cash flows from financing activities:
Proceeds from issuance of long-term debt 12,190 11,780 3,960
Payments on long-term debt and finance leases ( 7,343 ) ( 3,535 ) ( 4,190 )
Proceeds from issuance of equity 460 2,970 —
Deferred financing costs ( 209 ) ( 93 ) ( 61 )
Treasury stock repurchases and shares withheld for taxes pursuant to employee stock plans ( 18 ) ( 173 ) ( 1,097 )
Dividend payments — ( 43 ) ( 178 )
Other financing activities 208 88 ( 2 )
Net cash provided by (used in) financing activities 5,288 10,994 ( 1,568 )
Net increase in cash and restricted cash 9 109 4
Cash and restricted cash at beginning of year 399 290 286
Cash and restricted cash at end of year (a)
$ 408 $ 399 $ 290
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:
Cash $ 273 $ 245 $ 280
Restricted cash included in restricted cash and short-term investments 135 154 10
Total cash and restricted cash $ 408 $ 399 $ 290
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In millions, except share amounts)
Common
Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Loss Retained
Earnings
(Deficit) Total
Balance at December 31, 2018 $ 5 $ 4,964 $ ( 5,896 ) $ 758 $ ( 169 )
Net income — — — 1,686 1,686
Other comprehensive loss, net — — ( 435 ) — ( 435 )
Issuance of 1,682,202 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes
— ( 25 ) — — ( 25 )
Purchase and retirement of 34,090,566 shares of AAG common stock
( 1 ) ( 1,095 ) — — ( 1,096 )
Dividends declared on AAG common stock ($ 0.40 per share)
— — — ( 180 ) ( 180 )
Settlement of single-dip unsecured claims held in Disputed Claims Reserve (DCR) — 7 — — 7
Share-based compensation expense — 94 — — 94
Balance at December 31, 2019 4 3,945 ( 6,331 ) 2,264 ( 118 )
Net loss — — — ( 8,885 ) ( 8,885 )
Other comprehensive loss, net — — ( 772 ) — ( 772 )
Issuance of PSP1 Warrants (see Note 1(b)) — 63 — — 63
Issuance of Treasury Loan Warrants (see Note 1(b)) — 25 — — 25
Issuance of 1,603,554 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes
— ( 15 ) — — ( 15 )
Issuance of 129,490,000 shares of AAG common stock pursuant to public stock offerings, net of offering costs
1 1,686 — — 1,687
Issuance of 68,561,487 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs
1 868 — — 869
Equity component of convertible debt issued, net of tax and offering costs — 320 — — 320
Purchase and retirement of 6,378,025 shares of AAG common stock
— ( 145 ) — — ( 145 )
Dividends declared on AAG common stock ($ 0.10 per share)
— — — ( 43 ) ( 43 )
Settlement of single-dip unsecured claims held in DCR — 56 — — 56
Share-based compensation expense — 91 — — 91
Balance at December 31, 2020 6 6,894 ( 7,103 ) ( 6,664 ) ( 6,867 )
Net loss — — — ( 1,993 ) ( 1,993 )
Other comprehensive income, net — — 1,161 — 1,161
Issuance of 24,150,764 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs
— 460 — — 460
Impact of adoption of Accounting Standards Update (ASU) 2020-06 related to convertible instruments (see Note 1(c)) — ( 320 ) — 19 ( 301 )
Issuance of PSP2 and PSP3 Warrants (see Note 1(b)) — 121 — — 121
Issuance of 2,357,187 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes
— ( 18 ) — — ( 18 )
Settlement of single-dip unsecured claims held in DCR and retirement of 259,878 shares of AAG common stock
— ( 1 ) — — ( 1 )
Share-based compensation expense — 98 — — 98
Balance at December 31, 2021 $ 6 $ 7,234 $ ( 5,942 ) $ ( 8,638 ) $ ( 7,340 )
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
1. Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
American Airlines Group Inc. (we, us, our and similar terms, or AAG), a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo through its mainline operating subsidiary, American Airlines, Inc. (American) and its wholly-owned regional airline subsidiaries, Envoy Aviation Group Inc., PSA Airlines, Inc. and Piedmont Airlines, Inc., that operate under the brand American Eagle. On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. All significant intercompany transactions have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, the loyalty program, deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation. See (r) Regional Expenses below for further information.
(b) Impact of Coronavirus (COVID-19)
COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, “stay at home” orders and business closures. 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 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) and Section 7301 of the American Rescue Plan Act of 2021 (the ARP).
Capacity Reductions
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.
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 have reduced our 2021 operating expenditures as a result of permanent non-volume cost reductions and other efficiency measures. These reductions include labor productivity enhancements, management salaries and benefits and other permanent cost reductions. Also, during the first quarter of 2021, approximately 1,600 represented team members opted into a voluntary early retirement program.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
Liquidity
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 for further information):
• 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 the U.S. Department of the Treasury (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 John F. Kennedy International Airport (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; and
• 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.
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 below for further discussion on PSP2 and PSP3.
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 peak 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 projected cash flows from operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
PSP1
On April 20, 2020 (the PSP1 Closing Date), American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries), entered into a Payroll Support Program Agreement (the PSP1 Agreement) with Treasury, with respect to PSP1 provided pursuant to the CARES Act. In connection with our entry into the PSP1 Agreement, on the PSP1 Closing Date, AAG also entered into a warrant agreement (the PSP1 Warrant Agreement) with Treasury and issued the PSP1 Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).
PSP1 Agreement
In connection with PSP1, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP1 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, which expired on September 30, 2020, the requirement that certain levels of commercial air service be maintained and the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through at least September 30, 2021, as well as the provisions that restrict the payment of certain executive compensation until March 24, 2022. The PSP1 Agreement also imposes substantial reporting obligations on us. These provisions were subsequently extended upon our entry into PSP2 and PSP3. In addition, we have entered into the Treasury Loan Agreement (as defined below) and, as a result, the stock repurchase, dividend and executive compensation restrictions imposed by the Treasury Loan Agreement will remain in place through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid, which was in March 2021. See below for additional information on the Treasury Loan Agreement.
Pursuant to the PSP1 Agreement, Treasury provided us financial assistance in an aggregate of approximately $ 6.0 billion. As partial compensation to the U.S. Government for the provision of financial assistance under PSP1, AAG issued the PSP1 Promissory Note in the aggregate principal amount of $ 1.8 billion and issued warrants (each a PSP1 Warrant and, collectively, the PSP1 Warrants) to Treasury to purchase up to an aggregate of approximately 14.1 million shares (the PSP1 Warrant Shares) of AAG common stock for an exercise price of $ 12.51 per share, subject to adjustment. See Note 4(g) for further information on the PSP1 Promissory Note and below for more information on the PSP1 Warrant Agreement and the PSP1 Warrants.
For accounting purposes, the $ 6.0 billion of aggregate financial assistance we received pursuant to the PSP1 Agreement is allocated to the PSP1 Promissory Note, the PSP1 Warrants and other PSP1 financial assistance (the PSP1 Financial Assistance). The $ 1.8 billion aggregate principal amount of the PSP1 Promissory Note was recorded as unsecured long-term debt, and the $ 63 million total fair value of the PSP1 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in the consolidated balance sheet. The remaining amount of approximately $ 4.2 billion of PSP1 Financial Assistance was recognized as a credit to special items, net in the consolidated statement of operations in the second and third quarters of 2020, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.
PSP1 Warrant Agreement and PSP1 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP1 Agreement, and pursuant to the PSP1 Warrant Agreement, AAG issued the PSP1 Warrants to Treasury to purchase PSP1 Warrant Shares. The exercise price of the PSP1 Warrant Shares is $ 12.51 per share, subject to certain anti-dilution provisions provided for in the PSP1 Warrants.
Pursuant to the PSP1 Warrant Agreement, AAG issued to Treasury PSP1 Warrants to purchase up to an aggregate of approximately 14.1 million shares of AAG common stock for an exercise price of $ 12.51 per share, subject to adjustment.
The PSP1 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP1 Warrant expires on the fifth anniversary of the date of issuance of such PSP1 Warrant. The PSP1 Warrants will be exercisable either through net share settlement or cash, at our option. The PSP1 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP1 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP1 Warrants or will be received upon exercise thereof.
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Treasury Loan Agreement
On September 25, 2020 (the Treasury Loan Closing Date), AAG and American entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $ 5.5 billion. Subsequently, on October 21, 2020, AAG and American entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion. In connection with our entry into the Treasury Loan Agreement, on the Treasury Loan Closing Date, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury.
In September 2020, American borrowed $ 550 million under the Treasury Term Loan Facility and on March 24, 2021, used proceeds from the AAdvantage Financing to prepay in full the $ 550 million of outstanding loans under the Treasury Term Loan Facility. Pursuant to the Treasury Loan Agreement, AAG issued to Treasury warrants (Treasury Loan Warrants) to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock (the Treasury Loan Warrant Shares). The exercise price of the Treasury Loan Warrant Shares is $ 12.51 per share, subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement. For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Term Loan Facility in the consolidated balance sheet. The provisions of the Treasury Loan Warrants are substantially similar to the PSP1 Warrants.
PSP2
On January 15, 2021 (the PSP2 Closing Date), the Subsidiaries, entered into a Payroll Support Program Extension Agreement (the PSP2 Agreement) with Treasury, with respect to PSP2 as provided pursuant to the PSP Extension Law. In connection with our entry into the PSP2 Agreement, on the PSP2 Closing Date, AAG also entered into a warrant agreement (the PSP2 Warrant Agreement) with Treasury and issued the PSP2 Promissory Note to Treasury, with the Subsidiaries as guarantors.
PSP2 Agreement
In connection with PSP2, we are required to comply with the relevant provisions of the PSP Extension Law, which are substantially similar to the restrictions contained in the Payroll Support Program Agreement entered into by the Subsidiaries with Treasury in connection with the payroll support program established under the CARES Act (the PSP1 Agreement), but are in effect for a longer time period. These provisions include the requirement that funds provided pursuant to the PSP2 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, which expired on March 31, 2021, the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through at least March 31, 2022, the provisions that restrict the payment of certain executive compensation until at least October 1, 2022, and a requirement to recall employees involuntarily terminated or furloughed after September 30, 2020. As was the case with PSP1, the PSP2 Agreement also imposes substantial reporting obligations on us.
Pursuant to the PSP2 Agreement, Treasury provided us financial assistance in an aggregate of approximately $ 3.5 billion. As partial compensation to the U.S. Government for the provision of financial assistance under PSP2, AAG issued the PSP2 Promissory Note in the aggregate principal amount of $ 1.0 billion and issued warrants (each a PSP2 Warrant and, collectively, the PSP2 Warrants) to Treasury to purchase up to an aggregate of approximately 6.6 million shares of AAG common stock for an exercise price of $ 15.66 per share, subject to adjustment. See Note 4(g) for further information on the PSP2 Promissory Note and below for more information on the PSP2 Warrant Agreement and PSP2 Warrants.
For accounting purposes, the $ 3.5 billion of aggregate financial assistance we received pursuant to the PSP2 Agreement is allocated to the PSP2 Promissory Note, the PSP2 Warrants and other PSP2 financial assistance (the PSP2 Financial Assistance). The $ 1.0 billion aggregate principal amount of the PSP2 Promissory Note was recorded as unsecured long-term debt, and the $ 76 million total fair value of the PSP2 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in the consolidated balance sheet. The remaining amount of approximately $ 2.4 billion of PSP2 Financial Assistance was recognized as a credit to special items, net in the consolidated statement of operations in the first and second quarters of 2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.
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PSP2 Warrant Agreement and PSP2 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP2 Agreement, and pursuant to the PSP2 Warrant Agreement, AAG issued the PSP2 Warrants to Treasury to purchase PSP2 Warrant Shares. The exercise price of the PSP2 Warrant Shares is $ 15.66 per share, subject to certain anti-dilution provisions provided for in the PSP2 Warrants.
Pursuant to the PSP2 Warrant Agreement, AAG issued to Treasury PSP2 Warrants to purchase up to an aggregate of approximately 6.6 million shares of AAG common stock for an exercise price of $ 15.66 per share, subject to adjustment.
The PSP2 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP2 Warrant expires on the fifth anniversary of the date of issuance of such PSP2 Warrant. The PSP2 Warrants will be exercisable either through net share settlement or cash, at our option. The PSP2 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP2 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP2 Warrants or will be received upon exercise thereof.
PSP3
On April 23, 2021 (the PSP3 Closing Date), the Subsidiaries, entered into a Payroll Support Program 3 Agreement (the PSP3 Agreement) with Treasury, with respect to PSP3 as provided pursuant to the ARP. In connection with our entry into the PSP3 Agreement, on the PSP3 Closing Date, AAG also entered into a warrant agreement (the PSP3 Warrant Agreement) with Treasury and issued the PSP3 Promissory Note to Treasury, with the Subsidiaries as guarantors.
PSP3 Agreement
In connection with PSP3, we are required to comply with the relevant provisions of the ARP, which are substantially similar to the restrictions contained in the PSP1 Agreement, but are in effect for a longer time period. These provisions include the requirement that funds provided pursuant to the PSP3 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, which expired on September 30, 2021, the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through at least September 30, 2022, and the provisions that restrict the payment of certain executive compensation until April 1, 2023. As was the case with PSP1 and PSP2, the PSP3 Agreement also imposes substantial reporting obligations on us.
Pursuant to the PSP3 Agreement, Treasury provided us financial assistance in an aggregate of approximately $ 3.3 billion. As partial compensation to the U.S. Government for the provision of financial assistance under PSP3, AAG issued the PSP3 Promissory Note in the aggregate principal amount of $ 946 million and issued warrants (each a PSP3 Warrant and, collectively, the PSP3 Warrants) to Treasury to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock for an exercise price of $ 21.75 per share, subject to adjustment. See Note 4(g) for further information on the PSP3 Promissory Note and below for more information on the PSP3 Warrant Agreement and PSP3 Warrants.
For accounting purposes, the $ 3.3 billion of aggregate financial assistance we received pursuant to the PSP3 Agreement is allocated to the PSP3 Promissory Note, the PSP3 Warrants and other PSP3 financial assistance (the PSP3 Financial Assistance). The $ 946 million aggregate principal amount of the PSP3 Promissory Note was recorded as unsecured long-term debt, and the $ 46 million total fair value of the PSP3 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in the consolidated balance sheet. The remaining amount of approximately $ 2.3 billion of PSP3 Financial Assistance was recognized as a credit to special items, net in the consolidated statements of operations in the second and third quarters of 2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.
PSP3 Warrant Agreement and PSP3 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP3 Agreement, and pursuant to the PSP3 Warrant Agreement, AAG issued the PSP3 Warrants to Treasury to purchase PSP3 Warrant Shares. The exercise price of the PSP3 Warrant Shares is $ 21.75 per share, subject to certain anti-dilution provisions provided for in the PSP3 Warrants.
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Pursuant to the PSP3 Warrant Agreement, AAG issued to Treasury PSP3 Warrants to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock for an exercise price of $ 21.75 per share, subject to adjustment.
The PSP3 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP3 Warrant expires on the fifth anniversary of the date of issuance of such PSP3 Warrant. The PSP3 Warrants will be exercisable either through net share settlement or cash, at our option. The PSP3 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP3 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP3 Warrants or will be received upon exercise thereof.
(c) Recent Accounting Pronouncements
ASU 2020-06: Accounting for Convertible Instruments and Contracts In An Entity's Own Equity (the New Convertible Debt Standard)
The New Convertible Debt Standard simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, the New Convertible Debt Standard amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt the New Convertible Debt Standard using either a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning after December 15, 2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020. The New Convertible Debt Standard is applicable to our 6.50 % convertible senior notes due 2025 (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) for additional information on the Convertible Notes.
ASU 2019-12: 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.
ASU 2021-10: 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 (b) Impact of COVID-19 above for disclosure related to the financial assistance we have received from Treasury.
(d) Investments
Short-term investments primarily include debt securities and are classified as available-for-sale and stated at fair value. Realized gains and losses are recorded in nonoperating expense on our consolidated statements of operations. Unrealized gains and losses are recorded in accumulated other comprehensive loss on our consolidated balance sheets. For investments in an unrealized loss position, we determine whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. There have been no credit losses.
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Equity investments are accounted for under the equity method if we are able to exercise significant influence over an investee. Equity investments for which we do not have significant influence are recorded at fair value or at cost, if fair value is not readily determinable, with adjustments for observable changes in price or impairments (referred to as the measurement alternative). Our share of equity method investee’s financial results and changes in fair value are recorded in nonoperating other income, net on the consolidated statements of operations. See Note 8 for additional information related to our investments.
(e) Restricted Cash and Short-term Investments
We have restricted cash and short-term investments related primarily to collateral held to support workers’ compensation obligations, collateral associated with the payment of interest for the AAdvantage Financing and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of the Terminal at JFK.
(f) Aircraft Fuel, Spare Parts and Supplies, Net
Aircraft fuel is recorded on a first-in, first-out basis. Spare parts and supplies are recorded at average costs less an allowance for obsolescence, which is recognized over the weighted average remaining useful life of the related fleet. We also provide an allowance for spare parts and supplies identified as excess or obsolete to reduce the carrying cost to the lower of cost or net realizable value. Aircraft fuel, spare parts and supplies are expensed when used.
(g) Operating Property and Equipment
Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight-line method. Residual values for aircraft, engines and related rotable parts are generally 5 % to 10 % of original cost. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less. The estimated useful lives for the principal property and equipment classifications are as follows:
Principal Property and Equipment Classification Estimated Useful Life
Aircraft, engines and related rotable parts 20 – 30 years
Buildings and improvements 5 – 30 years
Furniture, fixtures and other equipment 3 – 10 years
Capitalized software 5 – 10 years
Total depreciation and amortization expense was $ 2.3 billion, $ 2.4 billion and $ 2.6 billion for the years ended December 31, 2021, 2020 and 2019, respectively.
We assess impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired. An impairment of an asset or group of assets exists only when the sum of the estimated undiscounted cash flows expected to be generated directly by the assets are less than the carrying value of the assets. We group assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for which identifiable cash flows exist. Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including our current fleet plan. If such assets are impaired, the impairment charge recognized is the amount by which the carrying value of the assets exceed their fair value. Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable. In 2021, we retired our remaining Embraer 140 fleet and recorded $ 27 million in non-cash special impairment charges reflecting the difference between the carrying values of these assets and their fair values.
At December 31, 2021 and 2020, prepaid expense and other on the consolidated balance sheets included $ 29 million and $ 164 million, respectively, of retired aircraft that are expected to be sold in the next year, and other assets on the consolidated balance sheets included $ 383 million and $ 401 million, respectively, of nonoperating retired aircraft.
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(h) Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, on our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date , in determining the present value of lease payments. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on our consolidated balance sheets. Our lease agreements do not contain any residual value guarantees.
Under certain of our capacity purchase agreements with third-party regional carriers, we do not own the underlying aircraft. However, since we control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes. For these capacity purchase agreements, we account for the lease and non-lease components separately. The lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. We allocate the consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See Note 11(b) for additional information on our capacity purchase agreements .
For real estate, we account for the lease and non-lease components as a single lease component.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.
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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand.
(j) Goodwill
Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the merger with US Airways Group. We have one reporting unit. We assess goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of goodwill may be lower than the carrying value. Our annual assessment date is October 1.
Goodwill is assessed for impairment by initially performing a qualitative assessment. If we determine that it is more likely than not that our goodwill may be impaired, we use a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon our annual assessment, there was no goodwill impairment in 2021. The carrying value of our goodwill on our consolidated balance sheets was $ 4.1 billion as of December 31, 2021 and 2020.
(k) Other Intangibles, Net
Intangible assets consist primarily of certain domestic airport slots and gate leasehold rights, customer relationships, marketing agreements, international slots and route authorities and tradenames.
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Definite-Lived Intangible Assets
Definite-lived intangible assets are originally recorded at their acquired fair values, subsequently amortized over their respective estimated useful lives and are assessed for impairment whenever events and circumstances indicate that the assets may be impaired.
The following table provides information relating to our amortizable intangible assets as of December 31, 2021 and 2020 (in millions):
December 31,
2021 2020
Domestic airport slots $ 365 $ 365
Customer relationships 300 300
Marketing agreements 105 105
Tradenames 35 35
Airport gate leasehold rights 137 137
Accumulated amortization ( 786 ) ( 745 )
Total $ 156 $ 197
Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight-line basis over approximately nine years and 30 years, respectively. Tradenames are fully amortized.
We recorded amortization expense related to these intangible assets of $ 41 million for each of the years ended December 31, 2021, 2020 and 2019. We expect to record annual amortization expense for these intangible assets as follows (in millions):
2022 $ 41
2023 7
2024 7
2025 7
2026 6
2027 and thereafter 88
Total $ 156
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets include certain domestic airport slots and international slots and route authorities. We assess indefinite-lived intangible assets for impairment annually or more frequently if events or circumstances indicate that the fair values of indefinite-lived intangible assets may be lower than their carrying values. Our annual assessment date is October 1.
Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment. If we determine that it is more likely than not that our indefinite-lived intangible assets may be impaired, we use a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon our annual assessment, there were no indefinite-lived intangible asset impairments in 2021. We had $ 1.8 billion of indefinite-lived intangible assets on our consolidated balance sheets as of December 31, 2021 and 2020.
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(l) Revenue Recognition
Revenue
The following are the significant categories comprising our reported operating revenues (in millions):
Year Ended December 31,
2021 2020 2019
Passenger revenue:
Passenger travel $ 23,896 $ 13,456 $ 38,831
Loyalty revenue - travel (1)
2,167 1,062 3,179
Total passenger revenue 26,063 14,518 42,010
Cargo 1,314 769 863
Other:
Loyalty revenue - marketing services (2)
2,166 1,825 2,361
Other revenue 339 225 534
Total other revenue 2,505 2,050 2,895
Total operating revenues $ 29,882 $ 17,337 $ 45,768
(1) Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners. See “ Loyalty Revenue ” below for further discussion on these mileage credits.
(2) During the years ended December 31, 2021, 2020 and 2019, cash payments from co-branded credit card and other partners were $ 3.4 billion, $ 2.9 billion and $ 3.9 billion, respectively.
The following is our total passenger revenue by geographic region (in millions):
Year Ended December 31,
2021 2020 2019
Domestic $ 21,453 $ 11,765 $ 30,881
Latin America 3,506 1,852 5,047
Atlantic
965 654 4,624
Pacific 139 247 1,458
Total passenger revenue $ 26,063 $ 14,518 $ 42,010
We attribute passenger revenue by geographic region based upon the origin and destination of each flight segment.
Passenger Revenue
We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on our consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel.
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. We have consistently applied this accounting method to estimate revenue from unused tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of our estimates. 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.
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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.
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 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 March 31, 2022 and eliminated mileage reinstatement fees for canceled award tickets.
Mileage credits earned through travel
For mileage credits earned through travel, we apply a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. 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 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.
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 five 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. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.
Our most significant partner agreements are our co-branded credit card agreements with Citi and Barclaycard US. We identified the following revenue elements in these co-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.
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 a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption.
Cargo Revenue
Cargo revenue is recognized when we provide the transportation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
Other Revenue
Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded credit card and other partners and other marketing related payments. Loyalty revenue included in other revenue was $ 2.2 billion, $ 1.8 billion and $ 2.4 billion for the years ended December 31, 2021, 2020 and 2019, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty Revenue .” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.
Contract Balances
Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on our consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our consolidated balance sheets.
December 31,
2021 2020
(in millions)
Loyalty program liability $ 9,135 $ 9,195
Air traffic liability 6,087 4,757
Total $ 15,222 $ 13,952
The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
Balance at December 31, 2020 $ 9,195
Deferral of revenue 2,161
Recognition of revenue (1)
( 2,221 )
Balance at December 31, 2021 (2)
$ 9,135
(1) Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.
(2) Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. 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. As of December 31, 2021, our current loyalty program liability was $ 2.9 billion and represents our current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter. Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, we will continue to monitor redemption patterns and may adjust our estimates in the future.
The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel. The balance in our air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is generally one year . Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months. For 2021, $ 1.7 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2020. 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.
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Our ticket contract receivables relate to ticket sales to individual passengers primarily through the use of major credit cards and are reflected as accounts receivable, net on the accompanying consolidated balance sheets. These receivables are short-term, mostly settled within seven days after sale. All accounts receivable are reported net of an allowance for credit losses, which have been minimal. We consider past and future financial and qualitative factors when establishing the allowance for credit losses.
(m) Maintenance, Materials and Repairs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.
(n) Selling Expenses
Selling expenses include credit card fees, commissions, third party distribution channel fees and advertising. Selling expenses associated with passenger revenue are expensed when the transportation or service is provided. Advertising costs are expensed as incurred. Advertising expense was $ 105 million, $ 57 million and $ 144 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(o) Share-based Compensation
We account for our share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. The majority of our stock awards are time vested restricted stock units, and the fair value of such awards is based on the market price of the underlying shares of AAG common stock on the date of grant. See Note 14 for further discussion of share-based compensation.
(p) Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net on our consolidated statements of operations. For the years ended December 31, 2021, 2020 and 2019, respectively, foreign currency losses were $ 4 million, $ 24 million and $ 32 million.
(q) Other Operating Expenses
Other operating expenses includes costs associated with ground and cargo handling, crew travel, aircraft food and catering, aircraft cleaning, passenger accommodation, international navigation fees and certain general and administrative expenses.
(r) Regional Expenses
Our regional carriers provide scheduled air transportation under the brand name “American Eagle.” The American Eagle carriers include our wholly-owned regional carriers as well as third-party regional carriers. Substantially all of our regional carrier arrangements are in the form of capacity purchase agreements. Expenses associated with American Eagle operations are classified as regional expenses on the consolidated statements of operations.
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 consolidated statements of operations. The 2020 consolidated statement of operations has been recast to conform to the 2021 presentation. This statement of operations presentation change has no impact on total operating expenses or net loss.
Regional expenses for the years ended December 31, 2021 , 2020, and 2019 include $ 316 million, $ 325 million and $ 336 million of depreciation and amortization, respectively, and $ 6 million, $ 13 million and $ 29 million of aircraft rent, respectively.
In 2021 , 2020, and 2019, we recognized $ 495 million, $ 438 million and $ 590 million, respectively, of expense under our capacity purchase agreement with Republic Airways Inc. (Republic). We hold a 25 % equity interest in Republic Airways Holdings Inc. (Republic Holdings), the parent company of Republic.
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2. Special Items, Net
Special items, net on our consolidated statements of operations consisted of the following (in millions):
Year Ended December 31,
2021 2020 2019
PSP Financial Assistance (1)
$ ( 4,162 ) $ ( 3,710 ) $ —
Severance expenses (2)
168 1,408 11
Litigation reserve adjustments ( 19 ) — ( 53 )
Mark-to-market adjustments on bankruptcy obligations, net (3)
( 3 ) ( 49 ) ( 11 )
Fleet impairment (4)
— 1,484 213
Labor contract expenses (5)
— 228 —
Fleet restructuring expenses (6)
— — 271
Merger integration expenses (7)
— — 191
Other operating special items, net 10 ( 18 ) 13
Mainline operating special items, net ( 4,006 ) ( 657 ) 635
PSP Financial Assistance (1)
( 539 ) ( 444 ) —
Regional pilot retention program (8)
61 — —
Fleet impairment (4)
27 117 —
Severance expenses (2)
2 18 —
Other operating special items, net — — 6
Regional operating special items, net ( 449 ) ( 309 ) 6
Operating special items, net ( 4,455 ) ( 966 ) 641
Mark-to-market adjustments on equity and other investments, net (9)
31 135 ( 5 )
Debt refinancing, extinguishment and other, net 29 35 8
Nonoperating special items, net 60 170 3
(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) for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2) The 2021 and 2020 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.
