What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-22 · 180 added, 251 removed, 329 unchanged (57% of the section changed)

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2022 Financial Overview

Impact of COVID-19

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

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

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

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

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

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

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

Capacity Reductions

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

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

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

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

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

Cost Reductions

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

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

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

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

During 2021, we completed the following financing transactions (see Note 4 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information):

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

AAG’s 2021 Results

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

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

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

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

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

December 31, Increase

(Decrease) Percent

(Decrease) (2)

(In millions, except percentage changes)

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Total operating revenues 48,971 29,882 19,089 63.9

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

Aircraft fuel and related taxes 13,791 6,792 6,999 nm (2)

Salaries, wages and benefits 12,972 11,817 1,155 9.8

Total operating expenses 47,364 30,941 16,423 53.1

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

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

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

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

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

Operating income (loss) 1,607 (1,059) 2,666 nm

Pre-tax income (loss) 186 (2,548) 2,734 nm

Income tax provision (benefit) 59 (555) 614 nm

Net income (loss) 127 (1,993) 2,120 nm

Pre-tax income (loss) – GAAP $ 186 $ (2,548) $ 2,734 nm

Adjusted for:

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272 (4,395) 4,667 nm

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

Pre-tax income (loss) excluding net special items $ 458 $ (6,943) $ 7,401 nm

(1) See Part II, Item 6.

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

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

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

Pre-Tax Loss and Net Loss

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

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

Pre-tax income and net income were $186 million and $127 million, respectively, in 2022.

This compares to 2021 pre-tax loss and net loss of $2.5 billion and $2.0 billion, respectively.

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

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

The year-over-year improvement in our pre-tax income, on a GAAP basis, was driven by the continued strength in demand for air travel and a 21.3% increase in capacity as compared to 2021.

This resulted in record passenger revenue for 2022 which was offset in part by higher aircraft fuel and related taxes, due to a 73.0% increase in the average price per gallon of aircraft fuel as well as increases in other operating expenses from increased capacity.

The 2021 period also included the recognition of $4.4 billion of net pre-tax special credits, principally related to PSP Financial Assistance.

See Note 2 to AAG’s Consolidated Financial Statements in Part II, Item 8A for details on the components of pre-tax net special items.

Excluding the effects of pre-tax net special items, pre-tax income was $458 million in 2022 and pre-tax loss was $6.9 billion in 2021.

The year-over-year improvement in our pre-tax income excluding pre-tax net special items was primarily due to record passenger revenue in 2022, offset in part by higher aircraft fuel and related taxes and increases in other operating expenses, as described above.

In 2022, we reported total operating revenues of $49.0 billion, an increase of $19.1 billion, or 63.9%, as compared to 2021.

Passenger revenue was $44.6 billion, an increase of $18.5 billion, or 71.0%, as compared to 2021.

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

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

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

The increase in passenger revenue in 2022 was primarily due to a 33.5% increase in revenue passenger miles (RPMs), driven by the continued strength in demand for air travel domestically and in the Atlantic and Latin America regions, resulting in a 7.6 point increase in passenger load factor to 82.9% in 2022, and a 28.1% increase in passenger yield.

In 2022, cargo revenue was $1.2 billion, a decrease of $81 million, or 6.2%, as compared to 2021, primarily due to a 5.3% decrease in cargo ton miles driven by the discontinuation of our cargo-only flying and lower demand.

Other operating revenue increased $665 million, or 26.5%, in 2022 as compared to 2021, driven primarily by higher revenue associated with our loyalty program.

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

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

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

During 2022 and 2021, cash payments from co-branded credit card and other partners were $4.5 billion and $3.4 billion, respectively.

Our total revenue per available seat mile (TRASM) was 18.82 cents in 2022, a 35.1% increase as compared to 13.93 cents in 2021, driven principally by the increase in passenger revenue as described above.

In 2022, aircraft fuel expense totaled $13.8 billion, an increase of $7.0 billion as compared to 2021.

