Fraud and the lure of corporate estimates

In 2020, American Airlines (AA) grounded hundreds of planes and relegated them to long-term storage in the Arizona desert as the largest airline in the U.S. responded to sinking demand in the wake of the COVID-19 pandemic. By the end of March 2021, the planes were still in storage and hadn’t earned revenue for over 12 months, which meant they’d need to be “impaired” (written down to their current value) as defined by the accounting standards.

At the end of 2020, AA impaired five asset groups — Airbus A330-200s and 300s, Boeing 757-200s and 767-300ERs, and Embraer E190s — totaling 150 planes and $1.5 billion in impairment. Many of those planes were in excellent condition and had several years of useful life before they’d normally be retired, but impairing the entire asset group satisfied accounting standards. AA planes in storage, in other asset groups (i.e., 737s), didn’t need to be impaired because under “group asset” accounting rules, the asset group they belonged to was still earning revenue that exceeded the total value of the asset group. While the “group” is earning revenue, there can be individual assets within the group that aren’t. The challenge is knowing where the tipping point lies, and for AA that involved assumptions about when planes would start transporting passengers again.