The 2019 severance expenses primarily included costs associated with reductions of management and support staff team members.
(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) for further information related to these charges.
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.
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The 2019 fleet impairment principally included a non-cash write-down of aircraft related to the retirement of our Embraer 190 fleet.
(5) The 2020 labor contract expenses primarily related to one-time charges due to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM Association) for our maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(6) Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.
(7) Merger integration expenses included costs associated with integration projects, principally our technical operations, flight attendant, human resources and payroll systems.
(8) 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.
(9) Mark-to-market adjustments on equity and other investments, net primarily related to net unrealized gains and losses associated with our equity investments in China Southern Airlines Company Limited (China Southern Airlines) and in 2021, Vertical Aerospace Ltd. (Vertical), and certain treasury rate lock derivative instruments.
3. Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share (EPS) (in millions, except share and per share amounts):
Year Ended December 31,
2021 2020 2019
Basic EPS:
Net income (loss) $ ( 1,993 ) $ ( 8,885 ) $ 1,686
Weighted average common shares outstanding (in thousands) 644,015 483,888 443,363
Basic EPS $ ( 3.09 ) $ ( 18.36 ) $ 3.80
Diluted EPS:
Net income (loss) for purposes of computing diluted EPS $ ( 1,993 ) $ ( 8,885 ) $ 1,686
Share computation for diluted EPS (in thousands):
Basic weighted average common shares outstanding 644,015 483,888 443,363
Dilutive effect of stock awards and warrants — — 906
Diluted weighted average common shares outstanding 644,015 483,888 444,269
Diluted EPS $ ( 3.09 ) $ ( 18.36 ) $ 3.79
Securities that could potentially dilute EPS in the future, and which were excluded from the calculation of diluted EPS because inclusion of such shares would be antidilutive, are as follows (in thousands):
Year Ended December 31,
2021 2020 2019
6.50% convertible senior notes 61,728 31,882 —
PSP1 Warrants 5,392 349 —
Restricted stock unit awards 3,420 4,584 2,520
Treasury Loan Warrants 1,681 107 —
PSP2 Warrants 1,300 — —
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4. Debt
Long-term debt included on our consolidated balance sheets consisted of (in millions):
December 31,
2021 2020
Secured
2013 Term Loan Facility, variable interest rate of 1.85 %, installments through 2025 (a)
$ 1,770 $ 1,788
2013 Revolving Facility (a)
— 750
2014 Term Loan Facility, variable interest rate of 1.85 %, installments through 2027 (a)
1,208 1,220
2014 Revolving Facility (a)
— 1,643
April 2016 Spare Parts Term Loan Facility (a)
— 960
April 2016 Revolving Facility (a)
— 450
December 2016 Term Loan Facility, variable interest rate of 2.11 %, installments through 2023 (a)
1,188 1,200
11.75 % senior secured notes, interest only payments until due in July 2025 (b)
2,500 2,500
10.75 % senior secured IP notes, interest only payments until due in February 2026 (b)
1,000 1,000
10.75 % senior secured LGA/DCA notes, interest only payments until due in February 2026 (b)
200 200
Treasury Term Loan Facility (c)
— 550
5.50 % senior secured notes, installments beginning in July 2023 until due in April 2026 (d)
3,500 —
5.75 % senior secured notes, installments beginning in July 2026 until due in April 2029 (d)
3,000 —
AAdvantage Term Loan Facility, variable interest rate of 5.50 %, installments beginning in July 2023 through April 2028 (d)
3,500 —
Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 2.88 % to 8.39 %, averaging 3.84 %, maturing from 2022 to 2034 (e)
9,357 11,013
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.27 % to 4.64 %, averaging 1.82 %, maturing from 2022 to 2032
3,433 4,417
Special facility revenue bonds, fixed interest rates ranging from 2.25 % to 5.38 %, maturing from 2026 to 2036 (f)
1,129 1,064
31,785 28,755
Unsecured
PSP1 Promissory Note, interest only payments until due in April 2030 (g)
1,765 1,765
PSP2 Promissory Note, interest only payments until due in January 2031 (g)
1,035 —
PSP3 Promissory Note, interest only payments until due in April 2031 (g)
946 —
6.50 % convertible senior notes, interest only payments until due in July 2025 (h)
1,000 1,000
5.000 % senior notes, interest only payments until due in June 2022 (i)
750 750
3.75 % senior notes, interest only payments until due in March 2025 (i)
500 500
5,996 4,015
Total long-term debt 37,781 32,770
Less: Total unamortized debt discount, premium and issuance costs 458 749
Less: Current maturities 2,315 2,697
Long-term debt, net of current maturities $ 35,008 $ 29,324
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As of December 31, 2021, the maximum availability under our revolving credit and other facilities is as follows (in millions):
2013 Revolving Facility $ 750
2014 Revolving Facility 1,643
April 2016 Revolving Facility 450
Short-term Revolving and Other Facilities 568
Total $ 3,411
American has an undrawn $ 500 million short-term revolving credit facility, which was set to expire at the beginning of January 2022 but which has been extended through the beginning of January 2023. Beginning January 2, 2022, the available amount thereunder decreased to $ 150 million. American also currently has approximately $ 68 million of available borrowing base under a cargo receivables facility that was entered into in December 2020 and is set to expire in December 2022. The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future.
Secured financings, including revolving credit and other facilities, are collateralized by assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots, certain receivables, certain intellectual property and certain loyalty program assets.
At December 31, 2021, the maturities of long-term debt are as follows (in millions):
2022 $ 2,387
2023 4,167
2024 3,467
2025 9,249
2026 4,412
2027 and thereafter 14,099
Total $ 37,781
(a) 2013, 2014, April 2016 and December 2016 Credit Facilities
2013 Credit Facilities
In November 2019, American and AAG entered into the Sixth Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015 (as previously amended, the 2013 Credit Agreement; the revolving credit facility established thereunder, the 2013 Revolving Facility; the term loan facility established thereunder, the 2013 Term Loan Facility; and the 2013 Revolving Facility together with the 2013 Term Loan Facility, the 2013 Credit Facilities), which reduced the total aggregate commitments under the 2013 Revolving Facility to $ 750 million from $ 1.0 billion. In addition, certain lenders party to the 2013 Credit Agreement extended the maturity date of their commitments under the 2013 Revolving Facility to October 2024 from October 2023.
In March 2021, American repaid in full the $ 750 million of outstanding revolving loans under the 2013 Revolving Facility that was drawn in April 2020. Following the March 2021 repayment, American is able to draw upon the commitment under the 2013 Revolving Facility again as needed upon the terms of the 2013 Credit Agreement or leave it undrawn, in each case, until such commitment expires, which is currently scheduled to occur in October 2024. As of December 31, 2021, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.
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2014 Credit Facilities
In November 2019, American and AAG entered into the Seventh Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (as previously amended, the 2014 Credit Agreement; the revolving credit facility established thereunder, the 2014 Revolving Facility; the term loan facility established thereunder, the 2014 Term Loan Facility; and the 2014 Revolving Facility together with the 2014 Term Loan Facility, the 2014 Credit Facilities), which increased the total aggregate commitments under the 2014 Revolving Facility to $ 1.6 billion from $ 1.5 billion. In addition, certain lenders party to the 2014 Credit Agreement extended the maturity date of their commitments under the 2014 Revolving Facility to October 2024 from October 2023.
In January 2020, American and AAG entered into the Eighth Amendment to the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amount outstanding to $ 1.2 billion, reducing the LIBOR margin from 2.00 % to 1.75 %, with a LIBOR floor of 0 %, and reducing the base rate margin from 1.00 % to 0.75 %. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021.
In March 2021, American repaid in full the $ 1.6 billion of outstanding revolving loans under the 2014 Revolving Facility that was drawn in April and May 2020. Following the March 2021 repayment, American is able to draw upon the commitment under the 2014 Revolving Facility again as needed upon the terms of the 2014 Credit Agreement or leave it undrawn, in each case, until such commitment expires, which is currently scheduled to occur in October 2024. As of December 31, 2021, there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.
April 2016 Credit Facilities
In November 2019, American and AAG entered into the Fifth Amendment to Credit and Guaranty Agreement, amending the Credit and Guaranty Agreement dated as of April 29, 2016 (as previously amended, the April 2016 Credit Agreement; the revolving credit facility established thereunder, the April 2016 Revolving Facility; the term loan facility established thereunder, the April 2016 Spare Parts Term Loan Facility; and the April 2016 Revolving Facility together with the April 2016 Spare Parts Term Loan Facility, the April 2016 Credit Facilities), which increased the total aggregate commitments under the April 2016 Revolving Facility to $ 450 million from $ 300 million. In addition, certain lenders party to the April 2016 Credit Agreement extended the maturity date of their commitments under the April 2016 Revolving Facility to October 2024 from October 2023.
In March 2021, American repaid in full the $ 450 million of outstanding revolving loans under the April 2016 Revolving Facility that was drawn in April 2020. Following the March 2021 repayment, American is able to draw upon the commitment under the April 2016 Revolving Facility again as needed upon the terms of the April 2016 Credit Agreement or leave it undrawn, in each case, until such commitment expires, which is currently scheduled to occur in October 2024.
On July 22, 2021, American repaid in full the $ 950 million aggregate principal amount of outstanding term loans under, and terminated, the April 2016 Spare Parts Term Loan Facility. The April 2016 Revolving Facility, in an available aggregate principal amount of $ 450 million, remains in place. As of December 31, 2021, there were no borrowings outstanding under the April 2016 Revolving Facility.
December 2016 Credit Facilities
In December 2016, American and AAG entered into the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016 (as amended, the December 2016 Credit Agreement; the term loan facility established thereunder, the December 2016 Term Loan Facility; and together with the revolving credit facility that may be established thereunder in the future, the December 2016 Credit Facilities).
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Certain details of our 2013 Credit Facilities, 2014 Credit Facilities, April 2016 Credit Facilities and December 2016 Credit Facilities (collectively referred to as the Credit Facilities) are shown in the table below as of December 31, 2021:
2013 Credit Facilities 2014 Credit Facilities April 2016 Credit Facilities December 2016 Credit Facilities
2013 Term Loan 2013
Revolving Facility 2014 Term Loan 2014
Revolving
Facility April 2016
Revolving
Facility December 2016 Term Loan
Aggregate principal issued
or credit facility availability
(in millions) $ 1,919 $ 750 $ 1,280 $ 1,643 $ 450 $ 1,250
Principal outstanding or
drawn (in millions) $ 1,770 $ — $ 1,208 $ — $ — $ 1,188
Maturity date June 2025 October 2024 January 2027 October 2024 October 2024 December 2023
LIBOR margin 1.75 % 2.00 % 1.75 % 2.00 % 2.00 % 2.00 %
The term loans under each of the Credit Facilities are repayable in annual installments in an amount equal to 1.00 % of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates. Voluntary prepayments may be made by American at any time.
The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder. The 2013 Revolving Facility and 2014 Revolving Facility have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $ 100 million and $ 200 million, respectively. The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of 0.63 %.
Subject to certain limitations and exceptions, the Credit Facilities are secured by collateral, including certain spare parts, slots, route authorities, simulators and leasehold rights. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions. American’s obligations under the Credit Facilities are guaranteed by AAG. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in “Certain Covenants.”
The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become due and payable immediately. In addition, if a “change of control” occurs, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the Credit Facilities and terminate the 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility and any revolving credit facility established under the December 2016 Credit Facilities. The Credit Facilities also include covenants that, among other things, require AAG to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.
(b) Senior Secured Notes
11.75 % Senior Secured Notes
In June 2020, American issued $ 2.5 billion aggregate principal amount of 11.75 % senior secured notes due 2025 (the 11.75 % Senior Secured Notes) at a price equal to 99 % of their aggregate principal amount. The 11.75 % Senior Secured Notes bear interest at a rate of 11.75 % per annum (subject to increase if the collateral coverage ratio described below is not met). Interest on the 11.75 % Senior Secured Notes is payable semiannually in arrears on January 15 and July 15 of each year, which began on January 15, 2021. The 11.75 % Senior Secured Notes will mature on July 15, 2025. The obligations of American under the 11.75 % Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG.
The 11.75 % Senior Secured Notes were issued pursuant to an indenture, dated as of June 30, 2020 (the 11.75 % Senior Secured Notes Indenture), by and among American, AAG and Wilmington Trust, National Association, as trustee (the 11.75 % Senior Secured Notes Trustee). The 11.75 % Senior Secured Notes are American’s senior secured
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obligations. Subject to certain limitations and exceptions, the 11.75 % Senior Secured Notes are secured on a first-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland (collectively, the First Lien 11.75 % Senior Secured Notes Collateral). American’s obligations with respect to the 11.75 % Senior Secured Notes are also secured on a second-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in the European Union and the United Kingdom (collectively, the Second Lien 11.75 % Senior Secured Notes Collateral and together with the First Lien 11.75 % Senior Secured Notes Collateral, the 11.75 % Senior Secured Notes Collateral). American may be required to pledge additional collateral in the future under the terms of the 11.75 % Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral as a replacement for existing collateral. The Second Lien 11.75 % Senior Secured Notes Collateral also secures the 2014 Credit Facilities on a first-lien basis.
American may redeem the 11.75 % Senior Secured Notes, in whole at any time or in part from time to time, at a redemption price equal to 100 % of the principal amount of the 11.75 % Senior Secured Notes being redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any, to (but not including) the redemption date.
In the event of a specified change of control, each holder of 11.75 % Senior Secured Notes may require American to repurchase its 11.75 % Senior Secured Notes in whole or in part at a repurchase price of 101 % of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.
American is required to deliver an appraisal of the First Lien 11.75 % Senior Secured Notes Collateral and officer’s certificate on a semi-annual basis demonstrating the calculation of a collateral coverage ratio in relation to the First Lien 11.75 % Senior Secured Notes Collateral as of the end of each semi-annual period based on such appraisal. If American fails to deliver the officer’s certificate in a timely manner or the collateral coverage ratio is less than 1.6 to 1.0 as of the end of the semi-annual period, then, subject to an opportunity to cure the deficiency in the collateral coverage ratio, American will be required to pay special interest in an additional amount equal to 2.0 % per annum of the outstanding principal amount of the 11.75 % Senior Secured Notes until the collateral coverage ratio is established to be at least 1.6 to 1.0.
The 11.75 % Senior Secured Notes Indenture contains covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to: (i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 11.75 % Senior Secured Notes Collateral and dispose of or release the 11.75 % Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, (vii) undergo certain change of control transactions, and (viii) designate subsidiaries as unrestricted. These covenants are subject to a number of important exceptions and qualifications set forth in the 11.75 % Senior Secured Notes Indenture.
Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 11.75 % Senior Secured Notes may be declared to be due and payable immediately. Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting American or certain of its subsidiaries (including American), all outstanding 11.75 % Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 11.75 % Senior Secured Notes Trustee or any holder of the 11.75 % Senior Secured Notes.
10.75 % Senior Secured Notes
On September 25, 2020 (the 10.75 % Senior Secured Notes Closing Date), American issued $ 1.0 billion in initial principal amount of senior secured IP notes (the IP Notes) and $ 200 million in initial principal amount of senior secured LGA/DCA notes (the LGA/DCA Notes and together with the IP Notes, the 10.75 % Senior Secured Notes). The obligations of American under the 10.75 % Senior Secured Notes are fully and unconditionally guaranteed (the 10.75 % Senior Secured Notes Guarantees) on a senior unsecured basis by AAG. The 10.75 % Senior Secured Notes bear interest at a rate of 10.75 % per annum in cash. For any interest period on or prior to September 1, 2022, American may, at its election, pay interest at a rate of 12.00 % per annum payable one-half in cash and one-half in kind. Interest on the 10.75 % Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, which began on March 1, 2021. The 10.75 % Senior Secured Notes will mature on February 15, 2026.
The 10.75 % Senior Secured Notes were each issued pursuant to a separate indenture, dated as of September 25, 2020 (individually, the IP Notes Indenture and the LGA/DCA Notes Indenture and collectively, the 10.75 % Senior Secured Notes Indentures), by and among American, AAG and Wilmington Trust, National Association, as trustee and as collateral
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trustee (the 10.75 % Senior Secured Notes Trustee). The IP Notes are secured by a first lien security interest on certain intellectual property of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral), and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75 % Senior Secured Notes Collateral). Subject to certain conditions, American will be permitted to incur up to $ 4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes. The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral. American may be required to pledge additional collateral in the future under the terms of the 10.75 % Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral including as a replacement for existing collateral. The LGA/DCA Collateral also secures on a first-lien basis the December 2016 Credit Facilities.
On or prior to the fourth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at a redemption price equal to 100 % of the principal amount of the 10.75 % Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any. After the fourth anniversary of the 10.75 % Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at a redemption price equal to 105.375 % of the principal amount of the 10.75 % Senior Secured Notes redeemed, together with accrued and unpaid interest thereon, if any. After the fifth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at par, together with accrued and unpaid interest thereon, if any.
In the event of a specified change of control, each holder of 10.75 % Senior Secured Notes may require American to repurchase its 10.75 % Senior Secured Notes, in whole or in part, at a repurchase price of 101 % of the aggregate principal amount of the 10.75 % Senior Secured Notes so repurchased, plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.
The 10.75 % Senior Secured Notes Indentures contain covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to: (i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 10.75 % Senior Secured Notes Collateral and dispose of or release the 10.75 % Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, and (vii) designate subsidiaries as unrestricted. In addition, the 10.75 % Senior Secured Notes Indentures include covenants that require AAG to maintain (a) an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and (b) a certain minimum ratio of appraised value of the collateral to outstanding debt secured thereby on a first lien basis as further described below in “Certain Covenants.” These covenants are subject to a number of important exceptions and qualifications set forth in the 10.75 % Senior Secured Notes Indentures.
Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 10.75 % Senior Secured Notes may be declared to be due and payable immediately. Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting AAG or certain of its subsidiaries (including American), all outstanding 10.75 % Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 10.75 % Senior Secured Notes Trustee or any holder of the 10.75 % Senior Secured Notes.
(c) Treasury Loan Agreement
On September 25, 2020, American and AAG entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $ 5.5 billion. Subsequently, on October 21, 2020, American and AAG entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion.
In September 2020, American borrowed $ 550 million under the Treasury Term Loan Facility, and on March 24, 2021, used proceeds from the AAdvantage Financing to prepay in full the $ 550 million of outstanding loans under the Treasury Term Loan Facility and terminated the Treasury Loan Agreement.
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(d) AAdvantage Financing
On March 24, 2021 (the AAdvantage Financing Closing Date), American and AAdvantage Loyalty IP Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American (Loyalty Issuer and, together with American, the AAdvantage Issuers), completed the offering of $ 3.5 billion aggregate principal amount of 5.50 % Senior Secured Notes due 2026 (the 2026 Notes) and $ 3.0 billion aggregate principal amount of 5.75 % Senior Secured Notes due 2029 (the 2029 Notes, and together with the 2026 Notes, the AAdvantage Notes). The AAdvantage Notes are fully and unconditionally guaranteed (the AAdvantage Note Guarantees) on a senior unsecured basis by AAG and fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by AAdvantage Holdings 1, Ltd., a Cayman Islands exempted company incorporated with limited liability and a direct wholly-owned subsidiary of American, and AAdvantage Holdings 2, Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American and the direct parent of Loyalty Issuer (HoldCo2, and together with AAdvantage Holdings 1, Ltd., the Original SPV Guarantors), and as of August 27, 2021, certain Luxembourg limited liability companies and partnerships that are direct or indirect subsidiaries of Loyalty Issuer including Madrid IP Lux HoldCo SCS, a Luxembourg common limited partnership (Madrid IP SCS) (collectively, the Madrid SPV Guarantors and, together with the Original SPV Guarantors, the SPV Guarantors, and the SPV Guarantors together with AAG, the AAdvantage Guarantors). The AAdvantage Notes were issued pursuant to an indenture, dated as of March 24, 2021 (the AAdvantage Indenture), by and among the AAdvantage Issuers, the AAdvantage Guarantors and Wilmington Trust, National Association, as trustee and as collateral custodian.
Concurrent with the issuance of the AAdvantage Notes, the AAdvantage Issuers, as co-borrowers, entered into a term loan credit and guaranty agreement, dated March 24, 2021, with Barclays Bank PLC, as administrative agent, Wilmington Trust, National Association, as collateral administrator, and the lenders party thereto, providing for a $ 3.5 billion term loan facility (the AAdvantage Term Loan Facility and collectively with the AAdvantage Notes, the AAdvantage Financing) and pursuant to which the full $ 3.5 billion of term loans (the AAdvantage Loans) were drawn on the AAdvantage Financing Closing Date. The AAdvantage Loans are fully and unconditionally guaranteed (together with the AAdvantage Note Guarantees, the AAdvantage Guarantees) by the AAdvantage Guarantors.
Subject to certain permitted liens and other exceptions, the AAdvantage Notes, AAdvantage Loans and AAdvantage Guarantees provided by the SPV Guarantors will be secured by a first-priority security interest in, and pledge of, various agreements with respect to the AAdvantage program (the AAdvantage Agreements) (including all payments thereunder) and certain IP Licenses (as defined below), certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other assets of Loyalty Issuer and the SPV Guarantors including Transferred AAdvantage IP (as defined below) (collectively, the AAdvantage Collateral).
Payment Terms of the AAdvantage Notes and AAdvantage Loans under the AAdvantage Term Loan Facility
Interest on the AAdvantage Notes is payable in cash, quarterly in arrears on the 20th day of each January, April, July and October (each, an AAdvantage Payment Date), which began on July 20, 2021. The 2026 Notes will mature on April 20, 2026, and the 2029 Notes will mature on April 20, 2029. The outstanding principal on the 2026 Notes will be repaid in quarterly installments of $ 292 million on each AAdvantage Payment Date, beginning on July 20, 2023. The outstanding principal on the 2029 Notes will be repaid in quarterly installments of $ 250 million on each AAdvantage Payment Date, beginning on July 20, 2026.
The AAdvantage Issuers may redeem the AAdvantage Notes, at their option, in whole at any time or in part from time to time, at a redemption price equal to 100 % of the principal amount of the AAdvantage Notes redeemed plus a “make-whole” premium, together with accrued and unpaid interest to the date of redemption.
The scheduled maturity date of the AAdvantage Loans under the AAdvantage Term Loan Facility is April 20, 2028. The AAdvantage Loans bear interest at a variable rate equal to LIBOR (but not less than 0.75 % per annum), plus a margin of 4.75 % per annum, payable on each AAdvantage Payment Date. The outstanding principal on the AAdvantage Loans will be repaid in quarterly installments of $ 175 million, on each AAdvantage Payment Date beginning with the AAdvantage Payment Date in July 2023. These amortization payments (as well as those for the AAdvantage Notes) will be subject to the occurrence of certain early amortization events, including the failure to satisfy a minimum debt service coverage ratio at specified determination dates.
Prepayment of some or all of the AAdvantage Loans outstanding under the AAdvantage Term Loan Facility is permitted, although payment of an applicable premium is required as specified in the AAdvantage Term Loan Facility.
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The AAdvantage Indenture and the AAdvantage Term Loan Facility contain mandatory prepayment provisions triggered upon (i) the issuance or incurrence by Loyalty Issuer or the SPV Guarantors of certain indebtedness or (ii) the receipt by American or its subsidiaries of net proceeds from pre-paid frequent flyer (i.e., AAdvantage) mile sales exceeding $ 505 million. Each of these prepayments would also require payment of an applicable premium. Certain other events, including the occurrence of a change of control with respect to AAG and certain AAdvantage Collateral sales exceeding a specified threshold, will also trigger mandatory repurchase or mandatory prepayment provisions under the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively.
Other Terms of the AAdvantage Indenture and the AAdvantage Term Loan Facility
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain certain covenants that limit the ability of Loyalty Issuer, the SPV Guarantors and, in certain circumstances, American and AAG, to among other things, (i) incur additional indebtedness and make restricted payments, (ii) incur certain liens on the AAdvantage Collateral, (iii) merge, consolidate or sell substantially all of their assets, (iv) dispose of the AAdvantage Collateral, (v) sell pre-paid frequent flyer (i.e. AAdvantage) miles in excess of $ 550 million in the aggregate, and (vi) terminate, amend, waive, supplement or modify the IP Licenses, or exercise rights and remedies thereunder, except under certain circumstances. American and Loyalty Issuer are also prohibited from substantially reducing the AAdvantage program business or modifying the terms of the AAdvantage program in a manner that would reasonably be expected to materially impair repayment of the AAdvantage Financing obligations (described as a Payment Material Adverse Effect in each of the AAdvantage Indenture and the AAdvantage Term Loan Facility), and AAG and its subsidiaries are prohibited from changing the policies and procedures of the AAdvantage program in a manner that would reasonably be expected to have a Payment Material Adverse Effect or operating a competing loyalty program. Notwithstanding these restrictions, the AAdvantage program is expected to operate as it has in the past, and the entry into the AAdvantage Financing is not expected to have any impact on the benefits offered to AAdvantage members.
The AAdvantage Indenture and the AAdvantage Term Loan Facility also require the AAdvantage Issuers to comply with certain affirmative covenants, including the requirement to use commercially reasonable efforts to cause sufficient counterparties to AAdvantage Agreements to direct at least 90 % of payments with respect to the AAdvantage program on a quarterly basis into a collections account, for application to the payment of fees, principal and interest on the AAdvantage Notes and the AAdvantage Loans pursuant to a payment waterfall described in the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively. In addition, the AAdvantage Indenture and the AAdvantage Term Loan Facility require AAG to maintain minimum liquidity, defined as the sum of (a) unrestricted cash and cash equivalents and (b) the aggregate principal amount committed and available to be drawn under all of AAG's revolving credit and other facilities, at the close of any business day of at least $ 2.0 billion.
Subject to certain materiality thresholds, qualifications, exceptions, “baskets” and grace and cure periods, the AAdvantage Indenture and the AAdvantage Term Loan Facility contain various events of default, including payment defaults, covenant defaults, cross-defaults to certain other indebtedness, termination of certain agreements related to the AAdvantage program, bankruptcy events of Loyalty Issuer or any SPV Guarantor, and a change of control of Loyalty Issuer or any SPV Guarantor. A bankruptcy event of American is not itself an event of default; following an American bankruptcy, an event of default would only occur if American failed to satisfy certain enumerated bankruptcy case milestones, including an assumption of the AAdvantage Financing by a certain date. Upon the occurrence of an event of default, the outstanding obligations under the AAdvantage Indenture and the AAdvantage Term Loan Facility may (or, with respect to the bankruptcy events noted above, shall) be accelerated and become due and payable immediately.
