ar022010k.htm
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
___________________________
Form
10-K
þ Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal year ended December 31, 2007
¨ Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Commission
File Number: 1-8400
AMR
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
|
75-1825172
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer
Identification
Number)
|
4333
Amon Carter Blvd.
Fort
Worth, Texas 76155
(Address
of principal executive offices, including zip code)
(817)
963-1234
(Registrant’s
telephone number, including area code)
______________________________
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
|
Name of Exchange on Which
Registered
|
Common
Stock, $1 par value per share
|
|
New
York Stock Exchange
|
9.00%
Debentures due 2016
|
|
New
York Stock Exchange
|
7.875%
Public Income Notes due 2039
|
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
______________________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
þ
Yes ¨ No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes þ No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. þ Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act.
þ Large Accelerated
Filer ¨ Accelerated
Filer ¨ Non-accelerated
Filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). ¨ Yes þ No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2007, was approximately $6.5 billion. As of
February 13, 2008, 249,410,640 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
of this Form 10-K incorporates by reference certain information from the Proxy
Statement for the Annual Meeting of Stockholders to be held May 21,
2008.
ITEM
1. BUSINESS
AMR
Corporation (AMR or the Company) was incorporated in October
1982. AMR’s operations fall almost entirely in the airline
industry. AMR's principal subsidiary, American Airlines, Inc.
(American), was founded in 1934. American is the largest scheduled
passenger airline in the world in terms of available seat miles and revenue
passenger miles. At the end of 2007, American provided scheduled jet
service to approximately 170 destinations throughout North America, the
Caribbean, Latin America, Europe and Asia. American is also one of
the largest scheduled air freight carriers in the world, providing a wide range
of freight and mail services to shippers throughout its system onboard
American’s passenger fleet.
AMR Eagle
Holding Corporation (AMR Eagle), a wholly-owned subsidiary of AMR, owns two
regional airlines which do business as "American Eagle” -- American Eagle
Airlines, Inc. and Executive Airlines, Inc. (Executive) (collectively, the
American Eagle® carriers). American also contracts with two
independently owned regional airlines, which do business as “American
Connection” (the American Connection® carriers). The American Eagle carriers and
the American Connection carriers provide connecting service from eight of
American's high-traffic cities to smaller markets throughout the United States,
Canada, Mexico and the Caribbean.
AMR Eagle
currently operates a fleet of 294 aircraft. The AMR Eagle fleet is
operated to feed passenger traffic to American pursuant to a capacity purchase
agreement between American and AMR Eagle under which American receives all
passenger revenue from flights and pays AMR Eagle a fee for each
flight. In July 2007, the capacity purchase agreement was amended to
reflect what the Company believes are current market rates received by other
regional carriers for similar flying. Amounts paid to AMR Eagle under
the capacity purchase agreement are for various operating expenses of AMR Eagle,
such as crew expenses, maintenance and aircraft ownership, some of which are
calculated based on specific operating statistics (e.g. block hours, departures)
and others of which are fixed monthly amounts. As of December 31,
2007, AMR Eagle averaged over 1,700 daily departures, offering scheduled
passenger service to over 150 destinations in North America, Mexico and the
Caribbean. On a separate company basis, AMR Eagle reported $2.3
billion in revenue and $114 million of income before income taxes in
2007. However, AMR Eagle’s historical financial information is not
indicative of the AMR Eagle’s future results of operations, financial position
and cash flows if AMR Eagle had been a stand-alone entity.
As
discussed in the Recent Events section of this Item 1., the Company plans to
divest AMR Eagle in 2008. Material modifications could be made to the
business and operations of AMR Eagle, and to the capacity purchase agreement
between American and AMR Eagle, prior to any such divestiture.
American
Beacon Advisors, Inc. (American Beacon), a wholly-owned subsidiary of AMR, is
responsible for the investment and oversight of assets of American’s U.S.
employee benefit plans, as well as AMR’s short-term investments. It
also serves as the investment manager of the American Beacon Funds, a family of
mutual funds with both institutional and retail shareholders, and provides
customized fixed income portfolio management services. American
Beacon’s average assets under management for 2007 was $65 billion, an increase
of 27 percent from 2006 and are almost evenly split between equities and fixed
income investments. American Beacon has been particularly successful
in growing its third party business, as average third-party assets under
management increased by approximately 39 percent in 2007. Third-party
assets under management accounted for $37 billion of average assets under
management and $90 million of 2007 gross revenue. For 2007, on a
separate company basis, American Beacon’s gross revenue was $101 million and
income before income taxes was approximately $48 million, both of which
increased approximately 40 percent over 2006.
Recent
Events
The Company recorded net
earnings of $504 million in 2007, its second consecutive annual profit and a
$273 million increase over 2006. Improved results reflected an
increase in operating revenue of $372 million, or 1.6 percent on 2.3 percent
less capacity, partially offset by higher fuel prices and increases in certain
other costs. American’s passenger revenues increased 2.1
percent despite a capacity (available seat mile) decrease of 2.4
percent. While passenger yield showed significant year-over-year
improvement as American implemented fare increases to partially offset the
continuing rise in the cost of fuel, passenger yield remains low by historical
standards.
The
average price per gallon of fuel the Company paid increased 27.9 cents from 2005
to 2006 and 11.7 cents from 2006 to 2007. These price increases
negatively impacted fuel expense by $787 million and $268 million in 2006 and
2007, respectively, as compared to the respective prior
years. Continuing high fuel prices, additional increases in the price
of fuel, and/or disruptions in the supply of fuel would further adversely affect
the Company’s financial condition and its results of operations.
AMR
continues to take steps to strengthen its balance sheet and in January 2007,
issued 13 million shares of common stock for net proceeds of $497
million. The Company reduced long-term debt and capital lease
obligations (including current maturities) by $2.3 billion during the year and
ended the year with $4.5 billion in unrestricted cash and short-term investments
and $428 million in restricted cash and short-term investments.
The
Company’s ability to remain profitable, reach acceptable profit levels and its
ability to continue to fund its obligations on an ongoing basis will depend on a
number of factors, many of which are largely beyond the Company’s
control. Certain risk factors that affect the Company’s business and
financial results are discussed in the Risk Factors listed in Item
1A. In addition, four of the Company’s largest domestic competitors
and several smaller carriers have filed for bankruptcy in the last several years
and have used this process to significantly reduce contractual labor and other
costs. In order to remain competitive and to improve its financial
condition, the Company must continue to take steps to generate additional
revenues and to reduce its costs. Although the Company has a number
of initiatives underway to address its cost and revenue challenges, the ultimate
success of these initiatives is not known at this time and cannot be
assured.
In
October 2007, the Company announced that it was conducting a review of its
strategic assets. The purpose of the review is to determine whether there exists
the potential for unlocking additional stockholder value with respect to one or
more of the Company’s strategic assets through some type of separation
transaction. For further information regarding the strategic asset
review, see Item 1A. Risk Factors.
On
November 28, 2007, the Company announced that it plans to divest AMR Eagle
(American Eagle Airlines, Inc., and Executive Airlines, Inc.), its wholly-owned
regional carrier. American Eagle Airlines, Inc. feeds American
Airlines hubs throughout North America, and its affiliate, Executive Airlines,
Inc., carries the American Eagle name throughout the Bahamas and the Caribbean
from bases in Miami and San Juan, Puerto Rico. AMR believes that a
divestiture of AMR Eagle is in the long-term best interests of the Company and
its shareholders.
The
divestiture of AMR Eagle is intended to provide it with the structure,
incentives and opportunities to win new business and provide new opportunities
for AMR Eagle’s employees. The Company also believes that the
divestiture will enable American to focus on its mainline business, while
ensuring the Company’s continued access to cost-competitive regional
feed. Once the two airlines are separated, it is expected that,
subject to market considerations, AMR Eagle will perform flying on behalf of
American pursuant to an air services agreement under which AMR Eagle will
continue to provide American with regional flying of a scope and quality
comparable to that provided prior to the separation and on terms that reflect
the current market for those services.
The
Company continues to evaluate the form of the divestiture, which may include a
spin-off to AMR shareholders, a sale to a third party, or some other form of
separation from AMR. The Company expects to complete the divestiture
in 2008; however, the completion of any transaction and its timing will depend
on a number of factors, including general economic, industry and financial
market conditions, as well as the ultimate form of the
divestiture. The impact on AMR of divesting AMR Eagle is not
currently quantifiable due to these uncertainties and the potential
restructuring of assets, liabilities and the capacity purchase agreement between
American and AMR Eagle. In addition, AMR Eagle’s historical financial
information is not indicative of AMR Eagle’s future results of operations,
financial position and cash flows as a stand-alone entity.
Competition
Domestic Air
Transportation The domestic airline industry is fiercely
competitive. Currently, any U.S. air carrier deemed fit by the U.S.
Department of Transportation (DOT) is free to operate scheduled passenger
service between any two points within the U.S. and its
possessions. Most major air carriers have developed hub-and-spoke
systems and schedule patterns in an effort to maximize the revenue potential of
their service. American operates five hubs: Dallas/Fort Worth (DFW),
Chicago O'Hare, Miami, St. Louis and San Juan, Puerto Rico. United
Air Lines (United) also has a hub operation at Chicago O'Hare.
The
American Eagle® carriers increase the number of markets the Company serves by
providing connections at American’s hubs and certain other major airports --
Boston, Los Angeles, Raleigh/Durham and New York’s LaGuardia (LaGuardia) and
John F. Kennedy International (JFK) Airports. The American
Connection® carriers provide connecting service to American through St.
Louis. American's competitors also own or have marketing agreements
with regional carriers which provide similar services at their major hubs and
other locations.
On most
of its domestic non-stop routes, the Company faces competing service from at
least one, and sometimes more than one, domestic airline including: AirTran
Airways (Air Tran), Alaska Airlines (Alaska), ATA Airlines, Continental Airlines
(Continental), Delta Air Lines (Delta), Frontier Airlines, JetBlue Airways
(JetBlue), Northwest Airlines (Northwest), Southwest Airlines (Southwest),
United, US Airways, Virgin America Airlines and their affiliated regional
carriers. Competition is even greater between cities that require a
connection, where the major airlines compete via their respective
hubs. In addition, the Company faces competition on some of its
connecting routes from carriers operating point-to-point service on such
routes. The Company also competes with all-cargo and charter carriers
and, particularly on shorter segments, ground and rail
transportation. On all of its routes, pricing decisions are affected,
in large part, by the need to meet competition from other airlines.
The
Company must also compete with carriers that have recently reorganized under the
protection of Chapter 11 of the U.S. Bankruptcy Code (Chapter 11). It
is possible that one or more other competitors may seek to reorganize in or out
of Chapter 11. Successful reorganizations present the Company with
competitors with significantly lower operating costs derived from renegotiated
labor, supply and financing contracts.
International Air
Transportation In addition to its extensive domestic
service, the Company provides international service to the Caribbean, Canada,
Latin America, Europe and Asia. The Company's operating revenues from
foreign operations were approximately 37 percent of the Company’s total
operating revenues in 2007, and 37 and 36 percent of the Company’s total
operating revenues in 2006 and 2005, respectively. Additional
information about the Company's foreign operations is included in Note 14 to the
consolidated financial statements.
In
providing international air transportation, the Company competes with foreign
investor-owned carriers, foreign state-owned carriers and U.S. airlines that
have been granted authority to provide scheduled passenger and cargo service
between the U.S. and various overseas locations. In general, carriers
that have the greatest ability to seamlessly connect passengers to and from
markets beyond the nonstop city pair have a competitive advantage. In
some cases, however, foreign governments limit U.S. air carriers' rights to
carry passengers beyond designated gateway cities in foreign
countries. To improve access to each other's markets, various U.S.
and foreign air carriers - including American - have established marketing
relationships with other airlines and rail companies. American
currently has marketing relationships with Aer Lingus, Air Pacific, Air Tahiti
Nui, Alaska Airlines, British Airways, Brussels Airlines, Cathay Pacific, China
Eastern Airlines, Dragonair, Deutsche Bahn German Rail, EL AL, EVA Air, Finnair,
Gulf Air, Hawaiian Airlines, Iberia, Japan Airlines, LAN (includes LAN Airlines,
LAN Argentina, LAN Ecuador and LAN Peru), Malév Hungarian Airlines, Mexicana,
Qantas Airways, Royal Jordanian, SNCF French Rail, and Turkish
Airlines.
American
is also a founding member of the oneworld alliance, which
includes British Airways, Cathay Pacific, Finnair, Lan Airlines, Iberia, Qantas,
Japan Airlines, Malev Hungarian, Dragonair, and Royal Jordanian. The oneworld alliance links the
networks of the member carriers to enhance customer service and smooth
connections to the destinations served by the alliance, including linking the
carriers' frequent flyer programs and access to the carriers' airport lounge
facilities. Several of American's major competitors are members of
marketing/operational alliances that enjoy antitrust
immunity. American and British Airways, the largest members of the
oneworld alliance, are
restricted in their relationship because they lack antitrust
immunity. They are, therefore, at a competitive disadvantage
vis-à-vis other alliances that have antitrust immunity.
Price
Competition The airline industry is characterized by
substantial and intense price competition. Fare discounting by competitors has
historically had a negative effect on the Company’s financial results because
the Company is generally required to match competitors' fares, as failing to
match would provide even less revenue due to customers’ price
sensitivity.
In recent
years, a number of low-cost carriers (LCCs) have entered the domestic
market. Several major airlines, including the Company, have
implemented efforts to lower their costs since lower cost structures enable
airlines to offer lower fares. In addition, several air carriers have
recently reorganized under Chapter 11, including United, Delta, US Airways and
Northwest Airlines. These cost reduction efforts and bankruptcy
reorganizations have allowed carriers to decrease operating costs. In
the past, lower cost structures have generally resulted in fare
reductions. If fare reductions are not offset by increases in
passenger traffic, changes in the mix of traffic that improve yields (passenger
revenue per passenger mile) and/or cost reductions, the Company’s operating
results will be negatively impacted.
Regulation
General The
Airline Deregulation Act of 1978, as amended, eliminated most domestic economic
regulation of passenger and freight transportation. However, the DOT
and the Federal Aviation Administration (FAA) still exercise certain regulatory
authority over air carriers. The DOT maintains jurisdiction over the
approval of international codeshare agreements, international route authorities
and certain consumer protection and competition matters, such as advertising,
denied boarding compensation and baggage liability.
The FAA
regulates flying operations generally, including establishing standards for
personnel, aircraft and certain security measures. As part of that
oversight, the FAA has implemented a number of requirements that the Company has
incorporated and is incorporating into its maintenance programs. The
Company is progressing toward the completion of over 180 airworthiness
directives including Boeing fuel tank safety directives, Boeing 757 and Boeing
767 pylon improvements, McDonnell Douglas MD-80 horizontal stabilizer, cargo
door and aft pressure bulkhead improvements, Boeing 737 horizontal stabilizer
actuator and digital flight recorder improvements and Airbus A300 structural
improvements. Based on its current implementation schedule, the
Company expects to be in compliance with the applicable requirements within the
required time periods.
The
Department of Justice (DOJ) has jurisdiction over airline antitrust
matters. The U.S. Postal Service has jurisdiction over certain
aspects of the transportation of mail and related services. Labor
relations in the air transportation industry are regulated under the Railway
Labor Act, which vests in the National Mediation Board certain regulatory
functions with respect to disputes between airlines and labor unions relating to
union representation and collective bargaining agreements.
On
December 21, 2007, a New York federal judge
dismissed the Air Transport Association‘s (“ATA”) challenge to a recently
enacted New York law requiring airlines to provide certain services to onboard
passengers whose flights are delayed on the ground prior to takeoff for more
than three hours. The ATA plans to appeal the ruling. The
law became effective in New York on January 1, 2008. In addition,
legislation similar to the New York law has been proposed in Congress and
several state legislatures. Legislation of this type requires
airlines to pay compensation to passengers for delayed or cancelled flights and
delayed, damaged, or lost luggage; sets limits on how long delayed flights can
remain on the tarmac without returning to the gate; and presents numerous other
service issues. The Company expects that the requirement of such
services in New York and elsewhere could adversely impact the Company, but the
magnitude of that impact cannot currently be determined.
International International
air transportation is subject to extensive government regulation. The Company's
operating authority in international markets is subject to aviation agreements
between the U.S. and the respective countries or governmental authorities (such
as the European Union), and in some cases, fares and schedules require the
approval of the DOT and/or the relevant foreign
governments. Moreover, alliances with international carriers may be
subject to the jurisdiction and regulations of various foreign
agencies. Bilateral agreements between the U.S. and various foreign
governments of countries served by the Company are periodically subject to
renegotiation. Changes in U.S. or foreign government aviation
policies could result in the alteration or termination of such agreements,
diminish the value of route authorities, or otherwise adversely affect the
Company's international operations. In addition, at some foreign airports, an
air carrier needs slots (landing and take-off authorizations) before the air
carrier can introduce new service or increase existing service. The
availability of such slots is not assured and the inability of the Company to
obtain and retain needed slots could therefore inhibit its efforts to compete in
certain international markets.
In April
2007, the United States and the European Union approved an “open skies” air
services agreement that provides airlines from the United States and EU member
states open access to each other’s markets, with freedom of pricing and
unlimited rights to fly beyond the United States and any airport in the EU
including London’s Heathrow Airport. The provisions of the agreement
will take effect on March 30, 2008. Under the agreement, every U.S.
and EU airline is authorized to operate between airports in the United States
and Heathrow. Notwithstanding the open skies agreement, Heathrow is a
slot-controlled airport. Only three airlines besides American were
previously allowed to provide that Heathrow service. The agreement
will result in the Company facing increased competition in serving Heathrow to
the extent that additional carriers are able to obtain necessary slots and
terminal facilities which could have an adverse impact on the
Company. In addition, the Company will face additional competition in
European markets. However, the Company believes that American and the
other carriers who currently have existing authorities and the related slots and
facilities will continue to hold an advantage after the advent of open
skies. See Item 1A, Risk Factors, and Note 11 to the consolidated
financial statements for additional information.
Security In
November 2001, the Aviation and Transportation Security Act (ATSA) was enacted
in the United States. The ATSA created a new government agency, the
Transportation Security Administration (TSA), which is part of the Department of
Homeland Security and is responsible for aviation security. The ATSA
mandates that the TSA provide for the screening of all passengers and property,
including U.S. mail, cargo, carry-on and checked baggage, and other articles
that will be carried aboard a passenger aircraft. The ATSA also provides for
security in flight decks of aircraft and requires federal air marshals to be
present on certain flights.
