Basis of Presentation and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2018

Organization Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]

Basis of Presentation and Summary of Significant Accounting Policies

(a) Basis of Presentation

American Airlines Group Inc. (we, us, our and similar terms, or AAG), a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo through its mainline operating subsidiary, American Airlines, Inc. (American) and its wholly-owned regional airline subsidiaries, Envoy Aviation Group Inc. (Envoy), PSA Airlines, Inc. (PSA) and Piedmont Airlines, Inc. (Piedmont) that operate under the brand American Eagle. On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. All significant intercompany transactions have been eliminated.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, as well as pension and retiree medical and other postretirement benefits.

(b) Recent Accounting Pronouncements

Standards Adopted in 2018

Effective January 1, 2018, we adopted the accounting pronouncements described below.

ASU 2014-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)

The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services. We adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods.

The adoption of the New Revenue Standard impacted our accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members. There was no change in accounting for sales of mileage credits to co-branded credit card or other partners. Prior to the adoption of the New Revenue Standard, we used the incremental cost method to account for the portion of our loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger. The New Revenue Standard required us to change our policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method.

The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue. Additionally, the New Revenue Standard required a gross presentation on the face of our consolidated statements of operations for certain revenues and expenses that had previously been presented on a net basis.

See “Impacts to 2017 Results” and “Impacts to 2016 Results” below for the impact to our consolidated statements of operations data for 2017 and 2016, respectively, and our consolidated balance sheet as of December 31, 2017 related to the adoption of the New Revenue Standard.

ASU 2017-07: Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)

The New Retirement Standard required all components of our net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented. The adoption of the New Retirement Standard had no impact on pre-tax income or net income reported.

See “Impacts to 2017 Results” and “Impacts to 2016 Results” below for the impact to our consolidated statements of operations data for 2017 and 2016, respectively, related to the adoption of the New Retirement Standard.

ASU 2016-02: Leases (Topic 842) (the New Lease Standard)

The New Lease Standard requires lessees to recognize a lease liability and a right-of-use (ROU) asset on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.

In the fourth quarter of 2018, we elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method). Under the effective date method, financial results reported in periods prior to 2018 are unchanged. We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

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

Additionally, we recognized a $197 million cumulative effect adjustment credit, net of tax, to retained earnings. The adjustment to retained earnings was driven principally by sale-leaseback transactions including the recognition of unamortized deferred aircraft sale-leaseback gains. Prior to the adoption of the New Lease Standard, gains on sale-leaseback transactions were generally deferred and recognized in the income statement over the lease term. Under the New Lease Standard, gains on sale-leaseback transactions (subject to adjustment for off-market terms) are recognized immediately.

ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)

This ASU made several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This standard was adopted prospectively as of January 1, 2018 and resulted in a $60 million cumulative effect adjustment credit to retained earnings, net of tax, related to our investment in China Southern Airlines Company Limited (China Southern Airlines), which was previously accounted for under the cost method.

ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash

This ASU required that the change in the total cash balance, cash at the beginning of the period and cash at the end of the period on the statement of cash flows include restricted cash, and also required companies that report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard was applied retrospectively, which resulted in the recast of prior reporting periods in the statement of cash flows. For the years ended December 31, 2018, 2017 and 2016, $11 million, $103 million and $113 million, respectively, of restricted cash is included in the total cash and restricted cash balance at the end of the period. A reconciliation of cash and restricted cash reported on our consolidated statements of cash flows to the amounts reported on our consolidated balance sheets is provided in a table below the Consolidated Statements of Cash Flows.