Terms of Certain Intercompany Agreements Related to the AAdvantage Financing
In connection with the issuance of the AAdvantage Notes and entry into the AAdvantage Term Loan Facility, American, Loyalty Issuer and the SPV Guarantors entered into a series of transactions that resulted in the transfer to Loyalty Issuer or Madrid IP SCS of, among other things, American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions) (such assets, the Transferred AAdvantage IP) and certain rights of American under specified AAdvantage Agreements. Loyalty Issuer, the SPV Guarantors and American have entered into a series of intercompany license agreements (collectively, the IP Licenses) pursuant to which Loyalty Issuer has indirectly granted to American an exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing sublicense to use the Transferred AAdvantage IP. The IP Licenses would be terminated, and American’s right to use the Transferred AAdvantage IP would cease, upon specified termination events, including, but not limited to, the occurrence of an event of default under the AAdvantage Indenture or the AAdvantage Term Loan Facility. In certain circumstances, such a termination would trigger a liquidated damages payment in an amount that is greater than the initial principal amount of the AAdvantage Notes and the AAdvantage Loans.
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In addition, proceeds from the AAdvantage Financing were loaned by Loyalty Issuer to American pursuant to an intercompany note that was guaranteed by AAG. The borrowings under this intercompany note are payable on demand by Loyalty Issuer or, after the occurrence and during the continuance of an event of default under the AAdvantage Financing, by the master collateral agent under the AAdvantage Financing.
(e) EETCs
2021-1 Aircraft EETCs
In November 2021, American created two pass-through trusts which issued approximately $ 960 million aggregate face amount of Series 2021-1 Class A and Class B EETCs (the 2021-1 Aircraft EETCs) in connection with the financing of 26 aircraft previously delivered or to be delivered to American through September 2022 (the 2021-1 Aircraft). As of December 31, 2021, approximately $ 94 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of five aircraft under the 2021-1 Aircraft EETCs, all of which was used to repay existing indebtedness. Interest and principal payments on equipment notes issued in connection with the 2021-1 Aircraft EETCs are payable semi-annually in January and July each year, with interest payments scheduled to begin in July 2022 and with principal payments scheduled to begin in January 2023. The remaining proceeds of approximately $ 866 million as of December 31, 2021 were being held in escrow with a depositary for the benefit of the holders of the 2021-1 Aircraft EETCs until such time as American issues additional equipment notes with respect to the remaining 2021-1 Aircraft to the pass-through trusts, which will purchase such additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its consolidated balance sheet because the proceeds held by the depositary for the benefit of the holders of the 2021-1 Aircraft EETCs are not American’s assets.
Certain information regarding the 2021-1 Aircraft EETC equipment notes, as of December 31, 2021, is set forth in the table below.
2021-1 Aircraft EETCs
Series A Series B
Aggregate principal issued $ 758 million $ 202 million
Remaining escrowed proceeds $ 684 million $ 182 million
Fixed interest rate per annum 2.875 % 3.95 %
Maturity date July 2034 July 2030
(f) Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8 (the Terminal). The construction project is currently scheduled to be completed in 2023 and is estimated to cost $ 439 million, of which $ 298 million was funded with proceeds of the special facility revenue bonds issued by the New York Transportation Development Corporation (NYTDC) on behalf of American in June 2020 (the 2020 JFK Bonds) and approximately $ 84 million of which was funded with proceeds of the approximately $ 150 million of special facility revenue bonds NYTDC issued in June 2021 (the 2021 JFK Bonds).
American is required to pay debt service on the 2021 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2021 JFK Bonds. American continues to pay debt service on the outstanding bonds issued by NYTDC on behalf of American in 2016 and 2020 (the 2016 and 2020 JFK Bonds) and American and AAG continue to guarantee the 2016 and 2020 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.
The 2021 JFK Bonds, in aggregate, were priced at par value. The gross proceeds from the issuance of the 2021 JFK Bonds were approximately $ 150 million. Of this amount, $ 4 million was used to fund the costs of issuance of the 2021 JFK Bonds, $ 62 million was used to fund the redemption of the 2016 and 2020 JFK Bonds due August 2021, with the remaining amount of proceeds received to be held in restricted cash and short-term investments on the consolidated balance sheet and to be used to finance a portion of the cost of the renovation and expansion of the Terminal. The 2021 JFK Bonds are comprised of term bonds, $ 70 million of which bear interest at 2.25 % per annum and mature on August 1, 2026, and $ 80 million of which bear interest at 3.00 % per annum and mature on August 1, 2031. As of December 31, 2021, $ 236 million of proceeds funded by the issuance of the 2020 and 2021 JFK Bonds are included in restricted cash and short-term investments on the accompanying consolidated balance sheet.
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(g) PSP Promissory Notes
PSP1 Promissory Note
On April 20, 2020 (the PSP1 Closing Date), as partial compensation to the U.S. Government for the provision of financial assistance under the PSP1 Agreement, AAG issued a promissory note (the PSP1 Promissory Note) to Treasury, which provides for our unconditional promise to pay to Treasury the principal sum of $ 1.8 billion, and the guarantee of our obligations under the PSP1 Promissory Note by the Subsidiaries.
The PSP1 Promissory Note bears interest on the outstanding principal amount at a rate equal to 1.00 % per annum until the fifth anniversary of the PSP1 Closing Date and 2.00 % plus an interest rate based on the secured overnight financing rate (SOFR) per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00 %) thereafter until the tenth anniversary of the PSP1 Closing Date (the PSP1 Maturity Date), and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, which began on September 30, 2020. The aggregate principal amount outstanding under the PSP1 Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the PSP1 Promissory Note, will be due and payable on the PSP1 Maturity Date.
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSP1 Promissory Note, in whole or in part, without penalty or premium. Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSP1 Promissory Note at such time, together with any accrued interest or other amounts owing under the PSP1 Promissory Note at such time.
The PSP1 Promissory Note is our senior unsecured obligation and each guarantee of the PSP1 Promissory Note is the senior unsecured obligation of each of the Subsidiaries, respectively.
The PSP1 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness. Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the PSP1 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.
PSP2 Promissory Note
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP2 Agreement, AAG issued the PSP2 Promissory Note to Treasury, which provides for our unconditional promise to pay to Treasury the principal sum of $ 1.0 billion, and the guarantee of our obligations under the PSP2 Promissory Note by the Subsidiaries.
The PSP2 Promissory Note bears interest on the outstanding principal amount at a rate equal to 1.00 % per annum until the fifth anniversary of the PSP2 Closing Date and 2.00 % plus an interest rate based on SOFR per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00 %) thereafter until the tenth anniversary of the PSP2 Closing Date (the PSP2 Maturity Date), and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, which began on March 31, 2021. The aggregate principal amount outstanding under the PSP2 Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the PSP2 Promissory Note, will be due and payable on the PSP2 Maturity Date.
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSP2 Promissory Note, in whole or in part, without penalty or premium. Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSP2 Promissory Note, together with any accrued interest or other amounts owing under the PSP2 Promissory Note at such time.
The PSP2 Promissory Note is our senior unsecured obligation and each guarantee of the PSP2 Promissory Note is the senior unsecured obligation of each of the Subsidiaries, respectively.
The PSP2 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness. Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the PSP2 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.
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PSP3 Promissory Note
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP3 Agreement, AAG issued the PSP3 Promissory Note to Treasury, which provides for our unconditional promise to pay to Treasury the principal sum of $ 946 million, and the guarantee of our obligations under the PSP3 Promissory Note by the Subsidiaries.
The PSP3 Promissory Note bears interest on the outstanding principal amount at a rate equal to 1.00 % per annum until the fifth anniversary of the PSP3 Closing Date and 2.00 % plus an interest rate based on SOFR per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00 %) thereafter until the tenth anniversary of the PSP3 Closing Date (the PSP3 Maturity Date), and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, which began on September 30, 2021. The aggregate principal amount outstanding under the PSP3 Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the PSP3 Promissory Note, will be due and payable on the PSP3 Maturity Date.
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSP3 Promissory Note, in whole or in part, without penalty or premium. Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSP3 Promissory Note, together with any accrued interest or other amounts owing under the PSP3 Promissory Note at such time.
The PSP3 Promissory Note is our senior unsecured obligation and each guarantee of the PSP3 Promissory Note is the senior unsecured obligation of each of the Subsidiaries, respectively.
The PSP3 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness. Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the PSP3 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.
(h) 6.50 % Convertible Senior Notes
In June 2020, AAG completed the public offering of $ 1.0 billion aggregate principal amount of AAG’s 6.50 % convertible senior notes due 2025 (the Convertible Notes). The Convertible Notes are fully and unconditionally guaranteed by American on a senior unsecured basis (the Convertible Notes Guarantee). The net proceeds to us from the Convertible Notes were approximately $ 970 million, after deducting the underwriters’ discounts and commissions and our estimated offering expenses. The Convertible Notes were priced to investors in the offering at 100 % of their principal amount.
The Convertible Notes were issued pursuant to an indenture, dated as of June 25, 2020 (the Base Indenture), between AAG and Wilmington Trust, National Association as trustee (the Convertible Notes Trustee), as supplemented by that certain first supplemental indenture, dated as of June 25, 2020, among AAG, American and the Convertible Notes Trustee (the Convertible Notes Supplemental Indenture and, together with the Base Indenture, the Convertible Notes Indenture). The Convertible Notes bear interest at a rate of 6.50 % per annum. Interest on the Convertible Notes is payable semiannually in arrears on January 1 and July 1 of each year, which began on January 1, 2021. The Convertible Notes will mature on July 1, 2025, unless earlier converted or redeemed or repurchased by us.
Upon conversion, AAG will pay or deliver, as the case may be, cash, shares of AAG common stock or a combination of cash and shares of AAG common stock, at AAG’s election. The initial conversion rate is 61.7284 shares of AAG common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 16.20 per share of AAG common stock). The conversion rate is subject to adjustment in some events as described in the Convertible Notes Indenture.
Holders may convert their Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of AAG common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of AAG common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on AAG common stock; (4) if
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AAG calls such Convertible Notes for redemption; and (5) at any time from, and including, April 1, 2025 until the close of business on the scheduled trading day immediately before the maturity date of the Convertible Notes.
In addition, following certain corporate events that occur prior to the maturity date or upon AAG’s issuance of a notice of redemption, AAG will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or during the related redemption period in certain circumstances by a specified number of shares of AAG common stock as described in the Convertible Notes Indenture.
AAG will not have the right to redeem the Convertible Notes prior to July 5, 2023. On or after July 5, 2023 and on or before the 20th scheduled trading day immediately before the maturity date, AAG may redeem the Convertible Notes, in whole or in part, if the last reported sale price of AAG common stock has been at least 130 % of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the date AAG sends the related redemption notice; and (2) the trading day immediately before the date AAG sends such notice. In the case of any optional redemption, AAG will redeem the Convertible Notes at a redemption price equal to 100 % of the principal amount of such Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If AAG undergoes a fundamental change described in the Convertible Notes Indenture prior to the maturity date of the Convertible Notes, except as described in the Convertible Notes Indenture, holders of the Convertible Notes may require AAG to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100 % of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Convertible Notes Indenture provides for customary terms and covenants, including that upon certain events of default, either the Convertible Notes Trustee or the holders of not less than 25 % in aggregate principal amount of the Convertible Notes then outstanding may declare the unpaid principal amount of the Convertible Notes and accrued and unpaid interest, if any, thereon immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization, the principal amount of the Convertible Notes together with accrued and unpaid interest thereon, if any, will automatically become and be immediately due and payable.
As previously discussed in Note 1(c), as of January 1, 2021, we early adopted the New Convertible Debt Standard. Accordingly, our unamortized debt discount as of January 1, 2021 was reduced by $ 389 million, increasing the liability and decreasing the effective interest rate on the Convertible Notes from approximately 20 % at December 31, 2020 to approximately 7 % at December 31, 2021. We recognized $ 70 million of interest expense in 2021 including $ 5 million of non-cash amortization of the debt discount and $ 65 million of contractual coupon interest. As of December 31, 2021, our unamortized debt discount on the Convertible Notes was $ 22 million.
At December 31, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $ 114 million. The last reported sale price per share of our common stock (as defined in the Convertible Notes Indenture) did not exceed 130 % of the conversion price of the Convertible Notes for at least 20 of the 30 consecutive trading days ending on December 31, 2021. Accordingly, pursuant to the terms of the Convertible Notes Indenture, the holders of the Convertible Notes cannot convert at their option at any time during the quarter ending March 31, 2022. Each $1,000 principal amount of Convertible Notes is convertible at a rate of 61.7284 shares of our common stock, subject to adjustment as provided in the Convertible Notes Indenture. We may settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
(i) Unsecured Senior Notes
5.000 % Senior Notes
In May 2019, AAG issued $ 750 million aggregate principal amount of 5.000 % senior notes due 2022 (the 5.000 % Senior Notes). The 5.000 % Senior Notes bear interest at a rate of 5.000 % per annum, payable semi-annually in arrears on June 1 and December 1 of each year, which began on December 1, 2019. The 5.000 % Senior Notes mature in June 2022.
3.75 % Senior Notes
In February 2020, AAG issued $ 500 million aggregate principal amount of 3.75 % senior notes due 2025 (the 3.75 % Senior Notes). The 3.75 % Senior Notes bear interest at a rate of 3.75 % per annum, payable semiannually in arrears in March and September of each year, which began in September 2020. The 3.75 % Senior Notes mature in March 2025.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
The details of our 5.000 % and 3.75 % Senior Notes are shown in the table below as of December 31, 2021:
5.000% Senior Notes 3.75% Senior Notes
Aggregate principal issued and outstanding $ 750 million $ 500 million
Maturity date June 2022 March 2025
Fixed interest rate per annum 5.000 % 3.75 %
Interest payments Semi-annually in arrears in June and December Semi-annually in arrears in March and September
The 5.000 % and 3.75 % Senior Notes are senior unsecured obligations of AAG. These Senior Notes are fully and unconditionally guaranteed by American. The indentures for these Senior Notes contain covenants and events of default generally customary for similar financings. In addition, if we experience specific kinds of changes of control, we must offer to repurchase these Senior Notes in whole or in part at a price of 101 % of the principal amount plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date. Upon the occurrence of certain events of default, these Senior Notes may be accelerated and become due and payable.
Guarantees
As of December 31, 2021, AAG had issued guarantees covering approximately $ 19.8 billion of American’s secured debt (and interest thereon), including the Credit Facilities, the AAdvantage Financing, certain EETC financings and $ 1.1 billion of American’s special facility revenue bonds (and interest thereon).
Certain Covenants
Certain of our debt financing agreements (including our secured notes, term loans, revolving credit facilities and spare engine EETCs) contain loan to value (LTV), 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. 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.
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Specifically, we are required to meet certain collateral coverage tests for our Credit Facilities, 10.75 % Senior Secured Notes and 11.75 % Senior Secured Notes, as described below:
2013 Credit
Facilities 2014 Credit
Facilities April 2016
Credit Facilities December 2016
Credit Facilities 10.75% Senior Secured Notes 11.75% Senior Secured Notes
Frequency of Appraisals of Appraised Collateral Annual Annual Annual Annual Annual Semi-Annual
LTV Requirement 1.6 x Collateral valuation to amount of debt outstanding ( 62.5 % LTV)
LTV as of Last Measurement Date 38.4 % 18.0 % Not Applicable 53.5 % 53.5 % 33.5 %
Collateral Description Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U.S. and South America Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and European Union (including London Heathrow) Generally, certain spare parts Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain LaGuardia Airport (LGA) slots, certain simulators and certain leasehold rights Generally, certain DCA slots, certain LGA slots, certain simulators and certain leasehold rights and, in the case of the IP Notes, certain intellectual property of American Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and the Caribbean, Central America and various other countries
At December 31, 2021, we were in compliance with the applicable collateral coverage tests as of the most recent measurement dates.
5. Leases
We lease certain aircraft and engines, including aircraft under capacity purchase agreements. As of December 31, 2021, we operated 696 leased aircraft, with remaining terms ranging from less than one year to 12 years.
At each airport where we conduct flight operations, we have agreements, generally with a governmental unit or authority, for the use of passenger, operations and baggage handling space as well as runways and taxiways. These agreements, particularly in the U.S., often contain provisions for periodic adjustments to rates and charges applicable under such agreements. These rates and charges also vary with our level of operations and the operations of the airport. Because of the variable nature of these rates, these leases are not recorded on our consolidated balance sheets as a ROU asset or a lease liability. Additionally, at our hub locations and in certain other cities we serve, we lease administrative offices, catering, cargo, training, maintenance and other facilities.
The components of lease expense were as follows (in millions):
Year Ended December 31,
2021 2020 2019
Operating lease cost $ 2,012 $ 1,957 $ 2,027
Finance lease cost:
Amortization of assets 107 92 79
Interest on lease liabilities 44 38 43
Variable lease cost 2,471 1,801 2,558
Total net lease cost $ 4,634 $ 3,888 $ 4,707
Included in the table above is $ 190 million, $ 172 million and $ 236 million of operating lease cost under our capacity purchase agreement with Republic for the years ended December 31, 2021, 2020 and 2019, respectively. We hold a 25 % equity interest in Republic Holdings, the parent company of Republic.
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Additionally, not included in the table above, we recognized $ 109 million in cash special charges in 2020 related to the impairment of ROU assets and lease return costs resulting from our decision to retire certain leased aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
December 31,
2021 2020
Operating leases:
Operating lease ROU assets $ 7,850 $ 8,039
Current operating lease liabilities $ 1,507 $ 1,651
Noncurrent operating lease liabilities 6,610 6,777
Total operating lease liabilities $ 8,117 $ 8,428
Finance leases:
Property and equipment, at cost $ 1,201 $ 1,021
Accumulated amortization ( 653 ) ( 539 )
Property and equipment, net $ 548 $ 482
Current finance lease liabilities $ 174 $ 100
Noncurrent finance lease liabilities 563 472
Total finance lease liabilities $ 737 $ 572
Weighted average remaining lease term (in years):
Operating leases 7.6 7.4
Finance leases 4.6 5.4
Weighted average discount rate:
Operating leases 6.3 % 5.6 %
Finance leases 6.1 % 6.3 %
Supplemental cash flow and other information related to leases was as follows (in millions):
Year Ended December 31,
2021 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 2,053 $ 2,028 $ 2,013
Operating cash flows from finance leases 37 39 43
Financing cash flows from finance leases 126 114 83
Non-cash transactions:
ROU assets acquired through operating leases 1,386 917 1,145
Property and equipment acquired through finance leases 180 11 20
Operating lease conversion to finance lease 102 5 41
Gain on sale leaseback transactions, net 25 107 107
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Maturities of lease liabilities were as follows (in millions):
December 31, 2021
Operating Leases Finance Leases
2022 $ 1,929 $ 215
2023 1,791 183
2024 1,410 180
2025 1,039 113
2026 762 87
2027 and thereafter 3,614 77
Total lease payments 10,545 855
Less: Imputed interest ( 2,428 ) ( 118 )
Total lease obligations 8,117 737
Less: Current obligations ( 1,507 ) ( 174 )
Long-term lease obligations $ 6,610 $ 563
As of December 31, 2021, we had additional operating lease commitments that have not yet commenced of approximately $ 1.8 billion for 18 Boeing 787 Family aircraft scheduled to be delivered in 2022 through 2024 with lease terms of 10 years.
6. Income Taxes
The significant components of the income tax provision (benefit) were (in millions):
Year Ended December 31,
2021 2020 2019
Current income tax provision:
State and Local $ — $ — $ 2
Foreign — — 8
Current income tax provision — — 10
Deferred income tax provision (benefit):
Federal ( 508 ) ( 2,335 ) 498
State and Local ( 47 ) ( 233 ) 62
Deferred income tax provision (benefit) ( 555 ) ( 2,568 ) 560
Total income tax provision (benefit) $ ( 555 ) $ ( 2,568 ) $ 570
The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):
Year Ended December 31,
2021 2020 2019
Statutory income tax provision (benefit) $ ( 535 ) $ ( 2,405 ) $ 474
State income tax provision (benefit), net of federal tax effect ( 37 ) ( 183 ) 47
Book expenses not deductible for tax purposes 23 22 31
Foreign income taxes, net of federal tax effect — — 8
Change in valuation allowance — — 4
Other, net ( 6 ) ( 2 ) 6
Income tax provision (benefit) $ ( 555 ) $ ( 2,568 ) $ 570
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The components of our deferred tax assets and liabilities were (in millions):
December 31,
2021 2020
Deferred tax assets:
Operating loss and other carryforwards $ 4,612 $ 4,027
Loyalty program liability 1,903 1,977
Leases 1,833 1,913
Pensions 941 1,405
Postretirement benefits other than pensions 214 203
Rent expense 92 96
Reorganization items 24 28
Other 760 847
Total deferred tax assets 10,379 10,496
Valuation allowance ( 34 ) ( 34 )
Net deferred tax assets 10,345 10,462
Deferred tax liabilities:
Accelerated depreciation and amortization ( 4,747 ) ( 5,028 )
Leases ( 1,767 ) ( 1,818 )
Other ( 284 ) ( 386 )
Total deferred tax liabilities ( 6,798 ) ( 7,232 )
Net deferred tax asset $ 3,547 $ 3,230
At December 31, 2021, we had approximately $ 17.2 billion of gross federal net operating losses (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.
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, which include our NOLs, when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. We presently have a $ 34 million valuation allowance on certain net deferred tax assets related to state NOL carryforwards. There can be no assurance that an additional valuation allowance on our net deferred tax assets will not be required. Such valuation allowance could be material.
Our ability to deduct our NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. Substantially all of our remaining federal NOL carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, our ability to utilize such NOL carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit our future use of NOLs and tax credits.
In 2021, we recorded an income tax benefit of $ 555 million, with 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.
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We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our 2018 through 2020 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and we are under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. We believe that the effect of any assessments will not be material to our consolidated financial statements.
The amount of, and changes to, our uncertain tax positions were not material in any of the years presented. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.
7. Risk Management
Our economic prospects are heavily dependent upon two variables we cannot control: general economic conditions and the price of fuel.
Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a strong negative effect on our business. In particular, the ongoing COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels have had and are expected to continue to have a severe and prolonged effect on the global economy generally and, in turn, is expected to depress demand for air travel into the foreseeable future. Due to the uncertainty surrounding the duration and severity of this pandemic, we can provide no assurance as to when and at what pace demand for air travel will return to pre-COVID-19 pandemic levels, if at all. Accordingly, we cannot predict the ultimate impact of the COVID-19 pandemic on our business, financial condition and results of operations. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues.
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business. Aircraft fuel prices have in the past, and may in the future, experience substantial volatility. Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of aircraft fuel can have a material effect on our operating results and liquidity.
These additional factors could impact our results of operations, financial performance and liquidity:
(a) Credit Risk
Our accounts receivable relate primarily to our contracts with airline and non-airline business partners, including our co-branded credit card partners, and to tickets sold to individual passengers primarily through the use of major credit cards. Receivables from our business partners are typically settled within 30 days. Receivables from ticket sales are short-term, mostly settled within seven days after sale. All accounts receivable are reported net of an allowance for credit losses, which have been minimal. We consider past and future financial and qualitative factors when establishing the allowance for credit losses. We do not believe we are subject to any significant concentration of credit risk.
(b) Interest Rate Risk
We have exposure to market risk associated with changes in interest rates related primarily to our LIBOR variable-rate debt obligations. Interest rates on $ 10.9 billion principal amount of long-term debt as of December 31, 2021 are subject to adjustment to reflect changes in floating interest rates. The weighted average effective interest rate on our variable-rate debt was 3.0 % at December 31, 2021. We currently do not have an interest rate hedge program to hedge our exposure to floating interest rates on our variable-rate debt obligations.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.
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(c) Foreign Currency Risk
We are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated transactions. Our largest exposure comes from the British pound sterling, Euro, Chinese yuan, Canadian dollar and various Latin American currencies, primarily the Brazilian real. We do not currently have a foreign currency hedge program.
8. Fair Value Measurements and Other Investments
Assets Measured at Fair Value on a Recurring Basis
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i.e. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
• Level 1 – Observable inputs such as quoted prices in active markets;
• Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
• Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
When available, we use quoted market prices to determine the fair value of our financial assets. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates.
We utilize the market approach to measure the fair value of our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments, restricted cash and restricted short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the year ended December 31, 2021.
Assets measured at fair value on a recurring basis are summarized below (in millions):
Fair Value Measurements as of December 31, 2021
Total Level 1 Level 2 Level 3
Short-term investments (1), (2) :
Money market funds $ 108 $ 108 $ — $ —
Corporate obligations 8,665 — 8,665 —
Bank notes/certificates of deposit/time deposits 2,195 — 2,195 —
Repurchase agreements 1,190 — 1,190 —
12,158 108 12,050 —
Restricted cash and short-term investments (1), (3)
990 654 336 —
Long-term investments (4)
239 239 — —
Total $ 13,387 $ 1,001 $ 12,386 $ —
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Fair Value Measurements as of December 31, 2020
Total Level 1 Level 2 Level 3
Short-term investments (1) :
Money market funds $ 247 $ 247 $ — $ —
Corporate obligations 3,449 — 3,449 —
Bank notes/certificates of deposit/time deposits 2,168 — 2,168 —
Repurchase agreements 755 — 755 —
6,619 247 6,372 —
Restricted cash and short-term investments (1), (3)
609 448 161 —
Long-term investments (4)
161 161 — —
Total $ 7,389 $ 856 $ 6,533 $ —
(1) All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period. There were no credit losses.
(2) Our short-term investments as of December 31, 2021 mature in one year or less.
(3) Restricted cash and short-term investments primarily include collateral held to support workers' compensation obligations and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of the Terminal at JFK, and as of December 31, 2021, also include collateral associated with the payment of interest for the AAdvantage Financing.
(4) Long-term investments primarily include our equity investment in China Southern Airlines and as of December 31, 2021, our long-term investments also include Vertical. These investments are reflected in other assets on our consolidated balance sheets. See “Other Investments” below for further information on our equity investments.
Fair Value of Debt
The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 except for $ 3.7 billion and $ 2.3 billion as of December 31, 2021 and December 31, 2020, respectively, which would have been classified as Level 3 in the fair value hierarchy. The fair value of the Convertible Notes, which would have been classified as Level 2, was $ 1.4 billion and $ 1.2 billion as of December 31, 2021 and December 31, 2020, respectively.
The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions):
December 31, 2021 December 31, 2020
Carrying
Value Fair
Value Carrying
Value Fair
Value
Long-term debt, including current maturities $ 37,323 $ 38,567 $ 32,021 $ 30,454
Other Investments
An important part of our strategy to expand our network has been to initiate or expand our commercial relationships with other airlines, such as by entering into global alliance, joint business and codeshare relationships, and, in certain instances, by making an equity investment in another airline or other companies.
Republic Holdings
We have an approximate 25 % ownership interest in Republic Holdings, which we received in 2017 in consideration for our unsecured claim in the Republic Holdings bankruptcy case. This ownership interest is accounted for under the equity method and our portion of Republic Holdings’ financial results is recognized within nonoperating other income, net on the consolidated statements of operations and the investment is reflected within other assets on our consolidated balance sheets.
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China Southern
In the third quarter of 2017, we acquired 2.7 % of the outstanding shares of China Southern for $ 203 million. At December 31, 2021, we owned a 1.8 % equity interest in China Southern. This ownership interest is accounted for at fair value based on China Southern’s stock price and mark-to-market adjustments are recorded to nonoperating other income, net on the consolidated statement of operations.
