ar0630-10q.htm
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
FORM
10-Q
[ü]Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Quarterly Period Ended June 30,
2009.
[ ]Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
Transition Period From to .
Commission
file number 1-8400.
AMR
Corporation
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(Exact
name of registrant as specified in its
charter)
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Delaware
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75-1825172
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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4333
Amon Carter Blvd.
Fort
Worth, Texas
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76155
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code
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(817)
963-1234
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Not
Applicable
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(Former
name, former address and former fiscal year , if changed since last
report)
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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 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). ¨ Yes ¨ No
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). ¨
Yes þ No
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Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
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Common
Stock, $1 par value – 279,892,740 shares as of July 13,
2009.
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INDEX
AMR
CORPORATION
PART
I:FINANCIAL INFORMATION
Item
1. Financial Statements
Consolidated
Statements of Operations -- Three and six months ended June 30, 2009 and
2008
Condensed
Consolidated Balance Sheets -- June 30, 2009 and December 31, 2008
Condensed
Consolidated Statements of Cash Flows -- Six months ended June 30, 2009 and
2008
Notes to
Condensed Consolidated Financial Statements -- June 30, 2009
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Item
4. Controls and Procedures
PART
II:OTHER INFORMATION
Item
1. Legal Proceedings
Item
1A. Risk Factors
Item
4. Submission of Matters to a Vote of Security
Holders
Item
5. Other Information
Item
6. Exhibits
SIGNATURE
PART
I: FINANCIAL INFORMATION
Item
1. Financial
Statements
AMR
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited) (In millions,
except per share amounts)
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Three
Months Ended
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Six
Months Ended
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June
30,
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June
30,
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2009
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2008
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2009
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2008
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Revenues
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Passenger
– American Airlines
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$ |
3,677 |
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$ |
4,735 |
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$ |
7,357 |
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$ |
9,114 |
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-
Regional Affiliates
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513 |
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683 |
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|
970 |
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1,264 |
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Cargo
|
|
|
134 |
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233 |
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278 |
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|
448 |
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Other
revenues
|
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|
565 |
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|
528 |
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1,123 |
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|
|
1,050 |
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Total
operating revenues
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4,889 |
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6,179 |
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9,728 |
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11,876 |
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Expenses
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Wages,
salaries and benefits
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1,698 |
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1,658 |
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3,386 |
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3,302 |
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Aircraft
fuel
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1,334 |
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2,423 |
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2,632 |
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4,473 |
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Other
rentals and landing fees
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338 |
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318 |
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|
662 |
|
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|
641 |
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Depreciation
and amortization
|
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282 |
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324 |
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|
554 |
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|
633 |
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Maintenance,
materials and repairs
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314 |
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323 |
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619 |
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638 |
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Commissions,
booking fees and credit card expense
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207 |
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259 |
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424 |
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516 |
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Aircraft
rentals
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126 |
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125 |
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250 |
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250 |
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Food
service
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123 |
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133 |
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237 |
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260 |
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Special
charges
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23 |
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1,164 |
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36 |
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1,164 |
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Other
operating expenses
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670 |
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742 |
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1,348 |
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1,476 |
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Total
operating expenses
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5,115 |
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7,469 |
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10,148 |
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13,353 |
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Operating
Loss
|
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|
(226 |
) |
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(1,290 |
) |
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|
(420 |
) |
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(1,477 |
) |
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|
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|
|
|
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Other
Income (Expense)
|
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|
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Interest
income
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9 |
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48 |
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20 |
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101 |
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Interest
expense
|
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(167 |
) |
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(199 |
) |
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(353 |
) |
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(405 |
) |
Interest
capitalized
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10 |
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8 |
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20 |
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13 |
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Miscellaneous
– net
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(16 |
) |
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(28 |
) |
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(32 |
) |
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(34 |
) |
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|
|
(164 |
) |
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|
(171 |
) |
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(345 |
) |
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(325 |
) |
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Loss
Before Income Taxes
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(390 |
) |
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(1,461 |
) |
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(765 |
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(1,802 |
) |
Income
tax
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|
- |
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- |
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- |
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- |
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Net
Loss
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$ |
(390 |
) |
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$ |
(1,461 |
) |
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$ |
(765 |
) |
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$ |
(1,802 |
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Loss
Per Share
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|
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Basic
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$ |
(1.39 |
) |
|
$ |
(5.83 |
) |
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$ |
(2.74 |
) |
|
$ |
(7.21 |
) |
Diluted
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|
$ |
(1.39 |
) |
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$ |
(5.83 |
) |
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$ |
(2.74 |
) |
|
$ |
(7.21 |
) |
The
accompanying notes are an integral part of these financial
statements.
AMR
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In
millions)
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June
30,
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December
31,
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2009
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2008
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Assets
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Current
Assets |
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Cash
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$ |
191 |
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$ |
191 |
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Short-term
investments
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2,617 |
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2,916 |
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Restricted
cash and short-term investments
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|
460 |
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|
459 |
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Receivables,
net
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|
780 |
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|
811 |
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Inventories,
net
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|
535 |
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|
525 |
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Fuel
derivative contracts
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|
86 |
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|
188 |
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Fuel
derivative collateral deposits
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|
59 |
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|
575 |
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Other
current assets
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|
412 |
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|
270 |
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Total
current assets
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5,140 |
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5,935 |
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Equipment
and Property
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Flight
equipment, net
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12,266 |
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12,454 |
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Other
equipment and property, net
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2,335 |
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|
2,370 |
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Purchase
deposits for flight equipment
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|
709 |
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|
671 |
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15,310 |
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|
15,495 |
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Equipment
and Property Under Capital Leases
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Flight
equipment, net
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|
207 |
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|
181 |
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Other
equipment and property, net
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|
55 |
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|
59 |
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|
262 |
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|
240 |
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Route
acquisition costs and airport operating and gate lease rights,
net
|
|
1,098 |
|
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|
1,109 |
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Other
assets
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|
2,328 |
|
|
|
2,396 |
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$ |
24,138 |
|
|
$ |
25,175 |
|
Liabilities
and Stockholders’ Equity (Deficit)
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|
|
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Current
Liabilities
|
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|
|
|
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Accounts
payable
|
$ |
1,143 |
|
|
$ |
952 |
|
Accrued
liabilities
|
|
1,918 |
|
|
|
2,042 |
|
Air
traffic liability
|
|
3,847 |
|
|
|
3,708 |
|
Fuel
derivative liability
|
|
134 |
|
|
|
716 |
|
Current
maturities of long-term debt
|
|
1,124 |
|
|
|
1,845 |
|
Current
obligations under capital leases
|
|
104 |
|
|
|
107 |
|
Total
current liabilities
|
|
8,270 |
|
|
|
9,370 |
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|
|
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|
|
|
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Long-term
debt, less current maturities
|
|
8,292 |
|
|
|
8,423 |
|
Obligations
under capital leases, less current obligations
|
|
572 |
|
|
|
582 |
|
Pension
and postretirement benefits
|
|
6,881 |
|
|
|
6,614 |
|
Other
liabilities, deferred gains and deferred credits
|
|
3,123 |
|
|
|
3,121 |
|
|
|
|
|
|
|
|
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|
Stockholders'
Equity (Deficit)
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
- |
|
|
|
- |
|
Common
stock
|
|
286 |
|
|
|
285 |
|
Additional
paid-in capital
|
|
4,013 |
|
|
|
3,992 |
|
Treasury
stock
|
|
(367 |
) |
|
|
(367 |
) |
Accumulated
other comprehensive loss
|
|
(2,499 |
) |
|
|
(3,177 |
) |
Accumulated
deficit
|
|
(4,433 |
) |
|
|
(3,668 |
) |
|
|
(3,000 |
) |
|
|
(2,935 |
) |
|
$ |
24,138 |
|
|
$ |
25,175 |
|
The
accompanying notes are an integral part of these financial
statements.
AMR
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
938 |
|
|
$ |
1,154 |
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(602 |
) |
|
|
(473 |
) |
Net
(increase) decrease in short-term investments
|
|
|
299 |
|
|
|
(395 |
) |
Net
(increase) decrease in restricted cash and short-term
investments
|
|
|
(1 |
) |
|
|
(6 |
) |
Proceeds
from sale of equipment and property
|
|
|
5 |
|
|
|
9 |
|
Cash
collateral on spare parts financing
|
|
|
47 |
|
|
|
8 |
|
Net
cash used for investing activities
|
|
|
(252 |
) |
|
|
(857 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(1,157 |
) |
|
|
(379 |
) |
Proceeds
from:
|
|
|
|
|
|
|
|
|
Issuance
of debt and sale leaseback transactions
|
|
|
470 |
|
|
|
221 |
|
Reimbursement
from construction reserve account
|
|
|
1 |
|
|
|
- |
|
Net
cash used for financing activities
|
|
|
(686 |
) |
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
- |
|
|
|
139 |
|
Cash
at beginning of period
|
|
|
191 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
191 |
|
|
$ |
287 |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
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NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
The
accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, these financial statements contain all adjustments,
consisting of normal recurring accruals, necessary to present fairly the
financial position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein are not
necessarily indicative of results of operations for the entire
year. The condensed consolidated financial statements include
the accounts of AMR Corporation (AMR or the Company) and its wholly owned
subsidiaries, including (i) its principal subsidiary American Airlines,
Inc. (American) and (ii) its regional airline subsidiary, AMR Eagle
Holding Corporation and its primary subsidiaries, American Eagle Airlines,
Inc. and Executive Airlines, Inc. (collectively, AMR Eagle). The condensed
consolidated financial statements also include the accounts of variable
interest entities for which the Company is the primary beneficiary. For
further information, refer to the consolidated financial statements and
footnotes included in AMR’s Current Report on Form 8-K filed on April 21,
2009 (the Form 8-K). The Form 8-K reflects retrospective
application of the Company’s accounting for convertible debt under
Financial Accounting Standards Board Staff Position APB 14-1 (FSP APB
14-1), “Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement),” which was
adopted on January 1, 2009, as required. Further, in connection
with preparation of the condensed consolidated financial statements and in
accordance with the recently issued Statement of Financial Accounting
Standards No. 165 “Subsequent Events” (SFAS 165), the Company evaluated
subsequent events after the balance sheet date of June 30, 2009 through
July 15, 2009.
|
During
the first and second quarters of 2009, the Company experienced continued
significant weakening of the revenue environment, especially in international
markets, due to the worldwide economic recession. Lower revenues,
coupled with the recent severe disruptions in the capital markets and other
sources of funding, and the recent increase in fuel prices, have negatively
impacted the Company and significantly impacted its results of operations and
cash flows for the three and six months ended June 30,
2009. Consequently, the Company’s liquidity has been negatively
affected as unrestricted cash and short-term investments decreased from
$3.1 billion as of December 31, 2008 to $2.8 billion at June 30,
2009. In addition, the Company may not be able to improve its
liquidity position for the remainder of 2009 if the overall industry revenue
environment does not improve and if the Company is unable to obtain adequate
additional funding.
The Company also remains
heavily indebted and has significant obligations. As of the date of
this Form 10-Q, the Company believes it can access sufficient liquidity
to fund its operations and obligations for the remainder of 2009, including
repayment of debt and capital leases, capital expenditures and other contractual
obligations. However, no assurance can be given that the Company will
be able to do so.