Impacts to 2017 Results

The effects of the adoption of the New Revenue Standard and New Retirement Standard to our consolidated statement of operations for the twelve months ended December 31, 2017 were as follows (in millions):



				New Revenue Standard								New Retirement Standard
Year Ended December 31, 2017	As Reported			Deferred Revenue Method			Ancillary Revenue Reclassifications			Gross Versus Net Presentation		Reclassifications			As Recast
Operating revenues:
Passenger	$	36,133		$	311		$	2,648		$	39	$	—		$	39,131
Cargo	800			—			42			48		—			890
Other	5,274			—			(2,690		)	17		—			2,601
Total operating revenues	42,207			311			—			104		—			42,622
Total operating expenses	38,149			—			—			104		138			38,391
Operating income	4,058			311			—			—		(138		)	4,231
Total nonoperating expense, net	(974		)	—			—			—		138			(836		)
Income before income taxes	3,084			311			—			—		—			3,395
Income tax provision ⁽¹⁾	1,165			948			—			—		—			2,113
Net income	$	1,919		$	(637	)	$	—		$	—	$	—		$	1,282
Diluted earnings per common share	$	3.90													$	2.61


⁽¹⁾	The adjustment to the 2017 income tax provision includes an $823 million special charge to reduce our deferred tax asset associated with loyalty program liabilities as a result of H.R. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act), enacted in December 2017 that reduced the federal corporate income tax rate from 35% to 21%.

The effects of the adoption of the New Revenue Standard to our December 31, 2017 consolidated balance sheet were as follows (in millions):



	As Reported		New Revenue Standard			As Recast
Deferred tax asset	$	427	$	1,389		$	1,816
Air traffic liability	3,978		64			4,042
Current loyalty program liability	2,791		330			3,121
Noncurrent loyalty program liability	—		5,701			5,701
Total stockholders’ equity (deficit)	3,926		(4,706		)	(780		)

Impacts to 2016 Results

The effects of the adoption of the New Revenue Standard and New Retirement Standard to our consolidated statement of operations for the twelve months ended December 31, 2016 were as follows (in millions):



				New Revenue Standard								New Retirement Standard
Year Ended December 31, 2016	As Reported			Deferred Revenue Method			Ancillary Revenue Reclassifications			Gross Versus Net Presentation		Reclassifications			As Recast
Operating revenues:
Passenger	$	34,579		$	(147	)	$	2,571		$	42	$	—		$	37,045
Cargo	700			—			36			49		—			785
Other	4,901			—			(2,607		)	18		—			2,312
Total operating revenues	40,180			(147		)	—			109		—			40,142
Total operating expenses	34,896			—			—			109		77			35,082
Operating income	5,284			(147		)	—			—		(77		)	5,060
Total nonoperating expense, net	(985		)	—			—			—		77			(908		)
Income before income taxes	4,299			(147		)	—			—		—			4,152
Income tax provision	1,623			(55		)	—			—		—			1,568
Net income	$	2,676		$	(92	)	$	—		$	—	$	—		$	2,584
Diluted earnings per common share	$	4.81													$	4.65

Standards Effective for 2019 Reporting Periods

ASU 2018-02: Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S. federal corporate income tax rate change as a result of the 2017 Tax Act. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We will adopt this standard effective January 1, 2019. The adoption of the standard may impact tax amounts stranded in accumulated other comprehensive income related to our pension and retiree medical and other postretirement benefit plans.

Short-term investments are classified as available-for-sale and stated at fair value. Realized gains and losses are recorded in nonoperating expense on our consolidated statements of operations. Unrealized gains and losses are recorded in accumulated other comprehensive loss on our consolidated balance sheets.

(d) Restricted Cash and Short-term Investments

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

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

Aircraft fuel is recorded on a first-in, first-out basis. Spare parts and supplies are recorded at average costs less an allowance for obsolescence. These items are expensed when used.

(f) Operating Property and Equipment

Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight-line method. Residual values for aircraft, engines and related rotable parts are generally 5% to 10% of original cost. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less. The estimated useful lives for the principal property and equipment classifications are as follows:



Principal Property and Equipment Classification	Estimated Useful Life
Aircraft, engines and related rotable parts	20 – 30 years
Buildings and improvements	5 – 30 years
Furniture, fixtures and other equipment	3 – 10 years
Capitalized software	5 – 10 years

We assess impairment on operating property and equipment when events and circumstances indicate that the assets may be impaired. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.

