ar101610q.htm
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|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
FORM
10-Q
þ Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Quarterly Period Ended September 30,
2008.
¨ 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
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
75-1825172
|
(State
or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
4333
Amon Carter Blvd.
Fort
Worth, Texas
|
|
76155
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant's
telephone number, including area code
|
(817)
963-1234
|
|
|
|
|
|
|
|
Not
Applicable
|
(Former
name, former address and former fiscal year , if changed since last
report)
|
|
|
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 is a shell company (as defined in
Rule 12b-2 of the Act). ¨
Yes þ No
|
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
Common
Stock, $1 par value – 278,757,437 shares as of October 13,
2008.
|
|
|
INDEX
AMR
CORPORATION
PART
I:FINANCIAL INFORMATION
Item
1. Financial Statements
Consolidated
Statements of Operations -- Three and nine months ended September 30, 2008 and
2007
Condensed
Consolidated Balance Sheets -- September 30, 2008 and December 31,
2007
Condensed
Consolidated Statements of Cash Flows -- Nine months ended September 30, 2008
and 2007
Notes to
Condensed Consolidated Financial Statements -- September 30, 2008
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
6. Exhibits
SIGNATURE
PART
I: FINANCIAL INFORMATION
Item
1. Financial
Statements
AMR
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited) (In millions,
except per share amounts)
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- American Airlines
|
|
$ |
4,946 |
|
|
|
|
$ |
4,598 |
|
|
$ |
14,060 |
|
|
$ |
13,299 |
|
-
Regional Affiliates
|
|
|
668 |
|
|
|
|
|
648 |
|
|
|
1,932 |
|
|
|
1,864 |
|
Cargo
|
|
|
230 |
|
|
|
|
|
196 |
|
|
|
678 |
|
|
|
597 |
|
Other
revenues
|
|
|
577 |
|
|
|
|
|
504 |
|
|
|
1,627 |
|
|
|
1,492 |
|
Total
operating revenues
|
|
|
6,421 |
|
|
|
|
|
5,946 |
|
|
|
18,297 |
|
|
|
17,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
2,722 |
|
|
|
|
|
1,743 |
|
|
|
7,195 |
|
|
|
4,797 |
|
Wages,
salaries and benefits
|
|
|
1,633 |
|
|
|
|
|
1,721 |
|
|
|
4,935 |
|
|
|
5,047 |
|
Other
rentals and landing fees
|
|
|
344 |
|
|
|
|
|
328 |
|
|
|
985 |
|
|
|
970 |
|
Depreciation
and amortization
|
|
|
289 |
|
|
|
|
|
307 |
|
|
|
922 |
|
|
|
892 |
|
Maintenance,
materials and repairs
|
|
|
304 |
|
|
|
|
|
274 |
|
|
|
943 |
|
|
|
790 |
|
Commissions,
booking fees and credit
card
expense
|
|
|
264 |
|
|
|
|
|
270 |
|
|
|
780 |
|
|
|
787 |
|
Aircraft rentals |
|
|
122 |
|
|
|
|
|
148 |
|
|
|
372 |
|
|
|
451 |
|
Food
services |
|
|
135 |
|
|
|
|
|
139 |
|
|
|
395 |
|
|
|
399 |
|
Special
charges
|
|
|
27 |
|
|
|
|
|
- |
|
|
|
1,191 |
|
|
|
- |
|
Other
operating expenses
|
|
|
797 |
|
|
|
|
|
|
|
697 |
|
|
|
2,272 |
|
|
|
2,085 |
|
Total
operating expenses
|
|
|
6,637 |
|
|
|
|
|
|
|
5,627 |
|
|
|
19,990 |
|
|
|
16,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
(216 |
) |
|
|
|
|
|
|
319 |
|
|
|
(1,693 |
) |
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
37 |
|
|
|
|
|
|
|
90 |
|
|
|
138 |
|
|
|
257 |
|
Interest
expense
|
|
|
(190 |
) |
|
|
|
|
|
|
(227 |
) |
|
|
(569 |
) |
|
|
(703 |
) |
Interest
capitalized
|
|
|
10 |
|
|
|
|
|
|
|
3 |
|
|
|
23 |
|
|
|
17 |
|
Miscellaneous
– net
|
|
|
404 |
|
|
|
|
|
|
|
(10 |
) |
|
|
370 |
|
|
|
(32 |
) |
|
|
|
261 |
|
|
|
|
|
|
|
(144 |
) |
|
|
(38 |
) |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
|
45 |
|
|
|
|
|
|
|
175 |
|
|
|
(1,731 |
) |
|
|
573 |
|
Income
tax
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
Earnings (Loss)
|
|
$ |
45 |
|
|
|
|
|
|
$ |
175 |
|
|
$ |
(1,731 |
) |
|
$ |
573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
|
|
|
|
$ |
0.70 |
|
|
$ |
(6.84 |
) |
|
$ |
2.35 |
|
Diluted |
|
$ |
0.17 |
|
|
|
|
|
|
$ |
0.61 |
|
|
$ |
(6.84 |
) |
|
$ |
1.98 |
|
The
accompanying notes are an integral part of these financial
statements.
AMR
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In
millions)
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash |
|
$ 273
|
|
|
|
|
$ 148 |
|
Short-term
investments
|
|
|
4,348 |
|
|
|
|
|
|
|
4,387 |
|
Restricted
cash and short-term investments
|
|
|
456 |
|
|
|
|
|
|
|
428 |
|
Receivables,
net
|
|
|
1,104 |
|
|
|
|
|
|
|
1,027 |
|
Inventories,
net
Fuel
derivative contracts
|
|
|
670
210
|
|
|
|
|
|
|
|
601
416
|
|
Other
current assets
|
|
|
446 |
|
|
|
|
|
|
|
222 |
|
Total
current assets
|
|
|
7,507 |
|
|
|
|
|
|
|
7,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight
equipment, net
|
|
|
12,608 |
|
|
|
|
|
|
|
13,977 |
|
Other
equipment and property, net
|
|
|
2,376 |
|
|
|
|
|
|
|
2,413 |
|
Purchase
deposits for flight equipment
|
|
|
605 |
|
|
|
|
|
|
|
241 |
|
|
|
|
15,589 |
|
|
|
|
|
|
|
16,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and Property Under Capital Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight
equipment, net
|
|
|
277 |
|
|
|
|
|
|
|
686 |
|
Other
equipment and property, net
|
|
|
62 |
|
|
|
|
|
|
|
77 |
|
|
|
|
339 |
|
|
|
|
|
|
|
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Route
acquisition costs and airport operating and gate lease rights,
net
|
|
|
1,116 |
|
|
|
|
|
|
|
1,156 |
|
Other
assets
|
|
|
2,399 |
|
|
|
|
|
|
|
2,792 |
|
|
|
$ |
26,950 |
|
|
|
|
|
|
$ |
28,571 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ 1,164 |
|
|
|
|
$ 1,182 |
|
Accrued
liabilities
|
|
|
2,325 |
|
|
|
|
|
|
|
2,267 |
|
Air
traffic liability
|
|
|
4,405 |
|
|
|
|
|
|
|
3,985 |
|
Current
maturities of long-term debt
|
|
|
1,469 |
|
|
|
|
|
|
|
902 |
|
Current
obligations under capital leases
|
|
|
121 |
|
|
|
|
|
|
|
147 |
|
Total
current liabilities
|
|
|
9,484 |
|
|
|
|
|
|
|
8,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
8,946 |
|
|
|
|
|
|
|
9,413 |
|
Obligations
under capital leases, less current obligations
|
|
|
590 |
|
|
|
|
|
|
|
680 |
|
Pension
and postretirement benefits
|
|
|
3,736 |
|
|
|
|
|
|
|
3,620 |
|
Other liabilities, deferred gains and deferred credits |
|
|
3,260 |
|
|
|
|
|
|
|
3,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Common
stock
|
|
|
285 |
|
|
|
|
|
|
|
255 |
|
Additional paid-in-capital |
|
|
3,769 |
|
|
|
|
|
|
|
3,489 |
|
Treasury stock |
|
|
(367 |
) |
|
|
|
|
|
|
(367 |
) |
Accumulated other comprehensive income
|
|
|
368 |
|
|
|
|
|
|
|
670 |
|
Accumulated deficit
|
|
|
(3,121 |
) |
|
|
|
|
|
|
(1,390 |
) |
|
|
|
934 |
|
|
|
|
|
|
|
2,657 |
|
|
|
$ |
26,950 |
|
|
|
|
|
|
$ |
28,571 |
|
|
The
accompanying notes are an integral part of these financial
statements.