In June
2009, in response to the challenges it faces, the Company announced further
capacity reductions in an effort to balance supply and demand. AMR
will reduce mainline seating capacity by approximately 7.5 percent for the full
year 2009 versus 2008. The reduction consists of an approximately 9.0
percent reduction in mainline domestic capacity and more than 4.0 percent
reduction in mainline international capacity compared to the year ending
December 31, 2008. As a result, for the quarter ending September 30,
2009, AMR expects mainline domestic capacity to decline by approximately 10.5
percent and mainline international capacity to decline by 6.0 percent compared
to the quarter ending September 30, 2008.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
Through
June 30, 2009, the Company secured approximately $470 million of financing
through loans on certain aircraft and the sale leaseback financing of certain
aircraft. The Company also issued pass through trust certificates on
July 7, 2009 (as described in Note 5 to these condensed consolidated financial
statements) raising approximately $520 million to finance both currently owned
aircraft and future aircraft deliveries. Exclusive of these
transactions, the Company estimates that it has at least $3.7 billion in
unencumbered assets and other sources of liquidity and the Company continues to
evaluate the most cost-effective alternatives to raise additional
capital. The Company’s possible financing sources primarily include:
(i) a limited amount of additional secured aircraft debt or sale leaseback
transactions involving owned aircraft; (ii) leases of or 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 assets; (vi)
unsecured debt; and (vii) issuance of equity and/or equity-like securities.
Besides unencumbered aircraft, the Company’s most likely sources of liquidity
include the financing of AAdvantage program miles and takeoff and landing slots
and the sale or financing of certain of the Company’s business units and
subsidiaries, such as AMR Eagle.
For
additional information regarding the Company’s possible financing sources, see
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
|
2.
|
In June 2009, American entered
into an amendment to a purchase agreement with The Boeing Company
(Boeing). Pursuant to the
amendment, American
exercised rights to purchase an additional eight 737-800
aircraft and the delivery dates of certain
aircraft were rescheduled. As a result,
American’s total
737-800 purchase commitments for 2009 (including nine aircraft that have
been delivered as of June 30, 2009) have increased from 29 as of March 31,
2009 to 31 as of
June 30, 2009, and
American’s 737-800 purchase commitments for 2010 have increased from 39 as of
March 31, 2009 to 45 as of June 30, 2009. American’s 737-800
purchase commitments remain at eight in 2011. In addition to
these aircraft, American has firm commitments for eleven 737-800 aircraft
and seven Boeing 777 aircraft scheduled to be delivered in
2013-2016.
|
As of
June 30, 2009, payments for American’s 737-800 and 777 aircraft purchase
commitments will approximate $716 million for the remainder of 2009, $1.3
billion in 2010, $354 million in 2011, $217 million in 2012, $399 million in
2013, and $556 million for 2014 and beyond. These amounts are net of purchase
deposits currently held by the manufacturer.
American
previously arranged backstop financing which, together with other financing arranged through the date
of this filing, including the pass through certificate financing referred
to in Note 5 in these condensed consolidated financial statements, covers all of
its 2009-2011 Boeing 737-800 aircraft deliveries, subject to certain terms and
conditions (including, in the case of one of the financing arrangements covering
twelve aircraft, a condition that at the time of borrowing, the Company has a
certain amount of unrestricted cash and short term investments).
AMR's
subsidiaries lease various types of equipment and property, primarily aircraft
and airport facilities. The future minimum lease payments required
under capital leases, together with the present value of such payments, and
future minimum lease payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of June 30,
2009, were (in millions):
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
|
|
|
|
|
As
of June 30, 2009
|
|
$ |
85 |
|
|
$ |
439 |
|
2010
|
|
|
163 |
|
|
|
955 |
|
2011
|
|
|
165 |
|
|
|
946 |
|
2012
|
|
|
116 |
|
|
|
763 |
|
2013
|
|
|
103 |
|
|
|
675 |
|
2014
and thereafter
|
|
|
509 |
|
|
|
5,143 |
|
|
|
$ |
1,141 |
|
|
$ |
8,921 |
|
Less
amount representing interest
|
|
|
465 |
|
|
|
|
|
Present
value of net minimum lease payments
|
|
$ |
676 |
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
At June
30, 2009 the Company was operating 180 jet aircraft and 39 turboprop aircraft
under operating leases and 77 jet aircraft under capital leases.
|
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 European Union (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. Based on the information to date, the Company
has not recorded any reserve for this exposure for the quarter ended June
30, 2009. 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, or if the Company were named and found liable in
any litigation based on these allegations, such findings and related legal
proceedings could have a material adverse impact on the Company.
|
3.
|
Accumulated
depreciation of owned equipment and property at June 30, 2009 and December
31, 2008 was $10.2 billion and $9.9 billion,
respectively. Accumulated amortization of equipment and
property under capital leases at June 30, 2009 and December 31, 2008 was
$541 million and $536 million,
respectively.
|
4.
|
As
discussed in Note 8 to the consolidated financial statements in the Form
8-K, the Company has a valuation allowance against the full amount of its
net deferred tax asset. The Company currently provides a valuation
allowance against deferred tax assets when it is more likely than not that
some portion, or all of its deferred tax assets, will not be realized. The
Company’s deferred tax asset valuation allowance increased approximately
$20 million during the six months ended June 30, 2009 to $2.8 billion as
of June 30, 2009, including the impact of comprehensive income for the six
months ended June 30, 2009 and changes from other
adjustments.
|
The
Company estimates that the unrecognized tax benefit recorded under Financial
Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, may decrease during the next twelve months based on anticipated
resolution of a pending Internal Revenue Service Appeals process. Changes in the
unrecognized tax benefit will have no impact on the effective tax rate due to
the existence of the valuation allowance.
5.
|
As
of June 30, 2009, AMR had issued guarantees covering approximately $1.2
billion of American’s tax-exempt bond debt and American had issued
guarantees covering approximately $425 million of AMR’s unsecured
debt. In addition, as of June 30, 2009, AMR and American had
issued guarantees covering approximately $284 million of AMR Eagle’s
secured debt and AMR has issued guarantees covering an additional $2.0
billion of AMR Eagle’s secured
debt.
|
The
Company adopted FASB Staff Position APB 14-1 (FSP APB 14-1), “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” as of January 1, 2009, and the adoption
impacted the historical accounting for the 4.25 percent senior convertible notes
due 2023 (the 4.25 Notes) and the 4.50 percent senior convertible notes due 2024
(the 4.50 Notes), and resulted in increased interest expense of approximately
$14 million for the three months ended June, 30 2008 and increased interest
expense of approximately $5 million and $26 million for the six months ended
June 30, 2009 and 2008, respectively. In addition, the adoption
resulted in an increase to paid in capital of $207 million with an offset to
accumulated deficit of $206 million and current portion of long term debt of $1
million as of January 1, 2009. The impact to loss per share was an
increase of $0.06 for the quarter ended June 30, 2008, and an increase of $0.02
and $0.11 for the six months ended June 30, 2009 and 2008. The
Company filed a Current Report on Form 8-K on April 21, 2009 to reflect the
adoption of FSP APB 14-1 for the 2008, 2007 and 2006 financial
statements.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
The 4.25
Notes were retired in 2008. In the first quarter of 2009, AMR
retired, by purchasing with cash $318 million principal amount of its 4.50
Notes. Virtually all of the holders of the 4.50 Notes exercised their
elective put rights and the Company purchased and retired these notes at a price
equal to 100 percent of their principal amount. Under the terms of
the 4.50 Notes, the Company had the option to pay the purchase price with cash,
stock, or a combination of cash and stock, and the Company elected to pay for
the 4.50 Notes solely with cash.
During
the six months ended June 30, 2009, the Company raised approximately $204
million under loans secured by various aircraft. The loans generally bear
interest at a LIBOR-based (London Interbank Offered Rate) variable rate with a
fixed margin which resets quarterly and are due in installments through
2019.
American
has a secured $433 million term loan credit facility with a final maturity on
December 17, 2010 (the Credit Facility). 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. AMR and American were in compliance with the Liquidity
Covenant as of June 30, 2009. 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). In June 2009, AMR and American entered into an amendment to
the Credit Facility which waived compliance with the EBITDAR Covenant for the
quarter ended June 30, 2009; however, even absent this waiver the Company would
have complied with this covenant as of June 30, 2009. In addition,
the amendment reduced the minimum ratios AMR is required to satisfy to 0.95 to
1.00 for the one, two and three quarter periods ending September 30, 2009,
December 31, 2009 and March 31, 2010, respectively, to 1.00 to 1.00 for the four
quarter period ending June 30, 2010, and to 1.05 to 1.00 for the four quarter
period ending September 30, 2010.
Given the
volatility of fuel prices and revenues, uncertainty in the capital markets and
uncertainty about other sources of funding, and other factors, it is difficult
to assess whether the Company will be able to continue to comply with the
Liquidity Covenant and the EBITDAR Covenant, and there are no assurances that it
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 its other debt and lease
obligations, and otherwise have a material adverse impact on the Company and its
ability to sustain its operations.
On July
7, 2009, American closed a $520 million Pass Through Trust Certificates (the
Certificates) financing covering four Boeing 777-200ER aircraft owned by
American and 16 of American’s next 59 Boeing 737-800
deliveries. Equipment notes underlying the Certificates bear interest
at 10.375% per annum and principal and interest on the notes are payable in
semi-annual installments with a balloon payment at maturity in
2019. Approximately $153.7 million of the proceeds from the sale of
the Certificates were received by American at closing in exchange for equipment
notes secured by the four Boeing 777-200ER aircraft, which were treated as debt
at the time of issuance of the Certificates. The remainder of the
proceeds is being held in escrow for the benefit of holders of the
Certificates. When American finances each of the 16 Boeing 737-800
aircraft under this arrangement, an allocable portion of the proceeds will be
released to American in exchange for equipment notes secured by the individual
aircraft and such debt will be recorded by American. American
currently expects that it will use the escrowed proceeds of the Certificates to
finance 16 Boeing 737-800 aircraft to be delivered to American between July 2009
and March 2010, but American could elect to use this financing on any 16 of its
next 59 Boeing 737-800 aircraft deliveries currently scheduled for delivery
between July 2009 and October 2010.
In
addition, a third party is holding collateral from American to cover interest
distributable on the Certificates prior to when the 16 Boeing 737-800 aircraft
are delivered and the related equipment notes are issued.
Once
fully issued, American will hold variable interests in the pass through trusts
created for the Certificates, but is not expected to be the primary
beneficiary.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
6.
|
The
Company utilizes the market approach to measure fair value for its
financial assets and liabilities. The market approach uses
prices and other relevant information generated by market transactions
involving identical or comparable assets or
liabilities.
|
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
(in
millions)
|
|
Fair Value Measurements as of June 30,
2009
|
|
Description
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments 1
|
|
$ |
2,617 |
|
|
$ |
1,011 |
|
|
$ |
1,606 |
|
|
$ |
- |
|
Restricted
cash and short-term investments 1
|
|
|
460 |
|
|
|
460 |
|
|
|
- |
|
|
|
- |
|
Fuel
derivative contracts, net liability 1
|
|
|
(48 |
) |
|
|
- |
|
|
|
(48 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,029 |
|
|
$ |
1,471 |
|
|
$ |
1,558 |
|
|
$ |
- |
|
1
Unrealized gains or losses on short term investments, restricted cash and
short-term investments and derivatives qualifying for hedge accounting are
recorded in Accumulated other comprehensive income (loss) at each measurement
date.