This increase was primarily driven by a 73.0% increase in the average price per gallon of aircraft fuel including related taxes to $3.54 in 2022 from $2.04 in 2021 and a 17.4% increase in gallons of fuel consumed due to increased capacity.

As of December 31, 2022, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption.

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general economic conditions and the price of fuel.

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

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

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

Our 2022 CASM was 18.20 cents, an increase of 26.2%, from 14.42 cents in 2021.

This increase in CASM was primarily driven by higher aircraft fuel and related taxes in 2022, as described above, and the recognition of $4.5 billion of operating net special credits in 2021 principally related to PSP Financial Assistance.

Our 2022 CASM excluding net special items and fuel was 12.83 cents, a decrease of 3.8%, from 13.33 cents in 2021.

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

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

Selected Consolidated Financial Data – “Reconciliation of GAAP to Non-GAAP Financial Measures.”

As of December 31, 2022, we had $12.0 billion in total available liquidity, consisting of $9.0 billion in unrestricted cash and short-term investments, $2.8 billion in undrawn capacity under revolving credit facilities and a total of $220 million in undrawn short-term revolving and other facilities.

During 2022, we completed the following financing transactions (see Note 4 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information):

• repaid in full approximately $1.2 billion outstanding balance under, and terminated, the December 2016 Term Loan Facility;

• received $866 million in proceeds from enhanced equipment trust certificates (EETCs);

• repurchased $349 million of unsecured notes in the open market;

• issued $205 million of equipment loans and other notes payable in connection with the financing of certain aircraft.

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 covenants requiring us to meet certain loan to value, collateral coverage and/or peak debt service coverage ratios.

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

AAG’s Results of Operations

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The table below sets forth selected operating data for the years ended December 31, 2022 and 2021.

Year Ended December 31, Increase (Decrease)

Year Ended December 31, Increase

Revenue passenger miles (millions) (a)

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Average aircraft fuel price including related taxes (dollars per gallon) 3.54 2.04 73.0%

2.04 1.48 37.9%

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

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

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

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

Excludes nine mainline and 69 regional aircraft in temporary storage as of December 31, 2022 as follows:

nine Boeing 737-800, 40 Embraer 145, 19 Bombardier CRJ 700, six Embraer 170 and four Bombardier CRJ 900.

Operating Revenues

Year Ended December 31, Increase Percent

Year Ended December 31, Increase

(Decrease) Percent

(In millions, except percentage changes)

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Year Ended December 31, 2021

Year Ended December 31, 2021 Passenger

December 31, 2022 Passenger

Revenue RPMs ASMs Load

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Passenger revenue $ 44,568 71.0% 33.5% 21.3% 7.6pts 28.1% 41.0%

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

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

Passenger revenue increased $18.5 billion, or 71.0%, in 2022 from 2021 primarily due to a 33.5% increase in RPMs, driven by the continued strength in demand for air travel domestically and in the Atlantic and Latin America regions, resulting in a 7.6 point increase in passenger load factor to 82.9% in 2022, and a 28.1% increase in passenger yield.

Cargo revenue decreased $81 million, or 6.2%, in 2022 from 2021 primarily due to a 5.3% decrease in cargo ton miles driven by the discontinuation of our cargo-only flying and lower demand.

Other operating revenue increased $665 million, or 26.5%, in 2022 from 2021 driven primarily by higher revenue associated with our loyalty program.

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

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

During 2022 and 2021, cash payments from co-branded credit card and other partners were $4.5 billion and $3.4 billion, respectively.

Total operating revenues in 2022 increased $19.1 billion, or 63.9%, from 2021 and our TRASM increased 35.1% to 18.82 cents in 2022 from 13.93 cents in 2021, driven principally by the increase in passenger revenue as described above.