Total depreciation and amortization expense was $2.4 billion, $2.2 billion and $1.9 billion for the years ended December 31, 2018, 2017 and 2016, respectively.

(g) Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current operating lease liabilities and noncurrent operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, in our consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.

Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees.

Under certain of our capacity purchase agreements with third-party regional carriers, we do not own the underlying aircraft. However, since we control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes. For these capacity purchase agreements, we account for the lease and non-lease components separately. The lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. We allocate the consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See Note 12(b) for additional information on our capacity purchase agreements.

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

(h) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.

We provide a valuation allowance for our deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the level and volatility of fuel prices and travel demand.

(i) Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed. Goodwill is not amortized but assessed for impairment annually on October 1^st or more frequently if events or circumstances indicate that goodwill may be impaired. We have one consolidated reporting unit.

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded. Based upon our annual assessment, there was no goodwill impairment in 2018. The carrying value of the goodwill on our consolidated balance sheets was $4.1 billion as of December 31, 2018 and 2017.

(j) Other Intangibles, Net

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

Finite-Lived Intangible Assets

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

The following table provides information relating to our amortizable intangible assets as of December 31, 2018 and 2017 (in millions):



	December 31,
	2018			2017
Domestic airport slots	$	365		$	365
Customer relationships	300			300
Marketing agreements	105			105
Tradenames	35			35
Airport gate leasehold rights	137			137
Accumulated amortization	(663		)	(622		)
Total	$	279		$	320

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight-line basis over approximately nine years and 30 years, respectively. Tradenames are fully amortized.

We recorded amortization expense related to these intangible assets of $41 million, $44 million and $76 million for the years ended December 31, 2018, 2017 and 2016, respectively. We expect to record annual amortization expense for these intangible assets as follows (in millions):



2019	$	41
2020	41
2021	41
2022	41
2023	7
2024 and thereafter	108
Total	$	279

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets include certain domestic airport slots at our hubs and international slots and route authorities. Indefinite-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1^st or more frequently if events or circumstances indicate that the asset may be impaired. For both periods as of December 31, 2018 and 2017, we had $1.9 billion of indefinite-lived intangible assets on our consolidated balance sheets.

In the second quarter of 2018, we recorded a $26 million impairment charge on a Brazil route authority as a result of the U.S.-Brazil open skies agreement, which is included within special items, net on our consolidated statement of operations.

Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment to determine whether we believe it is more likely than not that an asset has been impaired. If we believe impairment has occurred, we then evaluate for impairment by comparing the estimated fair value of assets to the carrying value. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value. Based upon our annual assessment, there were no additional indefinite-lived intangible asset impairments in 2018 other than the Brazil route authority described above.

(k) Revenue Recognition

Revenue

Effective January 1, 2018, we adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods. Refer to “Recent Accounting Pronouncements” in Note 1(b) for the effects of the adoption on our consolidated statements of operations for the years ended December 31, 2017 and 2016 and on our consolidated balance sheet as of December 31, 2017. Under the New Revenue Standard, revenue is recognized upon the transfer of control of promised products or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

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



	2018		2017		2016
Passenger revenue:
Passenger travel	$	37,457	$	36,152	$	34,278
Loyalty revenue - travel ⁽¹⁾	3,219		2,979		2,767
Total passenger revenue	40,676		39,131		37,045
Cargo	1,013		890		785
Other:
Loyalty revenue - marketing services	2,352		2,124		1,872
Other revenue	500		477		440
Total other revenue	2,852		2,601		2,312
Total operating revenues	$	44,541	$	42,622	$	40,142


⁽¹⁾	Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions earned through travel and mileage credits sold to co-branded credit card and other partners. See “Loyalty Revenue” below for further discussion on these mileage credits.