In April
2009, the FASB issued Financial Accounting Standards Board Staff Position SFAS
107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP SFAS 107-1 and APB
28-1). The FSP amends SFAS 107, “Disclosures about Fair Values of
Financial Instruments,” to require disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. The FSP also amends APB Opinion 28, “Interim Financial
Reporting," to require those disclosures in all interim financial
statements. The FSP is effective for interim periods ending after
June 15, 2009. The Company has adopted FSP SFAS 107-1 and APB 28-1
and has provided the additional disclosures required.
|
The
fair values of the Company's long-term debt were estimated using quoted
market prices where available. For long-term debt not actively
traded, fair values were estimated using discounted cash flow analyses,
based on the Company's current estimated incremental borrowing rates for
similar types of borrowing
arrangements.
|
The
carrying amounts and estimated fair values of the Company's long-term debt,
including current maturities, were (in millions):
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Secured
variable and fixed rate indebtedness
|
|
$ |
4,724 |
|
|
$ |
2,661 |
|
|
$ |
4,783 |
|
|
$ |
2,534 |
|
Enhanced
equipment trust certificates
|
|
|
2,159 |
|
|
|
1,888 |
|
|
|
2,382 |
|
|
|
1,885 |
|
6.0% -
8.5% special facility revenue bonds
|
|
|
1,675 |
|
|
|
1,371 |
|
|
|
1,674 |
|
|
|
1,001 |
|
Credit
facility agreement
|
|
|
433 |
|
|
|
400 |
|
|
|
691 |
|
|
|
545 |
|
4.25% -
4.50 % senior convertible notes
|
|
|
- |
|
|
|
- |
|
|
|
314 |
|
|
|
308 |
|
9.0% -
10.20% debentures
|
|
|
214 |
|
|
|
108 |
|
|
|
213 |
|
|
|
105 |
|
7.88% -
10.55% notes
|
|
|
211 |
|
|
|
105 |
|
|
|
211 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,416 |
|
|
$ |
6,533 |
|
|
$ |
10,268 |
|
|
$ |
6,474 |
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
|
7. The
following tables provide the components of net periodic benefit cost for
the three and six months ended June 30, 2009 and 2008 (in
millions):
|
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
83 |
|
|
$ |
81 |
|
|
$ |
167 |
|
|
$ |
162 |
|
Interest
cost
|
|
|
178 |
|
|
|
171 |
|
|
|
356 |
|
|
|
342 |
|
Expected
return on assets
|
|
|
(141 |
) |
|
|
(197 |
) |
|
|
(284 |
) |
|
|
(395 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
3 |
|
|
|
4 |
|
|
|
7 |
|
|
|
8 |
|
Unrecognized
net loss
|
|
|
36 |
|
|
|
1 |
|
|
|
73 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
159 |
|
|
$ |
60 |
|
|
$ |
319 |
|
|
$ |
118 |
|
|
|
Retiree
Medical and Other Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
15 |
|
|
$ |
14 |
|
|
$ |
29 |
|
|
$ |
27 |
|
Interest
cost
|
|
|
45 |
|
|
|
43 |
|
|
|
89 |
|
|
|
86 |
|
Expected
return on assets
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(10 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(7 |
) |
Unrecognized
net (gain) loss
|
|
|
(4 |
) |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
50 |
|
|
$ |
43 |
|
|
$ |
100 |
|
|
$ |
84 |
|
The
Company has no required 2009 contributions to its defined benefit pension plans
under the provisions of the Pension Funding Equity Act of 2004 and the Pension
Protection Act of 2006. The Company’s estimates of its defined
benefit pension plan contributions reflect the current provisions of the Pension
Funding Equity Act of 2004 and the Pension Protection Act of
2006. The Company expects to contribute approximately $13 million to
its retiree medical and other benefit plan in 2009.
In
December 2008, the FASB affirmed Financial Accounting Standards Board Staff
Position SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit
Plan Assets” (FSP SFAS 132(R)-1). FSP SFAS 132(R)-1 requires
additional disclosures about assets held in an employer’s defined benefit
pension or other postretirement plan, primarily related to categories and fair
value measurements of plan assets. The FSP is effective for fiscal
years ending after December 15, 2009 and will only impact the disclosures of the
Company’s pension assets.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
8.
|
As
a result of the revenue environment, high fuel prices and the Company’s
restructuring activities, including its capacity reductions, the Company
has recorded a number of charges during the last few
years. The following table
summarizes the components of the Company’s special charges, the remaining
accruals for these charges and the capacity reduction related charges (in
millions) as of June 30,
2009:
|
|
|
Aircraft
Charges
|
|
|
Facility
Exit Costs
|
|
|
Employee
Charges
|
|
|
Total
|
|
Remaining
accrual at December 31, 2008
|
|
$ |
110 |
|
|
$ |
16 |
|
|
$ |
16 |
|
|
$ |
142 |
|
Capacity
reduction charges
|
|
|
35 |
|
|
|
- |
|
|
|
- |
|
|
|
35 |
|
Non-cash
charges
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Adjustments
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
Payments
|
|
|
(13 |
) |
|
|
(1 |
) |
|
|
(16 |
) |
|
|
(30 |
) |
Remaining
accrual at June 30, 2009
|
|
$ |
134 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
148 |
|
Cash
outlays related to the accruals for aircraft charges and facility exit costs
will occur through 2017 and 2018, respectively.
9.
|
As
part of the Company's risk management program, it uses a variety of
financial instruments, primarily heating oil option and collar contracts,
as cash flow hedges to mitigate commodity price risk. The
Company does not hold or issue derivative financial instruments for
trading purposes. As of June 30, 2009, the Company had fuel
derivative contracts outstanding covering 26 million barrels of jet fuel
that will be settled over the next 24 months. A deterioration
of the Company’s liquidity position may negatively affect the Company’s
ability to hedge fuel in the
future.
|
For the
quarter and six months ended June 30, 2009, the Company recognized an increase
of approximately $197 million and $465 million, respectively, in fuel expense on
the accompanying consolidated statements of operations related to its fuel
hedging agreements, including the ineffective portion of the
hedges. For the quarter and six months ended June 30, 2008, the
Company recognized a decrease of approximately $340 million and $447 million,
respectively, in fuel expense related to its fuel hedging agreements including
the ineffective portion of the hedges. The net fair value of the
Company’s fuel hedging agreements at June 30, 2009 and December 31, 2008,
representing the amount the Company would pay to terminate the agreements (net
of settled contract assets), totaled $30 million and $450 million, respectively,
which excludes a payable related to contracts that settled in the last month of
each respective reporting period. As of June 30, 2009, the Company
estimates that during the remainder of 2009 it will reclassify from Accumulated
other comprehensive loss into fuel expense approximately $190 million in net
losses (based on prices as of June 30, 2009) related to its fuel derivative
hedges, including losses from terminated contracts with a bankrupt counterparty
and unwound trades.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
The
impact of cash flow hedges on the Company’s consolidated financial statements is
depicted below (in millions):
Fair
Value of Aircraft Fuel Derivative Instruments (all cash flow hedges under
SFAS 133)
|
|
Asset
Derivatives as of
|
|
Liability
Derivatives as of
|
|
June
30, 2009
|
|
December
31, 2008
|
|
June
30, 2009
|
|
December
31, 2008
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Fuel
derivative contracts
|
|
$ |
10 |
|
Fuel
derivative contracts
|
|
$ |
- |
|
Fuel
derivative liability
|
|
$ |
58 |
|
Accrued
liabilities
|
|
$ |
528 |
|
Effect
of Aircraft Fuel Derivative Instruments on Statements of Operations (all
cash flow hedges under SFAS 133)
|
|
|
Amount
of Gain (Loss) Recognized in OCI on Derivative1 as
of June 30,
|
|
Location
of Gain (Loss) Reclassified from Accumulated OCI into Income 1
|
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income 1
for the six months ended June 30,
|
|
Location
of Gain (Loss) Recognized in Income on Derivative 2
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative 2
for the six months ended June 30,
|
|
|
2009
|
|
|
2008
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
127 |
|
|
$ |
1,215 |
|
Aircraft
Fuel
|
|
$ |
(471 |
) |
|
$ |
431 |
|
Aircraft
Fuel
|
|
$ |
6 |
|
|
$ |
16 |
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income 1
for the three months ended June 30,
|
|
Location
of Gain (Loss) Recognized in Income on Derivative 2
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative 2
for the three months ended June 30,
|
|
2009
|
|
|
2008
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(200 |
) |
|
$ |
316 |
|
Aircraft
Fuel
|
|
$ |
3 |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Effective
portion of gain (loss)
2 Ineffective
portion of gain (loss)
The
Company includes changes in the fair value of certain derivative financial
instruments that qualify for hedge accounting and unrealized gains and losses on
available-for-sale securities in comprehensive income. For the three month
periods ended June 30, 2009 and 2008, comprehensive income (loss) was $99
million and $(839) million, respectively, and for the six month periods ended
June 30, 2009 and 2008, comprehensive income (loss) was $(87) million and $(1.0)
billion, respectively. Total comprehensive loss for the year ended December 31,
2008 was $(6.0) billion. The difference between net
earnings (loss) and comprehensive income (loss) for the three and six month
periods ended June 30, 2009 and 2008 is due primarily to the accounting for the
Company’s derivative financial instruments and the Company’s pension
plans.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
The
Company is also exposed to credit losses in the event of non-performance by
counterparties to these financial instruments, and although no assurances can be
given, the Company does not expect any of the counterparties to fail to meet its
obligations. The credit exposure related to these financial
instruments is represented by the fair value of contracts with a positive fair
value at the reporting date, reduced by the effects of master netting
agreements. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position of the
program and its relative market position with each counterparty. The Company
also maintains industry-standard security agreements with a number of its
counterparties which may require the Company or the counterparty to post
collateral if the value of selected instruments exceed specified mark-to-market
thresholds or upon certain changes in credit ratings.
As of
June 30, 2009, the aggregate fair value of all cash flow derivatives qualifying
under SFAS 133 with credit-risk-related contingent features that are in a
liability position is $58 million, for which the Company had posted collateral
of $59 million. The Company was over-collateralized as of June 30, 2009 due to a
timing lag in collateral reconciliation with a certain
counterparty.
In
addition to the Company’s qualifying cash flow hedges, American has hedges that
were effectively unwound as in 2008 that are recorded as assets and liabilities
on the balance sheet. The fair value of these offsetting positions
not designated as hedges under SFAS 133 as of June 30, 2009 was a $76 million
asset recorded in Fuel derivative contracts and a $76 million liability recorded
in Fuel derivative liability.
10.
|
The
following table sets forth the computations of basic and diluted earnings
(loss) per share (in millions, except per share
data):
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) - numerator for basic earnings per share
|
|
$ |
(390 |
) |
|
$ |
(1,461 |
) |
|
$ |
(765 |
) |
|
$ |
(1,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share – weighted-average shares
|
|
|
280 |
|
|
|
251 |
|
|
|
279 |
|
|
|
250 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Employee
options and shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Assumed
treasury shares purchased
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Dilutive
potential common shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - adjusted weighted-average
shares
|
|
|
280 |
|
|
|
251 |
|
|
|
279 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
(1.39 |
) |
|
$ |
(5.83 |
) |
|
$ |
(2.74 |
) |
|
$ |
(7.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
(1.39 |
) |
|
$ |
(5.83 |
) |
|
$ |
(2.74 |
) |
|
$ |
(7.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following were excluded from the calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes, employee stock options and deferred stock because inclusion would
be anti-dilutive
|
|
|
- |
|
|
|
39 |
|
|
|
5 |
|
|
|
42 |
|
Employee
stock options because the options’ exercise price was greater than the
average market price of shares
|
|
|
27 |
|
|
|
16 |
|
|
|
21 |
|
|
|
14 |
|
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Information
Statements
in this report 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,” “seeks,” “targets” and similar expressions
are intended to identify forward-looking statements. Similarly, statements that
describe the Company’s objectives, plans or goals are 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; the amounts of its unencumbered assets and other sources of liquidity;
fleet plans; overall economic and industry conditions; plans and objectives for
future operations; regulatory approvals and actions, including the Company’s
application for antitrust immunity with other oneworld alliance members; 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. Guidance given in this report regarding
capacity, fuel consumption, fuel prices, fuel hedging, and unit costs, and
statements regarding expectations of regulatory approval of the Company’s
application for antitrust immunity with other oneworld members are
forward-looking statements.