Vertical
In the fourth quarter of 2021, we invested $ 25 million to acquire 5.4 %, or 11.25 million, of the outstanding shares of Vertical with an initial aggregate value of $ 113 million, of which $ 88 million was non-cash. In connection with this investment, we entered into a memorandum of understanding (MOU) with Vertical to pre-order (subject to certain conditions and future agreed upon milestones) up to 250 electric vertical take-off and landing (eVTOL) aircraft, with an option to order an additional 100 eVTOL aircraft. Pursuant to the MOU, we received warrants to purchase 1.75 million shares of Vertical common stock at $ 0.0001 per share, each time we place a legally binding commitment for 50 eVTOL aircraft, up to a maximum aggregate amount of 8.75 million shares. Our investment in Vertical is reflected within other assets on our consolidated balance sheet. The $ 88 million non-cash portion of the fair value of equity securities received from Vertical is included as a deferred credit within other liabilities on the consolidated balance sheet and will be recognized as a reduction to the cost of eVTOL aircraft received in future periods or, if no legally binding commitment for eVTOL aircraft is entered into, will be recognized into income. Our investment in Vertical is accounted for at fair value based on Vertical’s stock price and mark-to-market adjustments are recorded to nonoperating other income, net on the consolidated statement of operations.
9. Employee Benefit Plans
We sponsor defined benefit and defined contribution pension plans for eligible employees. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen and we began providing enhanced benefits under our defined contribution pension plans for certain employee groups. We use a December 31 measurement date for all of our defined benefit pension plans. We also provide certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees. Effective November 1, 2012, we modified our retiree medical and other postretirement benefits plans to eliminate the company subsidy for employees who retire on or after November 1, 2012. As a result of modifications to our retiree medical and other postretirement benefits plans in 2012, we recognized a negative plan amendment of $ 1.9 billion, which was included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and was amortized over the future service life of the active plan participants for whom the benefit was eliminated. This prior service benefit was fully amortized as of December 31, 2020.
Effective January 1, 2021, health coverage under our retiree medical benefit program that is currently provided to certain retirees age 65 and over who retired prior to November 1, 2012, transitioned from a self-insured plan to a fully-insured Medicare Advantage plan. Benefits coverage has not been reduced and cost shared has not changed as a result of this transition. Due to this transition, as of December 31, 2020, we recognized a negative plan amendment of $ 313 million to reduce our benefit obligation, which was included as a component of prior service cost in AOCI and will be amortized over the average remaining life expectancy of all retirees, or approximately 13 years. As of December 31, 2021, $ 195 million of prior service cost remains to be amortized.
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Benefit Obligations, Fair Value of Plan Assets and Funded Status
The following tables provide a reconciliation of the changes in the pension and retiree medical and other postretirement benefits obligations, fair value of plan assets and a statement of funded status as of December 31, 2021 and 2020:
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
(In millions)
Benefit obligation at beginning of period $ 19,812 $ 18,358 $ 1,046 $ 824
Service cost 4 2 12 8
Interest cost 526 615 30 30
Actuarial (gain) loss (1), (2)
( 609 ) 1,613 ( 57 ) 46
Special termination benefits (3)
— — 139 410
Plan amendments (4)
— — — ( 195 )
Settlements ( 1 ) ( 36 ) — —
Benefit payments ( 822 ) ( 740 ) ( 72 ) ( 77 )
Benefit obligation at end of period $ 18,910 $ 19,812 $ 1,098 $ 1,046
Fair value of plan assets at beginning of period $ 13,557 $ 12,897 $ 170 $ 204
Actual return on plan assets 1,710 1,427 21 13
Employer contributions (5)
247 9 48 30
Settlements ( 1 ) ( 36 ) — —
Benefit payments ( 822 ) ( 740 ) ( 72 ) ( 77 )
Fair value of plan assets at end of period $ 14,691 $ 13,557 $ 167 $ 170
Funded status at end of period $ ( 4,219 ) $ ( 6,255 ) $ ( 931 ) $ ( 876 )
(1) The 2021 and 2020 pension actuarial (gain) loss primarily relates to the change in our weighted average discount rate assumption.
(2) The 2021 and 2020 retiree medical and other postretirement benefits actuarial (gain) loss primarily relates to the change in our weighted average discount rate assumption and, in 2021, plan experience adjustments.
(3) During the first quarter of 2021 and the third quarter of 2020, we remeasured our retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted into voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic. As a result, during 2021, we recognized a $ 139 million special charge for these enhanced healthcare benefits and increased our postretirement benefits obligation by $ 139 million, and during 2020, we recognized a $ 410 million special charge for these enhanced healthcare benefits and increased our postretirement benefits obligation by $ 410 million.
(4) Principally relates to the transition of our retiree medical benefit program from a self-insured plan to a fully-insured Medicare Advantage plan as discussed above.
(5) In January 2021, we made $ 241 million in contributions to our pension plans, including a contribution of $ 130 million for the 2020 calendar year that was permitted to be deferred to January 4, 2021 as provided under the CARES Act.
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Balance Sheet Position
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
(In millions)
As of December 31,
Current liability $ 7 $ 7 $ 90 $ 55
Noncurrent liability 4,212 6,248 841 821
Total liabilities $ 4,219 $ 6,255 $ 931 $ 876
Net actuarial loss (gain) $ 5,252 $ 6,700 $ ( 396 ) $ ( 358 )
Prior service cost (benefit) 47 75 ( 167 ) ( 181 )
Total accumulated other comprehensive loss (income), pre-tax
$ 5,299 $ 6,775 $ ( 563 ) $ ( 539 )
Plans with Projected Benefit Obligations Exceeding Fair Value of Plan Assets
Pension Benefits
2021 2020
(In millions)
Projected benefit obligation $ 18,910 $ 19,812
Fair value of plan assets 14,691 13,557
Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
(In millions)
Accumulated benefit obligation $ 18,899 $ 19,799 $ — $ —
Accumulated postretirement benefit obligation
— — 1,098 1,046
Fair value of plan assets 14,691 13,557 167 170
Net Periodic Benefit Cost (Income)
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2019 2021 2020 2019
(In millions)
Defined benefit plans:
Service cost $ 4 $ 2 $ 2 $ 12 $ 8 $ 3
Interest cost 526 615 703 30 30 33
Expected return on assets ( 1,084 ) ( 1,010 ) ( 815 ) ( 12 ) ( 11 ) ( 15 )
Special termination benefits — — — 139 410 —
Settlements — 12 — — — —
Amortization of:
Prior service cost (benefit) 28 30 28 ( 13 ) ( 135 ) ( 236 )
Unrecognized net loss (gain) 212 164 150 ( 24 ) ( 24 ) ( 31 )
Net periodic benefit cost (income) $ ( 314 ) $ ( 187 ) $ 68 $ 132 $ 278 $ ( 246 )
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The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income, net on our consolidated statements of operations.
Assumptions
The following actuarial assumptions were used to determine our benefit obligations and net periodic benefit cost (income) for the periods presented:
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
Benefit obligations:
Weighted average discount rate 3.0 % 2.7 % 2.8 % 2.4 %
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2019 2021 2020 2019
Net periodic benefit cost (income):
Weighted average discount rate 2.7 % 3.4 % 4.4 % 2.4 % 3.2 % 4.3 %
Weighted average expected rate of return on plan assets
8.0 % 8.0 % 8.0 % 8.0 % 8.0 % 8.0 %
Weighted average health care cost trend rate assumed for next year (1)
N/A N/A N/A 4.8 % 4.0 % 3.7 %
(1) The weighted average health care cost trend rate at December 31, 2021 is assumed to decline gradually to 3.9 % by 2028 and remain level thereafter.
As of December 31, 2021, our estimate of the long-term rate of return on plan assets was 8.0 % based on the target asset allocation. Expected returns on long duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management and securities lending programs.
Minimum Contributions
We are required to make minimum contributions to our defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and various other laws for U.S. based plans as well as underfunding rules specific to countries where we maintain defined benefit plans. 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 us. Based on the ARP provisions applicable to our pension plans, we will have no additional funding requirements until 2023. Our funding obligations will depend on the performance of our investments held in trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and our actuarial experience.
Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):
2022 2023 2024 2025 2026 2027-2031
Pension benefits $ 864 $ 898 $ 933 $ 966 $ 994 $ 5,225
Retiree medical and other postretirement benefits 114 109 103 99 95 390
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Plan Assets
The objectives of our investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers.
Based on these investment objectives, a long-term strategic asset allocation has been established. This strategic allocation seeks to balance the potential benefit of improving the funded position with the potential risk that the funded position would decline. The current strategic target asset allocation is as follows:
Asset Class/Sub-Class Allowed Range
Equity 45 % - 80 %
Public:
U.S. Large 10 % - 40 %
U.S. Small/Mid 2 % - 10 %
International 10 % - 25 %
International Small/Mid 0 % - 10 %
Emerging Markets 2 % - 15 %
Alternative Investments 5 % - 30 %
Fixed Income 20 % - 55 %
Public:
U.S. Long Duration 15 % - 45 %
High Yield and Emerging Markets 0 % - 10 %
Private Income 0 % - 15 %
Other 0 % - 5 %
Cash Equivalents 0 % - 20 %
U.S. long duration bonds are used to partially hedge the assets from declines in interest rates. Public equity as well as high yield fixed income securities are used to provide diversification and are expected to generate higher returns over the long-term than U.S. long duration bonds. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long-term. The pension plan’s master trust also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis. These programs are subject to market risk.
Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market are valued at the last bid price. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. No changes in valuation techniques or inputs occurred during the year.
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Benefit Plan Assets Measured at Fair Value on a Recurring Basis
The fair value of our pension plan assets at December 31, 2021 and 2020, by asset category, were as follows (in millions):
Fair Value Measurements as of December 31, 2021
Asset Category Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Cash and cash equivalents $ 76 $ — $ — $ 76
Equity securities:
International markets (a), (b)
2,166 — 4 2,170
Large-cap companies (b)
1,860 — — 1,860
Mid-cap companies (b)
449 — — 449
Small-cap companies (b)
84 2 — 86
Mutual funds/exchange traded funds (c)
263 — — 263
Fixed income:
Corporate debt (d)
— 2,847 — 2,847
Government securities (e)
— 1,128 — 1,128
U.S. municipal securities — 19 — 19
Alternative instruments:
Private market partnerships (f)
— — 52 52
Private market partnerships measured at net asset value (f), (g)
— — — 2,827
Common/collective trusts (h)
— 337 — 337
Common/collective trusts measured at net asset value (g), (h)
— — — 2,514
Insurance group annuity contracts — — 2 2
Other investments — 3 — 3
Dividend and interest receivable 45 — — 45
Due from brokers for sale of securities – net 10 — — 10
Other receivables – net 3 — — 3
Total $ 4,956 $ 4,336 $ 58 $ 14,691
(a) Holdings are diversified as follows: 14 % United Kingdom, 10 % Ireland, 10 % Japan, 9 % Switzerland, 7 % France, 6 % Germany, 12 % emerging markets and the remaining 32 % with no concentration greater than 5% in any one country.
(b) There are no significant concentrations of holdings by company or industry.
(c) Investment includes holdings invested 70 % in U.S. treasuries and corporate bonds, 17 % in equity securities of international companies and 13 % in equity securities of large-cap, mid-cap and small-cap U.S. companies.
(d) Includes approximately 81 % investments in corporate debt with a S&P rating lower than A and 19 % investments in corporate debt with a S&P rating A or higher. Holdings include 86 % U.S. companies, 12 % international companies and 2 % emerging market companies.
(e) Includes approximately 94 % investments in U.S. domestic government securities and 6 % in emerging market government securities. There are no significant foreign currency risks within this classification.
(f) Includes limited partnerships that invest primarily in domestic private equity and private income opportunities. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next one to ten years . Additionally, the pension plan’s master trust has future funding commitments of approximately $ 1.6 billion over the next ten years .
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(g) Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements.
(h) Investment includes 31 % in a common/collective trust investing in large market capitalization equity securities within the U.S., 29 % in three common/collective trusts investing in emerging country equity securities, 22 % in a common/collective trust investing in equity securities of companies located outside the U.S., 11 % in a collective interest trust investing primarily in short-term securities, 6 % in a common/collective trust investing in smaller market capitalization equity securities within the U.S. and 1 % in Canadian segregated balanced value, income growth and diversified pooled funds. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
Fair Value Measurements as of December 31, 2020
Asset Category Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Cash and cash equivalents $ 40 $ — $ — $ 40
Equity securities:
International markets (a), (b)
2,282 — — 2,282
Large-cap companies (b)
2,085 — — 2,085
Mid-cap companies (b)
428 — — 428
Small-cap companies (b)
73 1 — 74
Mutual funds (c)
80 — — 80
Fixed income:
Corporate debt (d)
— 3,026 — 3,026
Government securities (e)
— 1,010 — 1,010
U.S. municipal securities — 30 — 30
Alternative instruments:
Private market partnerships (f)
— — 15 15
Private market partnerships measured at net asset value (f), (g)
— — — 1,791
Common/collective trusts (h)
— 259 — 259
Common/collective trusts measured at net asset value (g), (h)
— — — 2,384
Insurance group annuity contracts — — 2 2
Dividend and interest receivable 49 — — 49
Due from brokers for sale of securities – net 1 — — 1
Other receivables – net 1 — — 1
Total $ 5,039 $ 4,326 $ 17 $ 13,557
(a) Holdings are diversified as follows: 11 % Switzerland, 11 % Ireland, 10 % United Kingdom, 9 % France, 8 % Japan, 7 % Germany, 6 % Netherlands, 13 % emerging markets and the remaining 25 % with no concentration greater than 5% in any one country.
(b) There are no significant concentrations of holdings by company or industry.
(c) Investment includes mutual funds invested 39 % in equity securities of large-cap, mid-cap and small-cap U.S. companies, 35 % in U.S. treasuries and corporate bonds and 26 % in equity securities of international companies.
(d) Includes approximately 77 % investments in corporate debt with a S&P rating lower than A and 23 % investments in corporate debt with a S&P rating A or higher. Holdings include 89 % U.S. companies, 9 % international companies and 2 % emerging market companies.
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(e) Includes approximately 89 % investments in U.S. domestic government securities, 9 % in emerging market government securities and 2 % in international government securities. There are no significant foreign currency risks within this classification.
(f) Includes limited partnerships that invest primarily in domestic private equity and private income opportunities. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next one to ten years . Additionally, the pension plan’s master trust has future funding commitments of approximately $ 1.6 billion over the next ten years .
(g) Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements.
(h) Investment includes 34 % in a common/collective trust investing in large market capitalization equity securities within the U.S., 30 % in three common/collective trusts investing in emerging country equity securities, 21 % in a common/collective trust investing in equity securities of companies located outside the U.S., 9 % in a collective interest trust investing primarily in short-term securities, 5 % in a common/collective trust investing in smaller market capitalization equity securities within the U.S. and 1 % in Canadian segregated balanced value, income growth and diversified pooled funds. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
Changes in fair value measurements of Level 3 investments during the years ended December 31, 2021 and 2020, were as follows (in millions):
2021 2020
Balance at beginning of year $ 17 $ 12
Actual gain on plan assets:
Relating to assets still held at the reporting date 10 1
Purchases 32 4
Sales ( 1 ) —
Balance at end of year $ 58 $ 17
The fair value of our retiree medical and other postretirement benefits plans’ assets by asset category, were as follows (in millions):
Fair Value Measurements as of December 31, 2021
Asset Category Quoted Prices in
Active Markets for Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Money market fund $ 4 $ — $ — $ 4
Mutual funds – AAL Class — 163 — 163
Total $ 4 $ 163 $ — $ 167
Fair Value Measurements as of December 31, 2020
Asset Category Quoted Prices in
Active Markets for Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Money market fund $ 4 $ — $ — $ 4
Mutual funds – AAL Class — 166 — 166
Total $ 4 $ 166 $ — $ 170
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Investments in the retiree medical and other postretirement benefits plans’ mutual funds are valued by quoted prices on the active market, which is fair value, and represents the net asset value of the shares of such funds as of the close of business at the end of the period. Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination. The AAL Class mutual funds are offered only to benefit plans of American, therefore, trading is restricted only to American, resulting in a fair value classification of Level 2. Investments included approximately 24 % and 25 % of investments in non-U.S. common stocks in 2021 and 2020, respectively.
Defined Contribution and Multiemployer Plans
The costs associated with our defined contribution plans were $ 920 million for the year ended December 31, 2021 and $ 860 million for each of the years ended December 31, 2020 and 2019.
We participate in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund, Employer Identification No. 51-6031295 and Plan No. 002 (the IAM Pension Fund). Our contributions to the IAM Pension Fund were $ 43 million, $ 40 million and $ 32 million for the years ended December 31, 2021, 2020 and 2019, respectively. The IAM Pension Fund reported $ 494 million in employers’ contributions for the year ended December 31, 2020, which is the most recent year for which such information is available. For 2020, our contributions represented more than 5 % of total contributions to the IAM Pension Fund.
On March 29, 2019, the actuary for the IAM Pension Fund certified that the fund was in “endangered” status despite reporting a funded status of over 80 %. Additionally, the IAM Pension Fund’s Board voluntarily elected to enter into “critical” status on April 17, 2019. Upon entry into critical status, the IAM Pension Fund was required by law to adopt a rehabilitation plan aimed at restoring the financial health of the pension plan and did so on April 17, 2019 (the Rehabilitation Plan). Under the Rehabilitation Plan, we were subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon our mandatory adoption of a contribution schedule under the Rehabilitation Plan. The contribution schedule requires 2.5 % annual increases to our contribution rate. This contribution schedule will remain in effect through the earlier of December 31, 2031 or the date the IAM Pension Fund emerges from critical status.
Profit Sharing Program
We accrue 5 % of our pre-tax income excluding net special items for our profit sharing program. As a result of our pre-tax loss excluding net special items, there will not be a payout for 2021 under our profit sharing program.
10. Accumulated Other Comprehensive Loss
The components of AOCI are as follows (in millions):
Pension,
Retiree
Medical and
Other
Postretirement
Benefits Unrealized Loss on Investments Income Tax
Benefit
(Provision) (1)
Total
Balance at December 31, 2019 $ ( 5,238 ) $ ( 2 ) $ ( 1,091 ) $ ( 6,331 )
Other comprehensive income (loss) before reclassifications ( 1,045 ) — 236 ( 809 )
Amounts reclassified from AOCI 47 — ( 10 ) (2)
37
Net current-period other comprehensive income (loss) ( 998 ) — 226 ( 772 )
Balance at December 31, 2020 ( 6,236 ) ( 2 ) ( 865 ) ( 7,103 )
Other comprehensive income (loss) before reclassifications 1,297 — ( 293 ) 1,004
Amounts reclassified from AOCI 203 — ( 46 ) (2)
157
Net current-period other comprehensive income (loss) 1,500 — ( 339 ) 1,161
Balance at December 31, 2021 $ ( 4,736 ) $ ( 2 ) $ ( 1,204 ) $ ( 5,942 )
(1) Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net loss until the obligations are fully extinguished.
(2) Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax benefit on our consolidated statements of operations.
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Reclassifications out of AOCI for the years ended December 31, 2021 and 2020 are as follows (in millions):
Amounts reclassified from AOCI Affected line items on the
consolidated statements of
operations
Year Ended December 31,
AOCI Components 2021 2020
Amortization of pension, retiree medical and other postretirement benefits:
Prior service cost (benefit) $ 11 $ ( 81 ) Nonoperating other income, net
Actuarial loss 146 118 Nonoperating other income, net
Total reclassifications for the period, net of tax $ 157 $ 37
Amounts allocated to other comprehensive income (loss) for income taxes will remain in AOCI until we cease all related activities, such as termination of the pension plan.
11. Commitments, Contingencies and Guarantees
(a) Aircraft, Engine and Other Purchase Commitments
Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2021 are expected to be as follows (approximately, in millions):
2022 2023 2024 2025 2026 2027 and Thereafter Total
Payments for aircraft and
engine commitments (1)
$ 1,987 $ 1,851 $ 3,358 $ 3,535 $ 1,663 $ 688 $ 13,082
(1) These amounts are net of purchase deposits currently held by the manufacturers. Our purchase deposits held by all manufacturers totaled $ 517 million and $ 1.4 billion as of December 31, 2021 and December 31, 2020, respectively.
Due to the 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.
On January 31, 2022, we entered into an amended purchase agreement with The Boeing Company (Boeing) pursuant to which we agreed to purchase 23 additional Boeing 737 MAX Family aircraft through the conversion of existing purchase options. We also intend to exercise purchase options for an additional seven aircraft in 2022, bringing our total incremental firm order of Boeing 737 MAX Family aircraft to 30 , with 15 of such aircraft scheduled to be delivered in 2023 and 15 scheduled to be delivered in 2024. In addition, we entered into an amended purchase agreement with Boeing to defer the delivery of certain Boeing 787 Family aircraft previously scheduled to be delivered beginning in January 2023. Pursuant to this amendment, deliveries of these aircraft are now scheduled to commence in the fourth quarter of 2023 and will continue into 2027. The table above reflects our purchase commitments after giving effect to these amendments and assumes our exercise of the seven 737 MAX Family aircraft purchase options mentioned above.
Additionally, the amounts in the table exclude 10 and three Boeing 787-8 aircraft scheduled to be delivered in 2022 and 2023, respectively, and four and one Boeing 787-9 aircraft scheduled to be delivered in 2023 and 2024, respectively, for which we have obtained committed lease financing. See Note 5 for information regarding this operating lease commitment.
Additionally, we have purchase commitments related to aircraft fuel, flight equipment maintenance, construction projects and information technology support as follows (approximately): $ 4.4 billion in 2022, $ 1.8 billion in 2023, $ 1.4 billion in 2024, $ 154 million in 2025, $ 610 million in 2026 and $ 942 million in 2027 and thereafter.
(b) Capacity Purchase Agreements with Third-Party Regional Carriers
American has capacity purchase agreements with third-party regional carriers. The capacity purchase agreements provide that all revenues, including passenger, in-flight, ancillary, mail and freight revenues, go to American. American controls marketing, scheduling, ticketing, pricing and seat inventories. In return, American agrees to pay predetermined fees to these airlines for operating an agreed-upon number of aircraft, without regard to the number of passengers on board. In addition, these agreements provide that American either reimburses or pays 100 % of certain variable costs, such as airport landing fees, fuel and passenger liability insurance.
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As of December 31, 2021, American’s capacity purchase agreements with third-party regional carriers had expiration dates ranging from 2022 to 2033, with rights of American to extend the respective terms of certain agreements.
As of December 31, 2021, American’s minimum obligations under its capacity purchase agreements with third-party regional carriers are as follows (approximately, in millions):
2022 2023 2024 2025 2026 2027 and Thereafter Total
Minimum obligations under capacity purchase agreements with third-party regional carriers (1)
$ 1,495 $ 1,834 $ 1,875 $ 1,729 $ 1,123 $ 2,317 $ 10,373
(1) Represents minimum payments under capacity purchase agreements with third-party regional carriers, which are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially. Excludes payments for the lease of certain aircraft under capacity purchase agreements, which are reflected in the operating lease obligations in Note 5.
(c) Airport Redevelopment
Los Angeles International Airport (LAX)
From time to time, airports where we have operations engage in construction projects, often substantial, that result in new or improved facilities that are ultimately funded through increases in the rent and other occupancy costs payable by airlines using the airport. Unlike this construction and funding model, we are managing a project at LAX where we have legal title to the assets during construction. In 2018, we executed a lease agreement with Los Angeles World Airports (LAWA), which owns and operates LAX, in connection with a $ 1.6 billion modernization project related to LAX Terminals 4 and 5. Construction, which started in October 2018 and is expected to be completed in 2028, will occur in a phased approach. The modernization project will include a unified departure hall to the entranceway of Terminals 4 and 5, reconfigured ticket counter and check-in areas with seamless access to security screening areas, 10 new security screening lanes with automated technology in addition to the existing Terminal 5 lanes, and a new Terminal 4 South concourse with more open and upgraded amenities at gate areas. The project will also include renovated break rooms, multi-use meeting rooms and team gathering spaces throughout the terminals to support our team members at LAX.
As each phase is completed and ready for use, the assets will be sold and transferred to LAWA, including the site improvements and non-proprietary improvements. As we control the assets during construction, they are recognized on our balance sheet until the assets are sold and transferred to LAWA. As of December 31, 2021, we have incurred approximately $ 338 million in costs relating to the LAX modernization project, of which $ 112 million, $ 114 million and $ 98 million were incurred during 2021, 2020 and 2019, respectively, and have been included within operating property and equipment on our consolidated balance sheets and included within airport construction projects, net of reimbursements on our consolidated statements of cash flows. As of December 31, 2021, we have sold and transferred $ 132 million of non-proprietary improvements to LAWA, of which $ 21 million occurred during 2021. For non-proprietary improvements which are not yet ready for use, any cash payments received from LAWA will be reflected as a financial liability. As of December 31, 2021, we have received $ 88 million in cash proceeds for non-proprietary improvements which are not yet ready for use, and therefore have not been sold and transferred back to LAWA. These proceeds are currently included in other accrued liabilities on our consolidated balance sheet and are reflected as financing activities on our consolidated statement of cash flows.
JFK
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8 (the Terminal). The renovation projects at the Terminal include: (i) the reconfiguration or elimination of certain existing gates and the construction of widebody gates, (ii) the construction of approximately 51,000 square feet of new terminal building space and the refurbishment of 73,300 square feet of existing terminal space, (iii) the expansion of the baggage system capacity of the Terminal, (iv) improvements to the premium passenger lounges, check-in and, potentially, security access areas, and (v) bathroom refreshment, new signage, and other upgrades. The construction project is currently scheduled to be completed in 2023 and is estimated to cost $ 439 million. In 2021, $ 118 million was spent on construction projects to upgrade the Terminal and has been included in airport construction projects, net of reimbursements on our consolidated statement of cash flows.
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(d) Off-Balance Sheet Arrangements
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. In the case of aircraft EETCs, rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft. Similarly, in the case of the spare engine EETCs, the trusts allow American to use its existing pool of spare engines to raise financing under a single facility. The trusts have also been structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American.
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. 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. In the case of a leveraged lease financing, the owner trust then leases the aircraft to American. In both cases, the equipment notes are secured by a security interest in the aircraft or engines, as applicable. The pass-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG. As of December 31, 2021, $ 9.4 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet.
With respect to leveraged leases, American evaluated whether the leases had characteristics of a variable interest entity. American concluded the leasing entities met the criteria for variable interest entities; however, American concluded it is not the primary beneficiary under these leasing arrangements and accounts for the majority of its EETC leveraged lease financings as operating leases. American’s total future payments to the trusts of each of the relevant EETCs under these leveraged lease financings are $ 20 million as of December 31, 2021, which are reflected in the operating lease obligations in Note 5.
Letters of Credit and Other
We provide financial assurance, such as letters of credit, surety bonds or restricted cash and investments, primarily to support projected workers’ compensation obligations and airport commitments. As of December 31, 2021, we had $ 439 million of letters of credit and surety bonds securing various obligations, of which $ 94 million is collateralized with our restricted cash. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2025.