The following is our total passenger revenue by geographic region (in millions):



	2018		2017		2016
Domestic	$	29,573	$	28,749	$	27,202
Latin America	5,125		4,840		4,676
Atlantic	4,376		4,028		3,873
Pacific	1,602		1,514		1,294
Total passenger revenue	$	40,676	$	39,131	$	37,045

We attribute passenger revenue by geographic region based upon the origin and destination of each flight segment.

Passenger Revenue

We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on our consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel.

The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. We have consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of our estimates. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.

Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.

Loyalty Revenue

We currently operate the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co-branded credit cards, hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, we apply the deferred revenue method in accordance with the New Revenue Standard.

Mileage credits earned through travel

For mileage credits earned through travel, we apply a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.

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 nine years. Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.

Our most significant partner agreements are our co-branded credit card agreements with Citi and Barclaycard US that we entered into in 2016. We identified the following revenue elements in these co-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.

The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.

For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed. Our estimates are based on analysis of historical redemptions.

Cargo Revenue

Cargo revenue is recognized when we provide the transportation.

Other Revenue

Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded credit card and other partners and other marketing related payments. For the years ended December 31, 2018, 2017 and 2016, loyalty revenue included in other revenue was $2.4 billion, $2.1 billion and $1.9 billion, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in “Loyalty Revenue.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.

Contract Balances

Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on our consolidated balance sheet and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our consolidated balance sheet.



	December 31, 2018		December 31, 2017
	(in millions)
Loyalty program liability	$	8,539	$	8,822
Air traffic liability	4,339		4,042
Total	$	12,878	$	12,864

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



Balance at December 31, 2017	$	8,822
Deferral of revenue	3,083
Recognition of revenue ⁽¹⁾	(3,366		)
Balance at December 31, 2018 ⁽²⁾	$	8,539

⁽¹⁾

Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.

⁽²⁾

Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. As of December 31, 2018, our current loyalty program liability was $3.3 billion and represents our current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel. The balance in our air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is one year. Accordingly, any revenue associated with tickets sold for future travel will be recognized within twelve months. For 2018, $3.1 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2017.

With respect to contract receivables, reflected as accounts receivable, net on the accompanying consolidated balance sheet, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards. These receivables are short-term, mostly settled within seven days after sale. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.

(l) Maintenance, Materials and Repairs

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

(m) Selling Expenses

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising. Advertising costs are expensed as incurred. Advertising expense was $128 million, $135 million and $116 million for the years ended December 31, 2018, 2017 and 2016, respectively.

(n) Share-based Compensation

We account for our share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. Certain awards have performance conditions that must be achieved prior to vesting and are expensed based on the expected achievement at each reporting period. The fair value of stock appreciation rights is estimated using a Black-Scholes option pricing model. The fair value of restricted stock units is based on the market price of the underlying shares of AAG common stock on the date of grant. See Note 15 for further discussion of share-based compensation.

(o) Foreign Currency Gains and Losses

Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net in our consolidated statements of operations. Foreign currency losses for 2018 and 2017 were $55 million and $4 million, respectively, and for 2016, foreign currency gains were $1 million.

(p) Other Operating Expenses

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

(q) Regional Expenses

Expenses associated with American Eagle operations are classified as regional expenses on our consolidated statements of operations. Regional expenses consist of the following (in millions):



	Year Ended December 31,
	2018		2017		2016
Aircraft fuel and related taxes	$	1,843	$	1,382	$	1,109
Salaries, wages and benefits	1,591		1,452		1,333
Capacity purchases from third-party regional carriers ⁽¹⁾	1,431		1,581		1,538
Maintenance, materials and repairs	340		281		345
Other rent and landing fees	610		625		564
Aircraft rent	32		35		36
Selling expenses	369		361		347
Depreciation and amortization	318		315		301
Special items, net	6		22		14
Other	593		492		457
Total regional expenses	$	7,133	$	6,546	$	6,044


⁽¹⁾	In 2018, we recognized $565 million of expense under our capacity purchase agreement with Republic Airline Inc. (Republic). We hold a 25% equity interest in Republic Airways Holdings Inc. (Republic Holdings), the parent company of Republic.