Forward-looking
statements are subject to a number of factors that could cause the Company’s
actual results to differ materially from the Company’s
expectations. The following factors, in addition to other possible
factors not listed, could cause the Company’s actual results to differ
materially from those expressed in forward-looking statements: the
materially weakened financial condition of the Company, resulting from its
significant losses in recent years; weaker demand for air travel and lower
investment asset returns resulting from the severe global economic downturn; the
Company’s need to raise substantial additional funds and its ability to do so on
acceptable terms; the ability of the Company to generate additional revenues and
reduce its costs; continued high and volatile fuel prices and further increases
in the price of fuel, and the availability of fuel; the Company’s substantial
indebtedness and other obligations; the ability of the Company to satisfy
existing financial or other covenants in certain of its credit agreements;
changes in economic and other conditions beyond the Company’s control, and the
volatile results of the Company’s operations; the fiercely and increasingly
competitive business environment faced by the Company; potential industry
consolidation and alliance changes; competition with reorganized carriers; low
fare levels by historical standards and the Company’s reduced pricing power;
changes in the Company’s corporate or business strategy; government regulation
of the Company’s business; conflicts overseas or terrorist attacks;
uncertainties with respect to the Company’s international operations; outbreaks
of a disease (such as SARS, avian flu or the H1N1 virus) that affects travel
behavior; labor costs that are higher than those of the Company’s competitors;
uncertainties with respect to the Company’s relationships with unionized and
other employee work groups; increased insurance costs and potential reductions
of available insurance coverage; the Company’s ability to retain key management
personnel; potential failures or disruptions of the Company’s computer,
communications or other technology systems; losses and adverse publicity
resulting from any accident involving the Company’s aircraft; changes in the
price of the Company’s common stock; and the ability of the Company to reach
acceptable agreements with third parties. Additional information
concerning these and other factors is contained in the Company’s Securities and
Exchange Commission filings, including but not limited to the Company’s 2008
Form 10-K, as updated by the Form 8-K and Item 1A “Risk Factors” in this
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.
Overview
The
Company recorded a net loss of $390 million in the second quarter of 2009
compared to a net loss of $1.5 billion in the same period last year (second
quarter 2008 results include the $1.1 billion impact of the write down of the
McDonnell Douglas MD-80 and Embraer RJ-135 fleets and certain related long-lived
assets to their estimated fair values due to capacity reductions made in
response to unprecedentedly high fuel expenses). The Company’s second
quarter 2009 loss is primarily attributable to a significant decrease in
passenger revenue due to lower traffic and passenger yield. The
Company is experiencing significantly weaker
demand for air travel driven by the continuing severe downturn in the global
economy. Mainline passenger revenue decreased by $1.1 billion
to $3.7 billion in the three months ended June 30, 2009 compared to the same
period last year. Mainline passenger unit revenues decreased 16.0
percent for the second quarter due to a 15.4 percent decrease in passenger yield
(passenger revenue per passenger mile) compared to the same period in 2008 and a
load factor decrease of approximately one point.
In
addition, during the second quarter of 2009, there was an outbreak of the H1N1
Influenza virus which had an estimated $50 to $80 million adverse revenue impact
throughout the Company’s network, but primarily on operations to and from
Mexico. As a part of the second quarter 2009 net loss, the Company
also incurred approximately $70 million in non-recurring charges related to the
sale of certain aircraft and the grounding of leased Airbus A300 aircraft prior
to lease expiration.
The Company implemented capacity reductions in 2008 and
in the first quarter of 2009 in response to record high fuel
prices. These capacity reductions have somewhat mitigated the
weakening of demand and in June 2009, the Company announced additional
capacity reductions in a further effort to balance supply and
demand. AMR will reduce mainline seating capacity by approximately
7.5 percent for the full year 2009 versus 2008. The reduction
consists of an approximately 9.0 percent reduction in mainline domestic capacity
and more than 4.0 percent reduction in mainline international capacity compared
to the year ending December 31, 2008. As a result, for the quarter
ending September 30, 2009, AMR expects mainline domestic capacity to decline by
approximately 10.5 percent and mainline international capacity to decline by 6.0
percent compared to the quarter ending September 30, 2008. No
assurance can be given that any capacity reductions or other steps the Company
may take will be adequate to offset the effects of reduced
demand.
The
decrease in total passenger revenue was partially offset by significantly lower
year over year fuel prices; the Company paid an average of $1.90 per gallon in
the second quarter 2009 compared to an average of $3.19 per gallon in the same
period of 2008, including effects of hedging.
The
Company’s unit costs excluding fuel and special charges were greater for the
quarter ended June 30, 2009 than for the same period in 2008, and are expected
to be higher for each period for the remainder of 2009 compared to the
corresponding prior year period. Factors driving the increase include
increased defined benefit pension expenses (due to the stock market decline in
2008) and retiree medical and other expenses, and cost pressures associated with
the Company’s previously announced capacity reductions and dependability
initiatives.
In
reaction to these challenges, the Company has continued to work to implement and
maintain several key actions designed to help it manage through these near term
challenges while seeking to position itself for long-term success, including the
range of service charges introduced in 2008 to generate additional revenue,
execution of its fleet renewal and replacement plan, initiatives to improve
dependability and on-time performance, and an initiative to strengthen its
global network through the application pending with the U.S. Department of
Transportation for global antitrust immunity with four members of the oneworld global
alliance.
The Company’s ability to
become profitable 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 the 2008 Form 10-K and as amended in Item 1A in
this Quarterly Report on Form 10-Q for the quarter ended June 30,
2009. In addition, most 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,
some of these initiatives involve changes to the Company’s business which it may
be unable to implement. In addition, the Company expects 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 the Company’s initiatives to generate
additional revenues and reduce costs are not known at this time and cannot be
assured. Moreover, whether the Company’s initiatives will be adequate or
successful depends in large measure on factors beyond its control, notably the
overall industry environment, including passenger demand, yield and industry
capacity growth, and fuel prices. It will be very difficult for the Company to
continue to fund its obligations on an ongoing basis, and to return to
profitability, if the overall industry revenue environment does not improve
substantially or if fuel prices were to increase and persist for an extended
period at high levels.
LIQUIDITY
AND CAPITAL RESOURCES
Significant Indebtedness and
Future Financing
The Company remains
heavily indebted and has significant obligations (including substantial pension
funding obligations), as described more fully under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
the Form 8-K. Indebtedness
is a significant risk to the Company as discussed in the Risk Factors listed in
Item 1A in the 2008 Form 10-K and as amended in Item 1A in this Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009. During 2006, 2007,
2008 and 2009 (through the date of this filing), the Company raised an aggregate
of approximately $3.4 billion in financing to fund capital commitments (mainly
for aircraft and ground properties), debt maturities, and employee pension
obligations, and to bolster its liquidity. As of the date of this
Form 10-Q, although the Company believes it can access sufficient
liquidity to fund its operations and obligations for the remainder of 2009,
including repayment of debt and capital leases, capital expenditures and other
contractual obligations, there can be no assurance that the Company will be able
to do so. To meet the Company’s
commitments, to maintain sufficient liquidity and 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 Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Form 8-K), the Company will need
access to substantial additional funding.
As of
June 30, 2009, the Company is required to make scheduled principal payments of
approximately $779 million on long-term debt and approximately $85 million in
payments on capital leases, and the Company expects to spend approximately $1.0
billion on capital expenditures for the remainder of 2009. In
addition, the global economic downturn, potential increases in the amount of
required reserves under credit card processing agreements, and the obligation to
post cash collateral on fuel hedging contracts have negatively impacted, and may
in the future negatively impact, the Company’s liquidity.
Despite
the current disruptions in the capital markets, in the six months ended June 30,
2009, the Company obtained an aggregate of approximately $470 million of
financing under loans secured by various aircraft and sale leaseback financings
of certain aircraft
The
Company’s possible financing sources primarily include: (i) a limited amount of
additional secured aircraft debt or sale leaseback transactions involving owned
aircraft; (ii) leases of or 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 assets; (vi) unsecured debt; and (vii)
issuance of equity and/or equity-like securities. Besides unencumbered aircraft,
the Company’s most likely sources of liquidity include the financing of
AAdvantage program miles and takeoff and landing slots, and the sale or
financing of certain of the Company’s business units and subsidiaries, such as
AMR Eagle. The Company’s ability to obtain future financing is
limited by the value of its unencumbered assets. A very large
majority of the Company’s aircraft assets (including most of the aircraft
eligible for the benefits of Section 1110 of the U.S. Bankruptcy Code) are
encumbered. Also, the market value of these aircraft assets has
declined in recent years, and may continue to decline. The Company
believes it has at least $3.7 billion in unencumbered assets and other sources
of liquidity as the date of this filing. However, the
availability and level of the financing sources described above cannot be
assured, particularly in light of the Company’s and American’s financial results
in recent years, the Company’s and American’s substantial indebtedness, the
difficult revenue environment they face, their reduced credit ratings, recent
historically high fuel prices, and the financial difficulties experienced in the
airline industry. In addition, the global economic downturn and
recent severe disruptions in the capital markets and other sources of funding have resulted in greater
volatility, less liquidity, widening of credit spreads and substantially more
limited availability of funding. The inability of the Company to
obtain necessary additional funding on acceptable terms would have a material
adverse impact on the Company and on its ability to sustain its
operations.
The
Company’s substantial indebtedness and other obligations have important
consequences. For example, they: (i) limit the Company’s ability to
obtain additional funding for working capital, capital expenditures,
acquisitions and general corporate purposes, and adversely affect the terms on
which such funding could be obtained; (ii) require the Company to dedicate a
substantial portion of its cash flow from operations to payments on its
indebtedness and other obligations, thereby reducing the funds available for
other purposes; (iii) make the Company more vulnerable to economic downturns;
and (iv) limit the Company’s ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions.
In June 2009, American entered into an
amendment to a purchase agreement with Boeing. Pursuant to the
amendment, American exercised rights to purchase an additional eight 737-800
aircraft and the delivery dates of certain
aircraft were rescheduled. As a result, American’s total 737-800 purchase
commitments for 2009 (including nine aircraft that have been delivered as of
June 30, 2009) have increased from 29 as of March 31, 2009 to 31 as of June 30, 2009, and American’s
737-800 purchase commitments for 2010 have increased from 39 as of March 31,
2009 to 45 as of June 30, 2009. American’s 737-800 purchase
commitments remain at eight in 2011. In addition to these aircraft,
American has firm commitments for eleven 737-800 aircraft and seven Boeing 777
aircraft scheduled to be delivered in 2013-2016.
As of
June 30, 2009, payments for American’s 737-800 and 777 aircraft purchase
commitments will approximate $716 million for the remainder of 2009, $1.3
billion in 2010, $354 million in 2011, $217 million in 2012, $399 million in
2013, and $556 million for 2014 and beyond. These amounts are net of purchase
deposits currently held by the manufacturer.
American
previously arranged backstop financing which, together with other financing arranged through the date
of this filing, including the pass through certificate financing referred
to in the following paragraph, covers all of its 2009-2011 Boeing 737-800
aircraft deliveries, subject to certain terms and conditions (including, in the
case of one of the financing arrangements covering twelve aircraft, a condition
that at the time of borrowing, the Company has a certain amount of unrestricted
cash and short term investments).
As more
fully described in Note 5 to the condensed consolidated financial statements, on
July 7, 2009, American obtained financing for four Boeing 777-200ER aircraft
owned by American and 16 Boeing 737-800 aircraft to be delivered to American
through the issuance of the Certificates which raised $520
million. The Certificates bear interest at 10.375% per
annum. A majority of the proceeds were placed in
escrow. As American takes delivery of each Boeing 737-800 aircraft it
finances under this arrangement, American will issue equipment notes secured by
such aircraft to the trust, which will purchase such notes with an allocable
portion of the escrowed funds. American will use such funds to
finance the purchase of the aircraft and the Company will record the principal
amount of such equipment notes as debt on its consolidated balance
sheet.
The
Company’s continued aircraft replacement strategy, and its execution of that
strategy, will depend on such factors as future economic and industry conditions
and the financial condition of the Company.