Operating Expenses

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(In millions, except percentage changes)

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

Aircraft fuel and related taxes $ 13,791 $ 6,792 $ 6,999 nm

Salaries, wages and benefits 12,972 11,817 1,155 9.8

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Total operating expenses $ 47,364 $ 30,941 $ 16,423 53.1

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

Total operating expenses increased $16.4 billion, or 53.1%, in 2022 from 2021 driven by higher aircraft fuel and related taxes and other expenses as a result of an increase in the average price per gallon of aircraft fuel and increased capacity.

In 2021, total operating expenses also included $4.5 billion of net operating special credits principally related to PSP Financial Assistance.

See further discussion of operating special items, net below.

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

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

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

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

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

Aircraft fuel and related taxes increased $7.0 billion in 2022 from 2021 primarily driven by a 73.0% increase in the average price per gallon of aircraft fuel including related taxes to $3.54 in 2022 from $2.04 in 2021 and a 17.4% increase in gallons of fuel consumed due to increased capacity.

Salaries, wages and benefits increased $1.2 billion, or 9.8%, in 2022 from 2021 primarily due to an increase in average mainline full-time equivalent employees in 2022 as compared to 2021.

Regional expenses increased $1.2 billion, or 36.9%, in 2022 from 2021 primarily due to pay rate increases and retention bonuses offered at our wholly-owned regional carriers, as well as contractual rate increases with our third-party regional carriers.

The 2021 period also included the recognition of $539 million of PSP Financial Assistance as a regional operating special credit.

See further discussion of operating special items, net below.

Maintenance, materials and repairs increased $705 million, or 35.6%, in 2022 from 2021 primarily due to increased capacity and an increase in the volume of engine overhauls where expense is incurred as maintenance is performed.

Selling expenses increased $717 million, or 65.3%, in 2022 from 2021 primarily due to higher credit card fees and commission expense driven by the overall increase in passenger revenues.

Other operating expenses increased $1.4 billion, or 35.8%, in 2022 from 2021 primarily as a result of increased aircraft food and catering, crew travel, passenger accommodation and ground and cargo handling expenses driven by the increase in flight operations as well as certain general and administrative expenses.

Operating Special Items, Net

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(In millions)

Fleet impairment (1)

Litigation reserve adjustments 37 (19)

PSP Financial Assistance (2)

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

Severance expenses (3)

Litigation reserve adjustments (19) —

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

Fleet impairment (4)

Labor contract expenses (5)

Other operating special items, net 7 10

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Severance expenses (3)

Other operating special items, net 5 —

Regional operating special items, net 5 (449)

Operating special items, net $ 198 $ (4,455)

(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.

(1) Fleet impairment for 2022 included a non-cash impairment charge to write down the carrying value of our retired Airbus A330 fleet to the estimated fair value due to the market conditions for certain used aircraft.

We retired our Airbus A330 fleet in 2020 as a result of the decline in demand for air travel due to the COVID-19 pandemic.

Fleet impairment for 2021 included a non-cash impairment charge to write down regional aircraft resulting from the retirement of the remaining Embraer 140 fleet earlier than planned.

(2) The PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the payroll support programs established by the U.S.

See Note 1(b) to AAG’s Consolidated Financial Statements in Part II, Item 8A 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.

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

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

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

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

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

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

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

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

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

(4) 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 carriers included on the pilot seniority list as of September 1, 2021.

Nonoperating Results

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(In millions, except percentage changes)

Interest income $ 18 $ 41 $ (23) (55.2)

Interest income $ 216 $ 18 $ 198 nm

Interest expense, net (1,962) (1,800) (162) 9.0

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Total nonoperating expense, net $ (1,421) $ (1,489) $ 68 (4.6)

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

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

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

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

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

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

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

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

Interest income increased in 2022 compared to 2021 primarily as a result of higher returns on our short-term investments.

Interest expense, net increased in 2022 compared to 2021 primarily due to the impact of the AAdvantage Financing issued at the end of the first quarter of 2021 and higher interest expense on our variable-rate debt instruments as a result of increased interest rates, offset in part by debt repayments.