|
AMR
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In
millions)
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
Net
Cash Provided by (used for) Operating Activities
|
|
$ |
(30 |
) |
|
|
|
|
$ |
1,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(687 |
) |
|
|
|
|
|
(515 |
) |
Net
(increase)/decrease in short-term investments
|
|
|
39 |
|
|
|
|
|
|
(635 |
) |
Net
(increase)/decrease in restricted cash and short-term
investments
|
|
|
(28 |
) |
|
|
|
|
|
21 |
|
Proceeds
from sale of American Beacon Advisors, Inc., net of
expenses
|
|
|
442 |
|
|
|
|
|
|
- |
|
Proceeds
from sale of equipment and property
|
|
|
18 |
|
|
|
|
|
|
27 |
|
Other
|
|
|
8 |
|
|
|
|
|
|
7 |
|
Net
cash used by investing activities
|
|
|
(208 |
) |
|
|
|
|
|
(1,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(907 |
) |
|
|
|
|
|
|
(1,456 |
) |
Proceeds
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of debt
|
|
|
823 |
|
|
|
|
|
|
|
- |
|
Sale
leaseback transactions
|
|
|
151 |
|
|
|
|
|
|
|
- |
|
Issuance
of common stock, net of issuance costs
|
|
|
294 |
|
|
|
|
|
|
|
497 |
|
Reimbursement
from construction reserve account
|
|
|
1 |
|
|
|
|
|
|
|
61 |
|
Exercise
of stock options
|
|
|
1 |
|
|
|
|
|
|
|
88 |
|
Net
cash provided (used) by financing activities
|
|
|
363 |
|
|
|
|
|
|
|
(810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
125 |
|
|
|
|
|
|
|
40 |
|
Cash
at beginning of period
|
|
|
148 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
273 |
|
|
|
|
|
|
$ |
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
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 thereto included in the AMR Annual Report on Form 10-K for the
year ended December 31, 2007 (2007 Form
10-K).
|
2.
|
Beginning
in the first quarter of 2008, AMR reclassified revenues associated with
the marketing component of AAdvantage program mileage sales from Passenger
revenue to Other revenue. As a result of this change,
approximately $152 million and $450 million of revenue was reclassified
from Passenger revenue to Other revenue for the three and nine months
ended September 30, 2007, respectively, to conform to the current
presentation.
|
3.
|
During
the quarter ended September 30, 2008, the Company entered into amendments
to its 737-800 purchase agreement with the Boeing
Company. Giving effect to the amendments, the Company is now
committed to take delivery of a total of 36 737-800 aircraft in 2009 and
40 737-800 aircraft in 2010. In addition to these aircraft, the
Company has firm commitments for eleven 737-800 aircraft and seven Boeing
777 aircraft scheduled to be delivered in 2013 -
2016.
|
Under the
Boeing 737-800 and Boeing 777-200 aircraft purchase agreements, payments for the
related aircraft purchase commitments will be zero in the remainder of 2008,
approximately $1.2 billion in 2009, $1.1 billion in 2010, $99 million in 2011,
$220 million in 2012, and $1.0 billion for 2013 and beyond. These amounts are
net of purchase deposits currently held by the manufacturer. Any
incremental firm aircraft orders will increase the Company’s
commitments.
In
October of 2008, the Company entered into a sale-leaseback agreement for 20 of
the 36 Boeing 737-800 aircraft to be delivered in 2009. Such
financing is subject to certain terms and conditions including a minimum
liquidity requirement. In addition, the Company has arranged for
backstop financing which could be used for the remaining 16 of the Company’s
2009 Boeing 737-800 aircraft deliveries, as well as a significant portion of the
2010 Boeing 737-800 aircraft deliveries. If the Company elects to
utilize the backstop financing, all of its purchase commitments for 2009 and
2010 would be covered by committed financing except for approximately $400
million of commitments, substantially all of which are due in the fourth quarter
of 2010.
On
October 15, 2008, the Company entered into a new purchase agreement with Boeing
for the acquisition of 42 Boeing 787-9 aircraft. The first such
aircraft is scheduled to be delivered in 2012, and the last is scheduled to be
delivered in 2018. The agreement also includes purchase rights to
acquire up to 58 additional Boeing 787 aircraft, with deliveries between 2015
and 2020. Once the Company has satisfied certain contingent aspects
of the contract, the Company will have capital commitments for up to 42 Boeing
787-9 aircraft. As of October 15, 2008, the Company has $102 million
on deposit with Boeing for the 787-9 aircraft orders. If no Boeing
787-9 orders are ultimately executed, this deposit will be applied to the
Company’s other firm commitments at that time, or refunded to the Company if no
other firm commitments exist. See the Liquidity and
Capital Resources subsection of Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations for more information regarding the
contract contingencies.
AMR
CORPORATION
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
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. Based on
the information to date, the Company has not recorded any reserve for this
exposure for the quarter ended September 30, 2008. 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.
|
4.
|
Accumulated
depreciation of owned equipment and property at September 30, 2008 and
December 31, 2007 was $10.1 billion and $11.9 billion,
respectively. Accumulated amortization of equipment and
property under capital leases at September 30, 2008 and December 31, 2007
was $573 million and $1.2 billion, respectively. During the second quarter
of 2008, the Company recorded an impairment charge to write down its
McDonnell Douglas MD80 and Embraer RJ-135 fleets and certain related
long-lived assets to their estimated fair values. As a result
$2.8 billion of accumulated depreciation and amortization was eliminated
as a new cost basis was established for these aircraft. See Note 9 to the
condensed consolidated financial statements for more information regarding
the impairment charges.
|
5.
|
As
discussed in Note 7 to the consolidated financial statements in the 2007
Form 10-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
$678 million during the nine months ended September 30, 2008 to $1.3
billion as of September 30, 2008, including the impact of comprehensive
income for the nine months ended September 30, 2008 and changes from other
adjustments.
|
6.
|
As
of September 30, 2008, AMR had issued guarantees covering approximately
$1.4 billion of American’s tax-exempt bond debt and American had issued
guarantees covering approximately $750 million of AMR’s unsecured
debt. In addition, as of September 30, 2008, AMR and American
had issued guarantees covering approximately $305 million of AMR Eagle’s
secured debt and AMR has issued guarantees covering an additional $2.1
billion of AMR Eagle’s secured
debt.
|
As
discussed in Note 6 to the consolidated financial statements in the 2007 Form
10-K, the Company has outstanding $324 million principal amount of its 4.50
percent senior convertible notes due 2024 (the 4.50 Notes). On
February 15, 2009, and then again at certain later dates, the holders of the
4.50 Notes may require the Company to purchase all or a portion of their notes
at a price equal to 100% of their principal amount plus unpaid interest which
may be paid in cash, common stock or a combination of cash and common
stock. Accordingly, the Company has classified the $324 million
principal amount of the 4.50 Notes into Current maturities of long term debt as
of September 30, 2008 as a result of the existence of these put
provisions. The Company is evaluating various payment and refinancing
alternatives for the outstanding 4.50 Notes upon the expected exercise of the
put provision in February 2009.