Credit Facility
Covenants
American
has a secured $433 million term loan credit facility with a final maturity on
December 17, 2010. 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. AMR and American were in compliance with the Liquidity
Covenant as of June 30, 2009. 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). In June 2009, AMR and American entered into an amendment to
the Credit Facility which waived compliance with the EBITDAR Covenant for the
quarter ended June 30, 2009; however, even absent this waiver the Company would
have complied with this covenant as of June 30, 2009. In addition,
the amendment reduced the minimum ratios AMR is required to satisfy to 0.95 to
1.00 for the one, two and three quarter periods ending September 30, 2009,
December 31, 2009 and March 31, 2010, respectively, to 1.00 to 1.00 for the four
quarter period ending June 30, 2010, and to 1.05 to 1.00 for the four quarter
period ending September 30, 2010.
Given the
volatility of fuel prices and revenues, uncertainty in the capital markets and
uncertainty about other sources of funding, and other factors, it is difficult
to assess whether the Company will be able to continue to comply with the
Liquidity Covenant and the EBITDAR Covenant, and there are no assurances that it
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 its other debt and lease
obligations, and otherwise have a material adverse impact on the Company and its
ability to sustain its operations.
Credit Card Processing and
Other Reserves
American
has agreements with a number of credit card companies and processors to accept
credit cards for the sale of air travel and other services. Under
certain of American’s current credit card processing agreements, the related
credit card company or processor may hold back, under certain circumstances, a
reserve from American’s credit card receivables.
Under one
such agreement, which was recently amended, the amount of such reserve generally
is based on the amount of unrestricted cash (not including undrawn credit
facilities) held by the Company and the processor’s exposure to the Company
under the agreement. Given the volatility of fuel prices and
revenues, uncertainty in the capital markets and uncertainty about other sources
of funding, and other factors, it is difficult to forecast the required amount
of such reserve at any time. The amount of the reserve was $154
million as of June 30, 2009. The agreement limits the maximum amount
of the reserve (determined as described above) during the period ending February
15, 2010, and the Company currently estimates such maximum amount during that
period to be approximately $300 million. However, if current
conditions persist, absent a waiver or modification of the agreement, such
required amount could be substantially greater after such period.
Pension Funding
Obligation
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 Pension Funding Equity Act of 2004 and the Pension
Protection Act of 2006. The Company is not required to make any 2009
contributions to its defined benefit pension plans under the provisions of these
acts.
Although
the Company is not required to make contributions to its defined benefit pension
plans in 2009, based on current funding levels of the plans, the Company expects
that the amount of the required contributions will be substantial in 2010 and
future years. The Company expects to contribute approximately $13
million to its retiree medical and other benefit plan in 2009.
Cash Flow
Activity
At June 30, 2009, the
Company had $2.8 billion in unrestricted cash and short-term investments,
reflecting a decrease of $299 million from the balance of $3.1 billion at
December 31, 2008. Net cash provided by operating activities
in the six-month period ended June 30, 2009 was $938 million, a decrease of $216
million over the same period in 2008. The decline in unrestricted
cash and short-term investments is primarily due to the significant decline in
the demand for air travel, which resulted in a 22.7 percent decrease in
passenger revenue, and principal payments made during the first six months of
2009. The impact of these two factors was somewhat offset by the
year-over-year decrease in fuel prices from $2.97 per gallon for the first six
months of 2008 to $1.90 per gallon for the same period in 2009. The
fuel price decrease resulted in $1.5 billion in decremental year-over-year
expense in the six months ended June 30, 2009 (based on the year-over-year
decrease in the average price per gallon multiplied by gallons
consumed).
The
Company made scheduled debt and capital lease payments of $1.2 billion in the
first six months of 2009. Included in this amount, AMR retired, by
purchasing with cash, the $318 million principal amount of its 4.50
Notes. Virtually all of the holders of the 4.50 Notes exercised their
elective put rights and the Company purchased and retired these notes at a price
equal to 100 percent of their principal amount. Under the terms of
the 4.50 Notes, the Company had the option to pay the purchase price with cash,
stock, or a combination of cash and stock, and the Company elected to pay for
the 4.50 Notes solely with cash. Also included in total scheduled
debt payments, the Company retired, at maturity, its $255 million secured bank
revolving credit facility in June 2009.
Despite
the current disruptions in the capital markets, in the six months ended June 30,
2009, the Company obtained an aggregate of approximately $470 million of
financing under loans secured by various aircraft and sale leaseback financings
of certain aircraft.
Capital
expenditures for the first six months of 2009 were $602 million and primarily
consisted of new aircraft and certain aircraft modifications.
Due to
the current value of the Company’s derivative contracts, some agreements with
counterparties require collateral to be deposited by the Company. As
of June 30, 2009, the cash collateral held by such counterparties from AMR was
$59 million. The amount of collateral required to be deposited with
the Company or with the counterparty by the Company is based on fuel price in
relation to the market values of the derivative contracts and collateral
provisions per the terms of those contracts and can fluctuate
significantly. The Company was over-collateralized as of June 30,
2009 due to a timing lag in collateral reconciliation with a certain
counterparty. The Company is currently required to collateralize
approximately 100 percent of the outstanding liability hedge
contracts. As such, when these contracts settle, the collateral
posted with counterparties will effectively offset the loss position and minimal
further cash impact will be recorded assuming a static forward heating oil curve
from June 30, 2009. Under the same assumption, the Company does not
currently expect to be required to deposit significant additional cash
collateral above June 30, 2009 levels with counterparties with regard to fuel
hedges in place as of June 30, 2009. Additional information regarding
the Company’s fuel hedging program is also included in Item 3 “Quantitative and
Qualitative Disclosures about Market Risk” and in Note 9 to the condensed
consolidated financial statements.
War-Risk
Insurance
The U.S.
government has agreed to provide commercial war-risk insurance for U.S. based
airlines until September 30, 2009, covering losses to employees, passengers,
third parties and aircraft. If the U.S. government does not extend
the policy beyond that date, 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 terrorist attacks of September 11, 2001,
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.
RESULTS
OF OPERATIONS
For the Three Months Ended
June 30, 2009 and 2008
Revenues
The
Company’s revenues decreased approximately $1.3 billion, or 20.9 percent, to
$4.9 billion in the second quarter of 2009 from the same period last
year. American’s passenger revenues decreased by 22.3 percent, or
$1.1 billion, on a 7.6 percent decrease in capacity (available seat mile)
(ASM). American’s passenger load factor decreased by approximately
one point to 81.8 percent while passenger yield decreased by 15.4 percent to
11.65 cents. This resulted in a decrease in passenger revenue per
available seat mile (RASM) of 16.0 percent to 9.53 cents. Following is
additional information regarding American’s domestic and international RASM and
capacity:
|
|
Three
Months Ended June 30, 2009
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
9.79 |
|
|
|
(11.6 |
)
% |
|
|
23.4 |
|
|
|
(10.4 |
)
% |
International
|
|
|
9.14 |
|
|
|
(22.6 |
) |
|
|
15.2 |
|
|
|
(2.7 |
) |
DOT
Latin America
|
|
|
9.58 |
|
|
|
(20.2 |
) |
|
|
7.0 |
|
|
|
(5.7 |
) |
DOT
Atlantic
|
|
|
8.85 |
|
|
|
(24.0 |
) |
|
|
6.4 |
|
|
|
(0.3 |
) |
DOT
Pacific
|
|
|
8.43 |
|
|
|
(26.9 |
) |
|
|
1.7 |
|
|
|
1.3 |
|
The
Company’s Regional Affiliates include two wholly owned subsidiaries, American
Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR Eagle), and
an independent carrier with which American has a capacity purchase agreement,
Chautauqua Airlines, Inc. (Chautauqua).
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, decreased $170 million,
or 24.9 percent, to $513 million as a result of a reduction in capacity,
decreased passenger traffic and lower yield. Regional Affiliates’ traffic
decreased 9.1 percent to 2.2 billion revenue passenger miles (RPMs), on a
capacity decrease of 10.8 percent to 2.9 billion ASMs, resulting in a 1.4 point
increase in the passenger load factor to 74.7 percent.
Cargo
revenues decreased by 42.5 percent, or $99 million, primarily due to decreases
in advertising mail and freight traffic resulting from the current economic
downturn.
Other
revenues increased 7.0 percent, or $37 million, to $565 million due to increases
in certain passenger service charges.
Operating
Expenses
The
Company’s total operating expenses decreased 31.5 percent, or $2.4 billion, to
$5.1 billion in the second quarter of 2009 compared to the second quarter of
2008. The Company’s operating expenses per ASM in the second quarter
of 2009 decreased 25.7 percent to 12.33 cents compared to the second quarter of
2008. These decreases are largely due to an impairment charge of $1.1 billion to
write the McDonnell Douglas MD-80 and Embraer RJ-135 fleets and certain related
long-lived assets down to their estimated fair values in 2008, and to decreased
fuel prices in the second quarter of 2009 compared to the second quarter of
2008. These decreases were somewhat offset by increased defined
benefit pension expenses and retiree medical and other expenses (due to the
stock market decline in 2008), and by cost pressures associated with the
Company’s previously announced capacity reductions and dependability
initiatives.
(in
millions)
Operating
Expenses
|
|
Three
Months Ended
June
30, 2009
|
|
|
Change
from 2008
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
$ |
1,698 |
|
|
$ |
40 |
|
|
|
2.4 |
% |
|
Aircraft
fuel
|
|
|
1,334 |
|
|
|
(1,089 |
) |
|
|
(44.9 |
) |
(a)
|
Other
rentals and landing fees
|
|
|
338 |
|
|
|
20 |
|
|
|
6.3 |
|
|
Depreciation
and amortization
|
|
|
282 |
|
|
|
(42 |
) |
|
|
(13.0 |
) |
(b)
|
Maintenance,
materials and repairs
|
|
|
314 |
|
|
|
(9 |
) |
|
|
(2.8 |
) |
|
Commissions,
booking fees and credit card expense
|
|
|
207 |
|
|
|
(52 |
) |
|
|
(20.1 |
) |
(c)
|
Aircraft
rentals
|
|
|
126 |
|
|
|
1 |
|
|
|
0.8 |
|
|
Food
service
|
|
|
123 |
|
|
|
(10 |
) |
|
|
(7.5 |
) |
|
Special
charges
|
|
|
23 |
|
|
|
(1,141 |
) |
|
|
(98.0 |
) |
(d)
|
Other
operating expenses
|
|
|
670 |
|
|
|
(72 |
) |
|
|
(9.7 |
) |
|
Total
operating expenses
|
|
$ |
5,115 |
|
|
$ |
(2,354 |
) |
|
|
(31.5 |
)
% |
|
(a)
|
Aircraft
fuel expense decreased primarily due to a 40.6 percent decrease in the
Company’s price per gallon of fuel (net of the impact of fuel hedging) and
a 7.4 percent decrease in the Company’s fuel consumption. The
Company recorded $197 million in net losses and $340 million in net gains
on its fuel hedging contracts for the three months ended June 30, 2009 and
June 30, 2008, respectively.
|
(b)
|
Depreciation
and amortization expense decreased due to impairment charge in
2008.
|
(c)
|
Commissions,
booking fees and credit card expense decreased in conjunction with the
20.9 percent decrease in the Company’s
revenue.
|
(d)
|
Special
charges in 2008 are related to impairment charge of $1.1 billion to write
down the Company’s McDonnell Douglas MD-80 and Embraer RJ-135 fleets and
certain related long-lived assets to their estimated fair
values.
|
Other
Income (Expense)
Interest
income decreased $39 million due to both a decrease in short-term investment
balances and a decrease in interest rates. Interest expense decreased
$32 million as a result of a decrease in the Company’s long-term debt balance
and lower variable interest rates.
The
Company did not record a net tax provision (benefit) associated with its second
quarter 2009 or second quarter 2008 losses due to the Company providing a
valuation allowance, as discussed in Note 4 to the condensed consolidated
financial statements.