(e) Legal Proceedings
Chapter 11 Cases . On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.
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The Plan established a DCR to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. The shares of AAG common stock issued to the DCR were originally issued on December 13, 2013, and have at all times since been included in the number of shares issued and outstanding as reported from time to time in our quarterly and annual reports, including for calculating earnings per common share. As disputed claims are resolved, the claimants receive distributions of shares from the DCR. We are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the DCR are not sufficient to pay any additional allowed unsecured claims. On November 29, 2021, the Bankruptcy Court granted our motion to close the bankruptcy case. The motion authorized us to settle various bankruptcy-related claims, distribute excess reserved funds held in the DCR, excluding shares set aside for an earlier settlement of a claim that cannot be distributed until all appeals are final, and to close the Chapter 11 cases. On December 7, 2021, in accordance with the approval granted by the Bankruptcy Court, we distributed approximately 4.5 million shares of AAG common stock from the DCR to former AMR stockholders, to former convertible noteholders treated as stockholders under the Plan and to claimants. As of December 31, 2021, 0.3 million shares of AAG common stock remain in the DCR to be available to resolve an outstanding claim.
Private Party Antitrust Action Related to Passenger Capacity. We, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court). On June 15, 2018, we reached a settlement agreement with the plaintiffs in the amount of $ 45 million to resolve all class claims in the U.S. lawsuits. That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia. We believe these appeals are without merit and intend to vigorously defend against them.
Private Party Antitrust Action Related to the Merger . On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the Bankruptcy Court. The complaint named as defendants US Airways Group, US Airways, Inc., AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019 and the parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019. On January 29, 2021, the Bankruptcy Court published its decision finding in our favor. The plaintiffs have appealed this ruling to the U.S. District Court, which remains pending. We believe this lawsuit is without merit and intend to continue to vigorously defend against it, including against plaintiffs' appeal of the Bankruptcy Court's January 29, 2021 ruling.
Government Antitrust Action Related to the Northeast Alliance. On September 21, 2021, the United States Department of Justice (DOJ), joined by Attorneys General from six states and the District of Columbia, filed an antitrust complaint against American and JetBlue Airways Corporation (JetBlue) alleging that American and JetBlue violated U.S. antitrust laws in connection with the previously disclosed Northeast Alliance (NEA) arrangement. We believe the complaint is without merit and intend to defend against it vigorously.
Also on September 21, 2021, the United States Department of Transportation (DOT) published a Clarification Notice relating to the agreement that had been reached between the DOT, American, and JetBlue in January 2021, at the conclusion of the DOT’s review of the NEA (DOT Agreement) . The DOT Clarification Notice stated, among other things, that the DOT Agreement remains in force during the pendency of the DOJ action against the NEA and, while the DOT retains independent statutory authority to prohibit unfair methods of competition in air transportation, the DOT intends to defer to DOJ to resolve the antitrust concerns that DOJ has identified with respect to the NEA. The DOT simultaneously published a Notice Staying Proceeding in relation to a complaint by Spirit Airlines, Inc. regarding the NEA, pending resolution of the DOJ action described above.
General . In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
(f) Guarantees and Indemnifications
We are party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. We are not able to estimate the potential amount of any liability resulting from the indemnities. These indemnities are discussed in the following paragraphs.
In our aircraft financing agreements, we generally indemnify the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (including certain taxes) relate to the negligence of the indemnified parties.
Our loan agreements and other LIBOR-based financing transactions (including certain leveraged aircraft leases) generally obligate us to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, our loan agreements and other financing arrangements typically contain a withholding tax provision that requires us to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.
In certain transactions, including certain aircraft financing leases and loans, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances. In such a case, we may be required to make a lump sum payment to terminate the relevant transaction.
We have general indemnity clauses in many of our airport and other real estate leases where we as lessee indemnify the lessor (and related parties) against liabilities related to our use of the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties. In addition, we provide environmental indemnities in many of these leases for contamination related to our use of the leased property.
Under certain contracts with third parties, we indemnify the third-party against legal liability arising out of an action by the third-party, or certain other parties. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined. We have liability insurance protecting us for some of the obligations we have undertaken under these indemnities.
American is required to make principal and interest payments for certain special facility revenue bonds issued by municipalities primarily to build or improve airport facilities and purchase equipment, which are leased to American. The payment of principal and interest of certain special facility revenue bonds is guaranteed by AAG. As of December 31, 2021, the remaining lease payments through 2035 guaranteeing the principal and interest on these bonds are $ 555 million and the current carrying amount of the associated operating lease liability in the accompanying consolidated balance sheet is $ 321 million.
As of December 31, 2021, AAG had issued guarantees covering approximately $ 19.8 billion of American’s secured debt (and interest thereon), including the Credit Facilities, the AAdvantage Financing, certain EETC financings and $ 1.1 billion of American’s special facility revenue bonds (and interest thereon).
(g) Credit Card Processing Agreements
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Our agreements allow these credit card processing companies, under certain conditions, to hold an amount of our cash (referred to as a holdback) equal to all or a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. These holdback requirements can be modified at the discretion of the credit card processing companies upon the occurrence of specific events, including material adverse changes in our financial condition or the triggering of a liquidity covenant. These credit card processing companies are not currently entitled to maintain any holdbacks. The imposition of holdback requirements would reduce our liquidity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
(h) Labor Negotiations
As of December 31, 2021, we employed approximately 123,400 active full-time equivalent (FTE) employees, of which 26,600 were employed by our wholly-owned regional subsidiaries. Of the total active FTE employees, 86 % are covered by collective bargaining agreements (CBAs) with various labor unions and 45 % are covered by CBAs that are currently amendable or that will become amendable within one year. Joint collective bargaining agreements covering our mainline pilots, flight attendants, passenger service, flight simulator engineers and dispatchers are now amendable. The CBAs covering certain employee groups at our wholly-owned regional subsidiaries are also amendable.
12. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information and non-cash investing and financing activities are as follows (in millions):
Year Ended December 31,
2021 2020 2019
Non-cash investing and financing activities:
Equity investment $ 88 $ — $ —
Settlement of bankruptcy obligations ( 1 ) 56 7
Deferred financing costs paid through issuance of debt — 17 —
Supplemental information:
Interest paid, net 1,632 944 1,111
Income taxes paid 3 6 8
13. Operating Segments and Related Disclosures
We are managed as a single business unit that provides air transportation for passengers and cargo. This allows us to benefit from an integrated revenue pricing and route network that includes American and our wholly-owned and third-party regional carriers that fly under capacity purchase agreements operating as American Eagle. The flight equipment of all these carriers is combined to form one fleet that is deployed through a single route scheduling system. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual regional carriers. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle.
See Note 1(l) for our passenger revenue by geographic region. Our tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.
14. Share-based Compensation
The 2013 AAG Incentive Award Plan (the 2013 Plan) provides that awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right. The 2013 Plan initially authorized the grant of awards for the issuance of up to 40 million shares. Any shares underlying awards granted under the 2013 Plan that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant.
For the years ended December 31, 2021, 2020 and 2019, we recorded $ 98 million, $ 91 million and $ 95 million, respectively, of share-based compensation costs principally in salaries, wages and benefits expense on our consolidated statements of operations.
During 2021, 2020 and 2019, we withheld approximately 1.0 million, 0.7 million and 0.8 million shares of AAG common stock, respectively, and paid approximately $ 18 million, $ 15 million and $ 25 million, respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
Restricted Stock Unit Awards (RSUs)
The majority of our RSUs have service conditions (time vested primarily over three years ). The grant-date fair value of these RSUs is equal to the market price of the underlying shares of AAG common stock on the date of grant. The expense for these RSUs is recognized on a straight-line basis over the vesting period for the entire award. RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock.
RSU award activity for all plans for the years ended December 31, 2021, 2020 and 2019 is as follows:
Number of Shares Weighted Average Grant Date Fair Value
(In thousands)
Outstanding at December 31, 2018 4,320 $ 44.29
Granted 3,206 34.00
Vested and released ( 2,002 ) 44.90
Forfeited ( 337 ) 42.55
Outstanding at December 31, 2019 5,187 $ 37.01
Granted 5,883 22.07
Vested and released ( 2,268 ) 39.46
Forfeited ( 920 ) 29.78
Outstanding at December 31, 2020 7,882 $ 23.66
Granted 5,525 18.34
Vested and released ( 3,314 ) 25.58
Forfeited ( 692 ) 18.78
Outstanding at December 31, 2021 9,401 $ 20.17
As of December 31, 2021, there was $ 99 million of unrecognized compensation cost related to RSUs. These costs are expected to be recognized over a weighted average period of one year . The total fair value of RSUs vested during the years ended December 31, 2021, 2020 and 2019 was $ 62 million, $ 51 million and $ 68 million, respectively.
15. Valuation and Qualifying Accounts (in millions)
Balance at Beginning of Year Additions Charged to Statement of Operations Accounts Deductions Balance at
End of Year
Allowance for obsolescence of spare parts
Year ended December 31, 2021 $ 490 $ 177 $ ( 33 ) $ 634
Year ended December 31, 2020 784 100 ( 394 ) 490
Year ended December 31, 2019 814 91 ( 121 ) 784
Allowance for credit losses on accounts receivable
Year ended December 31, 2021 $ 36 $ 22 $ ( 24 ) $ 34
Year ended December 31, 2020 31 27 ( 22 ) 36
Year ended December 31, 2019 29 19 ( 17 ) 31
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .
16. Subsequent Event
On January 31, 2022, we entered into an amended purchase agreement with Boeing, pursuant to which we agreed to purchase 23 additional Boeing 737 MAX Family aircraft through the conversion of existing purchase options. We also intend to exercise purchase options for an additional seven aircraft in 2022, bringing our total incremental firm order of Boeing 737 MAX Family aircraft to 30 , with 15 of such aircraft scheduled to be delivered in 2023 and 15 scheduled to be delivered in 2024. In addition, we entered into an amended purchase agreement with Boeing to defer the delivery of certain Boeing 787 Family aircraft previously scheduled to be delivered beginning in January 2023. Pursuant to this amendment, deliveries of these aircraft are now scheduled to commence in the fourth quarter of 2023 and will continue into 2027.
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ITEM 8B. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES, INC.
Report of Independent Registered Public Accounting Firm
To the Stockholder and Board of Directors
American Airlines, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Airlines, Inc. and subsidiaries (American) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholder’s equity, for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), American’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2022 expressed an unqualified opinion on the effectiveness of American’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of American’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to American in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Estimate of mileage credits not expected to be redeemed
As discussed in Note 1(l) to the consolidated financial statements, American’s loyalty program awards mileage credits to passengers for flights on American, flights on a partner airline, or for using the services of other program participants. American uses a statistical model based on historical redemption patterns to develop an estimate of mileage credits not expected to be redeemed. The associated value of mileage credits not expected to be redeemed is recognized as revenue proportionally as the remaining mileage credits are redeemed. American’s loyalty program liability was $9.1 billion as of December 31, 2021 and the associated passenger revenue for mileage credits redeemed for travel was $2.2 billion for the year ended December 31, 2021.
We identified the evaluation of the estimation of mileage credits not expected to be redeemed as a critical audit matter. Evaluating the application of the statistical model used to develop the estimate involved complex auditor judgment and the use of actuarial professionals with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over American’s loyalty program accounting process, including a control related to the evaluation of the application of the statistical model used to develop the estimate of mileage credits not expected to be redeemed. We involved actuarial professionals with specialized skills and knowledge, who assisted in developing a statistical model to derive an independent expectation of mileage credits not expected to be redeemed. We compared this independent expectation to American’s estimate to evaluate the appropriateness of the amount of the loyalty program liability and associated passenger revenue.
Sufficiency of audit evidence over realizability of tax operating loss and other carryforwards
As discussed in Notes 1(i) and 5 to the consolidated financial statements, American had $4.5 billion of tax operating loss and other carryforwards, which are recorded as deferred tax assets at December 31, 2021. Deferred tax assets are recognized related to tax operating loss and other carryforwards that will reduce future taxable income. American provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In evaluating the need for a valuation allowance, management considers the weighting of all available positive and negative evidence.
We identified the evaluation of the sufficiency of audit evidence over the realizability of tax operating loss and other carryforwards as a critical audit matter. Evaluating the sufficiency of audit evidence required subjective auditor judgment in order to assess the extent of procedures performed in assessing the realizability of the tax operating loss and other carryforwards.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to American’s deferred tax asset valuation allowance process, including controls related to the realizability of tax operating loss and other carryforwards. We evaluated positive and negative evidence used in assessing whether the tax operating loss and other carryforwards were more likely than not to be realized in the future. We evaluated the reasonableness of management’s projections of future profitability considering historical profitability of American, and consistency with industry data and economic trends. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the application of tax law. We assessed the sufficiency of audit evidence obtained over the realizability of the tax operating loss and other carryforwards by evaluating the cumulative results of the audit procedures.
/s/ KPMG LLP
We have served as American’s auditor since 2014.
Dallas, Texas
February 22, 2022
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AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31,
2021 2020 2019
Operating revenues:
Passenger $ 26,063 $ 14,518 $ 42,010
Cargo 1,314 769 863
Other 2,503 2,048 2,888
Total operating revenues 29,880 17,335 45,761
Operating expenses:
Aircraft fuel and related taxes 6,792 3,402 9,395
Salaries, wages and benefits 11,811 11,224 12,886
Regional expenses 3,111 2,746 4,002
Maintenance, materials and repairs 1,979 1,585 2,381
Other rent and landing fees 2,619 2,004 2,672
Aircraft rent 1,425 1,341 1,326
Selling expenses 1,098 666 2,004
Depreciation and amortization 2,019 2,040 1,982
Special items, net ( 4,006 ) ( 657 ) 635
Other 3,993 3,208 5,431
Total operating expenses 30,841 27,559 42,714
Operating income (loss) ( 961 ) ( 10,224 ) 3,047
Nonoperating income (expense):
Interest income 34 337 515
Interest expense, net ( 1,642 ) ( 1,171 ) ( 1,109 )
Other income, net 292 155 152
Total nonoperating expense, net ( 1,316 ) ( 679 ) ( 442 )
Income (loss) before income taxes ( 2,277 ) ( 10,903 ) 2,605
Income tax provision (benefit) ( 500 ) ( 2,453 ) 633
Net income (loss) $ ( 1,777 ) $ ( 8,450 ) $ 1,972
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Year Ended December 31,
2021 2020 2019
Net income (loss) $ ( 1,777 ) $ ( 8,450 ) $ 1,972
Other comprehensive income (loss), net of tax:
Pension, retiree medical and other postretirement benefits 1,153 ( 771 ) ( 434 )
Investments — — 3
Total other comprehensive income (loss), net of tax 1,153 ( 771 ) ( 431 )
Total comprehensive income (loss) $ ( 624 ) $ ( 9,221 ) $ 1,541
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value)
December 31,
2021 2020
ASSETS
Current assets
Cash $ 265 $ 231
Short-term investments 12,155 6,617
Restricted cash and short-term investments 990 609
Accounts receivable, net 1,484 1,334
Receivables from related parties, net 5,547 7,877
Aircraft fuel, spare parts and supplies, net 1,692 1,520
Prepaid expenses and other 579 633
Total current assets 22,712 18,821
Operating property and equipment
Flight equipment 37,520 37,485
Ground property and equipment 8,966 8,836
Equipment purchase deposits 517 1,446
Total property and equipment, at cost 47,003 47,767
Less accumulated depreciation and amortization ( 17,770 ) ( 16,393 )
Total property and equipment, net 29,233 31,374
Operating lease right-of-use assets 7,810 7,994
Other assets
Goodwill 4,091 4,091
Intangibles, net of accumulated amortization of $ 786 and $ 745 , respectively
1,988 2,029
Deferred tax asset 3,408 3,235
Other assets 1,903 1,671
Total other assets 11,390 11,026
Total assets $ 71,145 $ 69,215
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Current maturities of long-term debt and finance leases $ 1,742 $ 2,800
Accounts payable 1,630 1,116
Accrued salaries and wages 1,385 1,661
Air traffic liability 6,087 4,757
Loyalty program liability 2,896 2,033
Operating lease liabilities 1,496 1,641
Other accrued liabilities 2,628 2,300
Total current liabilities 17,864 16,308
Noncurrent liabilities
Long-term debt and finance leases, net of current maturities 30,352 26,182
Pension and postretirement benefits 5,020 7,027
Loyalty program liability 6,239 7,162
Operating lease liabilities 6,578 6,739
Other liabilities 1,266 1,449
Total noncurrent liabilities 49,455 48,559
Commitments and contingencies (Note 10)
Stockholder’s equity
Common stock, $ 1.00 par value; 1,000 shares authorized, issued and outstanding
— —
Additional paid-in capital 17,152 17,050
Accumulated other comprehensive loss ( 6,041 ) ( 7,194 )
Retained deficit ( 7,285 ) ( 5,508 )
Total stockholder’s equity 3,826 4,348
Total liabilities and stockholder’s equity $ 71,145 $ 69,215
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2021 2020 2019
Cash flows from operating activities:
Net income (loss) $ ( 1,777 ) $ ( 8,450 ) $ 1,972
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 2,282 2,313 2,267
Net gains from sale of property and equipment and sale-leaseback transactions ( 26 ) ( 98 ) ( 109 )
Special items, net non-cash 83 1,588 384
Pension and postretirement ( 320 ) ( 319 ) ( 178 )
Deferred income tax provision (benefit) ( 500 ) ( 2,453 ) 623
Share-based compensation 95 91 94
Other, net 24 14 ( 56 )
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ( 290 ) 595 130
Decrease (increase) in other assets ( 370 ) 42 ( 321 )
Increase (decrease) in accounts payable and accrued liabilities 335 ( 619 ) 273
Increase (decrease) in air traffic liability 1,454 ( 51 ) 469
Decrease (increase) in receivables from related parties, net 1,857 4,134 ( 1,772 )
Increase (decrease) in loyalty program liability ( 60 ) 580 76
Contributions to pension plans ( 247 ) ( 6 ) ( 1,224 )
Increase (decrease) in other liabilities 650 1,210 ( 199 )
Net cash provided by (used in) operating activities 3,190 ( 1,429 ) 2,429
Cash flows from investing activities:
Capital expenditures, net of aircraft purchase deposit returns ( 169 ) ( 1,922 ) ( 4,156 )
Airport construction projects, net of reimbursements ( 204 ) ( 173 ) ( 98 )
Proceeds from sale of property and equipment 192 351 49
Proceeds from sale-leaseback transactions 181 665 850
Purchases of short-term investments ( 19,454 ) ( 5,874 ) ( 3,184 )
Sales of short-term investments 13,923 2,803 4,144
Increase in restricted short-term investments ( 401 ) ( 308 ) ( 3 )
Purchase of equity investment ( 28 ) — —
Proceeds on sale of equity investment 5 41 —
Proceeds from vendor — 90 250
Other investing activities 10 19 2
Net cash used in investing activities ( 5,945 ) ( 4,308 ) ( 2,146 )
Cash flows from financing activities:
Proceeds from issuance of long-term debt 10,209 8,959 3,210
Payments on long-term debt and finance leases ( 7,320 ) ( 3,029 ) ( 3,440 )
Deferred financing costs ( 207 ) ( 85 ) ( 52 )
Other financing activities 88 — —
Net cash provided by (used in) financing activities 2,770 5,845 ( 282 )
Net increase in cash and restricted cash 15 108 1
Cash and restricted cash at beginning of year 385 277 276
Cash and restricted cash at end of year (a)
$ 400 $ 385 $ 277
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:
Cash $ 265 $ 231 $ 267
Restricted cash included in restricted cash and short-term investments 135 154 10
Total cash and restricted cash $ 400 $ 385 $ 277
See accompanying notes to consolidated financial statements.
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AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(In millions)
Common
Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Loss Retained
Earnings
(Deficit) Total
Balance at December 31, 2018 $ — $ 16,802 $ ( 5,992 ) $ 960 $ 11,770
Net income — — — 1,972 1,972
Other comprehensive loss, net — — ( 431 ) — ( 431 )
Share-based compensation expense — 94 — — 94
Intercompany equity transfer — 7 — 10 17
Balance at December 31, 2019 — 16,903 ( 6,423 ) 2,942 13,422
Net loss — — — ( 8,450 ) ( 8,450 )
Other comprehensive loss, net — — ( 771 ) — ( 771 )
Share-based compensation expense — 91 — — 91
Intercompany equity transfer — 56 — — 56
Balance at December 31, 2020 — 17,050 ( 7,194 ) ( 5,508 ) 4,348
Net loss — — — ( 1,777 ) ( 1,777 )
Other comprehensive income, net — — 1,153 — 1,153
Share-based compensation expense — 95 — — 95
Intercompany equity transfer — 7 — — 7
Balance at December 31, 2021 $ — $ 17,152 $ ( 6,041 ) $ ( 7,285 ) $ 3,826
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
1. Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
American Airlines, Inc. (American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG), which owns all of American’s outstanding common stock, par value $ 1.00 per share. On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. All significant intercompany transactions have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, the loyalty program, deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation. See (r) Regional Expenses below for further information.
(b) Impact of Coronavirus (COVID-19)
COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, “stay at home” orders and business closures. 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 American’s 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.
American has taken aggressive actions since the beginning of the COVID-19 pandemic to mitigate its effects on its business, including capacity reductions, structural changes to its fleet, cost reductions including implementing voluntary leave and early retirement programs, and steps to preserve cash and improve its overall liquidity position, consistent with the terms of the financial assistance it has received from the U.S. Government under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) and Section 7301 of the American Rescue Plan Act of 2021 (the ARP).
Capacity Reductions
American's 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.
While demand for domestic and short-haul international markets has largely recovered to 2019 levels, uncertainty remains regarding the timing of a full recovery. American will continue to match its forward capacity with observed booking trends for future travel and make further adjustments to American’s capacity as needed.
Cost Reductions
American has reduced its 2021 operating expenditures as a result of permanent non-volume cost reductions and other efficiency measures. These reductions include labor productivity enhancements, management salaries and benefits and other permanent cost reductions. Also, during the first quarter of 2021, approximately 1,600 represented team members opted into a voluntary early retirement program.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Liquidity
As of December 31, 2021, American 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, American completed the following financing transactions (see Note 3 for further information):
• 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 the U.S. Department of the Treasury (Treasury) (the Treasury Loan Agreement);
• issued approximately $ 150 million in special facility revenue bonds related to John F. Kennedy International Airport (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; and
• received approximately $ 192 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, AAG and the Subsidiaries (as defined below) 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 AAG and the Subsidiaries 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.
Also in 2021, AAG and the Subsidiaries received an aggregate of approximately $ 3.3 billion in financial assistance through the payroll support program (PSP3) established under the ARP. In connection with AAG and the Subsidiaries 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 below for further discussion on PSP2 and PSP3.
A significant portion of American’s debt financing agreements contain covenants requiring it to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value, collateral coverage and/or peak debt service coverage ratio covenants.
Given the above actions and American’s current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, American expects to meet its cash obligations as well as remain in compliance with the debt covenants in its existing financing agreements for the next 12 months based on its current level of unrestricted cash and short-term investments, its anticipated access to liquidity (including via proceeds from financings), and projected cash flows from operations.
PSP1
On April 20, 2020 (the PSP1 Closing Date), American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries), entered into a Payroll Support Program Agreement (the PSP1 Agreement) with Treasury, with respect to PSP1 provided pursuant to the CARES Act. In connection with AAG and the Subsidiaries’ entry into the PSP1 Agreement, on the PSP1 Closing Date, AAG also entered into a warrant agreement (the PSP1 Warrant Agreement) with Treasury and issued the PSP1 Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).
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PSP1 Agreement
In connection with PSP1, AAG and the Subsidiaries are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP1 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, which expired on September 30, 2020, the requirement that certain levels of commercial air service be maintained and the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through at least September 30, 2021, as well as the provisions that restrict the payment of certain executive compensation until March 24, 2022. The PSP1 Agreement also imposes substantial reporting obligations on AAG and the Subsidiaries. These provisions were subsequently extended upon the entry of AAG and its Subsidiaries into PSP2 and PSP3. In addition, AAG and the Subsidiaries have entered into the Treasury Loan Agreement (as defined below) and, as a result, the stock repurchase, dividend and executive compensation restrictions imposed by the Treasury Loan Agreement will remain in place through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid, which was in March 2021. See below for additional information on the Treasury Loan Agreement.
Pursuant to the PSP1 Agreement, Treasury provided to AAG and the Subsidiaries financial assistance in an aggregate of approximately $ 6.0 billion. As partial compensation to the U.S. Government for the provision of financial assistance under PSP1, AAG issued the PSP1 Promissory Note in the aggregate principal amount of $ 1.8 billion and issued warrants (each a PSP1 Warrant and, collectively, the PSP1 Warrants) to Treasury to purchase up to an aggregate of approximately 14.1 million shares (the PSP1 Warrant Shares) of AAG common stock for an exercise price of $ 12.51 per share, subject to adjustment. See below for more information on the PSP1 Warrant Agreement and the PSP1 Warrants.
For accounting purposes, the $ 6.0 billion of aggregate financial assistance AAG and the Subsidiaries received pursuant to the PSP1 Agreement is allocated to the PSP1 Promissory Note, the PSP1 Warrants and other PSP1 financial assistance (the PSP1 Financial Assistance). The $ 1.8 billion aggregate principal amount of the PSP1 Promissory Note was recorded as unsecured long-term debt, and the $ 63 million total fair value of the PSP1 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in the consolidated balance sheet. The remaining amount of approximately $ 4.2 billion of PSP1 Financial Assistance was recognized as a credit to special items, net in the consolidated statement of operations in the second and third quarters of 2020, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.
PSP1 Warrant Agreement and PSP1 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP1 Agreement, and pursuant to the PSP1 Warrant Agreement, AAG issued the PSP1 Warrants to Treasury to purchase PSP1 Warrant Shares. The exercise price of the PSP1 Warrant Shares is $ 12.51 per share, subject to certain anti-dilution provisions provided for in the PSP1 Warrants.
Pursuant to the PSP1 Warrant Agreement, AAG issued to Treasury PSP1 Warrants to purchase up to an aggregate of approximately 14.1 million shares of AAG common stock for an exercise price of $ 12.51 per share, subject to adjustment.
The PSP1 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP1 Warrant expires on the fifth anniversary of the date of issuance of such PSP1 Warrant. The PSP1 Warrants will be exercisable either through net share settlement or cash, at AAG’s option. The PSP1 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP1 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP1 Warrants or will be received upon exercise thereof.
Treasury Loan Agreement
On September 25, 2020 (the Treasury Loan Closing Date), AAG and American entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $ 5.5 billion. Subsequently, on October 21, 2020, AAG and American entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion. In connection with AAG’s entry into the Treasury Loan Agreement, on the Treasury Loan Closing Date, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury.
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In September 2020, American borrowed $ 550 million under the Treasury Term Loan Facility and on March 24, 2021, used proceeds from the AAdvantage Financing to prepay in full the $ 550 million of outstanding loans under the Treasury Term Loan Facility. Pursuant to the Treasury Loan Agreement, AAG issued to Treasury warrants (Treasury Loan Warrants) to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock (the Treasury Loan Warrant Shares). The exercise price of the Treasury Loan Warrant Shares is $ 12.51 per share, subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement. For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Term Loan Facility in the consolidated balance sheet. The provisions of the Treasury Loan Warrants are substantially similar to the PSP1 Warrants.