In 2022, other nonoperating income, net primarily included $424 million of non-service related pension and other postretirement benefit plan income, offset in part by $74 million of net special charges principally for mark-to-market net unrealized losses associated with certain equity investments.

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

In 2022, we recorded an income tax provision of $59 million with an effective rate of approximately 32%, which was substantially non-cash.

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

At December 31, 2022, we had approximately $16.2 billion of gross federal NOLs and $4.3 billion of other carryforwards available to reduce future federal taxable income, of which $5.9 billion will expire beginning in 2024 if unused and $14.6 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, 2022, which will expire in taxable years 2022 through 2042 if unused.

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

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

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

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Operating Revenues

Year Ended December 31, Increase Percent

Year Ended December 31, Increase (Decrease) Percent

Increase (Decrease)

(In millions, except percentage changes)

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Total operating revenues $ 48,965 $ 29,880 $ 19,085 63.9

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

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

Passenger revenue increased $18.5 billion, or 71.0%, in 2022 from 2021 primarily due to an increase in RPMs, driven by the continued strength in demand for air travel domestically and in the Atlantic and Latin America regions, resulting in an increase in passenger load factor in 2022, and an increase in passenger yield.

Cargo revenue decreased $81 million, or 6.2%, in 2022 from 2021 primarily due to a decrease in cargo ton miles driven by the discontinuation of American’s cargo-only flying and lower demand.

Other operating revenue increased $661 million, or 26.4%, in 2022 from 2021 driven primarily by higher revenue associated with American’s loyalty program.

During 2022 and 2021, cash payments from co-branded credit card and other partners were $4.5 billion and $3.4 billion, respectively.

Total operating revenues in 2022 increased $19.1 billion, or 63.9%, from 2021 driven principally by the increase in passenger revenue as described above.

Operating Expenses

December 31, Increase

Year Ended December 31, Increase

(Decrease) Percent

(In millions, except percentage changes)

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

Aircraft fuel and related taxes $ 13,791 $ 6,792 $ 6,999 nm

Salaries, wages and benefits 12,965 11,811 1,154 9.8

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Total operating expenses $ 47,312 $ 30,841 $ 16,471 53.4

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

Total operating expenses increased $16.5 billion, or 53.4%, in 2022 from 2021 driven by higher aircraft fuel and related taxes and other expenses as a result of an increase in the average price per gallon of aircraft fuel and increased capacity.

In 2021, total operating expenses also included $4.5 billion of net operating special credits principally related to PSP Financial Assistance.

See further discussion of operating special items, net below.

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

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

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

Salaries, wages and benefits increased $1.2 billion, or 9.8%, in 2022 from 2021 primarily due to an increase in average mainline full-time equivalent employees in 2022 as compared to 2021.

Regional expenses increased $1.2 billion, or 39.7%, in 2022 from 2021 primarily due to contractual rate increases with American's third-party regional carriers.

The 2021 period also included the recognition of $539 million of PSP Financial Assistance as a regional operating special credit.

See further discussion of operating special items, net below.

Selling expenses increased $717 million, or 65.3%, in 2022 from 2021 primarily due to higher credit card fees and commission expense driven by the overall increase in passenger revenues.

Operating Special Items, Net

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(In millions)

Fleet impairment (1)

Litigation reserve adjustments 37 (19)

PSP Financial Assistance (2)

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

Severance expenses (3)

Litigation reserve adjustments (19) —

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

Fleet impairment (4)

Labor contract expenses (5)

Other operating special items, net 7 10

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Operating special items, net $ 193 $ (4,518)

(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.

(1) Fleet impairment for 2022 included a non-cash impairment charge to write down the carrying value of American’s retired Airbus A330 fleet to the estimated fair value due to the market conditions for certain used aircraft.

American retired its Airbus A330 fleet in 2020 as a result of the decline in demand for air travel due to the COVID-19 pandemic.