American Airlines, Inc. [Member]

Organization Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]

Basis of Presentation and Summary of Significant Accounting Policies

(a) Basis of Presentation

American Airlines, Inc. (American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG), which owns all of American’s outstanding common stock, par value $1.00 per share. On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. All significant intercompany transactions have been eliminated.

(b) Recent Accounting Pronouncements

Standards Adopted in 2018

Effective January 1, 2018, American adopted the accounting pronouncements described below.

ASU 2014-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)

The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services. American adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods.

The adoption of the New Revenue Standard impacted American’s accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members. There was no change in accounting for sales of mileage credits to co-branded credit card or other partners. Prior to the adoption of the New Revenue Standard, American used the incremental cost method to account for the portion of its loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger. The New Revenue Standard required American to change its policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method.

The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue. Additionally, the New Revenue Standard required a gross presentation on the face of American’s consolidated statements of operations for certain revenues and expenses that had previously been presented on a net basis.

See “Impacts to 2017 Results” and “Impacts to 2016 Results” below for the impact to American’s consolidated statements of operations data for 2017 and 2016, respectively, and American’s consolidated balance sheet as of December 31, 2017 related to the adoption of the New Revenue Standard.

ASU 2017-07: Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)

The New Retirement Standard required all components of American’s net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented. The adoption of the New Retirement Standard had no impact on pre-tax income or net income reported.

See “Impacts to 2017 Results” and “Impacts to 2016 Results” below for the impact to American’s consolidated statements of operations data for 2017 and 2016, respectively, related to the adoption of the New Retirement Standard.

ASU 2016-02: Leases (Topic 842) (the New Lease Standard)

In the fourth quarter of 2018, American elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method). Under the effective date method, financial results reported in periods prior to 2018 are unchanged. American also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

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

Additionally, American recognized a $197 million cumulative effect adjustment credit, net of tax, to retained earnings. The adjustment to retained earnings was driven principally by sale-leaseback transactions including the recognition of unamortized deferred aircraft sale-leaseback gains. Prior to the adoption of the New Lease Standard, gains on sale-leaseback transactions were generally deferred and recognized in the income statement over the lease term. Under the New Lease Standard, gains on sale-leaseback transactions (subject to adjustment for off-market terms) are recognized immediately.

ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)

This ASU made several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This standard was adopted prospectively as of January 1, 2018 and resulted in a $60 million cumulative effect adjustment credit to retained earnings, net of tax, related to American's investment in China Southern Airlines Company Limited (China Southern Airlines), which was previously accounted for under the cost method.

ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash

This ASU required that the change in the total cash balance, cash at the beginning of the period and cash at the end of the period on the statement of cash flows include restricted cash, and also required companies that report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard was applied retrospectively, which resulted in the recast of prior reporting periods in the statement of cash flows. For the years ended December 31, 2018, 2017 and 2016, $11 million, $103 million and $113 million, respectively, of restricted cash is included in the total cash and restricted cash balance at the end of the period. A reconciliation of cash and restricted cash reported on American's consolidated statements of cash flows to the amounts reported on its consolidated balance sheets is provided in a table below the Consolidated Statements of Cash Flows.