Effective
February 1, 2002, the ATSA imposed a $2.50 per enplanement security service fee,
which is being collected by the air carriers and submitted to the government to
pay for these enhanced security measures. Additionally, air carriers are
annually required to submit to the government an amount equal to what the air
carriers paid for screening passengers and property in 2000. In
recent years, President Bush has sought to increase both of these fees under
spending proposals for the Department of Homeland Security. American and other
carriers have announced their opposition to these proposals as there is no
assurance that any increase in fees could be passed on to
customers.
Airline
Fares Airlines are permitted to establish their own
domestic fares without governmental regulation. The DOT maintains authority over
certain international fares, rates and charges, but applies this authority on a
limited basis. In addition, international fares and rates are
sometimes subject to the jurisdiction of the governments of the foreign
countries which the Company serves. While air carriers are required
to file and adhere to international fare and rate tariffs, substantial
commissions, fare overrides and discounts to travel agents, brokers and
wholesalers characterize many international markets.
Airport Access
Historically, the FAA designated JFK, LaGuardia, and Washington Reagan airports
as high-density traffic airports. The high-density rule limits the
number of Instrument Flight Rule operations - take-offs and landings - permitted
per hour and requires that a “take-off/landing slot right” support each
operation. In April 2000, the Wendell H. Ford Aviation Investment and
Reform Act for the 21st Century
(Air 21 Act) was enacted. It eliminated slot restrictions at JFK and
LaGuardia airports effective January 1, 2007; slot restrictions remain in effect
at Washington Reagan.
Although
slot restrictions were eliminated at JFK in January 2007, on December 19, 2007,
the United States transportation secretary announced an agreement had been
reached between the Department of Transportation (“DOT”) and domestic airlines
to ease congestion at JFK by shifting the timing of certain
flights. As a result, the DOT does not currently expect to order a
reduction in the number of flights per hour or to reimplement and auction
landing slots at JFK. The shifting of timing of flights has not
caused a significant impact to flights to or from JFK.
In order
to remedy congestion at LaGuardia that was exacerbated by the elimination of
slot restrictions, the FAA placed caps on total operations, and required
carriers at LaGuardia to hold operating authorizations. In addition,
the FAA has proposed rules for carriers operating at LaGuardia that would
fundamentally change the manner in which operating authorizations are held and
distributed at that airport. The Company, along with other carriers
and interested parties, filed comments with the FAA seeking changes in the
proposed rules, which remain pending. The proposed rules, as
currently drafted, could require the Company to change the routes and service it
currently operates at LaGuardia, which could adversely impact the
Company.
Under the
high-density rule, still in effect at Washington Reagan Airport, the FAA permits
the purchasing, selling, leasing or transferring of slots, except those slots
designated as international, and essential air service slots. Trading of any
domestic slot is permitted subject to certain parameters. The FAA’s
proposed rules for carriers operating at LaGuardia, described above, also
contemplate certain restrictions. Some foreign airports, including London
Heathrow, a major European destination for American, also have slot
allocations. Most foreign authorities do not officially recognize the
purchasing, selling or leasing of slots.
In 2006,
the FAA issued an order requiring carriers to hold arrival authorizations to
land during certain hours at Chicago O’Hare. The FAA’s O’Hare order
places some limits on the ability to buy and sell arrival
authorizations. The Company has not experienced any significant
adverse impact from this order. In addition, the DOT is considering
imposing a schedule reduction order at Newark airport, which could include slot
controls at that airport. The Company could be adversely affected if
such an order is imposed.
Although
the Company is constrained by slots, it currently has sufficient slot
authorizations to operate its existing flights. However, there is no
assurance that the Company will be able to obtain slots in the future to expand
its operations or change its schedules because, among other factors, slot
allocations are subject to changes in government policies.
On
October 13, 2006, the Wright Amendment Reform Act of 2006 (the Act) was signed
into law by the President. The Act is based on an agreement by the
cities of Dallas and Fort Worth, Texas, DFW International Airport, Southwest,
and the Company to modify the Wright Amendment, which authorizes certain flight
operations at Dallas Love Field within limited geographic
areas. Among other things, the Act eventually eliminates domestic
geographic restrictions on operations while limiting the maximum number of gates
at Love Field. The Company believes the Act is a pragmatic resolution
of the issues related to the Wright Amendment and the use of Love
Field.
Environmental
Matters The Company is subject to various laws and
government regulations concerning environmental matters and employee safety and
health in the U.S. and other countries. U.S. federal laws that have a
particular impact on the Company include the Airport Noise and Capacity Act of
1990 (ANCA), the Clean Air Act, the Resource Conservation and Recovery Act, the
Clean Water Act, the Safe Drinking Water Act, and the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA or the Superfund
Act). Certain operations of the Company are also subject to the
oversight of the Occupational Safety and Health Administration (OSHA) concerning
employee safety and health matters. The U.S. Environmental Protection
Agency (EPA), OSHA, and other federal agencies have been authorized to
promulgate regulations that have an impact on the Company's
operations. In addition to these federal activities, various states
have been delegated certain authorities under the aforementioned federal
statutes. Many state and local governments have adopted environmental
and employee safety and health laws and regulations, some of which are similar
to or stricter than federal requirements.
The ANCA
recognizes the rights of airport operators with noise problems to implement
local noise abatement programs so long as they do not interfere unreasonably
with interstate or foreign commerce or the national air transportation
system. Authorities in several cities have promulgated aircraft noise
reduction programs, including the imposition of nighttime
curfews. The ANCA generally requires FAA approval of local noise
restrictions on aircraft. While the Company has had sufficient
scheduling flexibility to accommodate local noise restrictions imposed to date,
the Company’s operations could be adversely affected if locally-imposed
regulations become more restrictive or widespread.
Many
aspects of the Company’s operations are subject to increasingly stringent
environmental regulations. Concerns about climate change and
greenhouse gas emissions, in particular, may result in the imposition of
additional regulation. For example, the European Commission is
currently seeking to impose emissions controls on all flights coming into
Europe. Such regulatory action by the U.S. or foreign governments in
the future may adversely affect the Company’s business and financial
results.
American
is a named potentially responsible party (PRP) at the former Operating
Industries, Inc. Landfill in Monterrey Park, CA (OII). American is
participating with a number of other PRPs in a Steering Committee that have
entered into a series of partial consent decrees with EPA and the State of
California which address specific aspects of investigation and cleanup at
OII. American’s alleged volumetric contributions at OII are small
when compared with those of other PRPs, and American expects that any future
payments will be immaterial.
American
also has been named as a PRP for soil contamination at the Double Eagle
Superfund Site in Oklahoma City, OK (Double Eagle). American's
alleged volumetric contributions are small when compared with those of other
PRPs. American is participating with a number of other PRPs at Double
Eagle in a Joint Defense Group that is currently conducting settlement
negotiations with the EPA and state officials. The group is seeking a
settlement on behalf of its members that will enable American to resolve its
past and present liabilities at Double Eagle in exchange for a one-time,
lump-sum settlement payment. American expects that its payment will be
immaterial.
American,
along with most other tenants at the San Francisco International Airport (SFIA),
has been ordered by the California Regional Water Quality Control Board to
engage in various studies of potential environmental contamination at the
airport and to undertake remedial measures, if necessary. In 1997, the SFIA
pursued a cost recovery action in the U.S. District Court of Northern California
against certain airport tenants to recover past and future costs associated with
historic airport contamination. American entered an initial settlement for
accrued past costs in 2000. In 2004, American resolved its liability for all
remaining past and future costs. Based on SFIA’s cost projections,
the value of American’s second settlement is immaterial and is payable over a 30
year period.
In 1999,
American was ordered by the New York State Department of Environmental
Conservation (NYSDEC) to conduct remediation of environmental contamination
located at Terminals 8 and 9 at JFK. In 2004, American entered a Consent Order
with NYSDEC for the remediation of a JFK off-terminal hangar facility. American
expects that the projected costs associated with the completion of the JFK
remediation will be immaterial.
In 1996,
American and Executive, along with other tenants at the Luis Munoz Marin
International Airport in San Juan, Puerto Rico (SJU) were notified by the SJU
Port Authority that it considered them potentially responsible for environmental
contamination at the airport. In 2003, the SJU Port Authority
requested that American, among other airport tenants, fund an ongoing subsurface
investigation and site assessment. American denied liability for the
related costs. No further action has been taken against American or
Executive.
Pursuant
to an Administrative Order on Consent entered into with NYSDEC, American Eagle
is implementing a final remedy to address contamination at an inactive hazardous
waste site in Poughkeepsie, New York. The costs of this final remedy are
immaterial.
The
Company does not expect these matters, individually or collectively, to have a
material adverse impact on the Company. See Note 4 to the
consolidated financial statements for additional information on accruals related
to environmental issues.
Labor
The
airline business is labor intensive. Wages, salaries and benefits
represented approximately 31 percent of the Company’s consolidated operating
expenses for the year ended December 31, 2007. The average full-time
equivalent number of employees of the Company’s subsidiaries for the year ended
December 31, 2007 was 85,500.
The
majority of these employees are represented by labor unions and covered by
collective bargaining agreements. Relations with such labor
organizations are governed by the Railway Labor Act (RLA). Under this
act, the collective bargaining agreements among the Company’s subsidiaries and
these organizations generally do not expire but instead become amendable as of a
stated date. If either party wishes to modify the terms of any such
agreement, it must notify the other party in the manner agreed to by the
parties. Under the RLA, after receipt of such notice, the parties
must meet for direct negotiations, and if no agreement is reached, either party
may request the National Mediation Board (NMB) to appoint a federal
mediator. The RLA prescribes no set timetable for the direct
negotiation and mediation process. It is not unusual for those
processes to last for many months, and even for a few years. If no
agreement is reached in mediation, the NMB in its discretion may declare at some
time that an impasse exists, and if an impasse is declared, the NMB proffers
binding arbitration to the parties. Either party may decline to
submit to arbitration. If arbitration is rejected by either party, a
30-day “cooling off” period commences. During that period (or after),
a Presidential Emergency Board (PEB) may be established, which examines the
parties’ positions and recommends a solution. The PEB process lasts
for 30 days and is followed by another “cooling off” period of 30
days. At the end of a “cooling off” period, unless an agreement is
reached or action is taken by Congress, the labor organization may strike and
the airline may resort to “self-help”, including the imposition of any or all of
its proposed amendments and the hiring of new employees to replace any striking
workers.
In April
2003, American reached agreements (the Labor Agreements) with its three major
unions - the Allied Pilots Association (the APA) which represents American’s
pilots, the Transport Workers Union of America (AFL-CIO) (the TWU), which
represents seven different employee groups, and the Association of Professional
Flight Attendants (the APFA), which represents American’s flight attendants. The
Labor Agreements substantially moderated the labor costs associated with the
employees represented by the unions. In conjunction with the Labor
Agreements, American also implemented various changes in the pay plans and
benefits for non-unionized personnel, including officers and other management
(the Management Reductions). While the Labor Agreements do not become amendable
until 2008, they do allow the parties to begin contract discussions in or after
2006. In 2006, American and the APA commenced negotiations under the
RLA. In early 2008, the APA asked that the NMB appoint a
mediator. In response, the NMB noted that it is required to docket
all facially valid mediation applications. The NMB also expressed an
interest in exploring with the parties alternative methods of narrowing the
issues prior to entering formal mediation in light of the fact that as of
January 29, 2008, no issues had been agreed upon between the
parties. Also in 2006, American and the TWU commenced negotiations
with respect only to dispatchers, one of the seven groups at American
represented by the TWU. In November 2007, American and the TWU
commenced negotiations under the RLA with respect to the other employee groups
represented by the TWU. The negotiations between American and the APA
and TWU employees are still in their early stages. It is anticipated
that negotiations between American and the APFA will commence in the first half
of 2008.
The Air
Line Pilots Association (ALPA), which represents American Eagle pilots, reached
agreement with American Eagle effective September 1, 1997, to have all of the
pilots of the American Eagle® carriers
(currently American Eagle Airlines, Inc. and Executive Airlines, Inc.) covered
by a single contract. This agreement lasts until October 31,
2013. The agreement provides to the parties the right to seek limited
changes in 2000, 2004, 2008 and 2012. If the parties are unable to agree on the
limited changes, the agreement provides that any issues would be resolved by
interest arbitration, without the exercise of self-help (such as a
strike). ALPA and American Eagle negotiated a tentative agreement in
2000, but that agreement failed in ratification. Thereafter, the parties
participated in interest arbitration. The interest arbitration panel determined
the limited changes that should be made and these changes were appropriately
effected. In 2004, the parties successfully negotiated limited
changes that became effective on January 1, 2005. The quadrennial
process described above is scheduled to occur in 2008.
The
Association of Flight Attendants (AFA) represents the flight attendants of the
American Eagle carriers. The current agreement between the American Eagle
carriers and the AFA is amendable on October 27, 2009; however, the parties have
agreed that contract openers may be exchanged 90 days prior to that
date.
The other
union employees at the American Eagle carriers are covered by separate
agreements with the TWU. The agreements between the American Eagle carriers and
the TWU were amendable beginning on October 1, 2007. Negotiations
commenced in that month and the parties have reached a tentative agreement on a
number of articles. Negotiations are ongoing.
Fuel
The
Company’s operations and financial results are significantly affected by the
availability and price of jet fuel. The Company's fuel costs and
consumption for the years 2005 through 2007 were:
Year
|
|
Gallons
Consumed
(in
millions)
|
|
|
Total
Cost
(in
millions)
|
|
|
Average
Cost Per Gallon
(in
cents)
|
|
|
Percent
of AMR's Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
3,237 |
|
|
$ |
5,615 |
|
|
|
173.5 |
|
|
|
27.0 |
% |
2006
|
|
|
3,178 |
|
|
|
6,402 |
|
|
|
201.4 |
|
|
|
29.8 |
|
2007
|
|
|
3,130 |
|
|
|
6,670 |
|
|
|
213.1 |
|
|
|
30.4 |
|
The
impact of fuel price changes on the Company and its competitors depends on
various factors, including hedging strategies. The Company has a fuel
hedging program in which it enters into jet fuel and heating oil hedging
contracts to dampen the impact of the volatility of jet fuel prices. During
2007, 2006 and 2005, the Company’s fuel hedging program reduced the Company’s
fuel expense by approximately $239 million, $97 million and $64 million,
respectively. As of January 2008, the Company had hedged, with option contracts,
primarily heating oil collars and call options, approximately 24 percent of its
estimated 2008 fuel requirements. The consumption hedged for 2008 is
capped at an average price of approximately $2.31 per gallon of jet fuel
excluding taxes and transportation costs. A deterioration of the
Company’s financial position could negatively affect the Company’s ability to
hedge fuel in the future. See the Risk Factors under Item 1A for additional
information regarding fuel.
Additional
information regarding the Company’s fuel program is also included in Item 7(A) –
Quantitative and Qualitative Disclosures about Market Risk, Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and in Note 7 to the consolidated financial statements.
Frequent Flyer
Program
American
established the AAdvantage frequent flyer program (AAdvantage) to develop
passenger loyalty by offering awards to travelers for their continued patronage.
The Company believes that the AAdvantage program is one of its competitive
strengths. AAdvantage benefits from a growing base of approximately sixty
million members with desirable demographics who have demonstrated a strong
willingness to collect AAdvantage miles over other loyalty program incentives
and are generally disposed to adjusting their purchasing behavior in order to
earn additional AAdvantage miles. AAdvantage members earn mileage
credits by flying on American, American Eagle, and the American Connection
carriers or by using services of other participants in the AAdvantage
program. Mileage credits can be redeemed for free, discounted or
upgraded travel on American, American Eagle or other participating airlines, or
for other awards. Once a member accrues sufficient mileage for an
award, the member may book award travel. Most travel awards are
subject to capacity controlled seating. A member’s mileage credit does not
expire provided that member has any type of qualifying activity at least once
every 18 months.
American
sells mileage credits and related services to other participants in the
AAdvantage program. There are over 1,000 program participants, including a
leading credit card issuer, hotels, car rental companies and other products and
services companies in the AAdvantage program. The Company believes
that program participants benefit from the sustained purchasing behavior of
AAdvantage members, which translates into a recurring stream of revenues for
AAdvantage. Under its agreements with AAdvantage members and program
participants, the Company reserves the right to change the AAdvantage program at
any time without notice, and may end the program with six months
notice. As of December 31, 2007, AAdvantage had approximately 60
million total members, and 613 billion outstanding award
miles. During 2007, AAdvantage issued approximately 200 billion
miles, of which approximately one-half were sold to program
participants. See Critical Accounting Policies and Estimates under
Item 7 for more information on AAdvantage.
Other
Matters
Seasonality and Other
Factors The Company’s results of operations for any
interim period are not necessarily indicative of those for the entire year,
since the air transportation business is subject to seasonal
fluctuations. Higher demand for air travel has traditionally resulted
in more favorable operating and financial results for the second and third
quarters of the year than for the first and fourth quarters. Fears of terrorism
or war, fare initiatives, fluctuations in fuel prices, labor actions, weather
and other factors could impact this seasonal pattern. Unaudited quarterly
financial data for the two-year period ended December 31, 2007 is included in
Note 15 to the consolidated financial statements. In addition, the
results of operations in the air transportation business have also significantly
fluctuated in the past in response to general economic conditions.
No
material part of the business of AMR and its subsidiaries is dependent upon a
single customer or very few customers. Consequently, the loss of the
Company's largest few customers would not have a materially adverse effect upon
the Company.
Insurance The
Company carries insurance for public liability, passenger liability, property
damage and all-risk coverage for damage to its aircraft.
As a
result of the terrorist attacks of September 11, 2001 (the Terrorist Attacks),
aviation insurers significantly reduced the amount of insurance coverage
available to commercial air carriers for liability to persons other than
employees or passengers for claims resulting from acts of terrorism, war or
similar events (war-risk coverage). At the same time, these insurers
significantly increased the premiums for aviation insurance in
general.
The U.S.
government has agreed to provide commercial war-risk insurance for U.S. based
airlines until August 31, 2008, covering losses to employees, passengers, third
parties and aircraft. If the U.S. government does not extend the
policy beyond August 31, 2008, or if the U.S. government at anytime thereafter
ceases to provide such insurance, or reduces the coverage provided by such
insurance, the Company will attempt to purchase similar coverage with narrower
scope from commercial insurers at an additional cost. To the extent this
coverage is not available at commercially reasonable rates, the Company would be
adversely affected. While the price of commercial insurance has declined since
the premium increases immediately after the Terrorist Attacks, in the event
commercial insurance carriers further reduce the amount of insurance coverage
available to the Company, or significantly increase its cost, the Company would
be adversely affected.