Fleet impairment for 2021 included a non-cash impairment charge to write down regional aircraft resulting from the retirement of the remaining Embraer 140 fleet earlier than planned.

(2) The PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the payroll support programs established by the U.S.

See Note 1(b) to American’s Consolidated Financial Statements in Part II, Item 8B 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.

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

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

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

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

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

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

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

Nonoperating Results

December 31, Increase

Year Ended December 31, Increase

(Decrease) Percent

(In millions, except percentage changes)

Interest income $ 34 $ 337 $ (303) (90.0)

Interest income $ 349 $ 34 $ 315 nm

Interest expense, net (1,872) (1,642) (230) 14.0

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Total nonoperating expense, net $ (1,199) $ (1,316) $ 117 (8.9)

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

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

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

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

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

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

Interest income increased in 2022 compared to 2021 primarily as a result of higher returns on American’s short-term investments and related party receivables from AAG.

Interest expense, net increased in 2022 compared to 2021 primarily due to the impact of the AAdvantage Financing issued at the end of the first quarter of 2021 and higher interest expense on American’s variable-rate debt instruments as a result of increased interest rates, offset in part by debt repayments.

In 2022, other nonoperating income, net primarily included $423 million of non-service related pension and other postretirement benefit plan income, offset in part by $72 million of net special charges principally for mark-to-market net unrealized losses associated with certain equity investments.

In 2021, other nonoperating income, net included $335 million of non-service related pension and other postretirement benefit plan income, offset in part by $60 million of net special charges principally for mark-to-market net unrealized losses associated with certain equity investments and non-cash charges associated with debt refinancings and extinguishments.

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

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

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

In 2022, American recorded an income tax provision of $116 million with an effective rate of approximately 26%, which was substantially non-cash.

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

At December 31, 2022, American had approximately $16.1 billion of gross federal NOLs and $3.5 billion of other carryforwards available to reduce future federal taxable income, of which $6.2 billion will expire beginning in 2024 if unused and $13.4 billion can be carried forward indefinitely.

American also had approximately $5.9 billion of NOL carryforwards to reduce future state taxable income at December 31, 2022, which will expire in taxable years 2022 through 2042 if unused.

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

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

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

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Total available liquidity $ 11,998 $ 15,842 $ 11,985 $ 15,831

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

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

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

The amounts involved may be material.

For further information regarding our debt repurchases for the year ended 2022, see Note 4 to AAG's Condensed Consolidated Financial Statements in Part II, Item 8A.

Certain Covenants

Our debt agreements contain customary terms and conditions as well as various affirmative, negative and financial covenants that, among other things, may restrict the ability of us and our subsidiaries to incur additional indebtedness, pay dividends or repurchase stock.

Our debt agreements also contain customary change of control provisions, which may require us to repay or redeem such indebtedness upon certain events constituting a change of control under the relevant agreement, in certain cases at a premium.

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.

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 pay down such financing, in whole or in part, or the interest rate for the relevant financing will be increased.

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

Additionally, a significant portion of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities, and our AAdvantage Financing contains a peak debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in early repayment, in whole or in part, of the AAdvantage Financing.

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

For further information regarding our debt covenants, see Note 4 to AAG’s

Consolidated Financial Statements in Part II, Item 8A and Note 3 to American’s Consolidated Financial Statements in Part II, Item 8B.

Sources and Uses of Cash

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Operating Activities

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

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

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

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

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

Our net cash provided by operating activities was $2.2 billion and $704 million in 2022 and 2021, respectively, a $1.5 billion year-over-year increase.

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

Excluding the PSP Financial Assistance, our operating cash flows increased $6.2 billion compared to 2021 primarily due to a return to profitability.

Investing Activities

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

Our net cash provided by investing activities was $636 million in 2022 as compared to net cash used in investing activities of $6.0 billion in 2021.

Our principal investing activities in 2022 included $3.7 billion in net sales of short-term investments.