In August
2008, AMR retired, by purchasing with cash, $75 million of the $300 million
principal amount of the 4.25% senior convertible notes due 2023 (the 4.25
Notes). In September 2008, the remaining holders of the 4.25 Notes
exercised their elective put rights and the Company purchased and retired these
notes at a price equal to 100% of their principal amount, totaling $225
million. Under the terms of the 4.25 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 4.25 Notes solely with
cash.
AMR
CORPORATION
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
In
May 2008, the Financial Accounting Standards Board (FASB) affirmed the
consensus of 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)”, which applies to all convertible debt
instruments that have a ‘‘net settlement feature’’, which means that such
convertible debt instruments, by their terms, may be settled either wholly or
partially in cash upon conversion. FSP APB 14-1 requires issuers of
convertible debt instruments that may be settled wholly or partially in cash
upon conversion to separately account for the liability and equity components in
a manner reflective of the issuers’ nonconvertible debt borrowing rate. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal
years. Early adoption is not permitted and retroactive application to
all periods presented is required. The adoption of FSP APB 14-1 will
affect the historical accounting for the 4.25% Notes and the 4.50% Notes, and
will result in increased interest expense of approximately $5 million in 2009,
as well as more significant increases to prior years’ interest expense upon
retrospective application in 2009.
American
has a secured bank credit facility which consists of a fully drawn $255 million
revolving credit facility (fully drawn in September 2008), with a final maturity
on June 17, 2009, and a fully drawn $437 million term loan facility, with a
final maturity on December 17, 2010 (the Revolving Facility and the Term Loan
Facility, respectively, and collectively, the Credit Facility). The
Credit Facility contains a covenant (the EBITDAR Covenant) requiring AMR to
maintain specified ratios of cash flow to fixed charges. In May 2008,
AMR and American entered into an amendment to the Credit Facility which waived
compliance with the EBITDAR Covenant for periods ending on any date from and
including June 30, 2008 through March 31, 2009, and which reduced the minimum
ratios AMR is required to satisfy thereafter. The required ratio will
be 0.90 to 1.00 for the one quarter period ending June 30, 2009 and will
increase to 1.15 to 1.00 for the four quarter period ending September 30,
2010.
In the
third quarter, the Company raised approximately $500 million under a loan
secured by aircraft. The loan bears interest at a LIBOR-based (London
Interbank Offered Rate) variable rate with a fixed margin which resets quarterly
and is due in installments through 2015.
7.
|
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 for financial
assets and liabilities is effective for fiscal years beginning after
November 15, 2007, and the Company has adopted the standard for those
assets and liabilities as of January 1, 2008 and the impact of adoption
was not significant.
|
SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. The
Company’s short-term investments primarily utilize broker quotes in a non-active
market for valuation of these securities. The Company’s fuel
derivative contracts, which primarily consist of commodity options and collars,
are valued using energy and commodity market data which is derived by combining
raw inputs with quantitative models and processes to generate forward curves and
volatilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
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 September 30,
2008
|
|
Description
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments 1
|
|
$ |
4,348 |
|
|
$ |
1,200 |
|
|
$ |
3,148 |
|
|
$ |
- |
|
Restricted
cash and short-term investments 1
|
|
|
456 |
|
|
|
456 |
|
|
|
- |
|
|
|
- |
|
Fuel
derivative contracts 1,
2
|
|
|
165 |
|
|
|
- |
|
|
|
165 |
|
|
|
- |
|
Total
|
|
$ |
4,969 |
|
|
$ |
1,656 |
|
|
$ |
3,313 |
|
|
$ |
- |
|
1
Unrealized gains or losses on short term investments, restricted cash and
short-term investments and derivatives are recorded in Accumulated other
comprehensive income (loss) at each measurement date.
2 Fuel
derivative contracts are recorded in the condensed consolidated balance sheets
on a gross basis. As of September 30, 2008, contracts in an asset
position were $210 million and were recorded in Fuel derivative contracts, while
contracts in a liability position were ($45) million and were recorded in
Accrued liabilities.
8.
|
The
following tables provide the components of net periodic benefit cost for
the three and nine months ended September 30, 2008 and 2007 (in
millions):
|
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic
benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
81 |
|
|
$ |
93 |
|
|
$ |
243 |
|
|
$ |
278 |
|
Interest
cost
|
|
|
171 |
|
|
|
168 |
|
|
|
513 |
|
|
|
504 |
|
Expected return on assets
|
|
|
(197 |
) |
|
|
(187 |
) |
|
|
(592 |
) |
|
|
(561 |
) |
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
4 |
|
|
|
4 |
|
|
|
12 |
|
|
|
12 |
|
Unrecognized net loss
|
|
|
1 |
|
|
|
6 |
|
|
|
2 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
60 |
|
|
$ |
84 |
|
|
$ |
178 |
|
|
$ |
252 |
|
AMR
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
|
|
Retiree
Medical and Other Benefits
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic
benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
14 |
|
|
$ |
18 |
|
|
$ |
41 |
|
|
$ |
53 |
|
Interest cost
|
|
|
43 |
|
|
|
49 |
|
|
|
129 |
|
|
|
145 |
|
Expected return on assets
|
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(15 |
) |
|
|
(13 |
) |
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(10 |
) |
Unrecognized net (gain) loss
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(17 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
44 |
|
|
$ |
59 |
|
|
$ |
128 |
|
|
$ |
170 |
|
|
The
Company’s 2008 minimum required contribution to its defined benefit
pension plan is $78 million. On July 15, 2008 the Company made
a contribution of $3 million bringing year to date contributions to the
minimum contribution amount of $78
million.
|
|
In
October 2008, the Company incurred a settlement for one of its defined
benefit plans under the application of Statement of Financial Accounting
Standard No. 88 “Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits” (SFAS 88) and
additional settlements may occur in the fourth quarter, dependent upon
plan redemptions. As a result, the Company will recognize, in
the fourth quarter of 2008, a pro-rata portion of the unrealized losses
associated with this plan. The amount of the non-cash charge to
be recognized is not yet
determinable.
|
9.
|
As a result of the
revenue environment, high fuel prices and the Company’s restructuring
activities, the Company has recorded a number of charges during the last
few years. In May 2008, the Company announced capacity
reductions due to unprecedented high fuel costs and the other challenges
facing the industry. In connection with these capacity
reductions, the Company incurred special charges related to aircraft,
employee reductions and certain other
charges.
|
Aircraft
Charges
In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company
records impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired, the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amount of those assets and the net book value of the assets exceeds their
estimated fair value. In connection with the May 2008 capacity reduction
announcement, the Company concluded that a triggering event had occurred and
required a test for impairment. As a result of this test, the Company
concluded the carrying values of its McDonnell Douglas MD-80 and the Embraer
RJ-135 aircraft fleets were no longer recoverable. Consequently, during the
second quarter of 2008, the Company recorded an impairment charge of $1.1
billion to write these and certain related long-lived assets down to their
estimated fair values. No portion of the impairment charge will result in future
cash expenditures. All other fleet types were tested for impairment
but were concluded to be recoverable with projected undiscounted cash flows or
had fair values at levels above current carrying value. Included in
the charge for the Embraer RJ-135 fleet were write downs on 29 aircraft that
were considered held for sale as of September 30, 2008. The McDonnell
Douglas MD-80 aircraft are being depreciated over their remaining useful lives
averaging approximately five years.