Other Government
Matters In time of war or during a national emergency or
defense oriented situation, American and other air carriers can be required to
provide airlift services to the Air Mobility Command under the Civil Reserve Air
Fleet program. In the event the Company has to provide a substantial number of
aircraft and crew to the Air Mobility Command, its operations could be adversely
impacted.
Available
Information The Company makes its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 available free of charge under the Investor
Relations page on its website, www.aa.com, as soon
as reasonably practicable after such reports are electronically filed with the
Securities and Exchange Commission. In addition, the Company’s code of ethics,
which applies to all employees of the Company, including the Company’s Chief
Executive Officer (CEO), Chief Financial Officer (CFO) and Controller, is posted
under the Investor Relations page on its website, www.aa.com. The
Company intends to disclose any amendments to the code of ethics, or waivers of
the code of ethics on behalf of the CEO, CFO or Controller, under the Investor
Relations page on the Company’s website, www.aa.com. The
charters for the AMR Board of Directors’ standing committees (the Audit,
Compensation, Diversity and Nominating/Corporate Governance Committees), as well
as the Board of Directors’ Governance Policies (the Governance Policies), are
likewise available on the Company’s website, www.aa.com. Upon
request, copies of the charters or the Governance Policies are available at no
cost. Information on the Company’s website is not incorporated into
or otherwise made a part of this Report.
ITEM
1A. RISK FACTORS
Our
ability to become consistently profitable and our ability to continue to fund
our obligations on an ongoing basis will depend on a number of risk factors,
many of which are largely beyond our control. Some of the factors
that may have a negative impact on us are described below:
As
a result of significant losses in recent years, our financial condition has been
materially weakened.
We
incurred significant losses in recent prior years: $857 million in
2005, $751 million in 2004, $1.2 billion in 2003, $3.5 billion in 2002 and $1.8
billion in 2001. As a result, our financial condition was materially
weakened, and although we earned a profit in 2007 and 2006, we remain vulnerable
both to unexpected events (such as additional terrorist attacks or a sudden
spike in jet fuel prices) and to general declines in the operating environment
(such as that resulting from a recession or significant increased
competition).
Our
initiatives to generate additional revenues and to reduce our costs may not be
adequate or successful.
As we
seek to improve our financial condition, we must continue to take steps to
generate additional revenues and to reduce our costs. Although we
have a number of initiatives underway to address our cost and revenue
challenges, some of these initiatives involve changes to our business which we
may be unable to implement. In addition, we expect that, as time goes
on, it will be progressively more difficult to identify and implement
significant revenue enhancement and cost savings initiatives. The
adequacy and ultimate success of our initiatives to generate additional revenues
and reduce our costs are not known at this time and cannot be
assured. Moreover, whether our initiatives will be adequate or
successful depends in large measure on factors beyond our control, notably the
overall industry environment, including passenger demand, yield and industry
capacity growth, and fuel prices. Given the competitive challenges we
face and other factors, such as high fuel prices, that are beyond our control,
we must continue to aggressively pursue profit improvement initiatives to
achieve long-term success.
Our
business is affected by many changing economic and other conditions beyond our
control, and our results of operations tend to be volatile and fluctuate due to
seasonality.
Our
business and our results of operations are affected by many changing economic
and other conditions beyond our control, including among others:
·
|
actual
or potential changes in international, national, regional and local
economic, business and financial conditions, including recession,
inflation and higher interest rates, war, terrorist attacks or political
instability;
|
·
|
changes
in consumer preferences, perceptions, spending patterns or demographic
trends;
|
·
|
changes
in the competitive environment due to industry consolidation and other
factors;
|
·
|
actual
or potential disruptions to the air traffic control
system;
|
·
|
increases
in costs of safety, security and environmental
measures;
|
·
|
outbreaks
of diseases that affect travel behavior;
and
|
·
|
weather
and natural disasters.
|
As a
result, our results of operations tend to be volatile and subject to rapid and
unexpected change. In addition, due to generally greater demand for
air travel during the summer, our revenues in the second and third quarters of
the year tend to be stronger than revenues in the first and fourth quarters of
the year.
Our
indebtedness and other obligations are substantial and could adversely affect
our business and liquidity.
We have
and will continue to have a significant amount of indebtedness and obligations
to make future payments on aircraft equipment and property leases, and a high
proportion of debt to equity capital. We may incur substantial
additional debt, including secured debt, and lease obligations in the
future. We also have substantial pension funding
obligations. Our substantial indebtedness and other obligations could
have important consequences. For example, they could:
·
|
limit
our ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes, or adversely
affect the terms on which such financing could be
obtained;
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness and other obligations, thereby reducing the
funds available for other purposes;
|
·
|
make
us more vulnerable to economic
downturns;
|
·
|
limit
our ability to withstand competitive pressures and reduce our flexibility
in responding to changing business and economic conditions;
or
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate.
|
We
may be unable to comply with our financial covenants.
American
has a secured bank credit facility which consists of an undrawn $255 million
revolving credit facility with a final maturity on June 17, 2009, and a fully
drawn $440 million term loan facility, with a final maturity on December 17,
2010 (the Revolving Facility and the Term Loan Facility, respectively, and
collectively, the Credit Facility). The Credit Facility contains a liquidity
covenant and a ratio of cash flow to fixed charges covenant. We complied with
these covenants as of December 31, 2007 and expect to be able to continue to
comply with these covenants. However, given fuel prices that are high
by historical standards and the volatility of fuel prices and revenues, it is
difficult to assess whether we will, in fact, be able to continue to comply with
these covenants, and there are no assurances that we will be able to do
so. Failure to comply with these covenants would result in a default
under the Credit Facility which - - if we did not take steps to obtain a waiver
of, or otherwise mitigate, the default - - could result in a default under a
significant amount of our other debt and lease obligations, and otherwise have a
material adverse impact on us.
We
are being adversely affected by increases in fuel prices, and we would be
adversely affected by disruptions in the supply of fuel.
Our
results are very significantly affected by the price and availability of jet
fuel, which are in turn affected by a number of factors beyond our
control. Fuel prices are volatile, increased significantly in 2007,
and remain very high by historical standards.
Due to
the competitive nature of the airline industry, we may not be able to pass on
increased fuel prices to customers by increasing fares. In fact, recent history
would indicate that we have limited ability to pass along the increased costs of
fuel. If fuel prices decline in the future, increased fare competition and lower
revenues may offset any potential benefit of lower fuel prices.
While we
do not currently anticipate a significant reduction in fuel availability,
dependency on foreign imports of crude oil, limited refining capacity and the
possibility of changes in government policy on jet fuel production,
transportation and marketing make it impossible to predict the future
availability of jet fuel. If there are additional outbreaks of
hostilities or other conflicts in oil producing areas or elsewhere, or a
reduction in refining capacity (due to weather events, for example), or
governmental limits on the production or sale of jet fuel, there could be
reductions in the supply of jet fuel and significant increases in the cost of
jet fuel. Major reductions in the availability of jet fuel or
significant increases in its cost, or a continuation of current high prices for
a significant period of time, would have a material adverse impact on
us.
While we
seek to manage the price risk of fuel costs by using derivative contracts, there
can be no assurance that, at any given time, we will have derivatives in place
to provide any particular level of protection against increased fuel
costs. In addition, a deterioration of our financial position could
negatively affect our ability to enter into derivative contracts in the
future.
The
airline industry is fiercely competitive, may undergo consolidation and we are
subject to increasing competition.
Service
over almost all of our routes is highly competitive and fares remain at low
levels by historical standards. We face vigorous, and in some cases,
increasing competition from major domestic airlines, national, regional,
all-cargo and charter carriers, foreign air carriers, low-cost carriers and,
particularly on shorter segments, ground and rail transportation. We also face
increasing and significant competition from marketing/operational alliances
formed by our competitors. The percentage of routes on which we
compete with carriers having substantially lower operating costs than ours has
grown significantly over the past decade, and, as of December 31, 2007, we now
compete with low-cost carriers on approximately 78 percent of our domestic
non-stop mainline network.
Certain
alliances have been granted immunity from anti-trust regulations by governmental
authorities for specific areas of cooperation, such as joint pricing decisions.
To the extent alliances formed by our competitors can undertake activities that
are not available to us, our ability to effectively compete may be
hindered.
Pricing
decisions are significantly affected by competition from other
airlines. Fare discounting by competitors has historically had a
negative effect on our financial results because we must generally match
competitors' fares, since failing to match would result in even less
revenue. We have faced increased competition from carriers with
simplified fare structures, which are generally preferred by
travelers. Any fare reduction or fare simplification initiative may
not be offset by increases in passenger traffic, a reduction in costs or changes
in the mix of traffic that would improve yields. Moreover, decisions
by our competitors that increase – or reduce – overall industry capacity, or
capacity dedicated to a particular domestic or foreign region, market or route,
can have a material impact on related fare levels.
There
have been numerous mergers and acquisitions within the U.S. airline industry
since its deregulation in 1978, and there may be additional mergers and
acquisitions in the future. Any airline industry consolidation could
substantially alter the competitive landscape and may result in changes in our
corporate or business strategy. We regularly assess and explore the
potential for consolidation in our industry, our strategic position and ways to
enhance our competitiveness, including the possibilities for our participation
in merger activity. Consolidation involving other participants in our
industry could result in the formation of one or more airlines with greater
financial resources, more extensive networks, and/or lower cost structures than
exist presently, which could have a material adverse effect on us.
We
compete with reorganized carriers, which may result in competitive disadvantages
for us or fare reductions.
We must
compete with air carriers that have recently reorganized under the protection of
Chapter 11, including United, the second largest U.S. air carrier, Delta, the
third largest U.S. air carrier and Northwest, the fourth largest U.S. air
carrier. It is possible that other competitors may seek to reorganize
in or out of Chapter 11. United emerged from Chapter 11 in the first
quarter of 2006, while Delta and Northwest emerged in the second quarter of
2007. We cannot predict the consequences of such a large
portion of the airline industry’s capacity being provided by recently
reorganized air carriers.
Successful
reorganizations by other carriers present us with competitors with significantly
lower operating costs and a stronger financial position derived from
renegotiated labor, supply, and financing contracts, which could lead to further
fare reductions. These competitive pressures may limit our ability to
adequately price our services, may require us to further reduce our operating
costs, and could have a material adverse impact on us.
Fares
are at low levels and our reduced pricing power adversely affects our ability to
achieve adequate pricing, especially with respect to business
travel.
While we
have recently been able to implement some fare increases on certain domestic and
international routes, our passenger yield remains low by historical standards.
We believe this is due in large part to a corresponding decline in our pricing
power. Our reduced pricing power is the product of several factors
including: greater cost sensitivity on the part of travelers
(particularly business travelers); pricing transparency resulting from the use
of the Internet; greater competition from low-cost carriers and from carriers
that have recently reorganized under the protection of Chapter 11; other
carriers being well hedged against rising fuel costs and able to better absorb
the current high jet fuel prices; and fare simplification efforts by certain
carriers. We believe that our reduced pricing power could persist
indefinitely.
We
may need to raise additional funds to maintain sufficient liquidity, but we may
be unable to do so on acceptable terms.
To
maintain sufficient liquidity as we continue to implement our restructuring and
cost reduction initiatives, and because we have significant debt, lease, pension
and other obligations in the next several years, we may need continued access to
additional funding.
Our
ability to obtain future financing has been reduced because we have had fewer
unencumbered assets available than in years past. A very large
majority of our aircraft assets (including most of our aircraft eligible for the
benefits of Section 1110 of the U.S. Bankruptcy Code) have been
encumbered. Also, the market value of our aircraft assets has
declined in recent years and those assets may not maintain their current market
value.
Since the
terrorist attacks of September 2001, which we refer to as the Terrorist Attacks,
our credit ratings have been lowered to significantly below investment grade.
These reductions have increased our borrowing costs and otherwise adversely
affected borrowing terms, and limited borrowing options. Additional
reductions in our credit ratings could further increase borrowing or other costs
and further restrict the availability of future financing.
A number
of other factors, including our financial results in recent years, our
substantial indebtedness, the difficult revenue environment we face, our reduced
credit ratings, high fuel prices, and the financial difficulties experienced in
the airline industry, adversely affect the availability and terms of financing
for us. As a result, there can be no assurance that financing will be
available to us on acceptable terms, if at all. An inability to
obtain additional financing on acceptable terms could have a material adverse
impact on us and on our ability to sustain our operations over the long
term.
Our
corporate or business strategy may change.
In light
of the rapid changes in the airline industry, we evaluate our assets on an
ongoing basis with a view to maximizing their value to us and determining which
are core to our operations. We also regularly evaluate our corporate
and business strategies, and they are influenced by factors beyond our control,
including changes in the competitive landscape we face. Our corporate
and business strategies are, therefore, subject to change.
In
October 2007, we announced that we were conducting a strategic value review
involving, among other things, AMR Eagle, our regional airline, American Beacon
Advisors, our investment advisory subsidiary and AAdvantage, the world’s most
popular frequent flyer program, and this review is continuing. The
purpose of the review is to determine whether there exists the potential for
unlocking additional stockholder value with respect to one or more of these
strategic assets through some type of separation transaction. A
separation may take the form of a spin-off transaction, a public offering of
securities, a sale to a third party or otherwise, and we may have discussions
from time-to-time with third parties involving these
possibilities. Pursuant to this review, we announced on November 28,
2007 that we plan to divest AMR Eagle. There can be no assurances
that our strategic review will lead to the completion of any separation
transactions or as to the impact of these transactions on stockholder value or
on us.
Our
business is subject to extensive government regulation, which can result in
increases in our costs, limits on our operating flexibility, reductions in the
demand for air travel, and competitive disadvantages.
Airlines
are subject to extensive domestic and international regulatory
requirements. Many of these requirements result in significant
costs. For example, the FAA from time to time issues directives and
other regulations relating to the maintenance and operation of aircraft, and
compliance with those requirements drives significant
expenditures. In addition, the ability of U.S. carriers to operate
international routes is subject to change because the applicable arrangements
between the United States and foreign governments may be amended from time to
time, or because appropriate slots or facilities are not made
available.
Moreover,
additional laws, regulations, taxes and airport rates and charges have been
enacted from time to time that have significantly increased the costs of airline
operations, reduced the demand for air travel or restricted the way we can
conduct our business. For example, the Aviation and Transportation
Security Act, which became law in 2001, mandated the federalization of certain
airport security procedures and resulted in the imposition of additional
security requirements on airlines. In addition, many aspects of our
operations are subject to increasingly stringent environmental regulations, and
concerns about climate change, in particular, may result in the imposition of
additional regulation. For example, the European Commission is
currently seeking to impose emissions controls on all flights coming into
Europe. Laws or regulations similar to those described above or other
U.S. or foreign governmental actions in the future may adversely affect our
business and financial results.
The
results of our operations, demand for air travel, and the manner in which we
conduct our business each may be affected by changes in law and future actions
taken by governmental agencies, including:
·
|
changes
in law which affect the services that can be offered by airlines in
particular markets and at particular
airports;
|
·
|
the
granting and timing of certain governmental approvals (including foreign
government approvals) needed for codesharing alliances and other
arrangements with other airlines;
|
·
|
restrictions
on competitive practices (for example court orders, or agency regulations
or orders, that would curtail an airline’s ability to respond to a
competitor);
|
·
|
the
adoption of regulations that impact customer service standards (for
example new passenger security standards, passenger bill of rights);
or
|
·
|
the
adoption of more restrictive locally-imposed noise
restrictions.
|
In addition, the
air traffic control (ATC) system, which is operated by the FAA, is not
successfully managing the growing demand for U.S. air travel. U.S.
airlines carry about 740 million passengers a year and are forecasted to
accommodate a billion passengers annually by 2015. Air-traffic
controllers rely on outdated technologies that routinely overwhelm the system
and compel airlines to fly inefficient, indirect routes. The Company supports a
common-sense approach to ATC modernization that would allocate costs to all ATC
system users in proportion to the services they consume. The Company
expects the U.S. Congress to address the reauthorization of legislation that
funds the Federal Aviation Administration in 2008, which includes proposals
regarding upgrades to the ATC system.
We
could be adversely affected by conflicts overseas or terrorist
attacks.
Actual or
threatened U.S. military involvement in overseas operations has, on occasion,
had an adverse impact on our business, financial position (including access to
capital markets) and results of operations, and on the airline industry in
general. The continuing conflict in Iraq and Afghanistan, or other
conflicts or events in the Middle East or elsewhere, may result in similar
adverse impacts.
The
Terrorist Attacks had a material adverse impact on us. The occurrence
of another terrorist attack (whether domestic or international and whether
against us or another entity) could again have a material adverse impact on
us.
Our
international operations could be adversely affected by numerous events,
circumstances or government actions beyond our control.
Our
current international activities and prospects could be adversely affected by
factors such as reversals or delays in the opening of foreign markets, exchange
controls, currency and political risks, environmental regulation, taxation and
changes in international government regulation of our operations, including the
inability to obtain or retain needed route authorities and/or
slots.
For
example, in April 2007, the United States and the European Union approved an
“open skies” air services agreement that provides airlines from the United
States and EU member states open access to each other’s markets, with freedom of
pricing and unlimited rights to fly beyond the United States and any airport in
the EU including London’s Heathrow Airport. The provisions of the
agreement will take effect on March 30, 2008. The agreement will
result in the Company facing increased competition in serving Heathrow to the
extent that additional carriers are able to obtain necessary slots and terminal
facilities, which could have an adverse impact on the Company.
We
could be adversely affected by an outbreak of a disease that affects travel
behavior.
In 2003,
there was an outbreak of Severe Acute Respiratory Syndrome (SARS), which
primarily had an adverse impact on our Asia operations. More
recently, there have been concerns about a potential outbreak of avian
flu. If there were another outbreak of a disease (such as SARS or
avian flu) that affects travel behavior, it could have a material adverse impact
on us.
Our
labor costs are higher than those of our competitors.
Wages,
salaries and benefits constitute a significant percentage of our total operating
expenses. In 2007, they constituted approximately 31 percent of our
total operating expenses. All of the major hub-and-spoke carriers
with whom American competes have achieved significant labor cost savings through
or outside of bankruptcy proceedings. We believe American’s labor
costs are higher than those of its primary competitors, and it is unclear how
long this labor cost disadvantage may persist.