These cash inflows were offset in part by $2.5 billion of capital expenditures, which primarily related to the purchase of 24 Airbus A321neo aircraft and 12 spare engines, and $321 million of equity investments, principally related to GOL.

Additionally, we incurred $360 million related to airport construction projects, net of reimbursements, principally in connection with the renovation and expansion of Terminal 8 at JFK and the modernization of Terminals 4 and 5 at LAX.

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

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

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

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

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

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

Financing Activities

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

Our net cash used in financing activities was $2.6 billion in 2022 as compared to net cash provided by financing activities of $5.3 billion in 2021.

Our principal financing activities in 2022 included $3.8 billion in repayments of debt and finance lease obligations, consisting of $2.2 billion of scheduled debt repayments including the repayment of $401 million in connection with the maturity of our 5.000% unsecured notes, the $1.2 billion prepayment of the December 2016 Term Loan Facility and the repurchase of $349 million of unsecured notes in the open market.

These cash outflows were offset in part by $1.1 billion of long-term debt proceeds, consisting of $866 million from the issuance of equipment notes related to the 2021-1 Aircraft EETCs and $205 million in connection with the financing of certain aircraft.

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

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

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

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

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

These proceeds principally include $2.8 billion borrowed under the 2014 Revolving Facility, the 2013 Revolving Facility and the April 2016 Revolving Facility, $2.5 billion in aggregate principal amount of 11.75% senior secured notes, $1.8 billion in aggregate principal amount under the PSP1 Promissory Note, $1.2 billion in aggregate principal amount of two series of 10.75% senior secured notes due 2026, $1.0 billion in aggregate principal amount of AAG’s 6.50% convertible senior notes, $1.0 billion under the Delayed Draw Term Loan Credit Facility, $600 million in connection with the issuance of equipment notes related to EETCs and the financing of certain aircraft, $550 million under the Treasury Term Loan Facility, $500 million in aggregate principal amount of 3.75% unsecured senior notes due 2025 and the $360 million issuance of special facility revenue bonds as well as $1.7 billion of net proceeds from two underwritten public offerings of common stock and $869 million of net proceeds from an at-the-market offering of common stock.

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

Operating Activities

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

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

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

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

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

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

American’s net cash provided by operating activities was $1.3 billion and $3.2 billion in 2022 and 2021, respectively, a $1.9 billion year-over-year decrease.

American had a $2.9 billion net decrease year-over-year in intercompany cash receipts principally from AAG's financing transactions.

Additionally, in 2021, American received cash proceeds of approximately $4.2 billion associated with the PSP Financial Assistance.

Excluding the PSP Financial Assistance and the net decrease in AAG's financing transactions, American's operating cash flows increased $5.2 billion compared to 2021 primarily due to a return to profitability.

Investing Activities

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

American’s net cash provided by investing activities was $693 million in 2022 as compared to net cash used in investing activities of $5.9 billion in 2021.

American’s principal investing activities in 2022 included $3.7 billion in net sales of short-term investments.

Additionally, American incurred $360 million related to airport construction projects, net of reimbursements, principally in connection with the renovation and expansion of Terminal 8 at JFK and the modernization of Terminals 4 and 5 at LAX.

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

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

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

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

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

Financing Activities

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

American’s net cash used in financing activities was $1.8 billion in 2022 as compared to net cash provided by financing activities of $2.8 billion in 2021.

American’s principal financing activities in 2022 included $3.0 billion in repayments of debt and finance lease obligations, consisting of $1.8 billion of scheduled debt repayments and the $1.2 billion prepayment of the December 2016 Term Loan Facility.

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

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

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

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

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

Long-term debt and debt covenants Note 4

Leases Note 5

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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.

American currently has 352 owned aircraft and 60 owned spare aircraft engines, which in each case were financed with EETCs issued by pass-through trusts.

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

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

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

notes relating to the financed aircraft or engines.

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 equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or spare engines.

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.

However, 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, 2022, $9.2 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 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 4 to American’s Consolidated Financial Statements in Part II, Item 8B .