Impacts to 2017 Results

The effects of the adoption of the New Revenue Standard and New Retirement Standard to American’s consolidated statement of operations for the twelve months ended December 31, 2017 were as follows (in millions):



				New Revenue Standard								New Retirement Standard
Year Ended December 31, 2017	As Reported			Deferred Revenue Method			Ancillary Revenue Reclassifications			Gross Versus Net Presentation		Reclassifications			As Recast
Operating revenues:
Passenger	$	36,133		$	311		$	2,648		$	39	$	—		$	39,131
Cargo	800			—			42			48		—			890
Other	5,262			—			(2,690		)	17		—			2,589
Total operating revenues	42,195			311			—			104		—			42,610
Total operating expenses	38,163			—			—			104		138			38,405
Operating income	4,032			311			—			—		(138		)	4,205
Total nonoperating expense, net	(788		)	—			—			—		138			(650		)
Income before income taxes	3,244			311			—			—		—			3,555
Income tax provision ⁽¹⁾	1,322			948			—			—		—			2,270
Net income	$	1,922		$	(637	)	$	—		$	—	$	—		$	1,285


⁽¹⁾	The adjustment to the 2017 income tax provision includes a $924 million special charge to reduce American’s deferred tax asset associated with loyalty program liabilities as a result of H.R. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act), enacted in December 2017 that reduced the federal corporate income tax rate from 35% to 21%.

The effects of the adoption of the New Revenue Standard to American’s December 31, 2017 consolidated balance sheet were as follows (in millions):



	As Reported		New Revenue Standard			As Recast
Deferred tax asset	$	682	$	1,389		$	2,071
Air traffic liability	3,978		64			4,042
Current loyalty program liability	2,791		330			3,121
Noncurrent loyalty program liability	—		5,701			5,701
Total stockholders’ equity (deficit)	14,594		(4,706		)	9,888

Impacts to 2016 Results



				New Revenue Standard								New Retirement Standard
Year Ended December 31, 2016	As Reported			Deferred Revenue Method			Ancillary Revenue Reclassifications			Gross Versus Net Presentation		Reclassifications			As Recast
Operating revenues:
Passenger	$	34,579		$	(147	)	$	2,571		$	42	$	—		$	37,045
Cargo	700			—			36			49		—			785
Other	4,884			—			(2,607		)	18		—			2,295
Total operating revenues	40,163			(147		)	—			109		—			40,125
Total operating expenses	34,859			—			—			109		77			35,045
Operating income	5,304			(147		)	—			—		(77		)	5,080
Total nonoperating expense, net	(861		)	—			—			—		77			(784		)
Income before income taxes	4,443			(147		)	—			—		—			4,296
Income tax provision	1,662			(55		)	—			—		—			1,607
Net income	$	2,781		$	(92	)	$	—		$	—	$	—		$	2,689

Standards Effective for 2019 Reporting Periods

ASU 2018-02: Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S. federal corporate income tax rate change as a result of the 2017 Tax Act. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. American will adopt this standard effective January 1, 2019. The adoption of the standard may impact tax amounts stranded in accumulated other comprehensive income related to American's pension and retiree medical and other postretirement benefit plans.

Short-term investments are classified as available-for-sale and stated at fair value. Realized gains and losses are recorded in nonoperating expense on American’s consolidated statements of operations. Unrealized gains and losses are recorded in accumulated other comprehensive loss on American’s consolidated balance sheets.

(d) Restricted Cash and Short-term Investments

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

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

Aircraft fuel is recorded on a first-in, first-out basis. Spare parts and supplies are recorded at average costs less an allowance for obsolescence. These items are expensed when used.

(f) Operating Property and Equipment



Principal Property and Equipment Classification	Estimated Useful Life
Aircraft, engines and related rotable parts	20 – 30 years
Buildings and improvements	5 – 30 years
Furniture, fixtures and other equipment	3 – 10 years
Capitalized software	5 – 10 years

American assesses impairment on operating property and equipment when events and circumstances indicate that the assets may be impaired. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.

Total depreciation and amortization expense was $2.4 billion, $2.1 billion and $1.8 billion for the years ended December 31, 2018, 2017 and 2016, respectively.

(g) Leases

American determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current operating lease liabilities and noncurrent operating lease liabilities in American’s consolidated balance sheet. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, in American’s consolidated balance sheet.