We
could be adversely affected if we are unable to maintain satisfactory relations
with any unionized or other employee work group.
Our
operations could be adversely affected if we fail to maintain satisfactory
relations with any labor union representing our employees. In
addition, any significant dispute we have with, or any disruption by, an
employee work group could adversely impact us. Moreover, one of the
fundamental tenets of our strategic Turnaround Plan is increased union and
employee involvement in our operations. To the extent that we are
unable to maintain satisfactory relations with any unionized or other employee
work group, our ability to execute our strategic plans could be adversely
affected.
Our
insurance costs have increased substantially and further increases in insurance
costs or reductions in coverage could have an adverse impact on us.
We carry
insurance for public liability, passenger liability, property damage and
all-risk coverage for damage to our aircraft. As a result of the
Terrorist Attacks, aviation insurers significantly reduced the amount of
insurance coverage available to commercial air carriers for liability to persons
other than employees or passengers for claims resulting from acts of terrorism,
war or similar events (war-risk coverage). At the same time, these
insurers significantly increased the premiums for aviation insurance in
general.
The U.S.
government has agreed to provide commercial war-risk insurance for U.S. based
airlines until August 31, 2008, covering losses to employees, passengers, third
parties and aircraft. If the U.S. government does not extend the
policy beyond August 31, 2008, or if the U.S. government at anytime thereafter
ceases to provide such insurance, or reduces the coverage provided by such
insurance, we will attempt to purchase similar coverage with narrower scope from
commercial insurers at an additional cost. To the extent this coverage is not
available at commercially reasonable rates, we would be adversely
affected.
While the
price of commercial insurance has declined since the period immediately after
the Terrorist Attacks, in the event commercial insurance carriers further reduce
the amount of insurance coverage available to us, or significantly increase its
cost, we would be adversely affected.
We
may be unable to retain key management personnel.
Since the
Terrorist Attacks, a number of our key management employees have elected to
retire early or leave for more financially favorable opportunities at other
companies, both within and outside of the airline industry. There can be no
assurance that we will be able to retain our key management employees. Any
inability to retain our key management employees, or attract and retain
additional qualified management employees, could have a negative impact on
us.
We
could be adversely affected by a failure or disruption of our computer,
communications or other technology systems.
We are
heavily and increasingly dependent on technology to operate our business. The
computer and communications systems on which we rely could be disrupted due to
various events, some of which are beyond our control, including natural
disasters, power failures, terrorist attacks, equipment failures, software
failures and computer viruses and hackers. We have taken certain steps to
help reduce the risk of some (but not all) of these potential disruptions.
There can be no assurance, however, that the measures we have taken are
adequate to prevent or remedy disruptions or failures of these systems.
Any substantial or repeated failure of these systems could impact our
operations and customer service, result in the loss of important data, loss of
revenues, and increased costs, and generally harm our business. Moreover,
a failure of certain of our vital systems could limit our ability to operate our
flights for an extended period of time, which would have a material adverse
impact on our operations and our business.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
The
Company had no unresolved Securities and Exchange Commission staff comments at
December 31, 2007.
ITEM
2. PROPERTIES
Flight
Equipment – Operating
Owned and
leased aircraft operated by the Company at December 31, 2007
included:
Equipment
Type
|
|
Average
Seating Capacity
|
|
|
Owned
|
|
|
Capital
Leased
|
|
|
Operating
Leased
|
|
|
Total
|
|
|
Average
Age
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Airlines Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airbus
A300-600R
|
|
|
267 |
|
|
|
10 |
|
|
|
- |
|
|
|
24 |
|
|
|
34 |
|
|
|
18 |
|
Boeing
737-800
|
|
|
148 |
|
|
|
67 |
|
|
|
- |
|
|
|
10 |
|
|
|
77 |
|
|
|
8 |
|
Boeing
757-200
|
|
|
188 |
|
|
|
87 |
|
|
|
6 |
|
|
|
31 |
|
|
|
124 |
|
|
|
13 |
|
Boeing
767-200 Extended Range
|
|
|
167 |
|
|
|
3 |
|
|
|
11 |
|
|
|
1 |
|
|
|
15 |
|
|
|
21 |
|
Boeing
767-300 Extended Range
|
|
|
225 |
|
|
|
47 |
|
|
|
- |
|
|
|
11 |
|
|
|
58 |
|
|
|
14 |
|
Boeing
777-200 Extended Range
|
|
|
246 |
|
|
|
47 |
|
|
|
- |
|
|
|
- |
|
|
|
47 |
|
|
|
7 |
|
McDonnell
Douglas MD-80
|
|
|
139 |
|
|
|
126 |
|
|
|
67 |
|
|
|
107 |
|
|
|
300 |
|
|
|
18 |
|
Total
|
|
|
|
|
|
|
387 |
|
|
|
84 |
|
|
|
184 |
|
|
|
655 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bombardier
CRJ-700
|
|
|
70 |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
25 |
|
|
|
5 |
|
Embraer
135
|
|
|
37 |
|
|
|
39 |
|
|
|
- |
|
|
|
- |
|
|
|
39 |
|
|
|
8 |
|
Embraer
140
|
|
|
44 |
|
|
|
59 |
|
|
|
- |
|
|
|
- |
|
|
|
59 |
|
|
|
5 |
|
Embraer
145
|
|
|
50 |
|
|
|
108 |
|
|
|
- |
|
|
|
- |
|
|
|
108 |
|
|
|
5 |
|
Super
ATR
|
|
|
64/66 |
|
|
|
39 |
|
|
|
- |
|
|
|
- |
|
|
|
39 |
|
|
|
14 |
|
Saab
340B/340B Plus
|
|
|
34 |
|
|
|
24 |
|
|
|
- |
|
|
|
2 |
|
|
|
26 |
|
|
|
15 |
|
Total
|
|
|
|
|
|
|
294 |
|
|
|
- |
|
|
|
2 |
|
|
|
296 |
|
|
|
8 |
|
A very
large majority of the Company’s owned aircraft are encumbered by liens granted
in connection with financing transactions entered into by the
Company.
Flight
Equipment – Non-Operating
Owned and
leased aircraft not operated by the Company at December 31, 2007
included:
Equipment
Type
|
|
Owned
|
|
|
Capital
Leased
|
|
|
Operating
Leased
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Airlines Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
Boeing
757-200TW
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
5 |
|
Boeing
767-200 Extended Range
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
Fokker
100
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
McDonnell
Douglas MD-80
|
|
|
13 |
|
|
|
11 |
|
|
|
13 |
|
|
|
37 |
|
Total
|
|
|
13 |
|
|
|
11 |
|
|
|
23 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embraer
145
|
|
|
10 |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
Saab
340B/340B Plus
|
|
|
23 |
|
|
|
- |
|
|
|
6 |
|
|
|
29 |
|
Total
|
|
|
33 |
|
|
|
- |
|
|
|
6 |
|
|
|
39 |
|
In the
fourth quarter of 2007, the Company permanently grounded and held for disposal
24 McDonnell Douglas MD-80 airframes and certain other equipment, all 24 of
which had previously been in temporary storage. Of these 24 aircraft, 12 are
owned by the Company, five are accounted for as capital leases and seven are
accounted for as operating leases.
AMR Eagle
has leased its 10 owned Embraer 145s not operated by the Company to Trans States
Airlines, Inc.
For
information concerning the estimated useful lives and residual values for owned
aircraft, lease terms for leased aircraft and amortization relating to aircraft
under capital leases, see Notes 1 and 5 to the consolidated financial
statements.
Lease
expirations for the aircraft included in the table of capital and operating
leased flight equipment operated by the Company as of December 31, 2007
are:
Equipment
Type
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
and
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Airlines Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airbus
A300-600R
|
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
Boeing
737-800
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
Boeing
757-200
|
|
|
5 |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
30 |
|
Boeing
767-200 Extended Range
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
6 |
|
Boeing
767-300 Extended Range
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
McDonnell
Douglas MD-80
|
|
|
- |
|
|
|
- |
|
|
|
11 |
|
|
|
21 |
|
|
|
23 |
|
|
|
119 |
|
|
|
|
11 |
|
|
|
5 |
|
|
|
21 |
|
|
|
33 |
|
|
|
25 |
|
|
|
173 |
|
AMR
Eagle Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saab
340B/340B Plus
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Substantially
all of the Company’s aircraft leases include an option to purchase the aircraft
or to extend the lease term, or both, with the purchase price or renewal rental
to be based essentially on the market value of the aircraft at the end of the
term of the lease or at a predetermined fixed amount.
Ground
Properties
The
Company leases, or has built as leasehold improvements on leased property: most
of its airport and terminal facilities; its training facilities in Fort Worth,
Texas; its principal overhaul and maintenance bases at Tulsa International
Airport (Tulsa, Oklahoma), Kansas City International Airport (Kansas City,
Missouri) and Alliance Airport (Fort Worth, Texas); its regional reservation
offices; and local ticket and administration offices throughout the
system. The Company owns its headquarters building in Fort Worth,
Texas, on which a mortgage loan is payable. American has entered into
agreements with the Tulsa Municipal Airport Trust; the Alliance Airport
Authority, Fort Worth, Texas; the New York City Industrial Development Agency;
and the Dallas/Fort Worth, Chicago O'Hare, Newark, San Juan, and Los Angeles
airport authorities to provide funds for constructing, improving and modifying
facilities and acquiring equipment which are or will be leased to the
Company. The Company also uses public airports for its flight
operations under lease or use arrangements with the municipalities or
governmental agencies owning or controlling them and leases certain other ground
equipment for use at its facilities.
For
information concerning the estimated lives and residual values for owned ground
properties, lease terms and amortization relating to ground properties under
capital leases, and acquisitions of ground properties, see Notes 1 and 5 to the
consolidated financial statements.
ITEM
3. LEGAL
PROCEEDINGS
On July
26, 1999, a class action lawsuit was filed, and in November 1999 an amended
complaint was filed, against AMR, American, AMR Eagle, Airlines Reporting
Corporation, and the Sabre Group Holdings, Inc. in the United States District
Court for the Central District of California, Western Division (Westways World Travel, Inc.
v. AMR Corp., et al.). The lawsuit alleges that requiring
travel agencies to pay debit memos to American for violations of American’s fare
rules (by customers of the agencies): (1) breaches the Agent
Reporting Agreement between American and AMR Eagle and the plaintiffs;
(2) constitutes unjust enrichment; and (3) violates the Racketeer
Influenced and Corrupt Organizations Act of 1970 (RICO). On July 9,
2003, the court certified a class that included all travel agencies who have
been or will be required to pay money to American for debit memos for fare rules
violations from July 26, 1995 to the present. The plaintiffs sought
to enjoin American from enforcing the pricing rules in question and to recover
the amounts paid for debit memos, plus treble damages, attorneys’ fees, and
costs. On February 24, 2005, the court decertified the class. The
claims against Airlines Reporting Corporation have been dismissed, and in
September 2005, the Court granted Summary Judgment in favor of the Company and
all other defendants. Plaintiffs appealed to the United States
Court of Appeals for the Ninth Circuit. On January 22, 2008, the
Ninth Circuit affirmed the decertification of the class and summary judgment on
the RICO claims, but remanded the remaining claims to the trial court for
factual determinations. The remaining claims, even if determined in
favor of the plaintiffs, would not have a material adverse impact on the
Company.
Between
April 3, 2003 and June 5, 2003, three lawsuits were filed by travel agents, some
of whom opted out of a prior class action (now dismissed) to pursue their claims
individually against American, other airline defendants, and in one case against
certain airline defendants and Orbitz LLC. The cases, Tam Travel et. al., v. Delta
Air Lines et. al., in the United States District Court for the Northern
District of California, San Francisco (51 individual agencies), Paula Fausky d/b/a Timeless
Travel v. American Airlines, et. al, in the United States District Court
for the Northern District of Ohio, Eastern Division (29 agencies) and Swope Travel et al. v.
Orbitz et. al. in the United States District Court for the Eastern
District of Texas, Beaumont Division (71 agencies) were consolidated for
pre-trial purposes in the United States District Court for the Northern District
of Ohio, Eastern Division. Collectively, these lawsuits seek damages and
injunctive relief alleging that the certain airline defendants and Orbitz LLC:
(i) conspired to prevent travel agents from acting as effective competitors in
the distribution of airline tickets to passengers in violation of Section 1 of
the Sherman Act; (ii) conspired to monopolize the distribution of common
carrier air travel between airports in the United States in violation of Section
2 of the Sherman Act; and that (iii) between 1995 and the present, the airline
defendants conspired to reduce commissions paid to U.S.-based travel agents in
violation of Section 1 of the Sherman Act. On September 23, 2005, the
Fausky
plaintiffs dismissed their claims with prejudice. On September 14, 2006,
the court dismissed with prejudice 28 of the Swope
plaintiffs. On October 29, 2007, the court dismissed all of the Swope plaintiffs’
claims. The Swope plaintiffs have
appealed the court’s decision. American continues to vigorously defend
these lawsuits. A final adverse court decision awarding substantial money
damages or placing material restrictions on the Company’s distribution practices
would have a material adverse impact on the Company.
On July
12, 2004, a consolidated class action complaint that was subsequently amended on
November 30, 2004, was filed against American and the Association of
Professional Flight Attendants (APFA), the union which represents American’s
flight attendants (Ann
M. Marcoux, et al., v. American Airlines Inc., et al. in the United
States District Court for the Eastern District of New York). While a class has
not yet been certified, the lawsuit seeks on behalf of all of American’s flight
attendants or various subclasses to set aside, and to obtain damages allegedly
resulting from, the April 2003 Collective Bargaining Agreement referred to as
the Restructuring Participation Agreement (RPA). The RPA was one of three labor
agreements American successfully reached with its unions in order to avoid
filing for bankruptcy in 2003. In a related case (Sherry Cooper, et al. v.
TWA Airlines, LLC, et al., also in the United States District Court for
the Eastern District of New York), the court denied a preliminary injunction
against implementation of the RPA on June 30, 2003. The Marcoux suit alleges
various claims against the APFA and American relating to the RPA and the
ratification vote on the RPA by individual APFA members, including: violation of
the Labor Management Reporting and Disclosure Act (LMRDA) and the APFA’s
Constitution and By-laws, violation by the APFA of its duty of fair
representation to its members, violation by American of provisions of the
Railway Labor Act (RLA) through improper coercion of flight attendants into
voting or changing their vote for ratification, and violations of the Racketeer
Influenced and Corrupt Organizations Act of 1970 (RICO). On March 28, 2006, the
district court dismissed all of various state law claims against American, all
but one of the LMRDA claims against the APFA, and the claimed violations of
RICO. This leaves the claimed violations of the RLA and the duty of
fair representation against American and the APFA (as well as one LMRDA claim
and one claim against the APFA of a breach of its
constitution). Although the Company believes the case against it is
without merit and both American and the APFA are vigorously defending the
lawsuit, a final adverse court decision invalidating the RPA and awarding
substantial money damages would have a material adverse impact on the
Company.
On
February 14, 2006, the Antitrust Division of the United States Department of
Justice (the “DOJ”) served the Company with a grand jury subpoena as part of an
ongoing investigation into possible criminal violations of the antitrust laws by
certain domestic and foreign air cargo carriers. At this time, the Company does
not believe it is a target of the DOJ investigation. The New Zealand
Commerce Commission notified the Company on February 17, 2006 that it is also
investigating whether the Company and certain other cargo carriers entered into
agreements relating to fuel surcharges, security surcharges, war risk
surcharges, and customs clearance surcharges. On February 22, 2006, the
Company received a letter from the Swiss Competition Commission informing the
Company that it too is investigating whether the Company and certain other cargo
carriers entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On December
19, 2006 and June 12, 2007, the Company received requests for information from
the European Commission, seeking information regarding the Company's corporate
structure, revenue and pricing announcements for air cargo shipments to and from
the European Union. On January 23, 2007, the Brazilian competition authorities,
as part of an ongoing investigation, conducted an unannounced search of the
Company’s cargo facilities in Sao Paulo, Brazil. The authorities are
investigating whether the Company and certain other foreign and domestic air
carriers violated Brazilian competition laws by illegally conspiring to set fuel
surcharges on cargo shipments. On June 27, 2007 and October 31, 2007, the
Company received requests for information from the Australian Competition and
Consumer Commission seeking information regarding fuel surcharges imposed by the
Company on cargo shipments to and from Australia and regarding the structure of
the Company's cargo operations. On December 18, 2007, the European Commission
issued a Statement of Objection (“SO”) against 26 airlines, including the
Company. The SO alleges that these carriers participated in a
conspiracy to set surcharges on cargo shipments in violation of EU
law. The SO states that, in the event that the allegations in the SO
are affirmed, the Commission will impose fines against the
Company. The Company intends to vigorously contest the allegations
and findings in the SO under EU laws, and it intends to cooperate fully with all
other pending investigations. In the event that the SO is affirmed or other
investigations uncover violations of the U.S. antitrust laws or the competition
laws of some other jurisdiction, such findings and related legal proceedings
could have a material adverse impact on the Company.
Approximately
44 purported class action lawsuits have been filed in the U.S. against the
Company and certain foreign and domestic air carriers alleging that the
defendants violated U.S. antitrust laws by illegally conspiring to set prices
and surcharges on cargo shipments. These cases, along with other
purported class action lawsuits in which the Company was not named, were
consolidated in the United States District Court for the Eastern District of New
York as In re Air
Cargo Shipping Services Antitrust Litigation, 06-MD-1775 on June 20,
2006. Plaintiffs are
seeking trebled money damages and injunctive relief. The Company has
not been named as a defendant in the consolidated complaint filed by the
plaintiffs. However, the plaintiffs have not released any claims that
they may have against the Company, and the Company may later be added as a
defendant in the litigation. If the Company is sued on these claims, it will
vigorously defend the suit, but any adverse judgment could have a material
adverse impact on the Company. Also, on January 23, 2007, the
Company was served with a purported class action complaint filed against the
Company, American, and certain foreign and domestic air carriers in the Supreme
Court of British Columbia in Canada (McKay v. Ace Aviation
Holdings, et al.). The plaintiff alleges that the defendants violated
Canadian competition laws by illegally conspiring to set prices and surcharges
on cargo shipments. The complaint seeks compensatory and punitive damages
under Canadian law. On June 22, 2007, the plaintiffs agreed to dismiss
their claims against the Company. The dismissal is without prejudice
and the Company could be brought back into the litigation at a future
date. If litigation is recommenced against the Company in the
Canadian courts, the Company will vigorously defend itself; however, any adverse
judgment could have a material adverse impact on the Company.