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.

We provide financial assurance, such as letters of credit and surety bonds, primarily to support airport commitments.

As of December 31, 2022, we had $218 million of letters of credit and surety bonds securing various obligations, of which $100 million is collateralized with our restricted cash.

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Contractual Obligations

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

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

The following table provides details of our estimated material cash requirements from contractual obligations as of December 31, 2022 (in millions).

The table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time and is subject to other conventions as set forth in the applicable accompanying footnotes.

Payments Due by Period

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121 121 144 155 189 575 1,305

Finance lease obligations (See Note 5)

8 10 — — — — 18

Operating lease commitments (See Note 5)

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

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

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

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

Due to uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent our most current estimate based on contractual delivery schedules adjusted for updates and revisions to such schedules communicated to management by the applicable equipment manufacturer.

However, the actual delivery schedule may differ, potentially materially, based on various potential factors including production delays by the manufacturer and regulatory concerns.

Additionally, the amounts in the table exclude four Boeing 787-8 aircraft scheduled to be delivered in 2023 and five Boeing 787-9 aircraft scheduled to be delivered in 2024, for which we have obtained committed lease financing.

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

(f) Represents minimum payments under capacity purchase agreements with third-party regional carriers.

These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and our actual payments could differ materially.

These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially.

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

(g) Represents minimum pension contributions based on actuarially determined estimates as of December 31, 2022 and is based on estimated payments through 2032.

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

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

In January 2023, we made $67 million of required pension contributions.

(h) Includes purchase commitments for aircraft fuel, flight equipment maintenance, information technology support and construction projects and excludes obligations under certain fuel offtake agreements or other agreements for which the timing of the related expenditure is uncertain, or which are subject to material contingencies, such as the construction of a production facility.

Capital Raising Activity and Other Possible Actions

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

In light of our significant financial commitments related to, among other things, the servicing and amortization of existing debt and equipment leasing arrangements and new flight equipment, we and our subsidiaries will regularly consider, and enter into negotiations related to, capital raising and liability management activity, which may include the entry into leasing transactions and future issuances of, and transactions designed to manage the timing and amount of, secured or unsecured debt obligations or additional equity or equity-linked securities in public or private offerings or otherwise.

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

For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks (in particular the ongoing global outbreak of COVID-19), natural disasters or other causes could reduce the demand for air travel, which would reduce the amount of cash generated by operations.

For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks (such as occurred during the COVID-19 pandemic), natural disasters or other causes could reduce the demand for air travel, which would reduce the amount of cash generated by operations.

See Part I, Item 1A.

Risk Factors – "The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted our business, operating results, financial condition and liquidity.

The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition and liquidity" for additional discussion.

Risk Factors – “Downturns in economic conditions could adversely affect our business.” for additional discussion.

An increase in costs, either due to an increase in borrowing costs caused by a reduction in credit ratings or a general increase in interest rates, or due to an increase in the cost of fuel, maintenance, aircraft, aircraft engines or parts, could decrease the amount of cash available to cover cash contractual obligations.

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Basis of Presentation

See Note 1 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 to American’s Consolidated Financial Statements in Part II, Item 8B for information regarding the basis of presentation.

See Note 1 to each of AAG’s and American’s Consolidated Financial Statements in Part II, Items 8A and 8B, respectively, for information regarding the basis of presentation.

Critical Accounting Policies and Estimates

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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 air traffic liability principally represents tickets sold for future travel on American and partner airlines.

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.

The estimate for tickets expected to expire unused is generally based on an analysis of our historical data.

We have consistently applied this accounting method to estimate and recognize revenue from unused tickets at the date of travel.

This estimate is periodically evaluated based on subsequent activity to validate its accuracy.

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

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

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

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

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

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

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

While the contract duration of passenger tickets is generally one year, in response to the COVID-19 pandemic, we extended the contract duration for certain tickets to September 30, 2022, principally those tickets which were issued in 2020 and 2021.