PSP2
On January 15, 2021 (the PSP2 Closing Date), the Subsidiaries, entered into a Payroll Support Program Extension Agreement (the PSP2 Agreement) with Treasury, with respect to PSP2 as provided pursuant to the PSP Extension Law. In connection with AAG and the Subsidiaries’ entry into the PSP2 Agreement, on the PSP2 Closing Date, AAG also entered into a warrant agreement (the PSP2 Warrant Agreement) with Treasury and issued the PSP2 Promissory Note to Treasury, with the Subsidiaries as guarantors.
PSP2 Agreement
In connection with PSP2, AAG and the Subsidiaries are required to comply with the relevant provisions of the PSP Extension Law, which are substantially similar to the restrictions contained in the Payroll Support Program Agreement entered into by the Subsidiaries with Treasury in connection with the payroll support program established under the CARES Act (the PSP1 Agreement), but are in effect for a longer time period. These provisions include the requirement that funds provided pursuant to the PSP2 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, which expired on March 31, 2021, the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through at least March 31, 2022, the provisions that restrict the payment of certain executive compensation until at least October 1, 2022, and a requirement to recall employees involuntarily terminated or furloughed after September 30, 2020. As was the case with PSP1, the PSP2 Agreement also imposes substantial reporting obligations on AAG and its Subsidiaries.
Pursuant to the PSP2 Agreement, Treasury provided AAG and its Subsidiaries financial assistance in an aggregate of approximately $ 3.5 billion. As partial compensation to the U.S. Government for the provision of financial assistance under PSP2, AAG issued the PSP2 Promissory Note in the aggregate principal amount of $ 1.0 billion and issued warrants (each a PSP2 Warrant and, collectively, the PSP2 Warrants) to Treasury to purchase up to an aggregate of approximately 6.6 million shares of AAG common stock for an exercise price of $ 15.66 per share, subject to adjustment. See below for more information on the PSP2 Warrant Agreement and PSP2 Warrants.
For accounting purposes, the $ 3.5 billion of aggregate financial assistance AAG and the Subsidiaries received pursuant to the PSP2 Agreement is allocated to the PSP2 Promissory Note, the PSP2 Warrants and other PSP2 financial assistance (the PSP2 Financial Assistance). The $ 1.0 billion aggregate principal amount of the PSP2 Promissory Note was recorded as unsecured long-term debt, and the $ 76 million total fair value of the PSP2 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in AAG’s consolidated balance sheet. The remaining amount of approximately $ 2.4 billion of PSP2 Financial Assistance was recognized as a credit to special items, net in the consolidated statement of operations in the first and second quarters of 2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.
PSP2 Warrant Agreement and PSP2 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP2 Agreement, and pursuant to the PSP2 Warrant Agreement, AAG issued the PSP2 Warrants to Treasury to purchase PSP2 Warrant Shares. The exercise price of the PSP2 Warrant Shares is $ 15.66 per share, subject to certain anti-dilution provisions provided for in the PSP2 Warrants.
Pursuant to the PSP2 Warrant Agreement, AAG issued to Treasury PSP2 Warrants to purchase up to an aggregate of approximately 6.6 million shares of AAG common stock for an exercise price of $ 15.66 per share, subject to adjustment.
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The PSP2 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP2 Warrant expires on the fifth anniversary of the date of issuance of such PSP2 Warrant. The PSP2 Warrants will be exercisable either through net share settlement or cash, at AAG’s option. The PSP2 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP2 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP2 Warrants or will be received upon exercise thereof.
PSP3
On April 23, 2021 (the PSP3 Closing Date), the Subsidiaries, entered into a Payroll Support Program 3 Agreement (the PSP3 Agreement) with Treasury, with respect to PSP3 as provided pursuant to the ARP. In connection with AAG and the Subsidiaries’ entry into the PSP3 Agreement, on the PSP3 Closing Date, AAG also entered into a warrant agreement (the PSP3 Warrant Agreement) with Treasury and issued the PSP3 Promissory Note to Treasury, with the Subsidiaries as guarantors.
PSP3 Agreement
In connection with PSP3, AAG and the Subsidiaries are required to comply with the relevant provisions of the ARP, which are substantially similar to the restrictions contained in the PSP1 Agreement, but are in effect for a longer time period. These provisions include the requirement that funds provided pursuant to the PSP3 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, which expired on September 30, 2021, the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through at least September 30, 2022, and the provisions that restrict the payment of certain executive compensation until April 1, 2023. As was the case with PSP1 and PSP2, the PSP3 Agreement also imposes substantial reporting obligations on AAG and the Subsidiaries.
Pursuant to the PSP3 Agreement, Treasury provided AAG and the Subsidiaries financial assistance in an aggregate of approximately $ 3.3 billion. As partial compensation to the U.S. Government for the provision of financial assistance under PSP3, AAG issued the PSP3 Promissory Note in the aggregate principal amount of $ 946 million and issued warrants (each a PSP3 Warrant and, collectively, the PSP3 Warrants) to Treasury to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock for an exercise price of $ 21.75 per share, subject to adjustment. See below for more information on the PSP3 Warrant Agreement and PSP3 Warrants.
For accounting purposes, the $ 3.3 billion of aggregate financial assistance AAG and the Subsidiaries received pursuant to the PSP3 Agreement is allocated to the PSP3 Promissory Note, the PSP3 Warrants and other PSP3 financial assistance (the PSP3 Financial Assistance). The $ 946 million aggregate principal amount of the PSP3 Promissory Note was recorded as unsecured long-term debt, and the $ 46 million total fair value of the PSP3 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in AAG’s consolidated balance sheet. The remaining amount of approximately $ 2.3 billion of PSP3 Financial Assistance was recognized as a credit to special items, net in the consolidated statements of operations in the second and third quarters of 2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.
PSP3 Warrant Agreement and PSP3 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP3 Agreement, and pursuant to the PSP3 Warrant Agreement, AAG issued the PSP3 Warrants to Treasury to purchase PSP3 Warrant Shares. The exercise price of the PSP3 Warrant Shares is $ 21.75 per share, subject to certain anti-dilution provisions provided for in the PSP3 Warrants.
Pursuant to the PSP3 Warrant Agreement, AAG issued to Treasury PSP3 Warrants to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock for an exercise price of $ 21.75 per share, subject to adjustment.
The PSP3 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP3 Warrant expires on the fifth anniversary of the date of issuance of such PSP3 Warrant. The PSP3 Warrants will be exercisable either through net share settlement or cash, at AAG’s option. The PSP3 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP3 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP3 Warrants or will be received upon exercise thereof.
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(c) Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2019-12: 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. American adopted this standard effective January 1, 2021, and it did not have a material impact on its consolidated financial statements.
ASU 2021-10: 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. American adopted this standard as of December 31, 2021. See (b) Impact of COVID-19 above for disclosure related to the financial assistance American received from Treasury.
(d) Investments
Short-term investments primarily include debt securities and are classified as available-for-sale and stated at fair value. Realized gains and losses are recorded in nonoperating expense on American’s consolidated statements of operations. Unrealized gains and losses are recorded in accumulated other comprehensive loss on American’s consolidated balance sheets. For investments in an unrealized loss position, American determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. There have been no credit losses.
Equity investments are accounted for under the equity method if American is able to exercise significant influence over an investee. Equity investments for which American does not have significant influence are recorded at fair value or at cost, if fair value is not readily determinable, with adjustments for observable changes in price or impairments (referred to as the measurement alternative). American’s share of equity method investee’s financial results and changes in fair value are recorded in nonoperating other income, net on the consolidated statements of operations. See Note 7 for additional information related to American’s investments.
(e) Restricted Cash and Short-term Investments
American has restricted cash and short-term investments related primarily to collateral held to support workers’ compensation obligations, collateral associated with the payment of interest for the AAdvantage Financing and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of the Terminal at JFK.
(f) Aircraft Fuel, Spare Parts and Supplies, Net
Aircraft fuel is recorded on a first-in, first-out basis. Spare parts and supplies are recorded at average costs less an allowance for obsolescence, which is recognized over the weighted average remaining useful life of the related fleet. American also provides an allowance for spare parts and supplies identified as excess or obsolete to reduce the carrying cost to the lower of cost or net realizable value. Aircraft fuel, spare parts and supplies are expensed when used.
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(g) Operating Property and Equipment
Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight-line method. Residual values for aircraft, engines and related rotable parts are generally 5 % to 10 % of original cost. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less. The estimated useful lives for the principal property and equipment classifications are as follows:
Principal Property and Equipment Classification Estimated Useful Life
Aircraft, engines and related rotable parts 20 – 30 years
Buildings and improvements 5 – 30 years
Furniture, fixtures and other equipment 3 – 10 years
Capitalized software 5 – 10 years
Total depreciation and amortization expense was $ 2.3 billion for each of the years ended December 31, 2021 and 2020, and $ 2.5 billion for the year ended December 31, 2019.
American assesses impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired. An impairment of an asset or group of assets exists only when the sum of the estimated undiscounted cash flows expected to be generated directly by the assets are less than the carrying value of the assets. American groups 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 American’s current fleet plan. If such assets are impaired, the impairment charge recognized is the amount by which the carrying value of the assets exceed their fair value. Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable. In 2021, American retired its remaining Embraer 140 fleet and recorded $ 27 million in non-cash special impairment charges reflecting the difference between the carrying values of these assets and their fair values.
At December 31, 2021 and 2020, prepaid expense and other on the consolidated balance sheets included $ 29 million and $ 164 million, respectively, of retired aircraft that are expected to be sold in the next year, and other assets on the consolidated balance sheets included $ 382 million and $ 400 million, respectively, of nonoperating retired aircraft.
(h) Leases
American determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities on American’s consolidated balance sheets. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, on American’s consolidated balance sheets.
ROU assets represent American’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
American uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date , in determining the present value of lease payments. American gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates.
American’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on its consolidated balance sheets. American’s lease agreements do not contain any residual value guarantees.
Under certain of American’s capacity purchase agreements with third-party regional carriers, American does not own the underlying aircraft. However, since American controls the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes. For these capacity purchase agreements, American accounts for the lease and non-lease components separately. The lease
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component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. American allocates the consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See Note 10(b) for additional information on its capacity purchase agreements .
For real estate, American accounts for the lease and non-lease components as a single lease component.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.
American provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand.
(j) Goodwill
Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the merger with US Airways Group. American has one reporting unit. American assesses goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of goodwill may be lower than the carrying value. American’s annual assessment date is October 1.
Goodwill is assessed for impairment by initially performing a qualitative assessment. If American determines that it is more likely than not that its goodwill may be impaired, it uses a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon American’s annual assessment, there was no goodwill impairment in 2021. The carrying value of American’s goodwill on its consolidated balance sheets was $ 4.1 billion as of December 31, 2021 and 2020.
(k) Other Intangibles, Net
Intangible assets consist primarily of certain domestic airport slots and gate leasehold rights, customer relationships, marketing agreements, international slots and route authorities and tradenames.
Definite-Lived Intangible Assets
Definite-lived intangible assets are originally recorded at their acquired fair values, subsequently amortized over their respective estimated useful lives and are assessed for impairment whenever events and circumstances indicate that the assets may be impaired.
The following table provides information relating to American’s amortizable intangible assets as of December 31, 2021 and 2020 (in millions):
December 31,
2021 2020
Domestic airport slots $ 365 $ 365
Customer relationships 300 300
Marketing agreements 105 105
Tradenames 35 35
Airport gate leasehold rights 137 137
Accumulated amortization ( 786 ) ( 745 )
Total $ 156 $ 197
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Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight-line basis over approximately nine years and 30 years, respectively. Tradenames are fully amortized.
American recorded amortization expense related to these intangible assets of $ 41 million for each of the years ended December 31, 2021, 2020 and 2019. American expects to record annual amortization expense for these intangible assets as follows (in millions):
2022 $ 41
2023 7
2024 7
2025 7
2026 6
2027 and thereafter 88
Total $ 156
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets include certain domestic airport slots and international slots and route authorities. American assesses indefinite-lived intangible assets for impairment annually or more frequently if events or circumstances indicate that the fair values of indefinite-lived intangible assets may be lower than their carrying values. American’s annual assessment date is October 1.
Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment. If American determines that it is more likely than not that its indefinite-lived intangible assets may be impaired, American uses a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon American’s annual assessment, there were no indefinite-lived intangible asset impairments in 2021. American had $ 1.8 billion of indefinite-lived intangible assets on its consolidated balance sheets as of December 31, 2021 and 2020.
(l) Revenue Recognition
Revenue
The following are the significant categories comprising American’s reported operating revenues (in millions):
Year Ended December 31,
2021 2020 2019
Passenger revenue:
Passenger travel $ 23,896 $ 13,456 $ 38,831
Loyalty revenue - travel (1)
2,167 1,062 3,179
Total passenger revenue 26,063 14,518 42,010
Cargo 1,314 769 863
Other:
Loyalty revenue - marketing services (2)
2,166 1,825 2,361
Other revenue 337 223 527
Total other revenue 2,503 2,048 2,888
Total operating revenues $ 29,880 $ 17,335 $ 45,761
(1) Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners. See “ Loyalty Revenue” below for further discussion on these mileage credits.
(2) During the years ended December 31, 2021, 2020 and 2019, cash payments from co-branded credit card and other partners were $ 3.4 billion, $ 2.9 billion and $ 3.9 billion, respectively.
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The following is American’s total passenger revenue by geographic region (in millions):
Year Ended December 31,
2021 2020 2019
Domestic $ 21,453 $ 11,765 $ 30,881
Latin America 3,506 1,852 5,047
Atlantic
965 654 4,624
Pacific 139 247 1,458
Total passenger revenue $ 26,063 $ 14,518 $ 42,010
American attributes passenger revenue by geographic region based upon the origin and destination of each flight segment.
Passenger Revenue
American recognizes all revenues generated from transportation on American and its regional flights operated under the brand name American Eagle, including associated baggage fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on American’s consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel.
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of American’s historical data. American has consistently applied this accounting method to estimate revenue from unused tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of American’s estimates. 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.
Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.
Loyalty Revenue
American currently operates 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 American’s 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, American applies the deferred revenue method. In response to the COVID-19 pandemic, American suspended the expiration of mileage credits through March 31, 2022 and eliminated mileage reinstatement fees for canceled award tickets.
Mileage credits earned through travel
For mileage credits earned through travel, American applies a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. 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 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, American will continue to monitor redemption patterns and may adjust its estimates in the future.
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Mileage credits sold to co-branded credit cards and other partners
American sells mileage credits to participating airline partners and non-airline business partners, including American’s co-branded credit card partners, under contracts with terms extending generally for one to five 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. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. American allocates the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.
American’s most significant partner agreements are its co-branded credit card agreements with Citi and Barclaycard US. American identified the following revenue elements in these co-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, American recognizes the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.
For the portion of American’s outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed. American’s estimates use a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption.
Cargo Revenue
Cargo revenue is recognized when American provides the transportation.
Other Revenue
Other revenue includes revenue associated with American’s loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded credit card and other partners and other marketing related payments. Loyalty revenue included in other revenue was $ 2.2 billion, $ 1.8 billion and $ 2.4 billion for the years ended December 31, 2021, 2020 and 2019, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty Revenue .” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.
Contract Balances
American’s significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on American’s consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on American’s consolidated balance sheets.
December 31,
2021 2020
(in millions)
Loyalty program liability $ 9,135 $ 9,195
Air traffic liability 6,087 4,757
Total $ 15,222 $ 13,952
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The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
Balance at December 31, 2020 $ 9,195
Deferral of revenue 2,161
Recognition of revenue (1)
( 2,221 )
Balance at December 31, 2021 (2)
$ 9,135
(1) Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.
(2) Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. In response to the COVID-19 pandemic, American suspended the expiration of mileage credits through March 31, 2022 and eliminated mileage reinstatement fees for canceled award tickets. As of December 31, 2021, American’s current loyalty program liability was $ 2.9 billion and represents American’s current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter. Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, American will continue to monitor redemption patterns and may adjust its estimates in the future.
The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel. The balance in American’s air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is generally one year . Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months. For 2021, $ 1.7 billion of revenue was recognized in passenger revenue that was included in American’s air traffic liability at December 31, 2020. In response to the COVID-19 pandemic, American 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. American also has 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, American’s estimates of revenue that will be recognized from the air traffic liability for future flown or unused tickets as well as its estimates of refunds may be subject to variability and differ from historical experience.
American’s ticket contract receivables relate to ticket sales to individual passengers primarily through the use of major credit cards and are reflected as accounts receivable, net on the accompanying consolidated balance sheets. These receivables are short-term, mostly settled within seven days after sale. All accounts receivable are reported net of an allowance for credit losses, which have been minimal. American considers past and future financial and qualitative factors when establishing the allowance for credit losses.
(m) Maintenance, Materials and Repairs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.
(n) Selling Expenses
Selling expenses include credit card fees, commissions, third party distribution channel fees and advertising. Selling expenses associated with passenger revenue are expensed when the transportation or service is provided. Advertising costs are expensed as incurred. Advertising expense was $ 105 million, $ 57 million and $ 144 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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(o) Share-based Compensation
American accounts for its share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. The majority of American’s stock awards are time vested restricted stock units, and the fair value of such awards is based on the market price of the underlying shares of AAG common stock on the date of grant. See Note 13 for further discussion of share-based compensation.
(p) Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net on American’s consolidated statements of operations. For the years ended December 31, 2021 , 2020 and 2019, respectively, foreign currency losses were $ 4 million, $ 24 million and $ 32 million.
(q) Other Operating Expenses
Other operating expenses includes costs associated with ground and cargo handling, crew travel, aircraft food and catering, aircraft cleaning, passenger accommodation, international navigation fees and certain general and administrative expenses.
(r) Regional Expenses
American's regional carriers provide scheduled air transportation under the brand name “American Eagle.” The American Eagle carriers include AAG's wholly-owned regional carriers as well as third-party regional carriers. Substantially all of American's regional carrier arrangements are in the form of capacity purchase agreements. Expenses associated with American Eagle operations are classified as regional expenses on the consolidated statements of operations.
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 American's consolidated statements of operations. The 2020 consolidated statement of operations has been recast to conform to the 2021 presentation. This statement of operations presentation change has no impact on total operating expenses or net loss.
Regional expenses for the years ended December 31, 2021 , 2020, and 2019 include $ 263 million, $ 273 million and $ 286 million of depreciation and amortization, respectively, and $ 6 million, $ 13 million and $ 29 million of aircraft rent, respectively.
In 2021, 2020, and 2019, American recognized $ 495 million, $ 438 million and $ 590 million, respectively, of expense under its capacity purchase agreement with Republic Airways Inc. (Republic). American holds a 25 % equity interest in Republic Airways Holdings Inc. (Republic Holdings), the parent company of Republic.
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2. Special Items, Net
Special items, net on American’s consolidated statements of operations consisted of the following (in millions):
Year Ended December 31,
2021 2020 2019
PSP Financial Assistance (1)
$ ( 4,162 ) $ ( 3,710 ) $ —
Severance expenses (2)
168 1,408 11
Litigation reserve adjustments ( 19 ) — ( 53 )
Mark-to-market adjustments on bankruptcy obligations, net (3)
( 3 ) ( 49 ) ( 11 )
Fleet impairment (4)
— 1,484 213
Labor contract expenses (5)
— 228 —
Fleet restructuring expenses (6)
— — 271
Merger integration expenses (7)
— — 191
Other operating special items, net 10 ( 18 ) 13
Mainline operating special items, net ( 4,006 ) ( 657 ) 635
PSP Financial Assistance (1)
( 539 ) ( 444 ) —
Fleet impairment (4)
27 106 —
Regional operating special items, net ( 512 ) ( 338 ) —
Operating special items, net ( 4,518 ) ( 995 ) 635
Mark-to-market adjustments on equity and other investments, net (8)
31 135 ( 5 )
Debt refinancing, extinguishment and other, net 29 35 16
Nonoperating special items, net 60 170 11
(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) for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2) The 2021 and 2020 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 American's operation due to the COVID-19 pandemic. Cash payments primarily associated with American's voluntary early retirement programs were approximately $520 million and $ 365 million in 2021 and 2020, respectively.
The 2019 severance expenses primarily included costs associated with reductions of management and support staff team members.
(3) Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG’s 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, American retired its remaining Embraer 140 fleet resulting in a non-cash write-down of these regional aircraft. See Note 1(g) 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.
The 2019 fleet impairment principally included a non-cash write-down of aircraft related to the retirement of American’s Embraer 190 fleet.
(5) The 2020 labor contract expenses primarily related to one-time charges due to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM
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Association) for American's maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(6) Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.
(7) Merger integration expenses included costs associated with integration projects, principally American's technical operations, flight attendant, human resources and payroll systems.
(8) Mark-to-market adjustments on equity and other investments, net primarily related to net unrealized gains and losses associated with American’s equity investments in China Southern Airlines Company Limited (China Southern Airlines) and in 2021, Vertical Aerospace Ltd. (Vertical), and certain treasury rate lock derivative instruments.
3. Debt
Long-term debt included on American’s consolidated balance sheets consisted of (in millions):
December 31,
2021 2020
Secured
2013 Term Loan Facility, variable interest rate of 1.85 %, installments through 2025 (a)
$ 1,770 $ 1,788
2013 Revolving Facility (a)
— 750
2014 Term Loan Facility, variable interest rate of 1.85 %, installments through 2027 (a)
1,208 1,220
2014 Revolving Facility (a)
— 1,643
April 2016 Spare Parts Term Loan Facility (a)
— 960
April 2016 Revolving Facility (a)
— 450
December 2016 Term Loan Facility, variable interest rate of 2.11 %, installments through 2023 (a)
1,188 1,200
11.75 % senior secured notes, interest only payments until due in July 2025 (b)
2,500 2,500
10.75 % senior secured IP notes, interest only payments until due in February 2026 (b)
1,000 1,000
10.75 % senior secured LGA/DCA notes, interest only payments until due in February 2026 (b)
200 200
Treasury Term Loan Facility (c)
— 550
5.50 % senior secured notes, installments beginning in July 2023 until due in April 2026 (d)
3,500 —
5.75 % senior secured notes, installments beginning in July 2026 until due in April 2029 (d)
3,000 —
AAdvantage Term Loan Facility, variable interest rate of 5.50 %, installments beginning in July 2023 through April 2028 (d)
3,500 —
Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 2.88 % to 8.39 %, averaging 3.84 %, maturing from 2022 to 2034 (e)
9,357 11,013
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.27 % to 4.64 %, averaging 1.82 %, maturing from 2022 to 2032
3,433 4,417
Special facility revenue bonds, fixed interest rates ranging from 2.25 % to 5.38 %, maturing from 2026 to 2036 (f)
1,129 1,040
Total long-term debt 31,785 28,731
Less: Total unamortized debt discount, premium and issuance costs 428 321
Less: Current maturities 1,568 2,700
Long-term debt, net of current maturities $ 29,789 $ 25,710
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As of December 31, 2021, the maximum availability under American’s revolving credit and other facilities is as follows (in millions):
2013 Revolving Facility $ 750
2014 Revolving Facility 1,643
April 2016 Revolving Facility 450
Short-term Revolving and Other Facilities 568
Total $ 3,411
American has an undrawn $ 500 million short-term revolving credit facility, which was set to expire at the beginning of January 2022 but which has been extended through the beginning of January 2023. Beginning January 2, 2022, the available amount thereunder decreased to $ 150 million. American also currently has approximately $ 68 million of available borrowing base under a cargo receivables facility that was entered into in December 2020 and is set to expire in December 2022. The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future.
Secured financings, including revolving credit and other facilities, are collateralized by assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots, certain receivables, certain intellectual property and certain loyalty program assets.
At December 31, 2021, the maturities of long-term debt are as follows (in millions):
2022 $ 1,637
2023 4,167
2024 3,467
2025 7,749
2026 4,412
2027 and thereafter 10,353
Total $ 31,785
(a) 2013, 2014, April 2016 and December 2016 Credit Facilities
2013 Credit Facilities
In November 2019, American and AAG entered into the Sixth Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015 (as previously amended, the 2013 Credit Agreement; the revolving credit facility established thereunder, the 2013 Revolving Facility; the term loan facility established thereunder, the 2013 Term Loan Facility; and the 2013 Revolving Facility together with the 2013 Term Loan Facility, the 2013 Credit Facilities), which reduced the total aggregate commitments under the 2013 Revolving Facility to $ 750 million from $ 1.0 billion. In addition, certain lenders party to the 2013 Credit Agreement extended the maturity date of their commitments under the 2013 Revolving Facility to October 2024 from October 2023.
In March 2021, American repaid in full the $ 750 million of outstanding revolving loans under the 2013 Revolving Facility that was drawn in April 2020. Following the March 2021 repayment, American is able to draw upon the commitment under the 2013 Revolving Facility again as needed upon the terms of the 2013 Credit Agreement or leave it undrawn, in each case, until such commitment expires, which is currently scheduled to occur in October 2024. As of December 31, 2021, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.
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2014 Credit Facilities
In November 2019, American and AAG entered into the Seventh Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (as previously amended, the 2014 Credit Agreement; the revolving credit facility established thereunder, the 2014 Revolving Facility; the term loan facility established thereunder, the 2014 Term Loan Facility; and the 2014 Revolving Facility together with the 2014 Term Loan Facility, the 2014 Credit Facilities), which increased the total aggregate commitments under the 2014 Revolving Facility to $ 1.6 billion from $ 1.5 billion. In addition, certain lenders party to the 2014 Credit Agreement extended the maturity date of their commitments under the 2014 Revolving Facility to October 2024 from October 2023.
In January 2020, American and AAG entered into the Eighth Amendment to the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amount outstanding to $ 1.2 billion, reducing the LIBOR margin from 2.00 % to 1.75 %, with a LIBOR floor of 0 %, and reducing the base rate margin from 1.00 % to 0.75 %. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021.
In March 2021, American repaid in full the $ 1.6 billion of outstanding revolving loans under the 2014 Revolving Facility that was drawn in April and May 2020. Following the March 2021 repayment, American is able to draw upon the commitment under the 2014 Revolving Facility again as needed upon the terms of the 2014 Credit Agreement or leave it undrawn, in each case, until such commitment expires, which is currently scheduled to occur in October 2024. As of December 31, 2021, there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.
April 2016 Credit Facilities
In November 2019, American and AAG entered into the Fifth Amendment to Credit and Guaranty Agreement, amending the Credit and Guaranty Agreement dated as of April 29, 2016 (as previously amended, the April 2016 Credit Agreement; the revolving credit facility established thereunder, the April 2016 Revolving Facility; the term loan facility established thereunder, the April 2016 Spare Parts Term Loan Facility; and the April 2016 Revolving Facility together with the April 2016 Spare Parts Term Loan Facility, the April 2016 Credit Facilities), which increased the total aggregate commitments under the April 2016 Revolving Facility to $ 450 million from $ 300 million. In addition, certain lenders party to the April 2016 Credit Agreement extended the maturity date of their commitments under the April 2016 Revolving Facility to October 2024 from October 2023.