On June
20, 2006, the DOJ served the Company with a grand jury subpoena as part of an
ongoing investigation into possible criminal violations of the antitrust laws by
certain domestic and foreign passenger carriers. At this time, the Company does
not believe it is a target of the DOJ investigation. The Company intends
to cooperate fully with this investigation. On September 4, 2007, the Attorney
General of the State of Florida served American with a Civil Investigative
Demand as part of its investigation of possible violations of federal and
Florida antitrust laws regarding the pricing of air passenger transportation. In
the event that this or other investigations uncover violations of the U.S.
antitrust laws or the competition laws of some other jurisdiction, such findings
and related legal proceedings could have a material adverse impact on the
Company. Approximately 52 purported class action lawsuits have been
filed in the U.S. against the Company and certain foreign and domestic air
carriers alleging that the defendants violated U.S. antitrust laws by illegally
conspiring to set prices and surcharges for passenger
transportation. These cases, along with other purported class action
lawsuits in which the Company was not named, were consolidated in the United
States District Court for the Northern District of California as In re International Air
Transportation Surcharge Antitrust Litigation, M 06-01793 on October 25,
2006. On July 9, 2007, the Company was named as a defendant in the
consolidated complaint. Plaintiffs are seeking trebled money damages
and injunctive relief. American will vigorously defend these lawsuits; however,
any adverse judgment could have a material adverse impact on the
Company.
American
is defending a lawsuit (Love Terminal Partners, L.P.
et al. v. The City of Dallas, Texas et al.) filed on July 17, 2006 in the
United States District Court in Dallas. The suit was brought by two
lessees of facilities at Dallas Love Field Airport against American, the cities
of Fort Worth and Dallas, Southwest Airlines, Inc., and the Dallas/Fort Worth
International Airport Board. The suit alleges that an agreement by and
between the five defendants with respect to Dallas Love Field violates Sections
1 and 2 of the Sherman Act. Plaintiffs seek injunctive relief and
compensatory and statutory damages. On October 31, 2007, the court entered an
order dismissing all of the plaintiffs’ claims. The plaintiffs have
appealed. American will vigorously defend this lawsuit; however, any
adverse judgment could have a material adverse impact on the
Company.
On August
21, 2006, a patent infringement lawsuit was filed against American and American
Beacon Advisors, Inc. (a wholly-owned subsidiary of the Company), in the United
States District Court for the Eastern District of Texas (Ronald A. Katz Technology
Licensing, L.P. v. American Airlines, Inc., et al.). This case
has been consolidated in the Central District of California for pre-trial
purposes with numerous other cases brought by the plaintiff against other
defendants. The plaintiff alleges that American and American Beacon
infringe a number of the plaintiff’s patents, each of which relates to automated
telephone call processing systems. The plaintiff is seeking past and
future royalties, injunctive relief, costs and attorneys'
fees. Although the Company believes that the plaintiff’s claims are
without merit and is vigorously defending the lawsuit, a final adverse court
decision awarding substantial money damages or placing material restrictions on
existing automated telephone call system operations would have a material
adverse impact on the Company.
ITEM
4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of the Company's security holders during the
last quarter of its fiscal year ended December 31, 2007.
Executive Officers of the
Registrant
The
following information relates to the executive officers of AMR as of the filing
of this Form 10-K.
|
|
|
Gerard
J. Arpey
|
|
Mr.
Arpey was elected Chairman, President and Chief Executive Officer of AMR
and American in May 2004. He was elected Chief Executive
Officer of AMR and American in April 2003. He served as
President and Chief Operating Officer of AMR and American from April 2002
to April 2003. He served as Executive Vice President – Operations of
American from January 2000 to April 2002, Chief Financial Officer of AMR
from 1995 through 2000 and Senior Vice President – Planning of American
from 1992 to January 1995. Prior to that, he served in various
management positions at American since 1982. Age
49.
|
|
|
|
Daniel
P. Garton
|
|
Mr.
Garton was elected Executive Vice President – Marketing of American in
September 2002. He is also an Executive Vice President of
AMR. He served as Executive Vice President – Customer Services
of American from January 2000 to September 2002 and Senior Vice President
– Customer Services of American from 1998 to January
2000. Prior to that, he served as President of AMR Eagle from
1995 to 1998. Except for two years service as Senior Vice
President and Chief Financial Officer of Continental between 1993 and
1995, he has been with the Company in various management positions since
1984. Age 50.
|
|
|
|
Thomas
W. Horton
|
|
Mr.
Horton was elected Executive Vice President of Finance and Planning and
Chief Financial Officer of AMR and American in March 2006 upon returning
to American from AT&T Corp., a telecommunications company, where he
had been Vice Chairman and Chief Financial Officer. Prior to leaving for
AT&T Corp., Mr. Horton was Senior Vice President and Chief Financial
Officer of AMR and American from January 2000 to 2002. From
1994 to January 2000 Mr. Horton served as a Vice President of American and
has served in various management positions of American since 1985. Age
46.
|
|
|
|
Robert
W. Reding
|
|
Mr.
Reding was elected Executive Vice President – Operations for American in
September 2007. He is also an Executive Vice President of
AMR. He served as Senior Vice President – Technical Operations
for American from May 2003 to September 2007. He joined the
Company in March 2000 and served as Chief Operations Officer of AMR Eagle
through May 2003. Prior to joining the Company, Mr. Reding
served as President and Chief Executive Officer of Reno Air from 1992 to
1998 and President and Chief Executive Officer of Canadian Regional
Airlines from 1998 to March 2000. Age 58.
|
|
|
|
Gary
F. Kennedy
|
|
Mr.
Kennedy was elected Senior Vice President and General Counsel of AMR and
American in January 2003. He is also the Company’s Chief
Compliance Officer. He served as Vice President – Corporate Real Estate of
American from 1996 to January 2003. Prior to that, he served as
an attorney and in various management positions at American since
1984. Age 52.
|
|
|
|
There are
no family relationships among the executive officers of the Company named
above.
There
have been no events under any bankruptcy act, no criminal proceedings, and no
judgments or injunctions material to the evaluation of the ability and integrity
of any director or executive officer during the past five
years.
ITEM
5. MARKET
FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The
Company's common stock is traded on the New York Stock Exchange (symbol
AMR). The approximate number of record holders of the Company's
common stock at February 13, 2008 was 16,267.
The range
of closing market prices for AMR's common stock on the New York Stock Exchange
was:
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$ |
40.66 |
|
|
$ |
30.14 |
|
|
$ |
28.88 |
|
|
$ |
18.76 |
|
June
30
|
|
|
33.12 |
|
|
|
25.34 |
|
|
|
28.76 |
|
|
|
21.88 |
|
September
30
|
|
|
28.83 |
|
|
|
20.77 |
|
|
|
27.66 |
|
|
|
18.83 |
|
December
31
|
|
|
25.64 |
|
|
|
14.03 |
|
|
|
34.10 |
|
|
|
24.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No cash
dividends on common stock were declared for any period during 2007 or
2006
ITEM
6. SELECTED
CONSOLIDATED FINANCIAL DATA
(in
millions, except per share amounts)
|
|
|
|
2007
2,3,6 |
|
|
|
2006
1,2 |
|
|
|
2005
1,3 |
|
|
|
2004
1,3 |
|
|
|
2003
1,3,4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$ |
22,935 |
|
|
$ |
22,563 |
|
|
$ |
20,712 |
|
|
$ |
18,645 |
|
|
$ |
17,440 |
|
Operating
income (loss)
|
|
|
965 |
|
|
|
1,060 |
|
|
|
(89 |
) |
|
|
(134 |
) |
|
|
(843 |
) |
Net
income (loss)
|
|
|
504 |
|
|
|
231 |
|
|
|
(857 |
) |
|
|
(751 |
) |
|
|
(1,227 |
) |
Net
income (loss) per share:
Basic
|
|
|
2.06 |
|
|
|
1.13 |
|
|
|
(5.18 |
) |
|
|
(4.68 |
) |
|
|
(7.75 |
) |
Diluted
|
|
|
1.78 |
|
|
|
0.98 |
|
|
|
(5.18 |
) |
|
|
(4.68 |
) |
|
|
(7.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
28,571 |
|
|
|
29,145 |
|
|
|
29,495 |
|
|
|
28,773 |
|
|
|
29,330 |
|
Long-term
debt, less current maturities
|
|
|
9,413 |
|
|
|
11,217 |
|
|
|
12,530 |
|
|
|
12,436 |
|
|
|
11,901 |
|
Obligations
under capital leases, less current obligations
|
|
|
680 |
|
|
|
824 |
|
|
|
926 |
|
|
|
1,088 |
|
|
|
1,225 |
|
Obligation
for pension and postretirement benefits
|
|
|
3,620 |
|
|
|
5,341 |
|
|
|
4,998 |
|
|
|
4,743 |
|
|
|
4,803 |
|
Stockholders’
equity (deficit) 5
|
|
|
2,657 |
|
|
|
(606 |
) |
|
|
(1,430 |
) |
|
|
(537 |
) |
|
|
80 |
|
1
|
Includes
the impact of adopting FSP AUG AIR-1 “Accounting for Planned Major
Maintenance Activities”.
|
2
|
Includes
the impact of adopting Statement of Financial Accounting Standards No.
123(R), “Share-Based Payment” as described in Note 9 to the consolidated
financial statements.
|
3
|
Includes
restructuring charges. In 2003 and 2004, respectively, these
restructuring charges consisted of $427 million and $63 million primarily
related to aircraft and employee charges (for further discussion of these
items for 2005 and 2007 see Note 2 to the consolidated financial
statements).
|
4
|
Includes
U.S. government grant of $358 million (net of payments to independent
regional affiliates) which reimbursed air carriers for increased security
costs.
|
5
|
The
Company recorded a reduction to the additional minimum pension liability
resulting in a credit to stockholders’ equity (deficit) of approximately
$337 million for the year ended December 31, 2003 and $129 million for the
year ended December 31, 2004. The Company recorded an
additional charge resulting in a debit to stockholders’ equity (deficit)
of $379 million for the year ended December 31, 2005. Effective
December 31, 2006, the Company adopted SFAS 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”. This
adoption decreased Stockholders’ equity by $1.0 billion and increased the
obligation for pension and other postretirement benefits by $880
million. As a result of actuarial changes including the
discount rate and the impact of legislation changing pilot retirement age
to 65, the Company recorded a $1.7 billion reduction in pension and other
postretirement benefits and a corresponding increase in stockholders’
equity in 2007.
|
6
|
Includes
the impact of the $138 million gain on the sale of ARINC as described in
Note 3 to the consolidated financial
statements.
|
No cash
dividends were declared on AMR’s common shares during any of the periods
above.
Information
on the comparability of results is included in Item 7, Management's Discussion
and Analysis and the notes to the consolidated financial
statements.
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking
Information
The
discussions under Business, Risk Factors, Properties and Legal Proceedings and
the following discussions under Management's Discussion and Analysis of
Financial Condition and Results of Operations and Quantitative and Qualitative
Disclosures about Market Risk contain various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events. When
used in this document and in documents incorporated herein by reference, the
words "expects," "plans," "anticipates," “indicates,” “believes,” “forecast,”
“guidance,” “outlook,” “may,” “will,” “should,” and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
include, without limitation, the Company’s expectations concerning operations
and financial conditions, including changes in capacity, revenues, and costs,
future financing plans and needs, overall economic conditions, plans and
objectives for future operations, and the impact on the Company of its results
of operations in recent years and the sufficiency of its financial resources to
absorb that impact. Other forward-looking statements include statements which do
not relate solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known trends or
uncertainties cannot be predicted, guaranteed or assured. All
forward-looking statements in this report are based upon information available
to the Company on the date of this report. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events, or otherwise. The Risk Factors listed in Item
1A, in addition to other possible factors not listed, could cause the Company's
actual results to differ materially from historical results and from those
expressed in forward-looking statements.
Overview
The
Company recorded net earnings of $504 million in 2007, its second consecutive
annual profit and a $273 million increase over 2006. Improved results
reflected an increase in operating revenue of $372 million or 1.6 percent on 2.3
percent less capacity, partially offset by higher fuel prices and increases in
certain other costs. While the Company recorded positive earnings in
2007 and 2006, it lost more than $8 billion in the five years prior to 2006 and
remains heavily indebted.
The
Company’s improved revenue results were a function of stronger passenger load
factors and higher passenger yield. The Company’s 2007 load factor
was 80.9 percent, 1.2 points higher year-over-year and its fifth consecutive
year of record load factor. Passenger yield, which is an industry
measure of average fares, increased 2.4 percent versus 2006. However,
passenger yield remains low by historical standards and well below the Company’s
peak yield set in the year 2000. The Company believes this is the
result of a fragmented industry with numerous competitors and excess capacity,
increased low cost carrier competition, increased price competition due to the
internet, and other factors. Since deregulation in 1978, the
Company’s passenger yield has increased 75 percent, while the Consumer Price
Index (CPI), as measured by the US Department of Labor Bureau of Labor
Statistics, has grown by 218 percent. The Company believes increases
in passenger yield will continue to significantly lag CPI
indefinitely.
Offsetting
improved revenue, the Company’s fuel price increased from 201.4 cents to 213.1
cents per gallon year-over-year driving $365 million in incremental
expense. Since 2002, the Company’s fuel price has increased by 136.9
cents per gallon representing $4.3 billion in additional annual expense based on
the Company’s 2007 fuel consumption. The Company’s fuel hedging
program offset $239 million in fuel expense in 2007.
The
Company’s 2007 earnings reflect the continuing joint efforts between the Company
and its employees to drive continuous revenue and cost improvement under the
Turnaround Plan. This plan was established in 2003 and is the
Company’s strategic framework for achieving sustained profitability and has four
tenets: (i) lower costs to compete, (ii) fly smart – give customers what they
value, (iii) pull together, win together and (iv) build a financial
foundation.
Under the
Turnaround Plan, the Company has implemented hundreds of cost savings
initiatives estimated to save approximately $3.8 billion in annual
expense. In combination with the Company’s 2003 restructuring of
labor and other contracts, these initiatives have more than offset the Company’s
non-fuel inflationary and other cost pressures during this
period. Although the Company’s cost per available seat mile increased
from 11.54 cents in 2002 to 11.98 cents in 2007, the fuel component of unit cost
increased from 1.43 cents to 3.63 cents over the same period. All
other components of unit cost decreased from 10.11 cents in 2002, to 8.35 cents
in 2007, or 17.4 percent. Employee productivity (measured in
available seat miles per full time equivalent head) and aircraft productivity
(measured in miles flown per day) consistently increased during this
period.
The
Company has also implemented numerous efforts to find additional revenue sources
and increase existing ones. In addition to improving core passenger
and cargo revenues, these efforts have contributed to an increase in Other
revenue from $966 million in 2002 to $1.4 billion in 2007. Examples
of new revenue sources over this period include onboard food sales, single day
passes for AAdmirals Club admission, reservations ticketing fees, First Class
upgrades on day of departure, and numerous other initiatives.
As a key
part of these efforts, the Company has sought to engage its labor unions and its
employees in jointly working together. The Company believes
heightened employee engagement has directly contributed to its progress under
the Turnaround Plan.
Lastly,
under the Turnaround Plan, the Company has worked to reduce debt, increase the
funded status of employee pension plans and improve financial flexibility for
the future. Historically, airline industry earnings are highly
cyclical with frequent and extended periods of significant losses, and an
airline’s liquidity and borrowing capacity can be critical to sustaining
operations. The Company has reduced its balance sheet debt
(Short-Term Debt plus Long-Term Debt) from $13.2 billion at the end of 2002 to
$11.1 billion at year end 2007. Over the same period, total Cash and
Short-term investments (including restricted cash and short-term investments)
have increased by $2.3 billion to $5.0 billion and the ratio of the fair value
of plan assets to the accumulated benefit obligations of the employee pension
programs has increased from 75 percent to 96 percent.
On
November 28, 2007, the Company announced that it plans to divest AMR Eagle
(American Eagle Airlines, Inc., and Executive Airlines, Inc.), its wholly-owned
regional carrier. AMR believes that a divestiture of AMR Eagle is in the
long-term best interests of the Company and its shareholders. The
Company continues to evaluate the form of the divestiture, which may include a
spin-off to AMR shareholders, a sale to a third party, or some other form of
separation from AMR. The Company expects to complete the divestiture in 2008;
however, the completion of any transaction and its timing will depend on a
number of factors, including general economic, industry and financial market
conditions, as well as the ultimate form of the divestiture. The
impact on AMR of divesting AMR Eagle is not currently quantifiable due to these
uncertainties and the potential restructuring of assets, liabilities and the
capacity purchase agreement between American and AMR Eagle. In
addition, AMR Eagle’s historical financial information is not indicative of the
AMR Eagle’s future results of operations, financial position and cash flows if
AMR Eagle had been a stand-alone entity.
The
Company’s ability to become consistently profitable and its ability to continue
to fund it obligations on an ongoing basis will depend on a number of factors,
many of which are largely beyond the Company’s control. Certain risk
factors that affect the Company’s business and financial results are discussed
in the Risk Factors listed in Item 1A. In addition, four of the
Company’s largest domestic competitors have filed for bankruptcy in the last
several years and have used this process to significantly reduce contractual
labor and other costs. In order to remain competitive and to improve
its financial condition, the Company must continue to take steps to generate
additional revenues and to reduce its costs. Although the Company has a number
of initiatives underway to address its cost and revenue challenges, the ultimate
success of these initiatives is not known at this time and cannot be
assured.
Liquidity and Capital
Resources
Cash, Short-Term Investments and
Restricted Assets At December 31, 2007, the
Company had $4.5 billion in unrestricted cash and short-term investments and
$428 million in restricted cash and short-term investments.
Significant Indebtedness and Future
Financing Indebtedness is a significant risk to the
Company as discussed in the Risk Factors listed in Item 1A. During
2005, 2006 and 2007, in addition to refinancing its Credit Facility and certain
other debt (see Note 6 to the consolidated financial statements), the Company
raised an aggregate of approximately $2.5 billion in financing to fund capital
commitments (mainly for aircraft and ground properties), debt maturities, and
employee pension obligations, and to bolster its liquidity. The Company believes
that it should have sufficient liquidity to fund its operations for the
foreseeable future, including repayment of debt and capital leases, capital
expenditures and other contractual obligations, including those relating to the
anticipated accelerated delivery of 47 Boeing 737 aircraft that American had
previously committed to acquire in 2013 through 2015. Through
December 31, 2007, the Company had advanced 18 of these deliveries and announced
its intent to accelerate the remainder, depending on a number of factors
including future economic conditions and the financial condition of the
Company. In addition to advancing prior commitments, the Company had
also ordered five incremental Boeing 737 aircraft. The Company
continues to examine its future aircraft needs and may need additional financing
to continue to execute its fleet renewal plan.