Operating
Statistics
The
following table provides statistical information for American and Regional
Affiliates for the three months ended June 30, 2009 and 2008.
|
|
Three
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
31,564 |
|
|
|
34,399 |
|
Available
seat miles (millions)
|
|
|
38,566 |
|
|
|
41,718 |
|
Cargo
ton miles (millions)
|
|
|
399 |
|
|
|
533 |
|
Passenger
load factor
|
|
|
81.8 |
% |
|
|
82.5 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
11.65 |
|
|
|
13.76 |
|
Passenger
revenue per available seat mile (cents)
|
|
|
9.53 |
|
|
|
11.35 |
|
Cargo
revenue yield per ton mile (cents)
|
|
|
33.53 |
|
|
|
43.74 |
|
Operating
expenses per available seat mile, excluding Regional Affiliates (cents)
(*)
|
|
|
11.76 |
|
|
|
15.80 |
|
Fuel
consumption (gallons, in millions)
|
|
|
638 |
|
|
|
688 |
|
Fuel
price per gallon (dollars)
|
|
|
1.89 |
|
|
|
3.17 |
|
Operating
aircraft at period-end
|
|
|
618 |
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
2,182 |
|
|
|
2,400 |
|
Available
seat miles (millions)
|
|
|
2,921 |
|
|
|
3,274 |
|
Passenger
load factor
|
|
|
74.7 |
% |
|
|
73.3 |
% |
(*)
|
Excludes
$608 million and $904 million of expense incurred related to Regional
Affiliates in 2009 and 2008,
respectively.
|
Operating
aircraft at June 30, 2009, included:
|
|
|
|
|
|
|
|
American
Airlines Aircraft
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
Airbus
A300-600R
|
|
|
19 |
|
Bombardier
CRJ-700
|
|
|
25 |
|
Boeing
737-800
|
|
|
86 |
|
Embraer
135
|
|
|
30 |
|
Boeing
757-200
|
|
|
124 |
|
Embraer
140
|
|
|
59 |
|
Boeing
767-200 Extended Range
|
|
|
15 |
|
Embraer
145
|
|
|
118 |
|
Boeing
767-300 Extended Range
|
|
|
58 |
|
Super
ATR
|
|
|
39 |
|
Boeing
777-200 Extended Range
|
|
|
47 |
|
Total
|
|
|
271 |
|
McDonnell
Douglas MD-80
|
|
|
269 |
|
|
|
|
|
|
Total
|
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
average aircraft age for American’s and AMR Eagle’s aircraft is 15.5 years and
8.3 years, respectively.
Of the
operating aircraft listed above, six owned Airbus A300-600R aircraft were in
temporary storage as of June 30, 2009.
Owned and
leased aircraft not operated by the Company at June 30, 2009,
included:
American
Airlines Aircraft
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
Airbus
A300-600R
|
|
|
9 |
|
Embraer
135
|
|
|
9 |
|
Fokker
100
|
|
|
4 |
|
Saab
340B
|
|
|
46 |
|
McDonnell
Douglas MD-80
|
|
|
34 |
|
Total
|
|
|
55 |
|
Total
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30, 2009 and 2008
Revenues
The
Company’s revenues decreased approximately $2.1 billion, or 18.1 percent, to
$9.7 billion in the second quarter of 2009 from the same period last
year. American’s passenger revenues decreased by 19.3 percent, or
$1.8 billion, on a 7.8 percent decrease in capacity (available seat mile)
(ASM). American’s passenger load factor decreased 2.0 points to 78.8
percent while passenger yield decreased by 10.3 percent to 12.23
cents. This resulted in a decrease in passenger revenue per available
seat mile (RASM) of 12.5 percent to 9.64 cents. Following is additional
information regarding American’s domestic and international RASM and
capacity:
|
|
Six
Months Ended June 30, 2009
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
9.74 |
|
|
|
(9.5 |
)
% |
|
|
46.5 |
|
|
|
(10.6 |
)
% |
International
|
|
|
9.48 |
|
|
|
(17.1 |
) |
|
|
29.9 |
|
|
|
(3.0 |
) |
DOT
Latin America
|
|
|
10.45 |
|
|
|
(13.7 |
) |
|
|
14.7 |
|
|
|
(5.1 |
) |
DOT
Atlantic
|
|
|
8.45 |
|
|
|
(21.3 |
) |
|
|
11.7 |
|
|
|
(1.9 |
) |
DOT
Pacific
|
|
|
8.85 |
|
|
|
(17.9 |
) |
|
|
3.4 |
|
|
|
2.7 |
|
The
Company’s Regional Affiliates include two wholly owned subsidiaries, American
Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR Eagle), and
an independent carrier with which American has a capacity purchase agreement,
Chautauqua Airlines, Inc. (Chautauqua).
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, decreased $294 million,
or 23.3 percent, to $970 million as a result of a reduction in capacity,
decreased passenger traffic and lower yield. Regional Affiliates’ traffic
decreased 11.0 percent to 4.0 billion revenue passenger miles (RPMs), on a
capacity decrease of 10.0 percent to 5.7 billion ASMs, resulting in an
approximately one point decrease in the passenger load factor to 70.4
percent.
Cargo
revenues decreased by 37.9 percent, or $170 million, primarily due to decreases
in advertising mail and freight traffic resulting from the current economic
downturn.
Other
revenues increased 7.0 percent, or $73 million, to $1.1 billion due to increases
in certain passenger service charges.
Operating
Expenses
The
Company’s total operating expenses decreased 24.0 percent, or $3.2 billion, to
$10.1 billion in the six months ended June 30, 2009 compared to the same period
in 2008. The Company’s operating expenses per ASM decreased 17.5
percent to 12.36 cents compared to 2008. These decreases are due primarily to
decreased fuel prices in the first half of 2009 compared to the first half of
2008. The decreases were somewhat offset by increased defined benefit
pension expenses and retiree medical and other expenses (due to the stock market
decline in 2008), and by cost pressures associated with the Company’s previously
announced capacity reductions and dependability initiatives.
(in
millions)
Operating
Expenses
|
|
Six
Months Ended
June
30, 2009
|
|
|
Change
from 2008
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
$ |
3,386 |
|
|
$ |
84 |
|
|
|
2.5 |
% |
|
Aircraft
fuel
|
|
|
2,632 |
|
|
|
(1,841 |
) |
|
|
(41.2 |
) |
(a)
|
Other
rentals and landing fees
|
|
|
662 |
|
|
|
21 |
|
|
|
3.3 |
|
|
Depreciation
and amortization
|
|
|
554 |
|
|
|
(79 |
) |
|
|
(12.5 |
) |
(b)
|
Maintenance,
materials and repairs
|
|
|
619 |
|
|
|
(19 |
) |
|
|
(3.0 |
) |
|
Commissions,
booking fees and credit card expense
|
|
|
424 |
|
|
|
(92 |
) |
|
|
(17.8 |
) |
(c)
|
Aircraft
rentals
|
|
|
250 |
|
|
|
- |
|
|
|
- |
|
|
Food
service
|
|
|
237 |
|
|
|
(23 |
) |
|
|
(8.8 |
) |
|
Special
charges
|
|
|
36 |
|
|
|
(1,128 |
) |
|
|
(96.9 |
) |
(d)
|
Other
operating expenses
|
|
|
1,348 |
|
|
|
(128 |
) |
|
|
(8.7 |
) |
|
Total
operating expenses
|
|
$ |
10,148 |
|
|
$ |
(3,205 |
) |
|
|
(24.0 |
) % |
|
(a)
|
Aircraft
fuel expense decreased primarily due to a 35.8 percent decrease in the
Company’s price per gallon of fuel (net of the impact of fuel hedging) and
an 8.3 percent decrease in the Company’s fuel consumption. The Company
recorded $465 million in net losses and $447 million in net gains on its
fuel hedging contracts for the six months ended June 30, 2009 and June 30,
2008, respectively.
|
(b)
|
Depreciation
and amortization expense decreased due to impairment charge in
2008.
|
(c)
|
Commissions,
booking fees and credit card expense decreased in conjunction with the
18.1 percent decrease in the Company’s
revenue.
|
(d)
|
Special
charges in 2008 are related to impairment charge of $1.1 billion to write
down the Company’s McDonnell Douglas MD-80 and Embraer RJ-135 fleets and
certain related long-lived assets to their estimated fair
values.
|
Interest
income decreased $81 million due to both a decrease in short-term investment
balances and a decrease in interest rates. Interest expense decreased
$52 million as a result of a decrease in the Company’s long-term debt balance
and lower variable interest rates.
The
Company did not record a net tax provision (benefit) associated with its loss
for the six months ended June 30, 2009 or June 30, 2008 due to the Company
providing a valuation allowance, as discussed in Note 4 to the condensed
consolidated financial statements.
Operating
Statistics
The
following table provides statistical information for American and Regional
Affiliates for the six months ended June 30, 2009 and 2008.
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
60,158 |
|
|
|
66,887 |
|
Available
seat miles (millions)
|
|
|
76,348 |
|
|
|
82,770 |
|
Cargo
ton miles (millions)
|
|
|
770 |
|
|
|
1,038 |
|
Passenger
load factor
|
|
|
78.8 |
% |
|
|
80.8 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
12.23 |
|
|
|
13.63 |
|
Passenger
revenue per available seat mile (cents)
|
|
|
9.64 |
|
|
|
11.01 |
|
Cargo
revenue yield per ton mile (cents)
|
|
|
36.12 |
|
|
|
43.17 |
|
Operating
expenses per available seat mile, excluding Regional Affiliates (cents)
(*)
|
|
|
11.79 |
|
|
|
14.23 |
|
Fuel
consumption (gallons, in millions)
|
|
|
1,255 |
|
|
|
1,368 |
|
Fuel
price per gallon (dollars)
|
|
|
1.90 |
|
|
|
2.95 |
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
4,043 |
|
|
|
4,542 |
|
Available
seat miles (millions)
|
|
|
5,739 |
|
|
|
6,380 |
|
Passenger
load factor
|
|
|
70.4 |
% |
|
|
71.2 |
% |
(*)
|
Excludes
$1.2 billion and $1.6 billion of expense incurred related to Regional
Affiliates in 2009 and 2008,
respectively.
|
The
Company currently expects capacity for American’s mainline jet operations to
decline by approximately 8.5 percent in the third quarter of 2009
versus the third quarter of 2008. American’s mainline capacity for the
full year 2009 is expected to decrease approximately 7.5 percent from 2008 with
approximately a 9.0 percent reduction in domestic capacity and more than a 4.0
percent decrease in international capacity.
The
Company currently expects third quarter 2009 mainline unit costs to decrease
approximately 14.3 percent year over year primarily due to historically high
fuel costs recorded in the third quarter 2008, somewhat offset by increased
defined benefit pension expenses (due to the stock market decline in 2008) and
retiree medical and other benefit expenses, and by cost pressures associated
with the Company’s previously announced capacity reductions and dependability
initiatives. Due to these cost pressures, the Company expects third
quarter and full year 2009 unit costs excluding fuel to be higher than the
respective prior year periods. The Company’s results are
significantly affected by the price of jet fuel, which is in turn affected by a
number of factors beyond the Company’s control. Although fuel prices
have abated somewhat from the record prices recorded in July 2008, fuel prices
have increased since the first quarter of 2009 and they remain high and very
volatile.
The
Company is experiencing significantly weaker
demand for air travel driven by the severe downturn in the global
economy. The Company implemented capacity reductions in 2008 and in
the first quarter of 2009 in response to record high fuel
prices. Those capacity reductions have somewhat mitigated this
weakening of demand, and in June 2009, the Company announced additional capacity
reductions in a further effort to balance supply and demand. However,
if the global economic downturn persists or worsens, demand for air travel may
continue to weaken. No assurance can be given that capacity
reductions or other steps the Company may take will be adequate to offset the
effects of reduced demand. In addition, fare discounting has recently
been both broader and deeper than usual, and the Company expects downward
pressure on passenger yields into the third quarter.