AMR
CORPORATION
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
In
determining the asset recoverability, management estimated the undiscounted
future cash flows utilizing models used by the Company in making fleet and
scheduling decisions. In determining fair market value, the Company
utilized recent external appraisals of its fleets, a published aircraft pricing
survey and recent transactions involving sales of similar aircraft, adjusted
based on estimates of maintenance status and to consider the impact of recent
industry events on these values. As a result of the write down of
these aircraft to fair value, as well as the acceleration of the retirement
dates, depreciation expense is expected to decrease by approximately $156
million on an annualized basis.
As part
of these capacity reductions, the Company expects to ground over the next twelve
months its leased Airbus A300 aircraft prior to lease expiration. As
of September 30, 2008, the Company estimates that it will incur approximately
$140 million in net present value of future lease payments and lease return
costs related to the grounding of the leased A300 fleet, of which $19 million
was incurred in the third quarter of 2008 as two aircraft were removed from
service. The remaining charges will be incurred over the next four
quarters as the aircraft are removed from service. These expected future charges
do not yet consider potential sublease contracts or similar arrangements with
respect to the leased Airbus 300 aircraft, which could offset a portion of the
charges, as significant contract amendments are required in order to execute any
sublease agreements. The Company estimates that virtually all of
these charges will result in future cash expenditures.
Employee
charges
In
conjunction with the capacity reductions announced in May 2008, the Company
estimated that it will reduce its workforce commensurate with the announced
system-wide capacity reductions. This reduction in workforce is being
accomplished through various measures, including voluntary programs, part-time
work schedules, furloughs in accordance with collective bargaining agreements,
and other reductions. As a result of this reduction in workforce the
Company will incur employee charges of approximately $70 million for severance
related costs, of which an aggregate $63 million had been recorded as of
September 30, 2008 in accordance with Statement of Financial Accounting
Standards No. 112, “Employers Accounting for Postemployment Benefits” (SFAS
112), based on probable expectations of involuntary terminations. The Company
does not expect remaining charges related to the reduction in workforce to be
significant.
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 September 30, 2008:
|
|
Aircraft
Charges
|
|
|
Facility
Exit Costs
|
|
|
Employee
Charges
|
|
|
Other
|
|
|
Total
|
|
Remaining accrual at
December
31, 2007
|
|
$ |
126 |
|
|
$ |
18 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
144 |
|
Capacity reduction charges
|
|
|
1,103 |
|
|
|
- |
|
|
|
63 |
|
|
|
25 |
|
|
|
1,191 |
|
Non-cash charges
|
|
|
(1,103 |
) |
|
|
- |
|
|
|
- |
|
|
|
(25 |
) |
|
|
(1,128 |
) |
Adjustments
|
|
|
- |
|
|
|
(5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
Payments
|
|
|
(28 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(28 |
) |
Remaining
accrual at
September 30, 2008
|
|
$ |
98 |
|
|
$ |
13 |
|
|
$ |
63 |
|
|
$ |
- |
|
|
$ |
174 |
|
Cash
outlays related to the accruals for aircraft charges and facility exit costs
will occur through 2017 and 2018, respectively. Cash outlays for the
employee charges will be incurred over the next several
quarters.
Other
During
the quarter ended September 30, 2008, the Company finalized the liability
associated with flight 587. A previously recorded liability and
related insurance receivable were reduced as a result of the settlement by
approximately $381 million.
AMR
CORPORATION
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
10.
|
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 September 30, 2008 and 2007, comprehensive income (loss) was
$(1.0) billion and $184 million, respectively, and for the nine month
periods ended September 30, 2008 and 2007, comprehensive income (loss) was
$(2.0) billion and $654 million, respectively. Total comprehensive income
for the year ended December 31, 2007 was $2.5
billion. The difference between net earnings (loss) and
comprehensive income (loss) for the three and nine month periods ended
September 30, 2008 and 2007 is due primarily to the accounting for the
Company’s derivative financial instruments. Due to the current
value of the Company’s derivative contracts, some agreements with
counterparties require collateral to be deposited with the
Company. As of September 30, 2008 the collateral held in
Short-term investments by AMR from such counterparties was $239 million,
an increase of $75 million from December 31, 2007, which is included in
cash flows from operations. 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 (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.
|
In March
of 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an amendment
of FASB Statement No. 133” (SFAS 161). SFAS 161 requires entities to
provide greater transparency about how and why the entity uses derivative
instruments, how the instruments and related hedged items are accounted for
under SFAS 133, and how the instruments and related hedged items affect the
financial position, results of operations, and cash flows of the
entity. SFAS 161 is effective for fiscal years beginning after
November 15, 2008. The principal impact to the Company will be to
require the Company to expand its disclosure regarding its derivative
instruments.
In
September 2008, a counterparty to certain of the Company’s fuel hedging
derivative contracts filed for protection under Chapter 11 of the Federal
Bankruptcy Code. Per the contract, the Company was able to terminate
its hedge positions with this counterparty as a result of the counterparty’s
default. Due to the decline in fuel prices subsequent to the Chapter
11 filing, the Company was in a liability position to this counterparty at the
time the hedge position was terminated. The Company incurred a charge
of $26 million associated with these contracts during the period subsequent to
the Chapter 11 filing and prior to termination, when the derivative contracts no
longer qualified for hedge accounting under SFAS 133. The charge was
recorded to Miscellaneous-net in the accompanying condensed consolidated
statement of operations. Had the Company retained these hedge
positions, this charge would have been incurred as fuel expense over the next
two years assuming a static fuel price from the termination date.
AMR
CORPORATION
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
11.
|
The
following table sets forth the computations of basic and diluted earnings
(loss) per share (in millions, except per share
data):
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) - numerator for basic earnings per
share
|
|
$ |
45 |
|
|
$ |
175 |
|
|
$ |
(1,731 |
) |
|
$ |
573 |
|
Interest on senior convertible notes
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
21 |
|
Net earnings (loss) adjusted for interest on senior
convertible notes -
numerator for diluted earnings per share
|
|
$ |
45 |
|
|
$ |
182 |
|
|
$ |
(1,731 |
) |
|
$ |
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share –
weighted-average
shares
|
|
|
258 |
|
|
|
249 |
|
|
|
253 |
|
|
|
244 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes
|
|
|
- |
|
|
|
32 |
|
|
|
- |
|
|
|
32 |
|
Employee options and shares
|
|
|
25 |
|
|
|
30 |
|
|
|
- |
|
|
|
37 |
|
Assumed treasury shares purchased
|
|
|
(15 |
) |
|
|
(11 |
) |
|
|
- |
|
|
|
(13 |
) |
Dilutive potential common shares
|
|
|
10 |
|
|
|
51 |
|
|
|
- |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share -adjusted
weighted-average
shares
|
|
|
268 |
|
|
|
300 |
|
|
|
253 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
0.17 |
|
|
$ |
0.70 |
|
|
$ |
(6.84 |
) |
|
$ |
2.35 |
|
Diluted
earnings (loss) per share
|
|
$ |
0.17 |
|
|
$ |
0.61 |
|
|
$ |
(6.84 |
) |
|
$ |
1.98 |
|
Approximately
28 million shares related to convertible notes were not added to the denominator
for the three months ended September 30, 2008 because inclusion of such shares
would have been antidilutive. For the three months ended September 30,
2008 and 2007, approximately twelve million and nine million shares,
respectively, related to employee stock options were not added to the
denominator because the options’ exercise prices were greater than the average
market price of the common shares.
Approximately
41 million shares related to employee stock options, performance share plans,
convertible notes and deferred stock were not added to the denominator for the
nine months ended September 30, 2008 because inclusion of such shares would have
been antidilutive. For the nine months ended September 30, 2008 and 2007,
approximately 13 million and five million shares, respectively, related to
employee stock options were not added to the denominator because the options’
exercise prices were greater than the average market price of the common
shares.