However,
because the Company has significant debt, lease and other obligations in the
next several years, including commitments to purchase aircraft as well as
substantial pension funding obligations (refer to Contractual Obligations in
this Item 7), the Company may need access to additional funding to maintain
sufficient liquidity. The Company currently has no committed financing for any
aircraft that it is committed to purchase. The Company’s possible
financing sources primarily include: (i) a limited amount of additional secured
aircraft debt (a most of the Company’s owned aircraft, including most of the
Company’s Section 1110-eligible aircraft, are encumbered) or sale-leaseback
transactions involving owned aircraft, (ii) debt secured by new aircraft
deliveries, (iii) debt secured by other assets, (iv) securitization of future
operating receipts, (v) the sale or monetization of certain strategic assets,
(vi) unsecured debt and (vii) issuance of equity and/or equity-like securities.
However, the availability and level of these financing sources cannot be
assured, particularly in light of the Company’s and American’s recent financial
results, substantial indebtedness, reduced credit ratings, high fuel prices,
revenues that are weak by historical standards, and the financial difficulties
being experienced in the airline industry. The inability of the Company to
obtain additional funding on acceptable terms could have a material adverse
impact on the Company and on the ability of the Company to sustain its
operations over the long-term.
Credit
Ratings AMR’s and American’s credit ratings are significantly
below investment grade. Additional reductions in AMR's or American's credit
ratings could further increase its borrowing or other costs and further restrict
the availability of future financing.
Credit Facility
Covenants American has a secured bank credit facility
which consists of an undrawn $255 million revolving credit facility with a final
maturity on June 17, 2009, and a fully drawn $440 million term loan facility,
with a final maturity on December 17, 2010 (the Revolving Facility and the Term
Loan Facility, respectively, and collectively, the Credit Facility). On March 30, 2007, American paid in full the principal
balance of the Revolving Facility and as of December 31, 2007, it remained
undrawn. American’s obligations under the Credit Facility are
guaranteed by AMR.
The
Credit Facility contains a covenant (the Liquidity Covenant) requiring American
to maintain, as defined, unrestricted cash, unencumbered short term investments
and amounts available for drawing under committed revolving credit facilities of
not less than $1.25 billion for each quarterly period through the life of the
Credit Facility. In addition, the Credit Facility contains a covenant (the
EBITDAR Covenant) requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized interest),
income taxes, depreciation and amortization and rentals, adjusted for certain
gains or losses and non-cash items) to fixed charges (comprising interest
expense (less capitalized interest) and rentals). The required ratio
was 1.40 to 1.00 for the four quarter period ending December 31, 2007 and will
increase to 1.50 to 1.00 for the four quarter period ending June 30, 2009. AMR
and American were in compliance with the Liquidity Covenant and the EBITDAR
covenant as of December 31, 2007 and expect to be able to continue to comply
with these covenants. However, given fuel prices that are high by
historical standards and the volatility of fuel prices and revenues, it is
difficult to assess whether AMR and American will, in fact, be able to continue
to comply with these covenants, and there are no assurances that AMR and
American will be able to do so. Failure to comply with these
covenants would result in a default under the Credit Facility which - - if the
Company did not take steps to obtain a waiver of, or otherwise mitigate, the
default - - could result in a default under a significant amount of the
Company’s other debt and lease obligations and otherwise have a material adverse
impact on the Company. See Note 6 for further information regarding
the Credit Facility.
Cash
Flow Activity The Company’s cash flow from operating
activities during the year ended December 31, 2007 generated $1.9
billion.
Capital
expenditures during 2007 were $714 million and primarily included aircraft
modifications and the cost of improvements at JFK. Substantially all
of the Company’s construction costs at JFK are being reimbursed through a fund
established from a previous financing transaction. See Note 6 to the
consolidated financial statements for additional information.
The
Company also reduced long-term debt by $2.3 billion including prepayment of
approximately $1 billion in debt instruments.
During
the first quarter of 2007, the Company issued and sold 13 million shares of its
common stock. The Company realized $497 million from the equity
sale.
During
the third quarter of 2007, the Company sold its interests in ARINC, Incorporated
(“ARINC”), a military and aviation communications company. The Company received
$192 million in proceeds for its interest in ARINC, $138 million of
which was recognized as a gain.
In the
past, the Company has from time to time refinanced, redeemed or repurchased its
debt and taken other steps to reduce its debt or lease obligations or otherwise
improve its balance sheet. Going forward, depending on market
conditions, its cash positions and other considerations, the Company may
continue to take such actions.
Compensation As
described in Note 9 to the consolidated financial statements, during 2006 and
January 2007, the AMR Board of Directors approved the amendment and restatement
of all of the outstanding performance share plans, the related performance share
agreements and deferred share agreements that required settlement in cash.
The plans were amended to permit settlement in cash and/or stock; however,
the amendments did not impact the fair value of the awards under the plans.
These changes were made in connection with a grievance filed in 2006 by
the Company’s three labor unions in which they argued that the entirely cash
settlement of the 2003-2005 Performance Unit Plan may be contrary to a component
of the Company’s 2003 Annual Incentive Program agreement with the
unions.
On
January 15, 2008, the Compensation Committee of the Board of Directors of AMR
approved the 2008 Annual Incentive Plan (AIP) for American. All U.S.
based employees of American are eligible to participate in the
AIP. The AIP is American's annual bonus plan and provides for the
payment of awards in the event certain financial and/or customer service metrics
are satisfied.
Working
Capital AMR (principally American) historically operates
with a working capital deficit, as do most other airline
companies. In addition, the Company has historically relied heavily
on external financing to fund capital expenditures. More recently,
the Company has also relied on external financing to fund operating losses,
employee pension obligations and debt maturities.
Off Balance Sheet
Arrangements American has determined that it holds a
significant variable interest in, but is not the primary beneficiary of, certain
trusts that are the lessors under 84 of its aircraft operating leases. These
leases contain a fixed price purchase option, which allows American to purchase
the aircraft at a predetermined price on a specified date. However, American
does not guarantee the residual value of the aircraft. As of December
31, 2007, future lease payments required under these leases totaled $2.0
billion.
Certain
special facility revenue bonds have been issued by certain municipalities
primarily to purchase equipment and improve airport facilities that are leased
by American and accounted for as operating leases. Approximately $1.7
billion of these bonds (with total future payments of approximately $4.1 billion
as of December 31, 2007) are guaranteed by American, AMR, or both. Approximately
$395 million of these special facility revenue bonds contain mandatory tender
provisions that require American to make operating lease payments sufficient to
repurchase the bonds at various times: $218 million in 2008, $112 million in
2014 and $65 million in 2015. Although American has the right to remarket the
bonds, there can be no assurance that these bonds will be successfully
remarketed. Any payments to redeem or purchase bonds that are not
remarketed would generally reduce existing rent leveling accruals or be
considered prepaid facility rentals and would reduce future operating lease
commitments.
In
addition, the Company had other operating leases, primarily for aircraft and
airport facilities, with total future lease payments of $4.1 billion as of
December 31, 2007. Entering into aircraft leases allows the Company
to obtain aircraft without immediate cash outflows.
Contractual
Obligations
The
following table summarizes the Company’s obligations and commitments as of
December 31, 2007 (in millions):
|
|
Payments
Due by Year(s) Ended December 31,
|
|
Contractual
Obligations
|
|
Total
|
|
|
2008
|
|
|
2009
and
2010
|
|
|
2011
and
2012
|
|
|
2013
and Beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease payments for aircraft and facility obligations 1
|
|
$ |
10,168 |
|
|
$ |
1,037 |
|
|
$ |
1,798 |
|
|
$ |
1,535 |
|
|
$ |
5,798 |
|
Firm
aircraft commitments 2
|
|
|
2,771 |
|
|
|
269 |
|
|
|
432 |
|
|
|
442 |
|
|
|
1,628 |
|
Capacity
purchase agreements 3
|
|
|
119 |
|
|
|
97 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
Long-term
debt 4
|
|
|
14,702 |
|
|
|
1,512 |
|
|
|
3,798 |
|
|
|
3,671 |
|
|
|
5,721 |
|
Capital
lease obligations
|
|
|
1,369 |
|
|
|
243 |
|
|
|
324 |
|
|
|
243 |
|
|
|
559 |
|
Other
purchase obligations 5
|
|
|
1,139 |
|
|
|
323 |
|
|
|
355 |
|
|
|
308 |
|
|
|
153 |
|
Other
long-term liabilities 6,
7
|
|
|
3,051 |
|
|
|
255 |
|
|
|
408 |
|
|
|
542 |
|
|
|
1,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
obligations and commitments
|
|
|
33,319 |
|
|
|
3,736 |
|
|
|
7,137 |
|
|
|
6,741 |
|
|
|
15,705 |
|
1.
|
Certain
special facility revenue bonds issued by municipalities - which are
supported by operating leases executed by American - are guaranteed by AMR
and/or American. The special facility revenue bonds with mandatory tender
provisions discussed above are included in this table under their ultimate
maturity date rather than their mandatory tender provision date. See Note
5 to the consolidated financial statements for additional information.
|
2.
|
As
of December 31, 2007, the Company had firm commitments to acquire 23
Boeing 737-800s in 2009 and an aggregate of 29 Boeing 737 aircraft and
seven Boeing 777 aircraft in 2013 through 2015. Future payments
for all aircraft, including the estimated amounts for price escalation,
are currently estimated to be approximately $2.8 billion, with the
majority occurring in 2011 through 2015. Additional information
about the Company’s obligations is included in Note 4 to the consolidated
financial statements.
|
3.
|
The
table reflects minimum required payments under capacity purchase contracts
between American and two regional airlines, Chautauqua Airlines, Inc.
(Chautauqua) and Trans States Airlines Inc. If the Company
terminates its contract with Chautauqua without cause, Chautauqua has the
right to put its 15 Embraer aircraft to the Company. If this
were to happen, the Company would take possession of the aircraft and
become liable for lease obligations totaling approximately $21 million per
year with lease expirations in 2018 and 2019. These lease
obligations are not included in the table above. See Note 4 to
the consolidated financial statements for additional
information.
|
4.
|
Amounts
represent contractual amounts due, including interest. Interest
on variable rate debt was estimated based on the current rate at December
31, 2007.
|
5.
|
Includes
noncancelable commitments to purchase goods or services, primarily
construction related costs at JFK and information technology related
support. The Company has made estimates as to the timing of certain
payments primarily for construction related costs. The actual timing of
payments may vary from these estimates. Substantially all of the Company’s
purchase orders issued for other purchases in the ordinary course of
business contain a 30-day cancellation clause that allows the Company to
cancel an order with 30 days
notice.
|
6.
|
Includes
minimum pension contributions based on actuarially determined estimates
and other postretirement benefit payments based on estimated payments
through 2017. See Note 10 to the consolidated financial
statements.
|
7.
|
Excludes
a $2.1 billion accident liability, related to the Terrorist Attacks and
flight 587, recorded in Other liabilities and deferred credits, as
discussed in Note 2 to the consolidated financial
statements. This liability is offset in its entirety by a
receivable, recorded in Other assets, which the Company expects to receive
from insurance carriers as claims are
resolved.
|
Pension Obligations The
Company is required to make minimum contributions to its defined benefit pension
plans under the minimum funding requirements of the Employee Retirement Income
Security Act (ERISA). The Company’s estimated 2008 contributions to its defined
benefit pension plans are approximately $350 million, which exceeds the amount
required to be contributed under the provisions of the Pension Funding Equity
Act of 2004 and the Pension Protection Act of 2006.
Results of
Operations
The Company recorded net
earnings of $504 million in 2007 compared to $231 million in
2006. The Company’s 2007 results reflected an improvement in revenues
somewhat offset by fuel prices and certain other costs that were higher in 2007
compared to 2006. The 2007 and 2006 results were impacted by
productivity improvements and by cost reductions resulting from progress under
the Turnaround Plan. The 2007 results include the impact of
several items including: a $138 million gain on the sale of AMR’s
stake in ARINC included in Other Income, Miscellaneous – net, a $39 million gain
to reflect the positive impact of the change to an 18-month expiration of
AAdvantage miles included in Passenger revenue, and a $63 million charge
associated with the retirement and planned disposal of 24 MD-80 aircraft and
certain other equipment that previously had been temporarily stored included in
Other operating expenses.
The Company’s 2005
results were impacted by a $155 million aircraft charge, a $73 million facility
charge, an $80 million charge for the termination of a contract, a $37 million
gain related to the resolution of a debt restructuring and a $22 million credit
for the reversal of an insurance reserve. All of these amounts are
included in Other operating expenses in the consolidated statement of
operations, except for a portion of the facility charge which is included in
Other rentals and landing fees. Also included in the 2005 results was
a $69 million fuel tax credit. Of this amount, $55 million is
included in Aircraft fuel expense and $14 million is included in Interest income
in the consolidated statement of operations. The Company did not
record a tax provision or benefit associated with its 2007 or 2006 earnings or
2005 losses.
Revenues
2007 Compared to
2006 The Company’s revenues increased approximately
$372 million, or 1.6 percent, to $22.9 billion in 2007 compared to 2006.
American’s passenger revenues increased by 2.1 percent, or $373 million, despite
a capacity (available seat mile) (ASM) decrease of 2.4
percent. American’s passenger load factor increased 1.4 points to
81.5 percent and passenger revenue yield per passenger mile increased 2.8
percent to 13.17 cents. This resulted in an increase in passenger
revenue per available seat mile (RASM) of 4.6 percent to 10.73 cents. In 2007,
American derived approximately 63 percent of its passenger revenues from
domestic operations and approximately 37 percent from international operations.
Following is additional information regarding American’s domestic and
international RASM and capacity:
|
|
Year
Ended December 31, 2007
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
10.5 |
|
|
|
3.0 |
% |
|
|
108.5 |
|
|
|
(2.6 |
)% |
International
|
|
|
11.1 |
|
|
|
7.4 |
|
|
|
61.4 |
|
|
|
(2.0 |
) |
DOT
Latin America
|
|
|
11.4 |
|
|
|
5.9 |
|
|
|
29.6 |
|
|
|
0.9 |
|
DOT
Atlantic
|
|
|
10.9 |
|
|
|
5.2 |
|
|
|
25.0 |
|
|
|
(0.5 |
) |
DOT
Pacific
|
|
|
10.2 |
|
|
|
20.2 |
|
|
|
6.8 |
|
|
|
(17.1 |
) |
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, decreased $32 million, or
1.3 percent, to $2.5 billion as a result of decreased capacity and load
factors. Regional Affiliates’ traffic decreased 1.2 percent to 9.8
billion revenue passenger miles (RPMs), while capacity decreased 1.0 percent to
13.4 billion ASMs, resulting in a 0.2 point decrease in passenger load factor to
73.4 percent.
Cargo
revenues decreased 0.2 percent, or $2 million primarily as a result of lower
freight traffic.
Other
revenues increased 2.4 percent, or $33 million, to $1.4 billion due in part to
increases in certain passenger fees and higher passenger volumes.
2006 Compared to
2005 The Company’s revenues increased approximately
$1.9 billion, or 8.9 percent, to $22.6 billion in 2006 compared to 2005.
American’s passenger revenues increased by 7.5 percent, or $1.2 billion, despite
a capacity (available seat mile) (ASM) decrease of 1.2
percent. American’s passenger load factor increased 1.5 points to
80.1 percent and passenger revenue yield per passenger mile increased 6.7
percent to 12.81 cents. This resulted in an increase in passenger
revenue per available seat mile (RASM) of 8.8 percent to 10.26 cents. In 2006,
American derived approximately 64 percent of its passenger revenues from
domestic operations and approximately 36 percent from international operations.
Following is additional information regarding American’s domestic and
international RASM and capacity:
|
|
Year
Ended December 31, 2006
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
10.24 |
|
|
|
9.3 |
% |
|
|
111 |
|
|
|
(3.2 |
)% |
International
|
|
|
10.30 |
|
|
|
7.8 |
|
|
|
63 |
|
|
|
2.7 |
|
DOT
Latin America
|
|
|
10.78 |
|
|
|
13.7 |
|
|
|
30 |
|
|
|
(2.1 |
) |
DOT
Atlantic
|
|
|
10.34 |
|
|
|
2.6 |
|
|
|
25 |
|
|
|
4.6 |
|
DOT
Pacific
|
|
|
8.49 |
|
|
|
4.6 |
|
|
|
8 |
|
|
|
16.7 |
|
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, increased $354 million,
or 16.5 percent, to $2.5 billion as a result of increased capacity and load
factors. Regional Affiliates’ traffic increased 11.5 percent to 10.0
billion revenue passenger miles (RPMs), while capacity increased 6.6 percent to
13.6 billion ASMs, resulting in a 3.2 point increase in passenger load factor to
73.6 percent.
Cargo revenues increased
5.5 percent, or $43 million as a result of a $31 million increase in mail
revenue and a $26 million increase in freight fuel surcharges.
Other
revenues increased 17.7 percent, or $206 million, to $1.4 billion due in part to
increased third-party maintenance contracts obtained by the Company’s
maintenance and engineering group and increases in certain passenger
fees.
Operating
Expenses
2007 Compared to
2006 The
Company’s total operating expenses increased 2.2 percent, or $467 million, to
$22.0 billion in 2007 compared to 2006. American’s mainline operating
expenses per ASM in 2007 increased 4.4 percent compared to 2006 to 11.38 cents.
This increase in operating expenses per ASM is due primarily to a 5.6 percent
increase in American’s price per gallon of fuel (net of the impact of fuel
hedging) in 2007 relative to 2006.