In March 2021, American repaid in full the $ 450 million of outstanding revolving loans under the April 2016 Revolving Facility that was drawn in April 2020. Following the March 2021 repayment, American is able to draw upon the commitment under the April 2016 Revolving Facility again as needed upon the terms of the April 2016 Credit Agreement or leave it undrawn, in each case, until such commitment expires, which is currently scheduled to occur in October 2024.
On July 22, 2021, American repaid in full the $ 950 million aggregate principal amount of outstanding term loans under, and terminated, the April 2016 Spare Parts Term Loan Facility. The April 2016 Revolving Facility, in an available aggregate principal amount of $ 450 million, remains in place. As of December 31, 2021, there were no borrowings outstanding under the April 2016 Revolving Facility.
December 2016 Credit Facilities
In December 2016, American and AAG entered into the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016 (as amended, the December 2016 Credit Agreement; the term loan facility established thereunder, the December 2016 Term Loan Facility; and together with the revolving credit facility that may be established thereunder in the future, the December 2016 Credit Facilities).
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Certain details of American’s 2013 Credit Facilities, 2014 Credit Facilities, April 2016 Credit Facilities and December 2016 Credit Facilities (collectively referred to as the Credit Facilities) are shown in the table below as of December 31, 2021:
2013 Credit Facilities 2014 Credit Facilities April 2016 Credit Facilities December 2016 Credit Facilities
2013 Term Loan 2013
Revolving Facility 2014 Term Loan 2014
Revolving
Facility April 2016
Revolving
Facility December 2016 Term Loan
Aggregate principal issued
or credit facility availability
(in millions) $ 1,919 $ 750 $ 1,280 $ 1,643 $ 450 $ 1,250
Principal outstanding or
drawn (in millions) $ 1,770 $ — $ 1,208 $ — $ — $ 1,188
Maturity date June 2025 October 2024 January 2027 October 2024 October 2024 December 2023
LIBOR margin 1.75 % 2.00 % 1.75 % 2.00 % 2.00 % 2.00 %
The term loans under each of the Credit Facilities are repayable in annual installments in an amount equal to 1.00 % of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates. Voluntary prepayments may be made by American at any time.
The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder. The 2013 Revolving Facility and 2014 Revolving Facility have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $ 100 million and $ 200 million, respectively. The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of 0.63 %.
Subject to certain limitations and exceptions, the Credit Facilities are secured by collateral, including certain spare parts, slots, route authorities, simulators and leasehold rights. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions. American’s obligations under the Credit Facilities are guaranteed by AAG. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in “Certain Covenants.”
The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become due and payable immediately. In addition, if a “change of control” occurs, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the Credit Facilities and terminate the 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility and any revolving credit facility established under the December 2016 Credit Facilities. The Credit Facilities also include covenants that, among other things, require AAG to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.
(b) Senior Secured Notes
11.75 % Senior Secured Notes
In June 2020, American issued $ 2.5 billion aggregate principal amount of 11.75 % senior secured notes due 2025 (the 11.75 % Senior Secured Notes) at a price equal to 99 % of their aggregate principal amount. The 11.75 % Senior Secured Notes bear interest at a rate of 11.75 % per annum (subject to increase if the collateral coverage ratio described below is not met). Interest on the 11.75 % Senior Secured Notes is payable semiannually in arrears on January 15 and July 15 of each year, which began on January 15, 2021. The 11.75 % Senior Secured Notes will mature on July 15, 2025. The obligations of American under the 11.75 % Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG.
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The 11.75 % Senior Secured Notes were issued pursuant to an indenture, dated as of June 30, 2020 (the 11.75 % Senior Secured Notes Indenture), by and among American, AAG and Wilmington Trust, National Association, as trustee (the 11.75 % Senior Secured Notes Trustee). The 11.75 % Senior Secured Notes are American’s senior secured obligations. Subject to certain limitations and exceptions, the 11.75 % Senior Secured Notes are secured on a first-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland (collectively, the First Lien 11.75 % Senior Secured Notes Collateral). American’s obligations with respect to the 11.75 % Senior Secured Notes are also secured on a second-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in the European Union and the United Kingdom (collectively, the Second Lien 11.75 % Senior Secured Notes Collateral and together with the First Lien 11.75 % Senior Secured Notes Collateral, the 11.75 % Senior Secured Notes Collateral). American may be required to pledge additional collateral in the future under the terms of the 11.75 % Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral as a replacement for existing collateral. The Second Lien 11.75 % Senior Secured Notes Collateral also secures the 2014 Credit Facilities on a first-lien basis.
American may redeem the 11.75 % Senior Secured Notes, in whole at any time or in part from time to time, at a redemption price equal to 100 % of the principal amount of the 11.75 % Senior Secured Notes being redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any, to (but not including) the redemption date.
In the event of a specified change of control, each holder of 11.75 % Senior Secured Notes may require American to repurchase its 11.75 % Senior Secured Notes in whole or in part at a repurchase price of 101 % of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.
American is required to deliver an appraisal of the First Lien 11.75 % Senior Secured Notes Collateral and officer’s certificate on a semi-annual basis demonstrating the calculation of a collateral coverage ratio in relation to the First Lien 11.75 % Senior Secured Notes Collateral as of the end of each semi-annual period based on such appraisal. If American fails to deliver the officer’s certificate in a timely manner or the collateral coverage ratio is less than 1.6 to 1.0 as of the end of the semi-annual period, then, subject to an opportunity to cure the deficiency in the collateral coverage ratio, American will be required to pay special interest in an additional amount equal to 2.0 % per annum of the outstanding principal amount of the 11.75 % Senior Secured Notes until the collateral coverage ratio is established to be at least 1.6 to 1.0.
The 11.75 % Senior Secured Notes Indenture contains covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to: (i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 11.75 % Senior Secured Notes Collateral and dispose of or release the 11.75 % Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, (vii) undergo certain change of control transactions, and (viii) designate subsidiaries as unrestricted. These covenants are subject to a number of important exceptions and qualifications set forth in the 11.75 % Senior Secured Notes Indenture.
Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 11.75 % Senior Secured Notes may be declared to be due and payable immediately. Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting American or certain of its subsidiaries (including American), all outstanding 11.75 % Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 11.75 % Senior Secured Notes Trustee or any holder of the 11.75 % Senior Secured Notes.
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10.75 % Senior Secured Notes
On September 25, 2020 (the 10.75 % Senior Secured Notes Closing Date), American issued $ 1.0 billion in initial principal amount of senior secured IP notes (the IP Notes) and $ 200 million in initial principal amount of senior secured LGA/DCA notes (the LGA/DCA Notes and together with the IP Notes, the 10.75 % Senior Secured Notes). The obligations of American under the 10.75 % Senior Secured Notes are fully and unconditionally guaranteed (the 10.75 % Senior Secured Notes Guarantees) on a senior unsecured basis by AAG. The 10.75 % Senior Secured Notes bear interest at a rate of 10.75 % per annum in cash. For any interest period on or prior to September 1, 2022, American may, at its election, pay interest at a rate of 12.00 % per annum payable one-half in cash and one-half in kind. Interest on the 10.75 % Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, which began on March 1, 2021. The 10.75 % Senior Secured Notes will mature on February 15, 2026.
The 10.75 % Senior Secured Notes were each issued pursuant to a separate indenture, dated as of September 25, 2020 (individually, the IP Notes Indenture and the LGA/DCA Notes Indenture and collectively, the 10.75 % Senior Secured Notes Indentures), by and among American, AAG and Wilmington Trust, National Association, as trustee and as collateral trustee (the 10.75 % Senior Secured Notes Trustee). The IP Notes are secured by a first lien security interest on certain intellectual property of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral), and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75 % Senior Secured Notes Collateral). Subject to certain conditions, American will be permitted to incur up to $ 4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes. The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral. American may be required to pledge additional collateral in the future under the terms of the 10.75 % Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral including as a replacement for existing collateral. The LGA/DCA Collateral also secures on a first-lien basis the December 2016 Credit Facilities.
On or prior to the fourth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at a redemption price equal to 100 % of the principal amount of the 10.75 % Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any. After the fourth anniversary of the 10.75 % Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at a redemption price equal to 105.375 % of the principal amount of the 10.75 % Senior Secured Notes redeemed, together with accrued and unpaid interest thereon, if any. After the fifth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at par, together with accrued and unpaid interest thereon, if any.
In the event of a specified change of control, each holder of 10.75 % Senior Secured Notes may require American to repurchase its 10.75 % Senior Secured Notes, in whole or in part, at a repurchase price of 101 % of the aggregate principal amount of the 10.75 % Senior Secured Notes so repurchased, plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.
The 10.75 % Senior Secured Notes Indentures contain covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to: (i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 10.75 % Senior Secured Notes Collateral and dispose of or release the 10.75 % Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, and (vii) designate subsidiaries as unrestricted. In addition, the 10.75 % Senior Secured Notes Indentures include covenants that require AAG to maintain (a) an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and (b) a certain minimum ratio of appraised value of the collateral to outstanding debt secured thereby on a first lien basis as further described below in “Certain Covenants.” These covenants are subject to a number of important exceptions and qualifications set forth in the 10.75 % Senior Secured Notes Indentures.
Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 10.75 % Senior Secured Notes may be declared to be due and payable immediately. Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting AAG or certain of its subsidiaries (including American), all outstanding 10.75 % Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 10.75 % Senior Secured Notes Trustee or any holder of the 10.75 % Senior Secured Notes.
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(c) Treasury Loan Agreement
On September 25, 2020, American and AAG entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $ 5.5 billion. Subsequently, on October 21, 2020, American and AAG entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion.
In September 2020, American borrowed $ 550 million under the Treasury Term Loan Facility, and on March 24, 2021, used proceeds from the AAdvantage Financing to prepay in full the $ 550 million of outstanding loans under the Treasury Term Loan Facility and terminated the Treasury Loan Agreement.
(d) AAdvantage Financing
On March 24, 2021 (the AAdvantage Financing Closing Date), American and AAdvantage Loyalty IP Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American (Loyalty Issuer and, together with American, the AAdvantage Issuers), completed the offering of $ 3.5 billion aggregate principal amount of 5.50 % Senior Secured Notes due 2026 (the 2026 Notes) and $ 3.0 billion aggregate principal amount of 5.75 % Senior Secured Notes due 2029 (the 2029 Notes, and together with the 2026 Notes, the AAdvantage Notes). The AAdvantage Notes are fully and unconditionally guaranteed (the AAdvantage Note Guarantees) on a senior unsecured basis by AAG and fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by AAdvantage Holdings 1, Ltd., a Cayman Islands exempted company incorporated with limited liability and a direct wholly-owned subsidiary of American, and AAdvantage Holdings 2, Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American and the direct parent of Loyalty Issuer (HoldCo2, and together with AAdvantage Holdings 1, Ltd., the Original SPV Guarantors), and as of August 27, 2021, certain Luxembourg limited liability companies and partnerships that are direct or indirect subsidiaries of Loyalty Issuer including Madrid IP Lux HoldCo SCS, a Luxembourg common limited partnership (Madrid IP SCS) (collectively, the Madrid SPV Guarantors and, together with the Original SPV Guarantors, the SPV Guarantors, and the SPV Guarantors together with AAG, the AAdvantage Guarantors). The AAdvantage Notes were issued pursuant to an indenture, dated as of March 24, 2021 (the AAdvantage Indenture), by and among the AAdvantage Issuers, the AAdvantage Guarantors and Wilmington Trust, National Association, as trustee and as collateral custodian.
Concurrent with the issuance of the AAdvantage Notes, the AAdvantage Issuers, as co-borrowers, entered into a term loan credit and guaranty agreement, dated March 24, 2021, with Barclays Bank PLC, as administrative agent, Wilmington Trust, National Association, as collateral administrator, and the lenders party thereto, providing for a $ 3.5 billion term loan facility (the AAdvantage Term Loan Facility and collectively with the AAdvantage Notes, the AAdvantage Financing) and pursuant to which the full $ 3.5 billion of term loans (the AAdvantage Loans) were drawn on the AAdvantage Financing Closing Date. The AAdvantage Loans are fully and unconditionally guaranteed (together with the AAdvantage Note Guarantees, the AAdvantage Guarantees) by the AAdvantage Guarantors.
Subject to certain permitted liens and other exceptions, the AAdvantage Notes, AAdvantage Loans and AAdvantage Guarantees provided by the SPV Guarantors will be secured by a first-priority security interest in, and pledge of, various agreements with respect to the AAdvantage program (the AAdvantage Agreements) (including all payments thereunder) and certain IP Licenses (as defined below), certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other assets of Loyalty Issuer and the SPV Guarantors including Transferred AAdvantage IP (as defined below) (collectively, the AAdvantage Collateral).
Payment Terms of the AAdvantage Notes and AAdvantage Loans under the AAdvantage Term Loan Facility
Interest on the AAdvantage Notes is payable in cash, quarterly in arrears on the 20th day of each January, April, July and October (each, an AAdvantage Payment Date), which began on July 20, 2021. The 2026 Notes will mature on April 20, 2026, and the 2029 Notes will mature on April 20, 2029. The outstanding principal on the 2026 Notes will be repaid in quarterly installments of $ 292 million on each AAdvantage Payment Date, beginning on July 20, 2023. The outstanding principal on the 2029 Notes will be repaid in quarterly installments of $ 250 million on each AAdvantage Payment Date, beginning on July 20, 2026.
The AAdvantage Issuers may redeem the AAdvantage Notes, at their option, in whole at any time or in part from time to time, at a redemption price equal to 100 % of the principal amount of the AAdvantage Notes redeemed plus a “make-whole” premium, together with accrued and unpaid interest to the date of redemption.
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The scheduled maturity date of the AAdvantage Loans under the AAdvantage Term Loan Facility is April 20, 2028. The AAdvantage Loans bear interest at a variable rate equal to LIBOR (but not less than 0.75 % per annum), plus a margin of 4.75 % per annum, payable on each AAdvantage Payment Date. The outstanding principal on the AAdvantage Loans will be repaid in quarterly installments of $ 175 million, on each AAdvantage Payment Date beginning with the AAdvantage Payment Date in July 2023. These amortization payments (as well as those for the AAdvantage Notes) will be subject to the occurrence of certain early amortization events, including the failure to satisfy a minimum debt service coverage ratio at specified determination dates.
Prepayment of some or all of the AAdvantage Loans outstanding under the AAdvantage Term Loan Facility is permitted, although payment of an applicable premium is required as specified in the AAdvantage Term Loan Facility.
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain mandatory prepayment provisions triggered upon (i) the issuance or incurrence by Loyalty Issuer or the SPV Guarantors of certain indebtedness or (ii) the receipt by American or its subsidiaries of net proceeds from pre-paid frequent flyer (i.e., AAdvantage) mile sales exceeding $ 505 million. Each of these prepayments would also require payment of an applicable premium. Certain other events, including the occurrence of a change of control with respect to AAG and certain AAdvantage Collateral sales exceeding a specified threshold, will also trigger mandatory repurchase or mandatory prepayment provisions under the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively.
Other Terms of the AAdvantage Indenture and the AAdvantage Term Loan Facility
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain certain covenants that limit the ability of Loyalty Issuer, the SPV Guarantors and, in certain circumstances, American and AAG, to among other things, (i) incur additional indebtedness and make restricted payments, (ii) incur certain liens on the AAdvantage Collateral, (iii) merge, consolidate or sell substantially all of their assets, (iv) dispose of the AAdvantage Collateral, (v) sell pre-paid frequent flyer (i.e. AAdvantage) miles in excess of $ 550 million in the aggregate, and (vi) terminate, amend, waive, supplement or modify the IP Licenses, or exercise rights and remedies thereunder, except under certain circumstances. American and Loyalty Issuer are also prohibited from substantially reducing the AAdvantage program business or modifying the terms of the AAdvantage program in a manner that would reasonably be expected to materially impair repayment of the AAdvantage Financing obligations (described as a Payment Material Adverse Effect in each of the AAdvantage Indenture and the AAdvantage Term Loan Facility), and AAG and its subsidiaries are prohibited from changing the policies and procedures of the AAdvantage program in a manner that would reasonably be expected to have a Payment Material Adverse Effect or operating a competing loyalty program. Notwithstanding these restrictions, the AAdvantage program is expected to operate as it has in the past, and the entry into the AAdvantage Financing is not expected to have any impact on the benefits offered to AAdvantage members.
The AAdvantage Indenture and the AAdvantage Term Loan Facility also require the AAdvantage Issuers to comply with certain affirmative covenants, including the requirement to use commercially reasonable efforts to cause sufficient counterparties to AAdvantage Agreements to direct at least 90 % of payments with respect to the AAdvantage program on a quarterly basis into a collections account, for application to the payment of fees, principal and interest on the AAdvantage Notes and the AAdvantage Loans pursuant to a payment waterfall described in the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively. In addition, the AAdvantage Indenture and the AAdvantage Term Loan Facility require AAG to maintain minimum liquidity, defined as the sum of (a) unrestricted cash and cash equivalents and (b) the aggregate principal amount committed and available to be drawn under all of AAG's revolving credit and other facilities, at the close of any business day of at least $ 2.0 billion.
Subject to certain materiality thresholds, qualifications, exceptions, “baskets” and grace and cure periods, the AAdvantage Indenture and the AAdvantage Term Loan Facility contain various events of default, including payment defaults, covenant defaults, cross-defaults to certain other indebtedness, termination of certain agreements related to the AAdvantage program, bankruptcy events of Loyalty Issuer or any SPV Guarantor, and a change of control of Loyalty Issuer or any SPV Guarantor. A bankruptcy event of American is not itself an event of default; following an American bankruptcy, an event of default would only occur if American failed to satisfy certain enumerated bankruptcy case milestones, including an assumption of the AAdvantage Financing by a certain date. Upon the occurrence of an event of default, the outstanding obligations under the AAdvantage Indenture and the AAdvantage Term Loan Facility may (or, with respect to the bankruptcy events noted above, shall) be accelerated and become due and payable immediately.
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Terms of Certain Intercompany Agreements Related to the AAdvantage Financing
In connection with the issuance of the AAdvantage Notes and entry into the AAdvantage Term Loan Facility, American, Loyalty Issuer and the SPV Guarantors entered into a series of transactions that resulted in the transfer to Loyalty Issuer or Madrid IP SCS of, among other things, American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions) (such assets, the Transferred AAdvantage IP) and certain rights of American under specified AAdvantage Agreements. Loyalty Issuer, the SPV Guarantors and American have entered into a series of intercompany license agreements (collectively, the IP Licenses) pursuant to which Loyalty Issuer has indirectly granted to American an exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing sublicense to use the Transferred AAdvantage IP. The IP Licenses would be terminated, and American’s right to use the Transferred AAdvantage IP would cease, upon specified termination events, including, but not limited to, the occurrence of an event of default under the AAdvantage Indenture or the AAdvantage Term Loan Facility. In certain circumstances, such a termination would trigger a liquidated damages payment in an amount that is greater than the initial principal amount of the AAdvantage Notes and the AAdvantage Loans.
In addition, proceeds from the AAdvantage Financing were loaned by Loyalty Issuer to American pursuant to an intercompany note that was guaranteed by AAG. The borrowings under this intercompany note are payable on demand by Loyalty Issuer or, after the occurrence and during the continuance of an event of default under the AAdvantage Financing, by the master collateral agent under the AAdvantage Financing.
(e) EETCs
2021-1 Aircraft EETCs
In November 2021, American created two pass-through trusts which issued approximately $ 960 million aggregate face amount of Series 2021-1 Class A and Class B EETCs (the 2021-1 Aircraft EETCs) in connection with the financing of 26 aircraft previously delivered or to be delivered to American through September 2022 (the 2021-1 Aircraft). As of December 31, 2021, approximately $ 94 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of five aircraft under the 2021-1 Aircraft EETCs, all of which was used to repay existing indebtedness. Interest and principal payments on equipment notes issued in connection with the 2021-1 Aircraft EETCs are payable semi-annually in January and July each year, with interest payments scheduled to begin in July 2022 and with principal payments scheduled to begin in January 2023. The remaining proceeds of approximately $ 866 million as of December 31, 2021 were being held in escrow with a depositary for the benefit of the holders of the 2021-1 Aircraft EETCs until such time as American issues additional equipment notes with respect to the remaining 2021-1 Aircraft to the pass-through trusts, which will purchase such additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its consolidated balance sheet because the proceeds held by the depositary for the benefit of the holders of the 2021-1 Aircraft EETCs are not American’s assets.
Certain information regarding the 2021-1 Aircraft EETC equipment notes, as of December 31, 2021, is set forth in the table below.
2021-1 Aircraft EETCs
Series A Series B
Aggregate principal issued $ 758 million $ 202 million
Remaining escrowed proceeds $ 684 million $ 182 million
Fixed interest rate per annum 2.875 % 3.95 %
Maturity date July 2034 July 2030
(f) Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8 (the Terminal). The construction project is currently scheduled to be completed in 2023 and is estimated to cost $ 439 million, of which $ 298 million was funded with proceeds of the special facility revenue bonds issued by the New York Transportation Development Corporation (NYTDC) on behalf of American in June 2020 (the 2020 JFK Bonds) and approximately $ 84 million of which was funded with proceeds of the approximately $ 150 million of special facility revenue bonds NYTDC issued in June 2021 (the 2021 JFK Bonds).
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American is required to pay debt service on the 2021 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2021 JFK Bonds. American continues to pay debt service on the outstanding bonds issued by NYTDC on behalf of American in 2016 and 2020 (the 2016 and 2020 JFK Bonds) and American and AAG continue to guarantee the 2016 and 2020 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.
The 2021 JFK Bonds, in aggregate, were priced at par value. The gross proceeds from the issuance of the 2021 JFK Bonds were approximately $ 150 million. Of this amount, $ 4 million was used to fund the costs of issuance of the 2021 JFK Bonds, $ 62 million was used to fund the redemption of the 2016 and 2020 JFK Bonds due August 2021, with the remaining amount of proceeds received to be held in restricted cash and short-term investments on the consolidated balance sheet and to be used to finance a portion of the cost of the renovation and expansion of the Terminal. The 2021 JFK Bonds are comprised of term bonds, $ 70 million of which bear interest at 2.25 % per annum and mature on August 1, 2026, and $ 80 million of which bear interest at 3.00 % per annum and mature on August 1, 2031. As of December 31, 2021, $ 236 million of proceeds funded by the issuance of the 2020 and 2021 JFK Bonds are included in restricted cash and short-term investments on the accompanying consolidated balance sheet.
Guarantees
As of December 31, 2021, American had issued guarantees covering AAG’s $ 1.8 billion aggregate principal amount of the PSP1 Promissory Note due April 2030, $ 1.0 billion aggregate principal amount of the PSP2 Promissory Note due January 2031, $ 946 million aggregate principal amount of the PSP3 Promissory Note due April 2031, $ 1.0 billion aggregate principal amount of 6.50 % convertible senior notes due July 2025, $ 750 million aggregate principal amount of 5.000 % senior notes due June 2022 and $ 500 million aggregate principal amount of 3.75 % senior notes due March 2025.
Certain Covenants
Certain of American’s debt financing agreements (including its 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 American 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, American 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. Additionally, a significant portion of American’s debt financing agreements contain covenants requiring it to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities, and its 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.
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Specifically, American is required to meet certain collateral coverage tests for its Credit Facilities, 10.75 % Senior Secured Notes and 11.75 % Senior Secured Notes, as described below:
2013 Credit Facilities 2014 Credit Facilities April 2016 Credit
Facilities December 2016
Credit Facilities 10.75% Senior Secured Notes 11.75% Senior Secured Notes
Frequency of Appraisals of Appraised Collateral Annual Annual Annual Annual Annual Semi-Annual
LTV Requirement 1.6 x Collateral valuation to amount of debt outstanding ( 62.5 % LTV)
LTV as of Last Measurement Date 38.4 % 18.0 % Not Applicable 53.5 % 53.5 % 33.5 %
Collateral Description Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U.S. and South America Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and European Union (including London Heathrow) Generally, certain spare parts Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain LaGuardia Airport (LGA) slots, certain simulators and certain leasehold rights Generally, certain DCA slots, certain LGA slots, certain simulators and certain leasehold rights and, in the case of the IP Notes, certain intellectual property of American Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and the Caribbean, Central America and various other countries
At December 31, 2021, American was in compliance with the applicable collateral coverage tests as of the most recent measurement dates.
4. Leases
American leases certain aircraft and engines, including aircraft under capacity purchase agreements. As of December 31, 2021, American operated 696 leased aircraft, with remaining terms ranging from less than one year to 12 years.
At each airport where American conducts flight operations, American has agreements, generally with a governmental unit or authority, for the use of passenger, operations and baggage handling space as well as runways and taxiways. These agreements, particularly in the U.S., often contain provisions for periodic adjustments to rates and charges applicable under such agreements. These rates and charges also vary with American’s level of operations and the operations of the airport. Because of the variable nature of these rates, these leases are not recorded on American’s consolidated balance sheets as a ROU asset or a lease liability. Additionally, at American’s hub locations and in certain other cities it serves, American leases administrative offices, catering, cargo, training, maintenance and other facilities.
The components of lease expense were as follows (in millions):
Year Ended December 31,
2021 2020 2019
Operating lease cost $ 1,998 $ 1,943 $ 2,012
Finance lease cost:
Amortization of assets 107 92 79
Interest on lease liabilities 44 38 43
Variable lease cost 2,461 1,786 2,542
Total net lease cost $ 4,610 $ 3,859 $ 4,676
Included in the table above is $ 190 million, $ 172 million and $ 236 million of operating lease cost under American’s capacity purchase agreement with Republic for the years ended December 31, 2021, 2020 and 2019, respectively. American holds a 25 % equity interest in Republic Holdings, the parent company of Republic.
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Additionally, not included in the table above, American recognized $ 109 million in cash special charges in 2020 related to the impairment of ROU assets and lease return costs resulting from its decision to retire certain leased aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
December 31,
2021 2020
Operating leases:
Operating lease ROU assets $ 7,810 $ 7,994
Current operating lease liabilities $ 1,496 $ 1,641
Noncurrent operating lease liabilities 6,578 6,739
Total operating lease liabilities $ 8,074 $ 8,380
Finance leases:
Property and equipment, at cost $ 1,201 $ 1,021
Accumulated amortization ( 653 ) ( 539 )
Property and equipment, net $ 548 $ 482
Current finance lease liabilities $ 174 $ 100
Noncurrent finance lease liabilities 563 472
Total finance lease liabilities $ 737 $ 572
Weighted average remaining lease term (in years):
Operating leases 7.6 7.4
Finance leases 4.6 5.4
Weighted average discount rate:
Operating leases 6.2 % 5.6 %
Finance leases 6.1 % 6.3 %
Supplemental cash flow and other information related to leases was as follows (in millions):
Year Ended December 31,
2021 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 2,040 $ 2,015 $ 1,996
Operating cash flows from finance leases 37 39 43
Financing cash flows from finance leases 126 114 83
Non-cash transactions:
ROU assets acquired through operating leases 1,381 898 1,144
Property and equipment acquired through finance leases 180 11 20
Operating lease conversion to finance lease 102 5 41
Gain on sale leaseback transactions, net 25 107 107
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Maturities of lease liabilities were as follows (in millions):
December 31, 2021
Operating Leases Finance Leases
2022 $ 1,912 $ 215
2023 1,777 183
2024 1,398 180
2025 1,032 113
2026 757 87
2027 and thereafter 3,600 77
Total lease payments 10,476 855
Less: Imputed interest ( 2,402 ) ( 118 )
Total lease obligations 8,074 737
Less: Current obligations ( 1,496 ) ( 174 )
Long-term lease obligations $ 6,578 $ 563
As of December 31, 2021, American had additional operating lease commitments that have not yet commenced of approximately $ 1.8 billion for 18 Boeing 787 Family aircraft scheduled to be delivered in 2022 through 2024 with lease terms of 10 years.