12.
|
On
April 16, 2008, the Company announced that it had reached a definitive
agreement with Lighthouse Holdings, Inc., which is owned by investment
funds affiliated with TPG Capital, L.P. and Pharos Capital Group, LLC for
the sale of American Beacon Advisors, Inc. (American Beacon), its
wholly-owned asset management subsidiary. On September 12, 2008, AMR
completed the sale of American Beacon which resulted in a net gain of $432
million. The gain on the sale is included in Miscellaneous-net in
the accompanying condensed consolidated statement of
operations. While primarily a cash transaction, the Company
also maintained a minority equity stake in American Beacon. As the
Company has significant continuing involvement with American Beacon
post-sale, AMR does not account for the disposal of American Beacon as
discontinued operations.
|
AMR
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
13.
|
During
the third quarter of 2008, AMR completed a public offering of 27.1 million
shares of its common stock. The Company realized net proceeds
of $294 million from the sale of equity and paid to the sales agent for
such offering compensation in the amount of $6
million.
|
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, fleet plans, overall economic conditions, plans and
objectives for future operations, and the impact on the Company of its results
of operations in recent years and the sufficiency of its financial resources to
absorb that impact. Other forward-looking statements include statements which do
not relate solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known trends or
uncertainties cannot be predicted, guaranteed or assured. All
forward-looking statements in this report are based upon information available
to the Company on the date of this report. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events, or otherwise.
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; the ability of the Company to generate
additional revenues and reduce its costs; changes in economic and other
conditions beyond the Company’s control, and the volatile results of the
Company’s operations; 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; continued high and volatile fuel
prices and further increases in the price of fuel, and the availability of fuel;
the fiercely and increasingly competitive business environment faced by the
Company; industry consolidation; competition with reorganized carriers; low fare
levels by historical standards and the Company’s reduced pricing power; the
Company’s need to raise substantial additional funds and its ability to do so on
acceptable terms; 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 or avian flu) 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; 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 2007 Form 10-K
(see in particular Item 1A “Risk Factors” in the 2007 Form 10-K, and as amended
in Item 1A in this Quarterly Report on Form 10-Q for the quarter ended September
30, 2008).
Overview
The
Company recorded net earnings of $45 million in the third quarter of 2008
compared to net earnings of $175 million in the same period last
year. The Company’s third quarter 2008 results includes the sale of
American Beacon for a net gain of $432 million and $27 million of special
charges due to continued capacity reduction effects. The gain on sale
and the capacity reduction charges are described in footnotes 12 and 9,
respectively, to the condensed consolidated financial statements.
Excluding
these special items, the Company’s third quarter 2008 net operating loss
reflects a dramatic year-over-year increase in fuel prices from an average of
$2.17 per gallon in the third quarter 2007 to an average of $3.57 per gallon in
the third quarter of 2008. Fuel expense has become the Company’s
largest single expense category and the price increase resulted in $1.1 billion
in incremental year-over-year fuel expense in the third quarter 2008 (based on
the year-over-year increase in the average price per gallon multiplied by
gallons consumed). Although fuel prices have abated somewhat from the
record prices recorded in July 2008, fuel prices are still very high and
volatile by historical standards.
The
significant rise in fuel price was partially offset by higher unit revenues
(passenger revenue per available seat mile). Mainline passenger unit
revenues increased 10.9 percent for the third quarter due to a 13.2 percent
increase in passenger yield (passenger revenue per passenger mile) partially
offset by a 1.7 point load factor decrease compared to the same period in
2007. Although passenger yield showed year-over-year improvement,
passenger yield remains essentially flat with the levels set in 2000 despite
cumulative inflation of approximately 27% over the same time frame.
The
Company made several announcements during the third quarter. In
August 2008, American entered into a joint business agreement and related
marketing arrangements with UK carrier, British Airways, and Spanish carrier,
Iberia providing for commercial cooperation by the three carriers on flights
between North America (consisting of the United States, Canada and Mexico) and
Europe (consisting of the European Union, Switzerland and
Norway). The agreement contemplates the pooling and sharing of
certain revenues and costs on transatlantic flights, expanded codesharing on
each other’s flights, enhanced frequent flyer program reciprocity, and
cooperation in the areas of planning, marketing and certain
operations. These agreements were signed in connection with an
application to the U.S. Department of Transportation by the three carriers for
antitrust immunity to permit global cooperation. The application also
included the Finnish carrier, Finnair, and the Jordanian carrier, Royal
Jordanian. If granted (which cannot be assured), antitrust immunity
will permit the five carriers, all of whom are members of the oneworld airline alliance, to
deepen cooperation on a bilateral and multilateral basis.
Implementation
of the joint business agreement and 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 regulatory approvals must be obtained
may impose requirements or limitations as a condition of granting such
approvals, such as requiring divestiture of routes, gates, slots or other
assets.
During
the quarter ended September 30, 2008, the Company entered into amendments to its
737-800 purchase agreement with the Boeing Company. Giving
effect to the amendments, the Company is now committed to take delivery of a
total of 36 737-800 aircraft in 2009 and 40 737-800 aircraft in
2010. In addition to these aircraft, the Company has firm commitments
for eleven 737-800 aircraft and seven Boeing 777 aircraft scheduled to be
delivered in 2013 - 2016.
On
October 15, 2008, the Company entered into a new purchase agreement with Boeing
for the acquisition of 42 Boeing 787-9 aircraft scheduled to be delivered
between 2012 and 2018. The Boeing 787-9
purchase agreement contains certain contingency provisions, which are described
in the Liquidity and Capital Resources subsection of Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. The agreement also includes purchase rights to
acquire up to 58 additional Boeing 787 aircraft, with deliveries between 2015
and 2020.
In
September 2008, AMR completed the sale of American Beacon which resulted in a
net gain of $432 million. American Beacon will continue to provide a
number of services for AMR and its affiliates, including cash management for AMR
and investment advisory services and investment management services for American
Airlines pension, 401(k) and other health and welfare plans. See
footnote 12 to the condensed consolidated financial statements for more
information.
In the
third quarter, the Company also realized net proceeds of $294 million through
the sale of 27.1 million shares of AMR common stock. Proceeds from
the issuance will be used for general corporate purposes.
The Company’s ability to
become consistently 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 referred to under
“Forward-Looking Information” above and are discussed in the Risk Factors listed
in Item 1A (on pages 11-17) in the 2007 Form 10-K, and as amended in Item 1A in
this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.
In addition, four of the Company’s largest domestic competitors and
several smaller carriers have filed for bankruptcy in the last several years and
have used this process to significantly reduce contractual labor and other
costs. In order to remain competitive and to improve its financial
condition, the Company must continue to take steps to generate additional
revenues and to reduce its costs. Although the Company has a number of
initiatives underway to address its cost and revenue challenges, the adequacy
and ultimate success of these initiatives is not known at this time and cannot
be assured. 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 and if fuel
prices were to persist for an extended period at recent historic 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 2007 Form 10-K. As of the date of this Form 10-Q,
the Company believes it should have sufficient liquidity to fund its operations
for the near term, including repayment of debt and capital leases, capital
expenditures and other contractual obligations. However, to maintain sufficient
liquidity as the Company continues to implement its restructuring and cost
reduction initiatives, and because the Company has significant debt, lease and
other obligations in the next several years, including commitments to purchase
aircraft, as well as significant pension funding obligations, the Company will
need access to substantial additional funding.