(in
millions)
Operating
Expenses
|
|
Year
ended December 31, 2007
|
|
|
Change
from 2006
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
$ |
6,770 |
|
|
$ |
(43 |
) |
|
|
(0.6 |
)% |
|
Aircraft
fuel
|
|
|
6,670 |
|
|
|
268 |
|
|
|
4.2 |
|
(a)
|
Other
rentals and landing fees
|
|
|
1,278 |
|
|
|
(5 |
) |
|
|
(0.4 |
) |
|
Depreciation
and amortization
|
|
|
1,202 |
|
|
|
45 |
|
|
|
3.9 |
|
|
Maintenance,
materials and repairs
|
|
|
1,057 |
|
|
|
86 |
|
|
|
8.9 |
|
(b)
|
Commissions,
booking fees and credit card expense
|
|
|
1,028 |
|
|
|
(47 |
) |
|
|
(4.5 |
) |
|
Aircraft
rentals
|
|
|
591 |
|
|
|
(15 |
) |
|
|
(2.5 |
) |
|
Food
service
|
|
|
534 |
|
|
|
26 |
|
|
|
5.1 |
|
|
Other
operating expenses
|
|
|
2,840 |
|
|
|
152 |
|
|
|
5.7 |
|
(c)
|
Total
operating expenses
|
|
$ |
21,970 |
|
|
$ |
467 |
|
|
|
2.2 |
% |
|
(a)
|
Aircraft
fuel expense increased primarily due to a 5.6 percent increase in
American’s price per gallon of fuel (net of the impact of fuel hedging)
offset by a 1.6 percent decrease in American’s fuel
consumption.
|
(b)
|
Maintenance,
materials and repairs expense increased due to $57 million a heavier
workscope of scheduled airframe maintenance overhauls, repair costs and
volume, and contractual engine repair rates, which are driven be aircraft
age.
|
(c)
|
Other
operating expenses increased due to charges taken in
2007. Included in 2007 expenses was a $63 million charge for
the retirement of 24 MD-80 aircraft and certain related
equipment. In addition, Other operating expenses increased due
to technology investments and development, and other costs associated with
improving the customer experience.
|
2006 Compared to
2005 The
Company’s total operating expenses increased 3.4 percent, or $702 million, to
$21.5 billion in 2006 compared to 2005. American’s mainline operating
expenses per ASM in 2006 increased 3.8 percent compared to 2005 to 10.90 cents.
This increase in operating expenses per ASM is due primarily to a 16.5 percent
increase in American’s price per gallon of fuel (net of the impact of a fuel tax
credit and fuel hedging) in 2006 relative to 2005.
(in
millions)
Operating
Expenses
|
|
Year
ended December 31, 2006
|
|
|
Change
from 2005
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
$ |
6,813 |
|
|
$ |
58 |
|
|
|
0.9 |
% |
|
Aircraft
fuel
|
|
|
6,402 |
|
|
|
787 |
|
|
|
14.0 |
|
(a)
|
Other
rentals and landing fees
|
|
|
1,283 |
|
|
|
21 |
|
|
|
1.7 |
|
|
Depreciation
and amortization
|
|
|
1,157 |
|
|
|
(7 |
) |
|
|
(0.6 |
) |
|
Commissions,
booking fees and credit card expense
|
|
|
1,076 |
|
|
|
(37 |
) |
|
|
(3.3 |
) |
|
Maintenance,
materials and repairs
|
|
|
971 |
|
|
|
(14 |
) |
|
|
(1.4 |
) |
|
Aircraft
rentals
|
|
|
606 |
|
|
|
15 |
|
|
|
2.5 |
|
|
Food
service
|
|
|
508 |
|
|
|
1 |
|
|
|
0.2 |
|
|
Other
operating expenses
|
|
|
2,687 |
|
|
|
(122 |
) |
|
|
(4.3 |
) |
(b)
|
Total
operating expenses
|
|
$ |
21,503 |
|
|
$ |
702 |
|
|
|
3.4 |
% |
|
(a)
|
Aircraft
fuel expense increased primarily due to a 16.5 percent increase in
American’s price per gallon of fuel (considering the benefit of a $55
million fuel excise tax refund received in March 2005 and the impact of
fuel hedging) offset by a 2.3 percent decrease in American’s fuel
consumption.
|
(b)
|
Other
operating expenses decreased due to charges taken in
2005. Included in 2005 expenses was a $155 million charge for
the retirement of 27 MD-80 aircraft, facilities charges of $56 million as
part of the Company’s restructuring initiatives and an $80 million charge
for the termination of an airport construction contract. These
charges were somewhat offset by a $37 million gain related to the
resolution of a debt restructuring and a $22 million credit for the
reversal of an insurance reserve. The 2006 expenses were
impacted by a $38 million increase in costs associated with third-party
maintenance contracts obtained by the Company’s maintenance and
engineering group
|
Other
Income (Expense)
Other
income (expense) consists of interest income and expense, interest capitalized
and miscellaneous - net.
2007 Compared to
2006 Increases in both short-term investment balances and interest rates
caused an increase in Interest income of $58 million, or 20.8 percent, to $337
million. Interest expense decreased $116 million, or 11.2 percent, to
$914 million primarily as a result of prepayment and repayment of existing
debt. Miscellaneous – net includes a gain of $138 million for the
sale of ARINC.
2006 Compared to
2005 Increases in both short-term investment balances and interest rates
caused an increase in Interest income of $130 million, or 87.2 percent, to $279
million. Interest expense increased $73 million, or 7.6 percent, to
$1.0 billion primarily as a result of increases in interest
rates. Miscellaneous – net includes a charge of $102 million for
changes in market value of hedges that did not qualify for hedge accounting
during certain periods in 2006. Gains deferred in Accumulated other
comprehensive income (loss) prior to these hedges being deemed ineffective
partially offset this charge as the hedges settled in 2006 and settle in
2007.
Income
Tax Benefit
The
Company did not record a net tax provision or benefit associated with its 2007
or 2006 earnings and 2005 losses due to the Company providing a valuation
allowance, as discussed in Note 8 to the consolidated financial
statements.
Operating
Statistics
The
following table provides statistical information for American and Regional
Affiliates for the years ended December 31, 2007, 2006 and 2005.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
138,453 |
|
|
|
139,454 |
|
|
|
138,374 |
|
Available
seat miles (millions)
|
|
|
169,906 |
|
|
|
174,021 |
|
|
|
176,112 |
|
Cargo
ton miles (millions)
|
|
|
2,122 |
|
|
|
2,224 |
|
|
|
2,209 |
|
Passenger
load factor
|
|
|
81.5 |
% |
|
|
80.1 |
% |
|
|
78.6 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
13.17 |
|
|
|
12.81 |
|
|
|
12.01 |
|
Passenger
revenue per available seat mile (cents)
|
|
|
10.73 |
|
|
|
10.26 |
|
|
|
9.43 |
|
Cargo
revenue yield per ton mile (cents)
|
|
|
38.86 |
|
|
|
37.18 |
|
|
|
35.49 |
|
Operating
expenses per available seat mile, excluding Regional Affiliates
(cents) (*)
|
|
|
11.38 |
|
|
|
10.90 |
|
|
|
10.50 |
|
Fuel
consumption (gallons, in millions)
|
|
|
2,834 |
|
|
|
2,881 |
|
|
|
2,948 |
|
Fuel
price per gallon (cents)
|
|
|
212.1 |
|
|
|
200.8 |
|
|
|
172.3 |
|
Operating
aircraft at year-end
|
|
|
655 |
|
|
|
697 |
|
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
9,848 |
|
|
|
9,972 |
|
|
|
8,946 |
|
Available
seat miles (millions)
|
|
|
13,414 |
|
|
|
13,554 |
|
|
|
12,714 |
|
Passenger
load factor
|
|
|
73.4 |
% |
|
|
73.6 |
% |
|
|
70.4 |
% |
(*)
|
Excludes
$2.8 billion, $2.7 billion and $2.5 billion of expense incurred related to
Regional Affiliates in 2007, 2006 and 2005,
respectively.
|
Outlook
Capacity
for American’s mainline jet operations is expected to decrease by 0.6 percent in
the first quarter of 2008 versus first quarter 2007. American’s mainline
capacity for the full year 2008 is expected to increase approximately 0.2
percent from 2007 with a 1.1 percent reduction in domestic capacity and a 2.5
percent increase in international capacity. On a consolidated basis
capacity is expected to be flat compared to 2007. This capacity forecast differs
from that provided on January 16, 2008, when the Company announced its fourth
quarter 2007 results. The Company is analyzing the impact of this planned
capacity reduction on the unit cost forecast provided on January 16. The
Company expects to provide revised unit cost guidance in March 2008 in its first
quarter 2008 Eagle Eye investor update.
Other
Information
Critical Accounting Policies and
Estimates The preparation of the Company’s financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. The
Company believes its estimates and assumptions are reasonable; however, actual
results and the timing of the recognition of such amounts could differ from
those estimates. The Company has identified the following critical
accounting policies and estimates used by management in the preparation of the
Company’s financial statements: accounting for long-lived assets, routes,
passenger revenue, frequent flyer program, stock compensation, pensions and
other postretirement benefits, income taxes and derivatives
accounting.
Long-lived
assets – The
Company has approximately $19 billion of long-lived assets as of December 31,
2007, including approximately $17 billion related to flight equipment and other
fixed assets. In addition to the original cost of these assets, their
recorded value is impacted by a number of estimates made by the Company,
including estimated useful lives, salvage values and the Company’s determination
as to whether aircraft are temporarily or permanently grounded. In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company
records impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired, the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amount of those assets and the net book value of the assets exceeds their
estimated fair value. In making these determinations, the Company uses certain
assumptions, including, but not limited to: (i) estimated fair value of the
assets; and (ii) estimated future cash flows expected to be generated by the
assets, generally evaluated at a fleet level, which are based on additional
assumptions such as asset utilization, length of service and estimated salvage
values. A change in the Company's fleet plan has been the primary indicator that
has resulted in an impairment charge in the past.
In the
fourth quarter of 2007, the Company permanently grounded and held for disposal
24 McDonnell Douglas MD-80 airframes and certain other equipment, all 24 of
which had previously been in temporary storage. See further discussion in Note 2
to the consolidated financial statements.
All of
American’s fleet types are depreciated over 30 years except for the Airbus A300
and the Boeing 767-200. It is possible that the ultimate lives of the
Company’s aircraft will be significantly different than the current estimate due
to unforeseen events in the future that impact the Company’s fleet plan,
including positive or negative developments in the areas described
above. For example, operating the aircraft for a longer period will
result in higher maintenance, fuel and other operating costs than if the Company
replaced the aircraft. At some point in the future, higher operating
costs and/or improvement in the Company’s economic condition could change the
Company’s analysis of the impact of retaining aircraft versus replacing them
with new aircraft.
Routes - AMR performs annual
impairment tests on its routes, which are indefinite life intangible assets
under Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangibles" and as a result they are not amortized. The Company also performs
impairment tests when events and circumstances indicate that the assets might be
impaired. These tests are primarily based on estimates of discounted
future cash flows, using assumptions based on historical results adjusted to
reflect the Company’s best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is
reduced to fair value. The Company's estimates of fair value represent its best
estimate based on industry trends and reference to market rates and
transactions.
The Company had recorded route acquisition costs (including
international routes and slots) of $846 million as of December
31, 2007,
including a significant amount related to operations at London
Heathrow. The Company has completed an impairment analysis on the
London Heathrow routes (including slots) and has concluded that no impairment
exists. The Company believes its estimates and
assumptions are reasonable; however, given the
significant uncertainty regarding how the recent open skies agreement will
ultimately affect the Company’s operations at Heathrow, the actual results could
differ from those estimates. See Note 4 to the consolidated financial
statements for additional information.
|
Passenger
revenue –
Passenger ticket sales are initially recorded as a component of Air
traffic liability. Revenue derived from ticket sales is
recognized at the time service is provided. However, due to
various factors, including the industry’s pricing structure and interline
agreements throughout the industry, certain amounts are recognized in
revenue using estimates regarding both the timing of the revenue
recognition and the amount of revenue to be recognized, including
breakage. These estimates are generally based upon the evaluation of
historical trends, including the use of regression analysis and other
methods to model the outcome of future events based on the Company’s
historical experience, and are recognized at the scheduled time of
departure. The Company’s estimation techniques have been applied
consistently from year to year. However, due to changes in the
Company’s ticket refund policy and changes in the travel profile of
customers, historical trends may not be representative of future
results.
|
Various
taxes and fees assessed on the sale of tickets to end customers are collected by
the Company as an agent and remitted to taxing authorities. These taxes and fees
have been presented on a net basis in the accompanying consolidated statement of
operations and recorded as a liability until remitted to the appropriate taxing
authority.
Frequent flyer
program –
American uses the incremental cost method to account for the portion of its
frequent flyer liability incurred when AAdvantage members earn mileage credits
by flying on American or its regional affiliates. In 2007, the
Company changed its policy regarding the life of AAdvantage mileage credits.
Effective December 15, 2007, AAdvantage members now must have mileage earning or
redemption activity at least once every eighteen (18) months in order to remain
active and retain their miles. Prior to this change, mileage credits
automatically expired after thirty-six (36) months of inactivity in the
AAdvantage member’s account. The Company recorded a one-time benefit
of $39 million as a component of passenger revenue in 2007 to reflect the impact
of the additional miles expiring upon the change of expiration period for
AAdvantage mileage.
The
Company considers breakage in its incremental cost calculation and recognizes
breakage on AAdvantage miles sold over the estimated period of usage for sold
miles that are ultimately redeemed. The Company calculates its
breakage estimate using separate breakage rates for miles earned by flying on
American and miles earned through other companies who have purchased AAdvantage
miles for distribution to their customers, due to differing behavior
patterns.
Management
considers historical patterns of account breakage to be a useful indicator when
estimating future breakage. Future program redemption opportunities can
significantly alter customer behavior from historical patterns with respect to
inactive accounts. Such changes may result in material changes to the deferred
revenue balance, as well as recognized revenues from the program.
American
includes fuel, food, passenger insurance and reservations/ticketing costs in the
calculation of incremental cost. These estimates are generally
updated based upon the Company’s 12-month historical average of such
costs. American also accrues a frequent flyer liability for the
mileage credits expected to be used for travel on participating airlines based
on historical usage patterns and contractual rates.
Revenue
earned from selling AAdvantage miles to other companies is recognized in two
components. The first component represents the revenue for air
transportation sold and is valued at fair value. This revenue is
deferred and recognized over the period the mileage is expected to be used,
which is currently estimated to be 28 months. The second revenue
component, representing the marketing services sold, is recognized as related
services are provided.
The
Company’s total liability for future AAdvantage award redemptions for free,
discounted or upgraded travel on American, American Eagle or participating
airlines as well as unrecognized revenue from selling AAdvantage miles to other
companies was approximately $1.6 billion at both December 21, 2007 and 2006 (and
is recorded as a component of Air traffic liability in the consolidated balance
sheets), representing 19.2 percent and 18.3 percent of AMR's total current
liabilities, at December 31, 2007 and 2006, respectively.
The
number of free travel awards used for travel on American and American Eagle was
2.6 million in 2007 and 2.6 million in 2006 representing approximately 7.5
percent of passengers boarded in each year. The Company believes displacement of
revenue passengers is minimal given the Company’s load factors, its ability to
manage frequent flyer seat inventory, and the relatively low ratio of free award
usage to total passengers boarded.
Changes
to the percentage of the amount of revenue deferred, deferred recognition
period, percentage of awards expected to be redeemed for travel on participating
airlines, breakage or cost per mile estimates could have a significant impact on
the Company’s revenues or incremental cost accrual in the year of the change as
well as in future years.
Stock
Compensation – Effective January
1, 2006, the Company adopted the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123(R) "Share-Based Payment". The Company
grants awards under its various share based payment plans and utilizes option
pricing models or fair value models to estimate the fair value of its
awards. Certain awards contain a market performance condition, which
is taken into account in estimating the fair value on the date of grant.
The fair value of those awards is estimated using a Monte Carlo valuation
model that estimates the probability of the potential payouts of these awards,
using the historical volatility of the Company's stock and the stock of other
carriers in the competitor group. The Company accounts for these awards over the
three year term of the award based on the grant date fair value, provided
adequate shares are available to settle the awards. For awards where
adequate shares are not anticipated to be available or that only permit
settlement in cash, the fair value is re-measured each reporting period.
Pensions and
other postretirement benefits – On December 31, 2006,
the Company adopted Statement of Accounting Standard 158 “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans” (SFAS
158). SFAS 158 required the Company to recognize the funded status
(i.e., the difference between the fair value of plan assets and the projected
benefit obligations) of its pension and postretirement plans in the consolidated
balance sheet as of December 31, 2006 with a corresponding adjustment to
Accumulated other comprehensive income (loss).
The
Company’s pension and other postretirement benefit costs and liabilities are
calculated using various actuarial assumptions and methodologies. The Company
uses certain assumptions including, but not limited to, the selection of the:
(i) discount rate; (ii) expected return on plan assets; and (iii) expected
health care cost trend rate and starting in 2007, the (iv) estimated age of
pilot retirement (as discussed below).
These
assumptions as of December 31 were:
|
2007
|
|
2006
|
Discount rate
|
6.50%
|
|
6.00%
|
Expected return on plan assets
|
8.75%
|
|
8.75%
|
Expected
health care cost trend rate:
|
|
|
|
Pre-65 individuals
|
|
|
|
Initial
|
7.0%
|
|
9.0%
|
Ultimate
|
4.5%
|
|
4.5%
|
Post-65 individuals
|
|
|
|
Initial
|
7.0%
|
|
9.0%
|
Ultimate (2010)
|
4.5%
|
|
4.5%
|
Pilot Retirement Age
|
63
|
|
60
|
The
Company’s discount rate is determined based upon the review of year-end high
quality corporate bond rates. Lowering the discount rate by 50 basis points as
of December 31, 2007 would increase the Company’s pension and postretirement
benefits obligations by approximately $710 million and $145 million,
respectively, and increase estimated 2008 pension and postretirement benefits
expense by $27 million and $6 million, respectively.
The
expected return on plan assets is based upon an evaluation of the Company's
historical trends and experience taking into account current and expected market
conditions and the Company’s target asset allocation of 40 percent longer
duration corporate bonds, 25 percent U.S. value stocks, 20 percent developed
international stocks, five percent emerging markets stocks and bonds and ten
percent alternative (private) investments. The expected return on plan assets
component of the Company’s net periodic benefit cost is calculated based on the
fair value of plan assets and the Company’s target asset
allocation. The Company monitors its actual asset allocation and
believes that its long-term asset allocation will continue to approximate its
target allocation. The Company’s historical annualized ten-year rate
of return on plan assets, calculated using a geometric compounding of monthly
returns, is approximately 10.39 percent as of December 31, 2007. Lowering the
expected long-term rate of return on plan assets by 50 basis points as of
December 31, 2007 would increase estimated 2008 pension expense by approximately
$45 million.