5. Income Taxes
The significant components of the income tax provision (benefit) were (in millions):
Year Ended December 31,
2021 2020 2019
Current income tax provision:
State and Local $ — $ — $ 2
Foreign — — 8
Current income tax provision — — 10
Deferred income tax provision (benefit):
Federal ( 453 ) ( 2,224 ) 567
State and Local ( 47 ) ( 229 ) 56
Deferred income tax provision (benefit) ( 500 ) ( 2,453 ) 623
Total income tax provision (benefit) $ ( 500 ) $ ( 2,453 ) $ 633
The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):
Year Ended December 31,
2021 2020 2019
Statutory income tax provision (benefit) $ ( 478 ) $ ( 2,290 ) $ 547
State income tax provision (benefit), net of federal tax effect ( 37 ) ( 181 ) 41
Book expenses not deductible for tax purposes 21 20 29
Foreign income taxes, net of federal tax effect — — 8
Change in valuation allowance — — 5
Other, net ( 6 ) ( 2 ) 3
Income tax provision (benefit) $ ( 500 ) $ ( 2,453 ) $ 633
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The components of American’s deferred tax assets and liabilities were (in millions):
December 31,
2021 2020
Deferred tax assets:
Operating loss and other carryforwards $ 4,476 $ 3,944
Loyalty program liability 1,903 1,977
Leases 1,822 1,904
Pensions 934 1,397
Postretirement benefits other than pensions 215 203
Rent expense 92 96
Reorganization items 24 28
Other 710 796
Total deferred tax assets 10,176 10,345
Valuation allowance ( 24 ) ( 24 )
Net deferred tax assets 10,152 10,321
Deferred tax liabilities:
Accelerated depreciation and amortization ( 4,715 ) ( 4,992 )
Leases ( 1,758 ) ( 1,809 )
Other ( 279 ) ( 294 )
Total deferred tax liabilities ( 6,752 ) ( 7,095 )
Net deferred tax asset $ 3,400 $ 3,226
At December 31, 2021, American had approximately $ 17.1 billion of gross federal net operating losses (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 is a member of AAG’s consolidated federal and certain state income tax returns. 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.
American’s ability to use its NOLs and other carryforwards depends on the amount of taxable income generated in future periods. American provides a valuation allowance for its deferred tax assets, which include the NOLs, when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond its control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. American presently has a $ 24 million valuation allowance on certain net deferred tax assets related to state NOL carryforwards. There can be no assurance that an additional valuation allowance on American’s net deferred tax assets will not be required. Such valuation allowance could be material.
American’s ability to deduct its NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. Substantially all of American’s remaining federal NOL carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, American’s ability to utilize such NOL carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit American’s future use of NOLs and tax credits.
In 2021, American recorded an income tax benefit of $ 500 million, with 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.
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American files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. American’s 2018 through 2020 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and American is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. American believes that the effect of any assessments will not be material to its consolidated financial statements.
The amount of, and changes to, American’s uncertain tax positions were not material in any of the years presented. American accrues interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.
6. Risk Management
American’s economic prospects are heavily dependent upon two variables it cannot control: general economic conditions and the price of fuel.
Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, American’s revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by American’s competitors, all of which in turn have had, and may have in the future, a strong negative effect on American’s business. In particular, the ongoing COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels have had and are expected to continue to have a severe and prolonged effect on the global economy generally and, in turn, is expected to depress demand for air travel into the foreseeable future. Due to the uncertainty surrounding the duration and severity of this pandemic, American can provide no assurance as to when and at what pace demand for air travel will return to pre-COVID-19 pandemic levels, if at all. Accordingly, American cannot predict the ultimate impact of the COVID-19 pandemic on its business, financial condition and results of operations. In addition, during challenging economic times, actions by its competitors to increase their revenues can have an adverse impact on American’s revenues.
American’s operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in American’s business. Aircraft fuel prices have in the past, and may in the future, experience substantial volatility. Because of the amount of fuel needed to operate American’s business, even a relatively small increase or decrease in the price of aircraft fuel can have a material effect on American’s operating results and liquidity.
These additional factors could impact American’s results of operations, financial performance and liquidity:
(a) Credit Risk
American’s accounts receivable relate primarily to its contracts with airline and non-airline business partners, including its co-branded credit card partners, and to tickets sold to individual passengers primarily through the use of major credit cards. Receivables from American’s business partners are typically settled within 30 days. Receivables from ticket sales are short-term, mostly settled within seven days after sale. All accounts receivable are reported net of an allowance for credit losses, which have been minimal. American considers past and future financial and qualitative factors when establishing the allowance for credit losses. American does not believe it is subject to any significant concentration of credit risk.
(b) Interest Rate Risk
American has exposure to market risk associated with changes in interest rates related primarily to its LIBOR variable-rate debt obligations. Interest rates on $ 10.9 billion principal amount of long-term debt as of December 31, 2021 are subject to adjustment to reflect changes in floating interest rates. The weighted average effective interest rate on American’s variable-rate debt was 3.0 % at December 31, 2021. American currently does not have an interest rate hedge program to hedge its exposure to floating interest rates on its variable-rate debt obligations.
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On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on American’s long-term debt to be different or higher than expected.
(c) Foreign Currency Risk
American is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated transactions. American’s largest exposure comes from the British pound sterling, Euro, Chinese yuan, Canadian dollar and various Latin American currencies, primarily the Brazilian real. American does not currently have a foreign currency hedge program.
7. Fair Value Measurements and Other Investments
Assets Measured at Fair Value on a Recurring Basis
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i.e. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
• Level 1 – Observable inputs such as quoted prices in active markets;
• Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
• Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
When available, American uses quoted market prices to determine the fair value of its financial assets. If quoted market prices are not available, American measures fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates.
American utilizes the market approach to measure the fair value of its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. American’s short-term investments, restricted cash and restricted short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the year ended December 31, 2021.
Assets measured at fair value on a recurring basis are summarized below (in millions):
Fair Value Measurements as of December 31, 2021
Total Level 1 Level 2 Level 3
Short-term investments (1), (2) :
Money market funds $ 106 $ 106 $ — $ —
Corporate obligations 8,665 — 8,665 —
Bank notes/certificates of deposit/time deposits 2,194 — 2,194 —
Repurchase agreements 1,190 — 1,190 —
12,155 106 12,049 —
Restricted cash and short-term investments (1), (3)
990 654 336 —
Long-term investments (4)
239 239 — —
Total $ 13,384 $ 999 $ 12,385 $ —
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Fair Value Measurements as of December 31, 2020
Total Level 1 Level 2 Level 3
Short-term investments (1) :
Money market funds $ 245 $ 245 $ — $ —
Corporate obligations 3,449 — 3,449 —
Bank notes/certificates of deposit/time deposits 2,168 — 2,168 —
Repurchase agreements 755 — 755 —
6,617 245 6,372 —
Restricted cash and short-term investments (1), (3)
609 448 161 —
Long-term investments (4)
161 161 — —
Total $ 7,387 $ 854 $ 6,533 $ —
(1) All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period. There were no credit losses.
(2) American’s short-term investments as of December 31, 2021 mature in one year or less.
(3) Restricted cash and short-term investments primarily include collateral held to support workers' compensation obligations and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of the Terminal at JFK, and as of December 31, 2021, also include collateral associated with the payment of interest for the AAdvantage Financing.
(4) Long-term investments primarily include American's equity investment in China Southern Airlines and as of December 31, 2021, American’s long-term investments also include Vertical. These investments are reflected in other assets on American’s consolidated balance sheets. See “Other Investments” below for further information on American’s equity investments.
Fair Value of Debt
The fair value of American’s long-term debt was estimated using quoted market prices or discounted cash flow analyses based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If American’s long-term debt was measured at fair value, it would have been classified as Level 2 except for $ 550 million as of December 31, 2020, which would have been classified as Level 3 in the fair value hierarchy.
The carrying value and estimated fair value of American’s long-term debt, including current maturities, were as follows (in millions):
December 31, 2021 December 31, 2020
Carrying
Value Fair
Value Carrying
Value Fair
Value
Long-term debt, including current maturities $ 31,357 $ 32,999 $ 28,410 $ 27,193
Other Investments
An important part of American’s strategy to expand its network has been to initiate or expand its commercial relationships with other airlines, such as by entering into global alliance, joint business and codeshare relationships, and, in certain instances, by making an equity investment in another airline or other companies.
Republic Holdings
American has an approximate 25 % ownership interest in Republic Holdings, which it received in 2017 in consideration for its unsecured claim in the Republic Holdings bankruptcy case. This ownership interest is accounted for under the equity method and American’s portion of Republic Holdings’ financial results is recognized within nonoperating other income, net on the consolidated statements of operations and the investment is reflected within other assets on its consolidated balance sheets.
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China Southern
In the third quarter of 2017, American acquired 2.7 % of the outstanding shares of China Southern for $ 203 million. At December 31, 2021, American owned a 1.8 % equity interest in China Southern. This ownership interest is accounted for at fair value based on China Southern’s stock price and mark-to-market adjustments are recorded to nonoperating other income, net on the consolidated statement of operations.
Vertical
In the fourth quarter of 2021, American invested $ 25 million to acquire 5.4 %, or 11.25 million, of the outstanding shares of Vertical with an initial aggregate value of $ 113 million, of which $ 88 million was non-cash. In connection with this investment, American entered into a memorandum of understanding (MOU) with Vertical to pre-order (subject to certain conditions and future agreed upon milestones) up to 250 electric vertical take-off and landing (eVTOL) aircraft, with an option to order an additional 100 eVTOL aircraft. Pursuant to the MOU, American received warrants to purchase 1.75 million shares of Vertical common stock at $ 0.0001 per share each time American places a legally binding commitment for 50 eVTOL aircraft, up to a maximum aggregate amount of 8.75 million shares. American’s investment in Vertical is reflected within other assets on its consolidated balance sheet. The $ 88 million non-cash portion of the fair value of equity securities received from Vertical is included as a deferred credit within other liabilities on the consolidated balance sheet and will be recognized as a reduction to the cost of eVTOL aircraft received in future periods or, if no legally binding commitment for eVTOL aircraft is entered into, will be recognized into income. American’s investment in Vertical is accounted for at fair value based on Vertical’s stock price and mark-to-market adjustments are recorded to nonoperating other income, net on the consolidated statement of operations.
8. Employee Benefit Plans
American sponsors defined benefit and defined contribution pension plans for eligible employees. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. Effective November 1, 2012, substantially all of American’s defined benefit pension plans were frozen and American began providing enhanced benefits under its defined contribution pension plans for certain employee groups. American uses a December 31 measurement date for all of its defined benefit pension plans. American also provides certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees. Effective November 1, 2012, American modified its retiree medical and other postretirement benefits plans to eliminate the company subsidy for employees who retire on or after November 1, 2012. As a result of modifications to its retiree medical and other postretirement benefits plans in 2012, American recognized a negative plan amendment of $ 1.9 billion, which was included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and was amortized over the future service life of the active plan participants for whom the benefit was eliminated. This prior service benefit was fully amortized as of December 31, 2020.
Effective January 1, 2021, health coverage under American’s retiree medical benefit program that is currently provided to certain retirees age 65 and over who retired prior to November 1, 2012, transitioned from a self-insured plan to a fully-insured Medicare Advantage plan. Benefits coverage has not been reduced and cost shared has not changed as a result of this transition. Due to this transition, as of December 31, 2020, American recognized a negative plan amendment of $ 313 million to reduce its benefit obligation, which was included as a component of prior service cost in AOCI and will be amortized over the average remaining life expectancy of all retirees, or approximately 13 years. As of December 31, 2021, $ 195 million of prior service cost remains to be amortized.
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Benefit Obligations, Fair Value of Plan Assets and Funded Status
The following tables provide a reconciliation of the changes in the pension and retiree medical and other postretirement benefits obligations, fair value of plan assets and a statement of funded status as of December 31, 2021 and 2020:
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
(In millions)
Benefit obligation at beginning of period $ 19,690 $ 18,246 $ 1,046 $ 824
Service cost 3 2 12 8
Interest cost 523 611 30 30
Actuarial (gain) loss (1), (2)
( 606 ) 1,603 ( 57 ) 46
Special termination benefits (3)
— — 139 410
Plan amendments (4)
— — — ( 195 )
Settlements ( 1 ) ( 36 ) — —
Benefit payments ( 818 ) ( 736 ) ( 72 ) ( 77 )
Benefit obligation at end of period $ 18,791 $ 19,690 $ 1,098 $ 1,046
Fair value of plan assets at beginning of period $ 13,477 $ 12,829 $ 170 $ 204
Actual return on plan assets 1,700 1,414 21 13
Employer contributions (5)
247 6 48 30
Settlements ( 1 ) ( 36 ) — —
Benefit payments ( 818 ) ( 736 ) ( 72 ) ( 77 )
Fair value of plan assets at end of period $ 14,605 $ 13,477 $ 167 $ 170
Funded status at end of period $ ( 4,186 ) $ ( 6,213 ) $ ( 931 ) $ ( 876 )
(1) The 2021 and 2020 pension actuarial (gain) loss primarily relates to the change in American’s weighted average discount rate assumption.
(2) The 2021 and 2020 retiree medical and other postretirement benefits actuarial (gain) loss primarily relates to the change in American’s weighted average discount rate assumption and, in 2021, plan experience adjustments.
(3) During the first quarter of 2021 and the third quarter of 2020, American remeasured its retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted into voluntary early retirement programs offered as a result of reductions to its operation due to the COVID-19 pandemic. As a result, during 2021, American recognized a $ 139 million special charge for these enhanced healthcare benefits and increased its postretirement benefits obligation by $ 139 million and during 2020 American recognized a $ 410 million special charge for these enhanced healthcare benefits and increased its postretirement benefits obligation by $ 410 million.
(4) Principally relates to the transition of American’s retiree medical benefit program from a self-insured plan to a fully-insured Medicare Advantage plan as discussed above.
(5) In January 2021, American made $ 241 million in contributions to its pension plans, including a contribution of $ 130 million for the 2020 calendar year that was permitted to be deferred to January 4, 2021 as provided under the CARES Act.
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Balance Sheet Position
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
(In millions)
As of December 31,
Current liability $ 7 $ 7 $ 90 $ 55
Noncurrent liability 4,179 6,206 841 821
Total liabilities $ 4,186 $ 6,213 $ 931 $ 876
Net actuarial loss (gain) $ 5,241 $ 6,679 $ ( 396 ) $ ( 358 )
Prior service cost (benefit) 46 75 ( 167 ) ( 181 )
Total accumulated other comprehensive loss (income), pre-tax
$ 5,287 $ 6,754 $ ( 563 ) $ ( 539 )
Plans with Projected Benefit Obligations Exceeding Fair Value of Plan Assets
Pension Benefits
2021 2020
(In millions)
Projected benefit obligation $ 18,791 $ 19,690
Fair value of plan assets 14,605 13,477
Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
(In millions)
Accumulated benefit obligation $ 18,782 $ 19,678 $ — $ —
Accumulated postretirement benefit obligation
— — 1,098 1,046
Fair value of plan assets 14,605 13,477 167 170
Net Periodic Benefit Cost (Income)
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2019 2021 2020 2019
(In millions)
Defined benefit plans:
Service cost $ 3 $ 2 $ 2 $ 12 $ 8 $ 3
Interest cost 523 611 699 30 30 33
Expected return on assets ( 1,078 ) ( 1,005 ) ( 811 ) ( 12 ) ( 11 ) ( 15 )
Special termination benefits — — — 139 410 —
Settlements — 12 — — — —
Amortization of:
Prior service cost (benefit) 28 29 28 ( 13 ) ( 135 ) ( 236 )
Unrecognized net loss (gain) 211 164 150 ( 24 ) ( 24 ) ( 31 )
Net periodic benefit cost (income) $ ( 313 ) $ ( 187 ) $ 68 $ 132 $ 278 $ ( 246 )
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The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income, net on American’s consolidated statements of operations.
Assumptions
The following actuarial assumptions were used to determine American’s benefit obligations and net periodic benefit cost (income) for the periods presented:
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2021 2020
Benefit obligations:
Weighted average discount rate 3.0 % 2.7 % 2.8 % 2.4 %
Pension Benefits Retiree Medical and
Other Postretirement Benefits
2021 2020 2019 2021 2020 2019
Net periodic benefit cost (income):
Weighted average discount rate 2.7 % 3.4 % 4.4 % 2.4 % 3.2 % 4.3 %
Weighted average expected rate of return on plan assets
8.0 % 8.0 % 8.0 % 8.0 % 8.0 % 8.0 %
Weighted average health care cost trend rate assumed for next year (1)
N/A N/A N/A 4.8 % 4.0 % 3.7 %
(1) The weighted average health care cost trend rate at December 31, 2021 is assumed to decline gradually to 3.9 % by 2028 and remain level thereafter.
As of December 31, 2021, American’s estimate of the long-term rate of return on plan assets was 8.0 % based on the target asset allocation. Expected returns on long duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management and securities lending programs.
Minimum Contributions
American is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and various other laws for U.S. based plans as well as underfunding rules specific to countries where American maintains defined benefit plans. 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. Based on the ARP provisions applicable to its pension plans, American will have no additional funding requirements until 2023. American’s funding obligations will depend on the performance of American’s investments held in trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and American’s actuarial experience.
Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):
2022 2023 2024 2025 2026 2027-2031
Pension benefits $ 860 $ 893 $ 928 $ 961 $ 989 $ 5,194
Retiree medical and other postretirement benefits 114 109 103 99 95 390
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Plan Assets
The objectives of American’s investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers.
Based on these investment objectives, a long-term strategic asset allocation has been established. This strategic allocation seeks to balance the potential benefit of improving the funded position with the potential risk that the funded position would decline. The current strategic target asset allocation is as follows:
Asset Class/Sub-Class Allowed Range
Equity 45 % - 80 %
Public:
U.S. Large 10 % - 40 %
U.S. Small/Mid 2 % - 10 %
International 10 % - 25 %
International Small/Mid 0 % - 10 %
Emerging Markets 2 % - 15 %
Alternative Investments 5 % - 30 %
Fixed Income 20 % - 55 %
Public:
U.S. Long Duration 15 % - 45 %
High Yield and Emerging Markets 0 % - 10 %
Private Income 0 % - 15 %
Other 0 % - 5 %
Cash Equivalents 0 % - 20 %
U.S. long duration bonds are used to partially hedge the assets from declines in interest rates. Public equity as well as high yield fixed income securities are used to provide diversification and are expected to generate higher returns over the long-term than U.S. long duration bonds. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long-term. The pension plan’s master trust also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis. These programs are subject to market risk.
Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market are valued at the last bid price. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. No changes in valuation techniques or inputs occurred during the year.
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Benefit Plan Assets Measured at Fair Value on a Recurring Basis
The fair value of American’s pension plan assets at December 31, 2021 and 2020, by asset category, were as follows (in millions):
Fair Value Measurements as of December 31, 2021
Asset Category Quoted Prices in
Active Markets
for Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Cash and cash equivalents $ 76 $ — $ — $ 76
Equity securities:
International markets (a), (b)
2,166 — 4 2,170
Large-cap companies (b)
1,860 — — 1,860
Mid-cap companies (b)
449 — — 449
Small-cap companies (b)
84 2 — 86
Mutual funds/exchange traded funds (c)
177 — — 177
Fixed income:
Corporate debt (d)
— 2,847 — 2,847
Government securities (e)
— 1,128 — 1,128
U.S. municipal securities — 19 — 19
Alternative instruments:
Private market partnerships (f)
— — 52 52
Private market partnerships measured at net asset value (f), (g)
— — — 2,827
Common/collective trusts (h)
— 337 — 337
Common/collective trusts measured at net asset value (g), (h)
— — — 2,514
Insurance group annuity contracts — — 2 2
Other investments — 3 — 3
Dividend and interest receivable 45 — — 45
Due from brokers for sale of securities – net 10 — — 10
Other receivables – net 3 — — 3
Total $ 4,870 $ 4,336 $ 58 $ 14,605
(a) Holdings are diversified as follows: 14 % United Kingdom, 10 % Ireland, 10 % Japan, 9 % Switzerland, 7 % France, 6 % Germany, 12 % emerging markets and the remaining 32 % with no concentration greater than 5% in any one country.
(b) There are no significant concentrations of holdings by company or industry.
(c) Investment includes holdings invested 86 % in U.S. treasuries and corporate bonds and 14 % in equity securities of international companies.
(d) Includes approximately 81 % investments in corporate debt with a S&P rating lower than A and 19 % investments in corporate debt with a S&P rating A or higher. Holdings include 86 % U.S. companies, 12 % international companies and 2 % emerging market companies.
(e) Includes approximately 94 % investments in U.S. domestic government securities and 6 % in emerging market government securities. There are no significant foreign currency risks within this classification.
(f) Includes limited partnerships that invest primarily in domestic private equity and private income opportunities. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next one to ten years . Additionally, the pension plan’s master trust has future funding commitments of approximately $ 1.6 billion over the next ten years .
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(g) Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements.
(h) Investment includes 31 % in a common/collective trust investing in large market capitalization equity securities within the U.S., 29 % in three common/collective trusts investing in emerging country equity securities, 22 % in a common/collective trust investing in equity securities of companies located outside the U.S., 11 % in a collective interest trust investing primarily in short-term securities, 6 % in a common/collective trust investing in smaller market capitalization equity securities within the U.S. and 1 % in Canadian segregated balanced value, income growth and diversified pooled funds. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
Fair Value Measurements as of December 31, 2020
Asset Category Quoted Prices in
Active Markets
for Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Cash and cash equivalents $ 40 $ — $ — $ 40
Equity securities:
International markets (a), (b)
2,282 — — 2,282
Large-cap companies (b)
2,085 — — 2,085
Mid-cap companies (b)
428 — — 428
Small-cap companies (b)
73 1 — 74
Fixed income:
Corporate debt (c)
— 3,026 — 3,026
Government securities (d)
— 1,010 — 1,010
U.S. municipal securities — 30 — 30
Alternative instruments:
Private market partnerships (e)
— — 15 15
Private market partnerships measured at net asset value (e), (f)
— — — 1,791
Common/collective trusts (g)
— 259 — 259
Common/collective trusts measured at net asset value (f), (g)
— — — 2,384
Insurance group annuity contracts — — 2 2
Dividend and interest receivable 49 — — 49
Due from brokers for sale of securities – net 1 — — 1
Other receivables – net 1 — — 1
Total $ 4,959 $ 4,326 $ 17 $ 13,477
(a) Holdings are diversified as follows: 11 % Switzerland, 11 % Ireland, 10 % United Kingdom, 9 % France, 8 % Japan, 7 % Germany, 6 % Netherlands, 13 % emerging markets and the remaining 25 % with no concentration greater than 5% in any one country.
(b) There are no significant concentrations of holdings by company or industry.
(c) Includes approximately 77 % investments in corporate debt with a S&P rating lower than A and 23 % investments in corporate debt with a S&P rating A or higher. Holdings include 89 % U.S. companies, 9 % international companies and 2 % emerging market companies.
(d) Includes approximately 89 % investments in U.S. domestic government securities, 9 % in emerging market government securities and 2 % in international government securities. There are no significant foreign currency risks within this classification.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(e) Includes limited partnerships that invest primarily in domestic private equity and private income opportunities. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next one to ten years . Additionally, the pension plan’s master trust has future funding commitments of approximately $ 1.6 billion over the next ten years .
(f) Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements.
(g) Investment includes 34 % in a common/collective trust investing in large market capitalization equity securities within the U.S., 30 % in three common/collective trusts investing in emerging country equity securities, 21 % in a common/collective trust investing in equity securities of companies located outside the U.S., 9 % in a collective interest trust investing primarily in short-term securities, 5 % in a common/collective trust investing in smaller market capitalization equity securities within the U.S. and 1 % in Canadian segregated balanced value, income growth and diversified pooled funds. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
Changes in fair value measurements of Level 3 investments during the years ended December 31, 2021 and 2020, were as follows (in millions):
2021 2020
Balance at beginning of year $ 17 $ 12
Actual gain on plan assets:
Relating to assets still held at the reporting date 10 1
Purchases 32 4
Sales ( 1 ) —
Balance at end of year $ 58 $ 17
The fair value of American’s retiree medical and other postretirement benefits plans’ assets by asset category, were as follows (in millions):
Fair Value Measurements as of December 31, 2021
Asset Category Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Money market fund $ 4 $ — $ — $ 4
Mutual funds – AAL Class — 163 — 163
Total $ 4 $ 163 $ — $ 167
Fair Value Measurements as of December 31, 2020
Asset Category Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Money market fund $ 4 $ — $ — $ 4
Mutual funds – AAL Class — 166 — 166
Total $ 4 $ 166 $ — $ 170
Investments in the retiree medical and other postretirement benefits plans’ mutual funds are valued by quoted prices on the active market, which is fair value, and represents the net asset value of the shares of such funds as of the close of business at the end of the period. Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination. The AAL Class mutual funds are offered only to benefit plans of American, therefore, trading is restricted only to American, resulting in a fair value classification of Level 2. Investments included approximately 24 % and 25 % of investments in non-U.S. common stocks in 2021 and 2020, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Defined Contribution and Multiemployer Plans
The costs associated with American’s defined contribution plans were $ 893 million, $ 835 million and $ 836 million for the years ended December 31, 2021, 2020 and 2019, respectively.
American participates in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund, Employer Identification No. 51-6031295 and Plan No. 002 (the IAM Pension Fund). American’s contributions to the IAM Pension Fund were $ 43 million, $ 40 million and $ 32 million for the years ended December 31, 2021, 2020 and 2019, respectively. The IAM Pension Fund reported $ 494 million in employers’ contributions for the year ended December 31, 2020, which is the most recent year for which such information is available. For 2020, American’s contributions represented more than 5 % of total contributions to the IAM Pension Fund.
On March 29, 2019, the actuary for the IAM Pension Fund certified that the fund was in “endangered” status despite reporting a funded status of over 80 %. Additionally, the IAM Pension Fund’s Board voluntarily elected to enter into “critical” status on April 17, 2019. Upon entry into critical status, the IAM Pension Fund was required by law to adopt a rehabilitation plan aimed at restoring the financial health of the pension plan and did so on April 17, 2019 (the Rehabilitation Plan). Under the Rehabilitation Plan, American was subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon American’s mandatory adoption of a contribution schedule under the Rehabilitation Plan. The contribution schedule requires 2.5 % annual increases to its contribution rate. This contribution schedule will remain in effect through the earlier of December 31, 2031 or the date the IAM Pension Fund emerges from critical status.
Profit Sharing Program
American accrues 5 % of its pre-tax income excluding net special items for its profit sharing program. As a