ROU assets represent American’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

American uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. American gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates.

American’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. American’s lease agreements do not contain any residual value guarantees.

Under certain of American’s capacity purchase agreements with third-party regional carriers, American does not own the underlying aircraft. However, since American controls the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes. For these capacity purchase agreements, American accounts for the lease and non-lease components separately. The lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. American allocates the consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See Note 10(b) for additional information on its capacity purchase agreements.

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

(h) Income Taxes

American provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the level and volatility of fuel prices and travel demand.

(i) Goodwill

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded. Based upon American’s annual assessment, there was no goodwill impairment in 2018. The carrying value of the goodwill on American’s consolidated balance sheets was $4.1 billion as of December 31, 2018 and 2017.

(j) Other Intangibles, Net

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

Finite-Lived Intangible Assets

The following table provides information relating to American’s amortizable intangible assets as of December 31, 2018 and 2017 (in millions):



	December 31,
	2018			2017
Domestic airport slots	$	365		$	365
Customer relationships	300			300
Marketing agreements	105			105
Tradenames	35			35
Airport gate leasehold rights	137			137
Accumulated amortization	(663		)	(622		)
Total	$	279		$	320

American recorded amortization expense related to these intangible assets of $41 million, $44 million and $76 million for the years ended December 31, 2018, 2017 and 2016, respectively. American expects to record annual amortization expense for these intangible assets as follows (in millions):



2019	$	41
2020	41
2021	41
2022	41
2023	7
2024 and thereafter	108
Total	$	279

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets include certain domestic airport slots at American’s hubs and international slots and route authorities. Indefinite-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1^st or more frequently if events or circumstances indicate that the asset may be impaired. For both periods as of December 31, 2018 and 2017, American had $1.9 billion of indefinite-lived intangible assets on its consolidated balance sheets.

In the second quarter of 2018, American recorded a $26 million impairment charge on a Brazil route authority as a result of the U.S.-Brazil open skies agreement, which is included within special items, net on its consolidated statement of operations.

Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment to determine whether American believes it is more likely than not that an asset has been impaired. If American believes impairment has occurred, American then evaluates for impairment by comparing the estimated fair value of assets to the carrying value. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value. Based upon American’s annual assessment, there were no additional indefinite-lived intangible asset impairments in 2018 other than the Brazil route authority described above.

(k) Revenue Recognition

Revenue

Effective January 1, 2018, American adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods. Refer to “Recent Accounting Pronouncements” in Note 1(b) for the effects of the adoption on American’s consolidated statements of operations for the years ended December 31, 2017 and 2016 and on American’s consolidated balance sheet as of December 31, 2017. Under the New Revenue Standard, revenue is recognized upon the transfer of control of promised products or services to American’s customers in an amount that reflects the consideration it expects to receive in exchange for those products or services.

The following are the significant categories comprising American’s reported operating revenues (in millions):



	2018		2017		2016
Passenger revenue:
Passenger travel	$	37,457	$	36,152	$	34,278
Loyalty revenue - travel ⁽¹⁾	3,219		2,979		2,767
Total passenger revenue	40,676		39,131		37,045
Cargo	1,013		890		785
Other:
Loyalty revenue - marketing services	2,352		2,124		1,872
Other revenue	489		465		423
Total other revenue	2,841		2,589		2,295
Total operating revenues	$	44,530	$	42,610	$	40,125


⁽¹⁾	Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions earned through travel and mileage credits sold to co-branded credit card and other partners. See “Loyalty Revenue” below for further discussion on these mileage credits.

The following is American’s total passenger revenue by geographic region (in millions):



	2018		2017		2016
Domestic	$	29,573	$	28,749	$	27,202
Latin America	5,125		4,840		4,676
Atlantic	4,376		4,028		3,873
Pacific	1,602		1,514		1,294
Total passenger revenue	$	40,676	$	39,131	$	37,045

American attributes passenger revenue by geographic region based upon the origin and destination of each flight segment.