The
health care cost trend rate is based upon an evaluation of the Company's
historical trends and experience taking into account current and expected market
conditions. Increasing the assumed health care cost trend rate by 100
basis points would increase estimated 2008 postretirement benefits expense by
$25 million.
On
December 13, 2007, President Bush signed the Fair Treatment for Experienced
Pilots Act (H.R. 4343) into law, raising the mandatory retirement age for
commercial pilots from 60 to 65. Previously, The Federal Aviation
Administration required commercial pilots to retire once they reached age
60. The Company’s pilot pension and other postretirement plans
continue to permit a pilot to retire as before at age 60, but the Company
believes that many pilots will choose to fly past age 60. As a result
of the new legislation, the Company has estimated the average retirement age for
the pilot workgroup to be 63, based on the approximate retirement age of the
Company’s other work groups, which did not have the same mandatory retirement
age. This change in the estimate caused a decrease to the pension and
other postretirement liability of approximately $540 million. See
Note 10 to the consolidated financial statements for additional
information.
The U.S.
Congress is also considering legislation that would amend the Pension Protection
Act of 2006. The Company has not completed its evaluation of the
impact of the proposed legislation; however, if enacted the proposed legislation
could materially increase the Company’s minimum required contributions to its
defined benefit pension plans.
Income
taxes – The
Company generally believes that the positions taken on previously filed income
tax returns are more likely than not to be sustained by the taxing
authorities. The Company has recorded income tax and related interest
liabilities where the Company believes its position may not be sustained or
where the full income tax benefit will not be recognized. In
accordance with the standards of Financial Accounting Standards Board
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109 (FIN 48), the effects of
potential income tax benefits resulting from the Company’s unrecognized tax
positions are not reflected in the tax balances of the financial
statements. Recognized and unrecognized tax positions are reviewed
and adjusted as events occur that affect the Company’s judgment about the
recognizability of income tax benefits, such as lapsing of applicable statutes
of limitations, conclusion of tax audits, release of administrative guidance, or
rendering of a court decision affecting a particular tax
position. Under FAS 109, the Company records a deferred tax asset
valuation allowance when it is more likely than not that some portion or all of
its deferred tax assets will not be realized. The Company considers
its historical earnings, trends, and outlook for future years in making this
determination. The Company had a deferred tax valuation allowance of
$625 million, and $1.3 billion, respectively, at December 31, 2007 and 2006. See
Note 8 to the consolidated financial statements for additional
information.
Derivatives – In accordance with
Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activity” (SFAS 133), the Company assesses, both at the
inception of each hedge and on an on-going basis, whether the derivatives that
are used in its hedging transactions are highly effective in offsetting changes
in cash flows of the hedged items. In doing so, the Company
uses a regression model to determine the correlation of the change in prices of
the commodities used to hedge jet fuel (e.g. NYMEX Heating oil) to the change in
the price of jet fuel purchases. The Company also monitors the actual
dollar offset of the hedges’ market values as compared to hypothetical jet fuel
hedges. The fuel hedge contracts are generally deemed to be “highly
effective” if the R-squared is greater than 80 percent and the hedge is expected
to continue to remain effective at offsetting jet fuel price
changes. The Company discontinues hedge accounting prospectively if
it determines that a derivative is no longer expected to be highly effective as
a hedge. As of December 31 2007, the Company had derivative
contracts with a value of $416 million including a receivable related to
contracts that settled in December. A deferred gain of $240 million
was recorded in Other comprehensive income at December 31, 2007 and will be
recognized in future periods as contracts settle.
New Accounting
Pronouncements In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 157 “Fair Value Measurements” (SFAS 157). SFAS 157
introduces a framework for measuring fair value and expands required disclosure
about fair value measurements of assets and liabilities. On February
6, 2008 the FASB issued a final FASB Staff Position (FSP) No. FAS 157-b,
“Effective Date of FASB Statement No. 157”. This FSP delays the effective date
of FASB Statement No. 157, Fair Value Measurements, for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. In addition, the FSP removes certain leasing transactions from
the scope of SFAS 157. The effective date of SFAS 157 for nonfinancial assets
and liabilities has been delayed by one year to fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. SFAS
157 for financial assets and liabilities is effective for fiscal years beginning
after November 15, 2007, and the Company will adopt the standard for those
assets and liabilities as of January 1, 2008. The principal impact to
the Company will be to require the Company to expand its disclosure regarding
its derivative instruments and to include credit risk as a part of the
calculation of the fair value of derivatives. Although the Company continues to
evaluate the impact of the adoption of this standard on its consolidated
financial statements, the Company believes the impact of adoption will be
immaterial.
ITEM
7(A).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive
Instruments and Positions
The risk
inherent in the Company’s market risk sensitive instruments and positions is the
potential loss arising from adverse changes in the price of fuel, foreign
currency exchange rates and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management may take to mitigate the Company’s exposure to such
changes. Therefore, actual results may differ. The Company
does not hold or issue derivative financial instruments for trading purposes.
See Note 7 to the consolidated financial statements for accounting policies and
additional information.
Aircraft
Fuel The Company’s earnings are affected by changes in
the price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships fuel and
maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel and heating oil hedging contracts. Market
risk is estimated as a hypothetical 10 percent increase in the December 31, 2007
and 2006 cost per gallon of fuel. Based on projected 2008 fuel usage,
such an increase would result in an increase to aircraft fuel expense of
approximately $649 million in 2008, inclusive of the impact of effective fuel
hedge instruments outstanding at December 31, 2007, and assumes the Company’s
fuel hedging program remains effective under Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities”. Comparatively, based on projected 2007 fuel usage, such
an increase would have resulted in an increase to aircraft fuel expense of
approximately $531 million in 2007, inclusive of the impact of fuel hedge
instruments outstanding at December 31, 2006. As of January 2008, the
Company had hedged, with collars and options, approximately 24 percent of its
estimated 2008 fuel requirements. The consumption hedged for 2008 is
capped at an average price of approximately $2.31 per gallon of jet fuel
excluding taxes and transportation costs. Comparatively, as of
December 31, 2006 the Company had hedged, with collars and options,
approximately 14 percent of its estimated 2007 fuel requirements. A
deterioration of the Company’s financial position could negatively affect the
Company’s ability to hedge fuel in the future.
Foreign
Currency The Company is exposed to the effect of foreign
exchange rate fluctuations on the U.S. dollar value of foreign
currency-denominated operating revenues and expenses. The Company’s
largest exposure comes from the British pound, Euro, Canadian dollar, Japanese
yen and various Latin American currencies. The Company does not currently have a
foreign currency hedge program related to its foreign currency-denominated
ticket sales. A uniform 10 percent strengthening in the value of the
U.S. dollar from December 31, 2007 and 2006 levels relative to each of the
currencies in which the Company has foreign currency exposure would result in a
decrease in operating income of approximately $132 million and $117 million for
the years ending December 31, 2007 and 2006 respectively, due to the Company’s
foreign-denominated revenues exceeding its foreign-denominated
expenses. This sensitivity analysis was prepared based upon projected
2008 and 2007 foreign currency-denominated revenues and expenses as of December
31, 2007 and 2006, respectively.
Interest The
Company’s earnings are also affected by changes in interest rates due to the
impact those changes have on its interest income from cash and short-term
investments, and its interest expense from variable-rate debt
instruments. The Company’s largest exposure with respect to
variable-rate debt comes from changes in the London Interbank Offered Rate
(LIBOR). The Company had variable-rate debt instruments representing
approximately 22 percent and 33 percent of its total long-term debt at December
31, 2007 and 2006, respectively. If the Company’s interest rates
average 10 percent more in 2008 than they did at December 31, 2007, the
Company’s interest expense would increase by approximately $14 million and
interest income from cash and short-term investments would increase by
approximately $25 million. In comparison, at December 31, 2006, the
Company estimated that if interest rates averaged 10 percent more in 2007 than
they did at December 31, 2006, the Company’s interest expense would have
increased by approximately $29 million and interest income from cash and
short-term investments would have increased by approximately $28
million. These amounts are determined by considering the impact of
the hypothetical interest rates on the Company’s variable-rate long-term debt
and cash and short-term investment balances at December 31, 2007 and
2006.
Market
risk for fixed-rate long-term debt is estimated as the potential increase in
fair value resulting from a hypothetical 10 percent decrease in interest rates,
and amounts to approximately $326 million and $315 million as of December 31,
2007 and 2006, respectively. The fair values of the Company’s long-term debt
were estimated using quoted market prices or discounted future cash flows based
on the Company’s incremental borrowing rates for similar types of borrowing
arrangements.
ITEM
8. CONSOLIDATED
FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
47
|
|
|
Consolidated
Statements of Operations
|
48
|
|
|
Consolidated
Balance Sheets
|
49-50
|
|
|
Consolidated
Statements of Cash Flows
|
51
|
|
|
Consolidated
Statements of Stockholders' Equity (Deficit)
|
52
|
|
|
Notes
to Consolidated Financial Statements
|
53-80
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
AMR
Corporation
We have
audited the accompanying consolidated balance sheets of AMR Corporation as of
December 31, 2007 and 2006 and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2007. Our audits also included
the financial statement schedule listed in the Index at Item
15(a)(2). These consolidated financial statements and schedule are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AMR Corporation at
December 31, 2007 and 2006 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2007 in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
As
discussed in Notes 9 and 10 to the consolidated financial statements, in 2006
the Company changed its method of accounting for share-based compensation as
required by Statement of Financial Accounting Standards No. 123(R), “Share-Based
Payment” and changed its method of accounting for retirement benefits as
required by Statement of Financial Accounting Standards No. 158, “Employer’s
Accounting for Defined Benefit Pension and Other Postretirement
Plans.”
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), AMR Corporation’s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 20, 2008
expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Dallas,
Texas
February
20, 2008
AMR
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
millions, except per share amounts)
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger -
American Airlines
|
|
$ |
18,235 |
|
|
$ |
17,862 |
|
|
$ |
16,614 |
|
-
Regional Affiliates
|
|
|
2,470 |
|
|
|
2,502 |
|
|
|
2,148 |
|
Cargo
|
|
|
825 |
|
|
|
827 |
|
|
|
784 |
|
Other
revenues
|
|
|
1,405 |
|
|
|
1,372 |
|
|
|
1,166 |
|
Total
operating revenues
|
|
|
22,935 |
|
|
|
22,563 |
|
|
|
20,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
|
6,770 |
|
|
|
6,813 |
|
|
|
6,755 |
|
Aircraft
fuel
|
|
|
6,670 |
|
|
|
6,402 |
|
|
|
5,615 |
|
Other
rentals and landing fees
|
|
|
1,278 |
|
|
|
1,283 |
|
|
|
1,262 |
|
Depreciation
and amortization
|
|
|
1,202 |
|
|
|
1,157 |
|
|
|
1,164 |
|
Commissions,
booking fees and credit card expense
|
|
|
1,028 |
|
|
|
1,076 |
|
|
|
1,113 |
|
Maintenance,
materials and repairs
|
|
|
1,057 |
|
|
|
971 |
|
|
|
985 |
|
Aircraft
rentals
|
|
|
591 |
|
|
|
606 |
|
|
|
591 |
|
Food
service
|
|
|
534 |
|
|
|
508 |
|
|
|
507 |
|
Other
operating expenses
|
|
|
2,840 |
|
|
|
2,687 |
|
|
|
2,809 |
|
Total
operating expenses
|
|
|
21,970 |
|
|
|
21,503 |
|
|
|
20,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
965 |
|
|
|
1,060 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
337 |
|
|
|
279 |
|
|
|
149 |
|
Interest
expense
|
|
|
(914 |
) |
|
|
(1,030 |
) |
|
|
(957 |
) |
Interest
capitalized
|
|
|
20 |
|
|
|
29 |
|
|
|
65 |
|
Miscellaneous
– net
|
|
|
96 |
|
|
|
(107 |
) |
|
|
(25 |
) |
|
|
|
(461 |
) |
|
|
(829 |
) |
|
|
(768 |
) |
Income
(Loss) Before Income Taxes
|
|
|
504 |
|
|
|
231 |
|
|
|
(857 |
) |
Income
tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
Earnings (Loss)
|
|
$ |
504 |
|
|
$ |
231 |
|
|
$ |
(857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.06 |
|
|
$ |
1.13 |
|
|
$ |
(5.18 |
) |
Diluted
|
|
$ |
1.78 |
|
|
$ |
0.98 |
|
|
$ |
(5.18 |
) |
The
accompanying notes are an integral part of these financial
statements.
AMR
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares and par value)
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$ |
148 |
|
|
$ |
121 |
|
Short-term
investments
|
|
|
4,387 |
|
|
|
4,594 |
|
Restricted
cash and short-term investments
|
|
|
428 |
|
|
|
468 |
|
Receivables,
less allowance for uncollectible
accounts
(2007 - $41; 2006- $45)
|
|
|
1,027 |
|
|
|
988 |
|
Inventories,
less allowance for obsolescence
(2007
- $424; 2006 - $411)
|
|
|
601 |
|
|
|
506 |
|
Fuel
derivative contracts
|
|
|
416 |
|
|
|
28 |
|
Other
current assets
|
|
|
222 |
|
|
|
197 |
|
Total
current assets
|
|
|
7,229 |
|
|
|
6,902 |
|
|
|
|
|
|
|
|
|
|
Equipment
and Property
|
|
|
|
|
|
|
|
|
Flight
equipment, at cost
|
|
|
23,006 |
|
|
|
22,913 |
|
Less
accumulated depreciation
|
|
|
9,029 |
|
|
|
8,406 |
|
|
|
|
13,977 |
|
|
|
14,507 |
|
|
|
|
|
|
|
|
|
|
Purchase
deposits for flight equipment
|
|
|
241 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
Other
equipment and property, at cost
|
|
|
5,238 |
|
|
|
5,097 |
|
Less
accumulated depreciation
|
|
|
2,825 |
|
|
|
2,706 |
|
|
|
|
2,413 |
|
|
|
2,391 |
|
|
|
|
16,631 |
|
|
|
17,076 |
|
|
|
|
|
|
|
|
|
|
Equipment
and Property Under Capital Leases
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
1,698 |
|
|
|
1,744 |
|
Other
equipment and property
|
|
|
217 |
|
|
|
217 |
|
|
|
|
1,915 |
|
|
|
1,961 |
|
Less
accumulated amortization
|
|
|
1,152 |
|
|
|
1,096 |
|
|
|
|
763 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Route
acquisition costs, slots and airport operating and gate lease rights, less
accumulated amortization (2007 - $389; 2006 -
$361)
|
|
|
1,156 |
|
|
|
1,167 |
|
Other
assets
|
|
|
2,792 |
|
|
|
3,135 |
|
|
|
|
3,948 |
|
|
|
4,302 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
28,571 |
|
|
$ |
29,145 |
|
The
accompanying notes are an integral part of these financial
statements.
AMR
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares and par value)
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Liabilities
and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,182 |
|
|
$ |
1,073 |
|
Accrued
salaries and wages
|
|
|
559 |
|
|
|
551 |
|
Accrued
liabilities
|
|
|
1,708 |
|
|
|
1,750 |
|
Air
traffic liability
|
|
|
3,985 |
|
|
|
3,782 |
|
Current
maturities of long-term debt
|
|
|
902 |
|
|
|
1,246 |
|
Current
obligations under capital leases
|
|
|
147 |
|
|
|
103 |
|
Total
current liabilities
|
|
|
8,483 |
|
|
|
8,505 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, Less Current Maturities
|
|
|
9,413 |
|
|
|
11,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
Under Capital Leases,
Less
Current Obligations
|
|
|
680 |
|
|
|
824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities and Credits
|
|
|
|
|
|
|
|
|
Deferred
gains
|
|
|
320 |
|
|
|
372 |
|
Pension
and postretirement benefits
|
|
|
3,620 |
|
|
|
5,341 |
|
Other
liabilities and deferred credits
|
|
|
3,398 |
|
|
|
3,492 |
|
|
|
|
7,338 |
|
|
|
9,205 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock - 20,000,000 shares authorized; None issued
|
|
|
- |
|
|
|
- |
|
Common
stock - $1 par value; 750,000,000 shares authorized;
shares
issued: 2007 – 255,338,431; 2006 - 228,164,821
|
|
|
255 |
|
|
|
228 |
|
Additional
paid-in capital
|
|
|
3,489 |
|
|
|
2,718 |
|
Treasury
shares at cost: 2007 and 2006 - 5,940,399
|
|
|
(367 |
) |
|
|
(367 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
670 |
|
|
|
(1,291 |
) |
Accumulated
deficit
|
|
|
(1,390 |
) |
|
|
(1,894 |
) |
|
|
|
2,657 |
|
|
|
(606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
28,571 |
|
|
$ |
29,145 |
|
The
accompanying notes are an integral part of these financial
statements.
AMR
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
millions)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
Flow from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
504 |
|
|
$ |
231 |
|
|
$ |
(857 |
) |
Adjustments
to reconcile net income (loss) to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,036 |
|
|
|
1,022 |
|
|
|
1,033 |
|
Amortization
|
|
|
166 |
|
|
|
135 |
|
|
|
131 |
|
Equity
based stock compensation
|
|
|
133 |
|
|
|
142 |
|
|
|
- |
|
Provisions
for asset impairments and restructuring charges
|
|
|
63 |
|
|
|
- |
|
|
|
134 |
|
Gain
on sale of investments
|
|
|
(138 |
) |
|
|
(13 |
) |
|
|
- |
|
Redemption
payments under operating leases for special facility revenue
bonds
|
|
|
(100 |
) |
|
|
(28 |
) |
|
|
(104 |
) |
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in receivables
|
|
|
(41 |
) |
|
|
3 |
|
|
|
(156 |
) |
Decrease
(increase) in inventories
|
|
|
(128 |
) |
|
|
(7 |
) |
|
|
(59 |
) |
Increase
(decrease) in accounts payable and accrued liabilities
|
|
|
412 |
|
|
|
(130 |
) |
|
|
246 |
|
Increase
in air traffic liability
|
|
|
203 |
|
|
|
168 |
|
|
|
432 |
|
Increase
(decrease) in other liabilities and deferred credits
|
|
|
(135 |
) |
|
|
382 |
|
|
|
197 |
|
Other,
net
|
|
|
(40 |
) |
|
|
34 |
|
|
|
27 |
|
Net
cash provided by operating activities
|
|
|
1,935 |
|
|
|
1,939 |
|
|
|
1,024 |
|
|
|
|