The
Company’s possible financing sources primarily include: (i) a limited amount of
additional secured aircraft debt (a very large majority of the Company’s owned
aircraft, including the Company’s Section 1110-eligible aircraft, are
encumbered) or sale-leaseback transactions involving owned aircraft; (ii) debt
secured by new aircraft deliveries; (iii) debt secured by other assets; (iv)
securitization of future operating receipts; (v) the sale or monetization of
certain assets; (vi) unsecured debt; and (vii) issuance of equity and/or
equity-like securities. Besides unencumbered aircraft, some of the Company’s
particular assets and other sources of liquidity that could be sold or otherwise
used as sources of financing include AAdvantage program miles, route authorities
and takeoff and landing slots, and certain of the Company’s business units and
subsidiaries, such as AMR Eagle. 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, historically high fuel prices, and the
financial difficulties experienced in the airline industry. In
addition, recent disruptions in the credit markets have resulted in greater
volatility, less liquidity, widening of credit spreads and more limited
availability of financing. The inability of the Company to obtain
necessary funding on acceptable terms would have a material adverse impact on
the Company.
The
Company’s substantial indebtedness and other obligations have important
consequences. For example, they: (i) limit the Company’s ability to
obtain additional financing for working capital, capital expenditures,
acquisitions and general corporate purposes, and adversely affect the terms on
which such financing 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.
The
Company has firm commitments to take delivery of a total of 36 737-800 aircraft
in 2009 and 40 737-800 aircraft in 2010. In addition to these
aircraft, the Company has firm commitments for eleven 737-800 aircraft and seven
Boeing 777 aircraft scheduled to be delivered in 2013 - 2016.
Under the
Company’s Boeing 737-800 and Boeing 777-200 purchase agreements, payments for
the related aircraft purchase commitments will be zero in the remainder of 2008,
approximately $1.2 billion in 2009, $1.1 billion in 2010, $99 million in 2011,
$220 million in 2012, and $1.0 billion for 2013 and beyond. These amounts are
net of purchase deposits currently held by the manufacturer.
In
October of 2008, the Company entered into a sale-leaseback agreement for 20 of
the 36 Boeing 737-800 aircraft to be delivered in 2009. Such financing is
subject to certain terms and conditions including a minimum liquidity
requirement. In addition, the Company had previously arranged for
backstop financing which could be used for the remaining 16 of the Company’s
2009 Boeing 737-800 aircraft deliveries, as well as a significant portion of the
2010 Boeing 737-800 aircraft deliveries. If the Company elects to utilize
the backstop financing, all of its purchase commitments for 2009 and 2010 will
be covered by committed financing except for approximately $400 million,
substantially all of which are due in the fourth quarter of 2010.
On
October 15, 2008, the Company entered into a new purchase agreement with Boeing
for the acquisition of 42 Boeing 787-9 aircraft. The first such
aircraft is scheduled to be delivered in 2012, and the last is scheduled to be
delivered in 2018. The agreement also includes purchase rights to
acquire up to 58 additional Boeing 787 aircraft, with deliveries between 2015
and 2020.
Under the
787-9 purchase agreement, except as described below, American will not be
obligated to purchase a 787-9 aircraft unless it gives Boeing notice confirming
its election to do so at least 18 months prior to the scheduled delivery date
for that aircraft (the first scheduled delivery date is in September
2012). If American does not give that notice with respect to an
aircraft, the aircraft will be no longer subject to the 787-9 purchase
agreement. These confirmation rights may be exercised until May 1,
2013, provided that those rights will terminate earlier if American reaches a
collective bargaining agreement with its pilot union that includes provisions
enabling American to utilize the 787-9 to American’s satisfaction in the
operations desired by American, or if American confirms its election to purchase
any of the initial 42 787-9 aircraft. While there can be no
assurances, American expects to have reached an agreement as described
above with its pilots union prior to the first notification
date. In either of those events, American would become obligated to
purchase all of the initial 42 aircraft then subject to the purchase
agreement. If neither of those events occur prior to May 1, 2013,
then on that date American may elect to purchase all of the initial 42 aircraft
then subject to the purchase agreement, and if it does not elect to do so, the
purchase agreement will terminate in its entirety.
.
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
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 September 30, 2008 and expect to be able to continue to
comply with this covenant. 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 May
2008, AMR and American entered into an amendment to the Credit Facility which
waived compliance with the EBITDAR Covenant for periods ending on any date from
and including June 30, 2008 through March 31, 2009, and which reduced the
minimum ratios AMR is required to satisfy thereafter. The required
ratio will be 0.90 to 1.00 for the one quarter period ending June 30, 2009 and
will increase to 1.15 to 1.00 for the four quarter period ending September 30,
2010. Given fuel prices that are very high by historical standards
and the volatility of fuel prices and revenues, it is difficult to assess
whether the Company will be able to continue to comply with these covenants, and
there are no assurances that the Company 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 other debt and lease obligations, and otherwise have a
material adverse impact on the Company.
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. American is not
currently required to maintain any reserve under these agreements.
Under one
such agreement, the amount of such reserve may be based on, among other things,
the amount of unrestricted cash (not including undrawn credit facilities) held
by American and American’s debt service coverage ratio, as defined in the
agreement. In order to mitigate the impact of this potential reserve,
the Company drew down its $255 million revolving credit facility in September
2008. American expects that if fuel prices remain high by
historical standards and are not adequately offset by fare increases, American
could be required to maintain a reserve under this agreement in future
years. Based on the Company’s current agreement, no reserves will be
required in 2008. Given the volatility of fuel prices and revenues,
it is difficult to forecast the required amount of such reserve at any time.
However, if current conditions persist for some time, such required amount could
be significant in 2009.
Pension Funding
Obligation
The
Company’s 2008 minimum required contribution to its defined benefit pension plan
is $78 million. On July 15, the Company made an additional
contribution of $3 million bringing year to date contributions to the minimum
contribution of $78 million.
Cash Flow
Activity
At September 30, 2008, the
Company had $4.6 billion in unrestricted cash and short-term investments,
compared with $4.5 billion as of December 31, 2007. The Company’s
unrestricted cash and short-term investments included $239 million and $164
million, respectively, in collateral deposits received from the counterparties
of the Company’s fuel derivative instruments. 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. Net cash provided by
(used for) operating activities in the nine month period ended September 30,
2008 was ($30) million, a decrease of $2.0 billion over the same period in 2007
primarily due to a dramatic year-over-year increase in average fuel prices from
$2.04 per gallon for the nine month ending September 30, 2007 to $3.17 per
gallon for the same period in 2008. The fuel price increase resulted
in $2.6 billion in incremental year-over-year expense in the third quarter 2008
(based on the year-over-year increase in the average price per gallon multiplied
by gallons consumed). The Company contributed $78 million to its
defined benefit pension plans in the first nine months of 2008 compared to $380
million during the first nine months of 2007.
In the
quarter ended September 30, 2008, American raised approximately $500 million
under a loan secured by aircraft, due in installments through 2015. In addition,
AMR completed a public offering of 27.1 million shares of its common
stock. The Company realized net proceeds of $294 million from the
sale of equity.
In August
2008, AMR retired, by purchasing with cash, $75 million of the $300 million
principal amount of the 4.25% senior convertible notes due 2023. In September
2008, the remaining holders of the 4.25 Notes exercised their elective put
rights and the Company purchased and retired these notes at a price equal to
100% of their principal amount, totaling $225 million. Under the
terms of the 4.25 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 4.25 Notes solely with cash.
In
September 2008, the Company drew down its $255 million revolving credit
facility. The draw on the credit facility was intended to reduce the
amount of a potential credit card hold back reserve that could have
been imposed in the fourth quarter of 2008 based on the terms of one of the
Company’s credit card processing agreements. The amount of the hold
back reserve from such agreement may be based on, among other things, the amount
of unrestricted cash (which does not include undrawn credit facilities) held by
the Company and the Company’s debt service coverage ratio.