Passenger Revenue

American recognizes all revenues generated from transportation on American and its regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on American’s consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel.

The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of American’s historical data. American has consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of American’s estimates. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.

Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.

Loyalty Revenue

American currently operates the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co-branded credit cards, hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, American applies the deferred revenue method in accordance with the New Revenue Standard.

Mileage credits earned through travel

For mileage credits earned through travel, American applies a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.

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

American sells mileage credits to participating airline partners and non-airline business partners including American’s co-branded credit card partners, under contracts with terms extending generally for one to nine years. Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. American allocates the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.

American’s most significant partner agreements are its co-branded credit card agreements with Citi and Barclaycard US that American entered into in 2016. American identified the following revenue elements in these co-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, American recognizes the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.

For the portion of American’s outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed. American’s estimates are based on analysis of historical redemptions.

Cargo Revenue

Cargo revenue is recognized when American provides the transportation.

Other Revenue

Other revenue includes revenue associated with American’s loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded credit card and other partners and other marketing related payments. For the years ended December 31, 2018, 2017 and 2016, loyalty revenue included in other revenue was $2.4 billion, $2.1 billion and $1.9 billion, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in “Loyalty Revenue.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.

Contract Balances

American’s significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on American’s consolidated balance sheet and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on American’s consolidated balance sheet.



	December 31, 2018		December 31, 2017
	(in millions)
Loyalty program liability	$	8,539	$	8,822
Air traffic liability	4,339		4,042
Total	$	12,878	$	12,864



Balance at December 31, 2017	$	8,822
Deferral of revenue	3,083
Recognition of revenue ⁽¹⁾	(3,366		)
Balance at December 31, 2018 ⁽²⁾	$	8,539

⁽¹⁾

⁽²⁾

Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. As of December 31, 2018, American’s current loyalty program liability was $3.3 billion and represents American’s current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel. The balance in American’s air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is one year. Accordingly, any revenue associated with tickets sold for future travel will be recognized within twelve months. For 2018, $3.1 billion of revenue was recognized in passenger revenue that was included in American’s air traffic liability at December 31, 2017.

(l) Maintenance, Materials and Repairs

(m) Selling Expenses

(n) Share-based Compensation

American accounts for its share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. Certain awards have performance conditions that must be achieved prior to vesting and are expensed based on the expected achievement at each reporting period. The fair value of stock appreciation rights is estimated using a Black-Scholes option pricing model. The fair value of restricted stock units is based on the market price of the underlying shares of AAG common stock on the date of grant. See Note 13 for further discussion of share-based compensation.

(o) Foreign Currency Gains and Losses

Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net in American’s consolidated statements of operations. Foreign currency losses for 2018 and 2017 were $54 million and $4 million, respectively, and for 2016, foreign currency gains were $1 million.

(p) Other Operating Expenses

(q) Regional Expenses

Expenses associated with American Eagle operations are classified as regional expenses on American’s consolidated statements of operations. Regional expenses consist of the following (in millions):



	Year Ended December 31,
	2018		2017		2016
Aircraft fuel and related taxes	$	1,843	$	1,382	$	1,109
Salaries, wages and benefits	338		356		327
Capacity purchases from third-party regional carriers ⁽¹⁾	3,267		3,283		3,186
Maintenance, materials and repairs	8		7		4
Other rent and landing fees	583		602		487
Aircraft rent	27		27		28
Selling expenses	369		361		347
Depreciation and amortization	267		262		237
Special items, net	—		3		13
Other	362		289		271
Total regional expenses	$	7,064	$	6,572	$	6,009


⁽¹⁾	In 2018, American recognized $565 million of expense under its capacity purchase agreement with Republic Airline Inc. (Republic). American holds a 25% equity interest in Republic Airways Holdings Inc. (Republic Holdings), the parent company of Republic.