Additionally, we extended the contract duration to December 31, 2022 for tickets to certain international destinations.

Tickets issued in 2022 and thereafter are no longer subject to change fees which provides more flexibility for customers to change travel plans.

Given this new flexibility offered to our customers, our estimate of revenue that will be recognized from the air traffic liability for future flown or unused tickets may be subject to variability and differ from historical experience.

Loyalty Revenue

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

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

Mileage credits earned through travel

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

The estimated selling price of miles is adjusted for an estimate of 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.

For the year ended December 31, 2021, a hypothetical 10% increase in the estimated selling price of miles would have decreased revenues by approximately $55 million as a result of additional amounts deferred from passenger ticket sales to be recognized in future periods.

The estimated selling price of mileage credits 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.

For the year ended December 31, 2022, a hypothetical 10% increase in the estimated selling price of mileage credits would have decreased revenues by approximately $105 million as a result of additional amounts deferred from passenger ticket sales to be recognized in future periods.

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.

We sell mileage credits to participating airline partners and non-airline business partners, including our co-branded credit card partners, under contracts with remaining terms generally from one to seven years as of December 31, 2022.

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

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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.

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

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

the transportation component and the marketing component.

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.

The marketing component includes the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in these agreements, as well as advertising.

We recognize the marketing component in other revenue in the period of the mileage credit sale following the sales-based royalty method.

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.

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

For the year ended December 31, 2022, a hypothetical 10% increase in our estimate of mileage credits not expected to be redeemed would have increased revenues by approximately $100 million.

Pensions and Retiree Medical and Other Postretirement Benefits

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

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

Lowering the discount rate by 50 basis points as of December 31, 2022 would increase our pension and retiree medical and other postretirement benefits obligations by approximately $725 million and $30 million, respectively, and decrease estimated 2023 pension and retiree medical and other postretirement benefits expense by approximately $5 million and $1 million, respectively.

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

stocks, 22% alternative (private) investments, 16% developed international stocks and 8% emerging market stocks.

stocks, 22% private investments, 16% developed international stocks and 8% emerging market stocks.

The expected rate of return on plan assets component of our net periodic benefit cost is calculated based on the fair value of plan assets and our target asset allocation.

Lowering the expected long-term rate of return on plan assets by 50 basis points as of December 31, 2022 would increase estimated 2023 pension expense and retiree medical and other postretirement benefits expense by approximately $60 million and $1 million, respectively.

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

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

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

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

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

Annually, we review and revise certain economic and demographic assumptions including the pension and retiree medical and other postretirement benefits discount rates.

The net effect of changing this assumption for the pension plans resulted in a decrease of $4.6 billion in the projected benefit obligation at December 31, 2022.

The net effect of changing this assumption for retiree medical and other postretirement benefits plans resulted in a decrease of $183 million in the accumulated postretirement benefit obligation at December 31, 2022.

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

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.

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

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

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

We have determined that positive factors outweigh negative factors in the determination of the realizability of our deferred tax assets.

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

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Accounting Standards Update (ASU) 2020-04:

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

Simplifying the Accounting for Income Taxes (Topic 740)

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

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

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

Disclosures by Business Entities about Government Assistance (Topic 832)

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

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

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

We adopted this standard as of December 31, 2021.

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

Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2022-06:

Deferral of the Sunset Date of Topic 848

ASU 2020-04 provides optional temporary guidance for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform.

Topic 848 is effective as of March 12, 2020 through December 31, 2022;

however, because the intended cessation date of LIBOR was deferred to June 30, 2023, ASU 2022-06 was issued in December 2022 to extend the current relief in Topic 848 through December 31, 2024.

We will adopt Topic 848 when our relevant contracts are modified upon transition to alternative reference rates and we do not expect the application of Topic 848 to have a material impact on our consolidated financial statements.

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What changed 10-K

Item 7. Management’s Discussion and Analysis