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 fair value, long-lived assets, routes, passenger revenue,
frequent flyer program, stock compensation, pensions and retiree medical and
other benefits, income taxes and derivatives accounting. These
policies and estimates are described in the Form 8-K except as updated
below.
Routes -- AMR performs annual
impairment tests on its routes, which are indefinite life intangible assets
under Statement of Financial Accounting Standards 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. Renewal and extension costs for the Company’s
intangible assets are minimal and are expensed as incurred.
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. SFAS 157-2, applicable to non-financial assets and
liabilities, is effective for fiscal years beginning after November 15, 2008,
and the Company has adopted the standard for those assets and liabilities as of
January 1, 2009. Annual impairment testing on the Company’s routes
will occur in the fourth quarter of 2009, at which time the net carrying value
of the routes will be reassessed for recoverability. If it at that
time, the fair value of the routes is less than the carrying value, the Company
will adjust the value of the route assets and apply SFAS 157-2 provisions to its
routes.
The Company had recorded route acquisition costs (including
international routes and slots) of $831 million as of June 30, 2009,
including a significant amount related to operations at London
Heathrow. The Company has completed an impairment analysis on the
London Heathrow routes (including slots) as of December 2008, resulting in no
impairment. However, given the significant uncertainty regarding the
long term impact of open skies, ultimate depth of the economic recession and how
these events ultimately affect the Company’s operations at Heathrow, the actual
results could differ from those estimates.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
There
have been no material changes in market risk from the information provided in
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk of the Form
8-K. The change in market risk for aircraft fuel is discussed below
for informational purposes.
The risk
inherent in the Company’s fuel related market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
fuel. 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.
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 ten percent increase in the June 30, 2009
cost per gallon of fuel. Based on projected 2009 and 2010 fuel usage
through June 30, 2010, such an increase would result in an increase to aircraft
fuel expense of approximately $441 million in the twelve months ended June 30,
2010, inclusive of the impact of effective fuel hedge instruments outstanding at
June 30, 2009, and assumes the Company’s fuel hedging program remains effective
under Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities”. Comparatively, based
on projected 2009 fuel usage, such an increase would have resulted in an
increase to aircraft fuel expense of approximately $399 million in the twelve
months ended December 31, 2008, inclusive of the impact of fuel hedge
instruments outstanding at December 31, 2008. The change in market
risk is primarily due to the decrease in fuel prices.
Ineffectiveness
is inherent in hedging jet fuel with derivative positions based in crude oil or
other crude oil related commodities. As required by Statement of
Financial Accounting Standard No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (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. 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 dollar offset
correlation is within 80 percent to 125 percent. The Company
discontinues hedge accounting prospectively if it determines that a derivative
is no longer expected to be highly effective as a hedge or if it decides to
discontinue the hedging relationship.
As of
June 30, 2009, the Company had cash flow hedges, with collars and options,
covering approximately 32 percent of its estimated remaining 2009 fuel
requirements. The consumption hedged for the remainder of 2009 is
capped at an average price of approximately $2.49 per gallon of jet fuel, and
the Company’s collars have an average floor price of approximately $1.80 per
gallon of jet fuel (both the capped and floor price exclude taxes and
transportation costs). The Company’s collars represent approximately
28 percent of its estimated remaining 2009 fuel requirements. A
deterioration of the Company’s financial position could negatively affect the
Company’s ability to hedge fuel in the future.
Item
4. Controls and
Procedures
The term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to
the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the Company’s disclosure
controls and procedures as of December 31, 2008. Based on that
evaluation, the Company’s management, including the CEO and CFO, concluded that
the Company’s disclosure controls and procedures were effective as of June 30,
2009. During the quarter ending on June 30, 2009, there was no change in the
Company’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II: OTHER INFORMATION
Item
1. Legal
Proceedings
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
actions. The Tam plaintiffs have
appealed the court’s decision. The Swope plaintiffs have
moved to have their case remanded to the Eastern District of Texas.
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. On July 22, 2008, the district court
granted summary judgment to American and APFA concerning the remaining 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). On August 20, 2008, a notice of appeal was
filed on behalf of the purported class of flight attendants. 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
March 11, 2008, the Company received from the Swiss Competition Commission a
request for information concerning, among other things, the scope and
organization of the Company’s activities in Switzerland. 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, and 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. On
April 28, 2008, the Brazilian competition authorities preliminarily charged the
Company with violating Brazilian competition laws. 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. The Company is vigorously contesting
the allegations and the preliminary findings of the Brazilian competition
authorities. 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 September 1, 2008, the Company received a request
from the Korea Fair Trade Commission seeking information regarding cargo rates
and surcharges and the structure of the Company’s activities in Korea. 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, or if the Company were named and found liable
in any litigation based on these allegations, such findings and related legal
proceedings could have a material adverse impact on the
Company.
Forty-five
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 the
Company 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. On October 25, 2006,
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, Civ. No. 06-1793 (the
“Passenger MDL”). On July 9, 2007, the Company was named as a
defendant in the Passenger MDL. On August 25, 2008, the plaintiffs
dismissed their claims against the Company in this action. On March
13, 2008, and March 14, 2008, two additional purported class action complaints,
Turner v. American Airlines, et al., Civ. No. 08-1444 (N.D. Cal.), and LaFlamme
v. American Airlines, et al., Civ. No. 08-1079 (E.D.N.Y.), were filed against
the Company, alleging that the Company violated U.S. antitrust laws by illegally
conspiring to set prices and surcharges for passenger transportation in Japan
and certain European countries, respectively. The Turner plaintiffs
have failed to perfect service against the Company, and it is unclear whether
they intend to pursue their claims. On February 17, 2009, the LaFlamme
plaintiffs agreed to dismiss their claims against the Company without
prejudice. In the event that the Turner plaintiffs pursue their claims or
the LaFlamme plaintiffs re-file claims against the Company, the Company will
vigorously defend these lawsuits, but any adverse judgment in these actions
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. (then 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 infringes
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. On
December 1, 2008, the court dismissed with prejudice all claims against American
Beacon. On May 22, 2009, following its granting of summary judgment
to American based on invalidity and non-infringement, the court dismissed all
claims against American. Plaintiff filed a notice of appeal on June
22, 2009 with respect to the court’s ruling for American. 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.
As a result of significant losses in
recent years, our financial condition has been materially
weakened.
We
incurred significant losses in 2001-2005, which materially weakened our
financial condition. We lost $893 million in 2005, $781 million in
2004, $1.2 billion in 2003, $3.5 billion in 2002 and $1.8 billion
in 2001. Although we earned a profit of $456 million in 2007 and
$189 million in 2006, we lost $2.1 billion in 2008 (which included a
$1.1 billion impairment charge), and $765 million in the six months
ended June 30, 2009. Because of our weakened financial
condition, we are vulnerable both to the impact of unexpected events (such as
terrorist attacks or spikes in jet fuel prices) and to deterioration of the
operating environment (such as a deepening of the current global recession or
significant increased competition).
The severe global economic downturn
has resulted in weaker demand for air travel and lower investment asset returns,
which may have a significant negative impact on us.
We are
experiencing significantly weaker demand for air travel driven by the severe
downturn in the global economy. Many of the countries we serve are
experiencing economic slowdowns or recessions. We began to experience
weakening demand late in 2008, and this weakness has continued in
2009. We reduced capacity in 2008, and in 2009 we have announced
additional reductions to our capacity plan for this year. If the
global economic downturn persists or worsens, demand for air travel may continue
to weaken. No assurance can be given that capacity reductions or other steps we
may take will be adequate to offset the effects of reduced demand.
The
economic downturn has resulted in broadly lower investment asset returns and
values, and our pension assets suffered a material decrease in value in 2008
related to broader stock market declines, which will result in higher pension
expense in 2009 and future years and higher required contributions in future
years. In addition, under these unfavorable economic conditions, the
amount of the cash reserves we are required to maintain under our credit card
processing agreements may increase substantially. These issues
individually or collectively may have a material adverse impact on our
liquidity. Also, disruptions in the capital markets and other sources
of funding may make it impossible for us to obtain necessary additional funding
or make the cost of that funding prohibitive.
We face numerous challenges as we
seek to maintain sufficient liquidity, and we will need to raise substantial
additional funds. We may not be able to raise those funds, or to do so on
acceptable terms.
We have
significant debt, lease and other obligations in the next several years,
including significant pension funding obligations. For example, in
2009 we will be required to make approximately $2.0 billion of principal
payments on long term debt and payments on capital leases, and we expect to
make approximately $1.6 billion of capital expenditures. In
addition, the global economic downturn, potential increases in the amount of
required reserves under credit card processing agreements, and the obligation to
post cash collateral on fuel hedging contracts have negatively impacted, and may
in the future negatively impact, our liquidity. To meet our
commitments and to maintain sufficient liquidity as we continue to implement our
restructuring and cost reduction initiatives, we will need continued access to
substantial additional funding. Moreover, while we have arranged financings
that, subject to certain terms and conditions (including, in the case of one of
the financing arrangements covering twelve aircraft, a condition that, at the
time of borrowing, we have a certain amount of unrestricted cash and short term
investments), cover all of our 2009-2011 aircraft delivery commitments through
2011, we will also need to raise substantial additional funds to meet our
commitments to purchase aircraft and execute our fleet replacement
plan.
Our
ability to obtain future financing is limited by the value of our unencumbered
assets. A very large majority of our aircraft assets (including most
of our aircraft eligible for the benefits of Section 1110) are
encumbered. Also, the market value of our aircraft assets has
declined in recent years, and may continue to decline.
Since the
terrorist attacks of September 2001 (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 might have other effects on us, such as further increasing
borrowing or other costs or further restricting our ability to raise
funds.
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, recent historically high fuel prices, and the financial
difficulties experienced in the airline industry, adversely affect the
availability and terms of funding for us. In addition, the global
economic downturn and recent severe disruptions in the capital markets and other
sources of funding have resulted in greater volatility, less liquidity, widening
of credit spreads, and substantially more limited availability of
funding. As a result of these and other factors, although we believe
we can access sufficient liquidity to fund our operations and obligations for
the remainder of 2009, there can be no assurance that we will be able to do
so. An inability to obtain necessary additional funding on acceptable
terms would have a material adverse impact on us and on our ability to sustain
our operations.
The
amount of the reserves we are required to maintain under our credit card
processing agreements could increase substantially, which would materially
adversely impact our liquidity.
American
has agreements with a number of credit card companies and processors to accept
credit cards for the sale of air travel and other services. Under
certain of American’s current credit card processing agreements, the related
credit card company or processor may hold back, under certain circumstances, a
reserve from American’s credit card receivables.
Under one
such agreement, which was recently amended, the amount of such reserve generally
is based on the amount of unrestricted cash (not including undrawn credit
facilities) held by the Company and the processor’s exposure to the Company
under the agreement. Given the volatility of fuel prices and
revenues, uncertainty in the capital markets and uncertainty about other sources
of funding, and other factors, it is difficult to forecast the required amount
of such reserve at any time. The amount of the reserve was $154
million as of June 30, 2009. The agreement limits the maximum amount
of the reserve (determined as described above) during the period ending February
15, 2010, and the Company currently estimates such maximum amount during that
period to be approximately $300 million. However, if current
conditions persist, absent a waiver or modification of the agreement, such
required amount could be substantially greater after such period.
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. It will be very difficult for us to continue to fund our
obligations on an ongoing basis, and to return to profitability, if the overall
industry revenue environment does not improve substantially or if fuel prices
were to increase and persist for an extended period at high levels.
We may be 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 volatile price and the
availability of jet fuel, which are in turn affected by a number of factors
beyond our control. Fuel prices have only recently declined from
historic high levels.