In
September, 2008, AMR completed the sale of American Beacon which resulted in a
net gain of $432 million. The gain on the sale is included in
Miscellaneous-net in the accompanying condensed consolidated statement of
operations. While primarily a cash transaction, the Company also
maintained a minority equity stake in American Beacon.
Capital
expenditures for the first nine months of 2008 were $687 million and primarily
included aircraft purchase deposits and aircraft modifications.
In the
past, the Company has from time to time refinanced, redeemed or repurchased its
debt and taken other steps to reduce its debt or lease obligations or otherwise
improve its balance sheet. Going forward, depending on market
conditions, its cash positions and other considerations, the Company may
continue to take such actions.
RESULTS
OF OPERATION
For the Three Months Ended
September 30, 2008 and 2007
Revenues
The
Company’s revenues increased approximately $475 million, or 8.0 percent, to $6.4
billion in the third quarter of 2008 from the same period last
year. American’s passenger revenues increased by 7.6 percent, or $348
million, despite a 3.0 percent decrease in capacity (available seat mile)
(ASM). American’s passenger load factor decreased 1.7 points to 82.2
percent while passenger yield increased by 13.2 percent to 14.34
cents. This resulted in an increase in passenger revenue per
available seat mile (RASM) of 10.9 percent to 11.79 cents.
Beginning
in the third quarter of 2008, AMR corrected the classification of certain
revenues associated with the fuel surcharge component of passenger revenue from
domestic to international revenue for purposes of the RASM
computations. As a result of this change, the previously reported
RASM and year-over-year trends have been corrected for the first and second
quarters of 2008 to conform to the current presentation.
Following
is additional information regarding American’s domestic and international RASM
and capacity:
|
|
Three
Months Ended March 31, 2008
|
|
|
|
As
Reported RASM (cents)
|
|
As
Reported
Y-O-Y
Change
|
|
Corrected
RASM
(cents)
|
|
Corrected
Y-O-Y
Change
|
|
DOT
Domestic
|
|
|
10.54 |
|
|
6.9%
|
|
|
|
10.4 |
|
|
5.9%
|
|
International
|
|
|
10.88 |
|
|
|
5.6 |
|
|
|
11.1 |
|
|
7.3
|
|
DOT
Latin America
|
|
|
12.08 |
|
|
|
8.0 |
|
|
|
12.2 |
|
|
9.2
|
|
DOT
Atlantic
|
|
9.43
|
|
|
|
(0.5) |
|
|
9.7
|
|
|
1.9
|
|
DOT
Pacific
|
|
9.79
|
|
|
|
10.7 |
|
|
|
10.0 |
|
|
|
13.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
|
As
Reported RASM (cents)
|
|
As
Reported
Y-O-Y
Change
|
|
Corrected
RASM
(cents)
|
|
Corrected
Y-O-Y
Change
|
|
DOT
Domestic
|
|
|
11.27 |
|
|
5.9%
|
|
|
|
11.08 |
|
|
4.2%
|
|
International
|
|
|
11.49 |
|
|
|
8.7 |
|
|
|
11.81 |
|
|
|
11.7 |
|
DOT
Latin America
|
|
|
11.73 |
|
|
|
10.2 |
|
|
|
12.01 |
|
|
|
12.8 |
|
DOT
Atlantic
|
|
|
11.29 |
|
|
6.0
|
|
|
|
11.65 |
|
|
9.3
|
|
DOT
Pacific
|
|
|
11.20 |
|
|
|
12.8 |
|
|
|
11.53 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2008
|
|
|
|
|
RASM
(cents)
|
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
DOT
Domestic
|
|
|
11.17 |
|
|
7.7%
|
|
|
|
26.1 |
|
|
(5.0)%
|
|
International
|
|
|
12.81 |
|
|
|
15.7 |
|
|
|
15.9 |
|
|
|
0.4 |
|
DOT
Latin America
|
|
|
13.58 |
|
|
|
19.7 |
|
|
'7.4
|
|
|
|
1.8 |
|
DOT
Atlantic
|
|
|
12.20 |
|
|
|
11.5 |
|
|
6.7
|
|
|
(1.4)
|
|
DOT
Pacific
|
|
|
11.86 |
|
|
|
13.8 |
|
|
1.7
|
|
|
|
1.8 |
|
The
Company’s Regional Affiliates include two wholly owned subsidiaries, American
Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR Eagle), and
two independent carriers with which American has capacity purchase agreements,
Trans States Airlines, Inc. (Trans States) and Chautauqua Airlines, Inc.
(Chautauqua).
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, increased $20 million, or
3.1 percent, to $668 million as a result of increased passenger
yield. Regional Affiliates’ traffic decreased 12.2 percent to 2.3
billion revenue passenger miles (RPMs), while capacity decreased 4.0 percent to
3.3 billion ASMs, resulting in a 6.5 point decrease in the passenger load factor
to 69.4 percent.
In the
first quarter of 2008, the Company began classifying certain mileage sales
revenue to Other revenue, which was previously recognized as a component of
Passenger revenue. See Note 2 to the condensed consolidated financial
statements for additional information.
The
Company continues to pursue ancillary revenue opportunities through
miscellaneous fee increases and the implementation of new fees for certain
services. For the three months ended September 30, 2008, these
revenues increased 14.5 percent, or $73 million versus the same period in
2007.
Operating
Expenses
The
Company’s total operating expenses increased 18.0 percent, or $1.0 billion, to
$6.6 billion for the third quarter 2008 compared to the third quarter of
2007. The Company’s operating expenses per ASM for the third quarter
2008 increased 21.7 percent to 14.66 cents compared to the same period in
2007. The increase in operating expense was primarily due to a
dramatic year-over-year increase in fuel prices from $2.17 per gallon in the
third quarter of 2007 to $3.57 per gallon for the third quarter of
2008. Fuel expense is the Company’s largest single expense category
and the price increase resulted in $1.1 billion in incremental year-over-year
fuel expense for the third quarter 2008 (based on the year-over-year increase in
the average price per gallon multiplied by gallons consumed). Continuing high
fuel prices, additional increases in the price of fuel and/or disruptions in the
supply of fuel would further materially adversely affect the Company’s financial
condition and results of operations. In addition, the Company accrued
$19 million related to the grounding of leased Airbus A300 aircraft prior to
lease expiration and an additional $8 million accrual for employee severance
costs related to the capacity reductions announced in the second
quarter.
(in
millions)
Operating
Expenses
|
|
Three
Months Ended
September
30, 2008
|
|
|
Change
from 2007
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
Fuel
|
|
$ |
2,722 |
|
|
$ |
979 |
|
|
|
56.1 |
% |
(a)
|
Wages,
salaries and benefits
|
|
|
1,633 |
|
|
|
(88 |
) |
|
|
(5.1 |
) |
|
Other
rentals and landing fees
|
|
|
344 |
|
|
|
16 |
|
|
|
4.9 |
|
|
Depreciation
and amortization
|
|
|
289 |
|
|
|
(18 |
) |
|
|
(5.8 |
) |
|
Maintenance,
materials and repairs
|
|
|
304 |
|
|
|
30 |
|
|
|
11.0 |
|
(b)
|
Commissions,
booking fees and credit card expense
|
|
|
264 |
|
|
|
(6 |
) |
|
|
(2.2 |
) |
|
Aircraft
rentals
|
|
|
122 |
|
|
|
(26 |
) |
|
|
(16.8 |
) |
|
Food
service
|
|
|
135 |
|
|
|
(4 |
) |
|
|
(3.2 |
) |
|
Special
charges
|
|
|
27 |
|
|
|
27 |
|
|
|
* |
|
(c)
|
Other
operating expenses
|
|
|
797 |
|
|
|
100 |
|
|
|
14.3 |
|
|
Total
operating expenses
|
|
$ |
6,637 |
|
|
$ |
1,010 |
|
|
|
18.0 |
% |
|
(a)
|
Aircraft
fuel expense increased primarily due to a 64.2 percent increase in the
Company’s price per gallon of fuel (net of the impact of fuel hedging)
offset by a 4.9 percent decrease in the Company’s fuel consumption,
primarily due to reductions in available seat
miles.
|
(b)
|
Maintenance,
materials and repairs expense increased due to a heavier workscope of
scheduled airframe maintenance overhauls, repair costs and volume, and
contractual engine repair rates, which are driven by aircraft
age.
|
(c)
|
Special
charges are related to the capacity reductions announced in the second
quarter. The Company accrued $19 million related to the
grounding of leased Airbus A300 aircraft prior to lease expiration and an
additional $8 million accrual for employee severance
costs.
|
Other
Income (Expense)
Interest
income decreased $53 million due to a decrease in interest
rates. Interest expense decreased $37 million as a result of a
decrease in the Company’s long-term debt balance.