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. Although we
had some success in raising fares and imposing fuel surcharges in reaction to
recent high fuel prices, these fare increases and surcharges did not keep pace
with the extraordinary increases in the price of fuel that occurred in 2007 and
2008. Furthermore, even though fuel prices have declined
significantly from their recent historic high levels, reduced demand or
increased fare competition, or both, and resulting lower revenues may offset any
potential benefit of these lower fuel prices.
While we
do not currently anticipate a significant reduction in fuel availability,
dependence 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 a
reduction 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 would have a material adverse impact on us.
We have a
large number of older aircraft in our fleet, and these aircraft are not as fuel
efficient as more recent models of aircraft. We believe it is
imperative that we continue to execute our fleet renewal
plans. However, due to the recent machinist strike at Boeing,
deliveries of the Boeing 737-800 aircraft we currently have on order have been
delayed. In addition, we expect delays in the deliveries of the
Boeing 787-9 aircraft we currently have on order.
While we
seek to manage the risk of fuel price increases 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. Moreover, declines in fuel prices below the levels
established in derivative contracts may require us to post cash collateral to
secure the loss positions on such contracts, and if such contracts close when
fuel prices are below the applicable levels, we would be required to make
payments to close such contracts; these payments would be treated as additional
fuel expense.
Our indebtedness and other
obligations are substantial and could adversely affect our business and
liquidity.
We have
and will continue to have significant amounts of indebtedness, obligations to
make future payments on aircraft equipment and property leases, and obligations
under aircraft purchase agreements, as well as a high proportion of debt to
equity capital. In 2009, we will be required to make approximately
$2.0 billion of principal payments on long-term debt and payments on capital
leases. We expect to 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 have important consequences. For example, they:
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limit
our ability to obtain additional funding for working capital, capital
expenditures, acquisitions and general corporate purposes, and adversely
affect the terms on which such funding can be obtained;
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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;
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make
us more vulnerable to economic downturns; and
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limit
our ability to withstand competitive pressures and reduce our flexibility
in responding to changing business and economic
conditions.
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We may be unable to comply with our
financial covenants.
American
has a $433 million secured bank term loan facility (the Credit Facility) with a
final maturity on December 17, 2010. The Credit Facility contains a liquidity
covenant (the Liquidity Covenant) and a covenant that requires AMR to maintain
certain minimum ratios of cash flow to fixed charges (the EBITDAR
Covenant). We were in compliance with the Liquidity Covenant as of
June 30, 2009. In June 2009, AMR and American entered into an
amendment to the Credit Facility which waived compliance with the EBITDAR
Covenant for the quarter ended June 30, 2009; however, even absent this waiver
we would have complied with this covenant as of June 30, 2009. In
addition, the amendment reduced the minimum ratios AMR is required to satisfy to
0.95 to 1.00 for the one, two and three quarter periods ending September 30,
2009, December 31, 2009 and March 31, 2010, respectively, to 1.00 to 1.00 for
the four quarter period ending June 30, 2010, and to 1.05 to 1.00 for the four
quarter period ending September 30, 2010. Given the volatility of
fuel prices and revenues, uncertainty in the capital markets and uncertainty
about other sources of funding, and other factors, it is difficult to assess
whether we will be able to continue to comply with the Liquidity Covenant and
the EBITDAR Covenant, 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 and our ability to sustain our operations.
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:
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actual
or potential changes in international, national, regional and local
economic, business and financial conditions, including recession,
inflation, higher interest rates, wars, terrorist attacks or political
instability;
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changes
in consumer preferences, perceptions, spending patterns or demographic
trends;
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changes
in the competitive environment due to industry consolidation and other
factors;
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actual
or potential disruptions to the air traffic control
systems;
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increases
in costs of safety, security and environmental
measures;
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outbreaks
of diseases that affect travel behavior; and
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weather
and natural disasters.
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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.
The airline industry is fiercely
competitive and may undergo further consolidation or changes in industry
alliances, 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 we now compete with
low-cost carriers on a large majority of our domestic non-stop mainline network
routes.
Certain
airline alliances have been granted immunity from antitrust 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 historically has 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, reduction in cost 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 airline industry and
numerous changes in industry alliances. Recently, two of our largest
competitors, Delta Air Lines, Inc. and Northwest Airlines Corporation, merged,
and the combined entity became the largest scheduled passenger airline in the
world in terms of available seat miles and revenue passenger
miles. In addition, another two of our largest competitors, United
Air Lines, Inc. and Continental Airlines, Inc., recently announced that they had
entered into a framework agreement to cooperate extensively and under which
Continental would join the global alliance of which United, Lufthansa and
certain other airlines are members.
In the
future, there may be additional mergers and acquisitions, and changes in airline
alliances, including those that may be undertaken in response to the merger of
Delta and Northwest or other developments in the airline
industry. Any airline industry consolidation or changes in airline
alliances could substantially alter the competitive landscape and result in
changes in our corporate or business strategy. We regularly assess
and explore the potential for consolidation in our industry and changes in
airline alliances, 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
currently, which could have a material adverse effect on us. For
similar reasons, changes in airline alliances could also adversely affect our
competitive position.
In 2008,
we entered into a joint business agreement and related marketing arrangements
with British Airways and Iberia, providing for commercial cooperation on flights
between North America and most countries in Europe, pooling and sharing of
certain revenues and costs, expanded codesharing, enhanced frequent flyer
program reciprocity, and cooperation in other areas. Along with these
carriers and certain other carriers, we have applied to the U.S. Department of
Transportation for antitrust immunity for this planned
cooperation. Implementation of this agreement and the related
arrangements is subject to conditions, including various U.S. and foreign
regulatory approvals, successful negotiation of certain detailed financial and
commercial arrangements, and other approvals. Agencies from which such approvals
must be obtained may impose requirements or limitations as a condition of
granting any such approvals, such as requiring divestiture of routes, gates,
slots or other assets. No assurances can be given as to any
arrangements that may ultimately be implemented or any benefits that we may
derive from such arrangements.
We compete with reorganized carriers,
which results in competitive disadvantages for us.
We must
compete with air carriers that have reorganized under the protection of
Chapter 11 of the Bankruptcy Code in recent years, including United, Delta,
Northwest and U.S. Airways. It is possible that other significant
competitors may seek to reorganize in or out of Chapter 11.
Successful
reorganizations by other carriers present us with competitors with significantly
lower operating costs and stronger financial positions derived from renegotiated
labor, supply, and financing contracts. 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.
Our
passenger yield remains very low by historical standards. We believe
that 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 high jet
fuel prices; and fare simplification efforts by certain carriers. We
believe that our reduced pricing power could persist indefinitely.
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.
Beginning
in late 2007 and continuing into 2008, AMR conducted a strategic value review
involving, among other things, AMR Eagle, American Beacon Advisors, Inc., AMR’s
investment advisory subsidiary (“American Beacon Advisors”) and AAdvantage, our
frequent flyer program. The purpose of the review was to determine
whether there existed the potential for unlocking additional stockholder value
with respect to one or more of these strategic assets through some type of
separation transaction. As a result of this review, AMR announced in
late 2007 that it planned to divest AMR Eagle; however, in mid-2008 AMR
announced that, given the then-current industry environment, AMR had decided to
place that planned divestiture on hold until industry conditions are more
favorable and stable. Also pursuant to the review, AMR sold American
Beacon Advisors to a third party in September 2008 (AMR maintained a
minority equity stake).
In the
future, AMR may consider and engage in discussions with third parties regarding
the divestiture of AMR Eagle and other separation transactions, and may decide
to proceed with one or more such transactions. There can be no
assurance that AMR will complete any separation transactions, that any announced
plans or transactions will be consummated, 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, disruptions
to our operations, 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. Compliance with those
requirements drives significant expenditures and has in the past, and may in the
future, cause disruptions to our operations. 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 U.S. Congress is considering
climate change legislation, and the European Union (the “EU”) has approved a
proposal that will put a cap on carbon dioxide emissions for all flights into
and out of the EU effective in 2012. 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:
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changes
in law which affect the services that can be offered by airlines in
particular markets and at particular airports;
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the
granting and timing of certain governmental approvals (including foreign
government approvals) needed for codesharing alliances and other
arrangements with other airlines;
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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);
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the
adoption of regulations that impact customer service standards (for
example new passenger security standards, passenger bill of
rights);
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restrictions
on airport operations, such as restrictions on the use of takeoff and
landing slots at airports or the auction of slot rights currently or
previously held by us; or
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the
adoption of more restrictive locally imposed noise
restrictions.
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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. We support a common-sense approach to ATC modernization that
would allocate cost to all ATC system users in proportion to the services they
consume. The reauthorization by the U.S. Congress of legislation that
funds the FAA, which includes proposals regarding upgrades to the ATC system, is
pending, but it is uncertain when any such legislation will be
enacted.
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 conflicts 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, the “open skies” air services agreement between the United States and
the EU which took effect in March 2008 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 agreement has
resulted in American facing increased competition in these markets, including
Heathrow, where we have lost market share.
We could be adversely affected by an
outbreak of a disease that affects travel behavior.
In the
second quarter of 2009, there was an outbreak of the H1N1 virus which had an
adverse impact throughout our network but primarily on our operations to and
from Mexico. In 2003, there was an outbreak of Severe Acute
Respiratory Syndrome (“SARS”), which had an adverse impact primarily on our Asia
operations. In addition, in the past there have been concerns about outbreaks or
potential outbreaks of other diseases, such as avian flu. Any
outbreak of a disease (including a worsening of the outbreak of the H1N1 virus)
that affects travel behavior could have a material adverse impact on
us. In addition, outbreaks of disease could result in quarantines of
our personnel or an inability to access facilities or our aircraft, which could
adversely affect our operations.
Our labor costs are higher than those
of our competitors.
Wages,
salaries and benefits constitute a significant percentage of our total operating
expenses. In 2008, they constituted approximately 23 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 have satisfactory relations with any unionized or other employee
work group.
Our
operations could be adversely affected if we fail to have 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 have satisfactory
relations with any unionized or other employee work group, our ability to
execute our strategic plans could be adversely affected.
American
is currently in mediated negotiations with each of its three major unions
regarding amendments to their respective labor agreements. The
negotiations process in the airline industry typically is slow and sometimes
contentious. The union that represents American’s pilots has recently
filed a number of grievances, lawsuits and complaints, most of which American
believes are part of a corporate campaign related to the union’s labor agreement
negotiations with American. While American is vigorously defending
these claims, unfavorable outcomes of one or more of them could require American
to incur additional costs, change the way it conducts some parts of its
business, or otherwise adversely affect us.
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 through September 30, 2009, covering losses to employees, passengers,
third parties and aircraft. If the U.S. government does not provide
such insurance at any time beyond that date, 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 had 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.
We are at risk of losses and adverse
publicity which might result from an accident involving any of our
aircraft.
If one of
our aircraft were to be involved in an accident, we could be exposed to
significant tort liability. The insurance we carry to cover damages arising from
any future accidents may be inadequate. In the event that our
insurance is not adequate, we may be forced to bear substantial losses from an
accident. In addition, any accident involving an aircraft operated by
us could adversely affect the public’s perception of us.
Item
4. Submission of Matters to a
Vote of Security Holders
The
owners of 248,061,322 shares of common stock, or 88.91 percent of shares
outstanding, were represented at the annual meeting of stockholders on May 20,
2009 at the American Airlines Training & Conference Center, Flagship
Auditorium, 4501 Highway 360 South, Fort Worth, Texas.
Stockholders
elected the Company’s 13 nominees to the 13 director positions by the vote shown
below:
Nominees
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Votes
For
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Votes
Withheld
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Gerard
J. Arpey
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232,266,550 |
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15,794,772 |
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John
W. Bachmann
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237,478,936 |
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10,582,386 |
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David
L. Boren
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197,013,858 |
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51,047,464 |
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Armando
M. Codina
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230,720,320 |
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17,341,002 |
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Rajat
K. Gupta
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237,579,017 |
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