Income Tax
The
Company did not record a net tax provision (benefit) associated with its
earnings for the three months ended September 30, 2008 or its earnings for the
three months ended September
30, 2007 due to the Company providing a valuation allowance, as discussed in
Note 5 to the condensed consolidated financial statements.
Operating
Statistics
The
following table provides statistical information for American and Regional
Affiliates for the three months ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
34,491 |
|
|
|
36,290 |
|
Available
seat miles (millions)
|
|
|
41,965 |
|
|
|
43,271 |
|
Cargo
ton miles (millions)
|
|
|
509 |
|
|
|
514 |
|
Passenger
load factor
|
|
|
82.2 |
% |
|
|
83.9 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
14.34 |
|
|
|
13.09 |
|
Passenger
revenue per available seat mile (cents)
|
|
|
11.79 |
|
|
|
10.98 |
|
Cargo
revenue yield per ton mile (cents)
|
|
|
45.16 |
|
|
|
38.14 |
|
Operating
expenses per available seat mile, excluding Regional Affiliates (cents)
(*)
|
|
|
13.99 |
|
|
|
11.45 |
|
Fuel
consumption (gallons, in millions)
|
|
|
690 |
|
|
|
725 |
|
Fuel
price per gallon (cents)
|
|
|
356.7 |
|
|
|
216.5 |
|
Operating
aircraft at period-end
|
|
|
650 |
|
|
|
684 |
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
2,293 |
|
|
|
2,611 |
|
Available
seat miles (millions)
|
|
|
3,305 |
|
|
|
3,442 |
|
Passenger
load factor
|
|
|
69.4 |
% |
|
|
75.9 |
% |
|
|
|
|
|
|
|
|
|
(*)
|
Excludes
$798 million and $701 million of expense incurred related to Regional
Affiliates in 2008 and 2007,
respectively.
|
Operating
aircraft at September 30, 2008, included:
|
|
|
|
|
|
|
|
American
Airlines Aircraft
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
Airbus
A300-600R
|
|
|
30 |
|
Bombardier
CRJ-700
|
|
|
25 |
|
Boeing
737-800
|
|
|
77 |
|
Embraer
135
|
|
|
34 |
|
Boeing
757-200
|
|
|
124 |
|
Embraer
140
|
|
|
59 |
|
Boeing
767-200 Extended Range
|
|
|
15 |
|
Embraer
145
|
|
|
108 |
|
Boeing
767-300 Extended Range
|
|
|
57 |
|
Super
ATR
|
|
|
39 |
|
Boeing
777-200 Extended Range
|
|
|
47 |
|
Saab
340B/340B Plus
|
|
|
23 |
|
McDonnell
Douglas MD-80
|
|
|
300 |
|
Total
|
|
|
288 |
|
Total
|
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
average aircraft age for American’s and AMR Eagle’s aircraft is 15.4 years and
8.1 years, respectively.
Of the
operating aircraft listed above, 13 owned McDonnell Douglas MD-80 aircraft, one
owned and one leased Airbus A300-600R and six operating leased Saab 340B Plus
aircraft were in temporary storage as of September 30, 2008.
Owned and
leased aircraft not operated by the Company at September 30, 2008,
included:
American
Airlines Aircraft
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
Boeing
767-300 Extended Range
|
|
|
1
|
|
Embraer
135
|
|
|
5 |
|
Airbus
A300 |
|
|
2 |
|
Embraer
145
|
|
|
10 |
|
Fokker
100
|
|
|
4
|
|
Saab
340B
|
|
|
29 |
|
McDonnell
Couglas MD-80
|
|
|
29
|
|
Total
|
|
|
44 |
|
Total
|
|
|
36
|
|
|
|
|
|
|
AMR Eagle
leased its ten owned Embraer 145s that are not operated by AMR Eagle to Trans
States Airlines, Inc.
For the Nine Months Ended
September 30, 2008 and 2007
Revenues
The
Company’s revenues increased approximately $1.0 billion, or 6.1 percent, to
$18.3 billion for the nine months ended September 30, 2008 from the same period
last year. American’s passenger revenues increased by 5.7 percent, or
$761 million, while capacity (ASM) decreased by 2.3
percent. American’s passenger load factor remained effectively static
at 81.3 percent and passenger revenue yield per passenger mile increased by 9.0
percent to 13.87 cents. This resulted in an increase in American’s
passenger RASM of 8.2 percent to 11.27 cents.
Following
is additional information regarding American’s domestic and international RASM
and capacity based on geographic areas defined by the DOT:
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
10.90 |
|
|
|
5.9 |
% |
|
|
78.0 |
|
|
|
(4.1 |
)% |
International
|
|
|
11.90 |
|
|
|
11.7 |
|
|
|
46.7 |
|
|
|
0.9 |
|
DOT
Latin America
|
|
|
12.59 |
|
|
|
13.8 |
|
|
|
22.9 |
|
|
|
2.7 |
|
DOT
Atlantic
|
|
|
11.26 |
|
|
|
8.1 |
|
|
|
18.7 |
|
|
|
(0.9 |
) |
DOT
Pacific
|
|
|
11.15 |
|
|
|
14.5 |
|
|
|
5.0 |
|
|
|
(0.5 |
) |
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, increased $68 million, or
3.6 percent, to $1.9 billion as a result of increased passenger
yield. Regional Affiliates’ traffic decreased 8.5 percent to 6.8
billion revenue passenger miles (RPMs), while capacity decreased 4.1 percent to
9.7 billion ASMs, resulting in a 3.4 point decrease in the passenger load factor
to 70.6 percent.
In the
first quarter of 2008, the Company began classifying certain mileage sales
revenue to Other revenue, which was previously recognized as a component of
Passenger revenue. See Note 2 to the condensed consolidated financial
statements for additional information.
The
Company continues to pursue ancillary revenue opportunities through
miscellaneous fee increases and the implementation of new fees for certain
services. For the nine months ending September 30, 2008, these
revenues increased 9 percent, or $135 million versus the same period in
2007.
Operating
Expenses
The
Company’s total operating expenses increased 23.3 percent, or $3.8 billion, to
$20.0 billion for the nine months ended September 30, 2008 compared to the same
period of 2007. The Company’s operating expenses per ASM increased
26.3 percent to 14.87 cents compared to the same period in 2007. These increases
are partially due to a non-cash 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. This impairment charge
was triggered by the record increase in fuel prices over the last twelve
months. In addition, the Company accrued $63 million for severance
costs related to the capacity reductions and $19 million related to the
grounding of leased Airbus A300 aircraft prior to lease
expiration. These special items represented 8.86 cents of the
increase in operating expenses per ASM for the nine months ended September 30,
2008. The remaining increase in operating expense was primarily due
to a dramatic year-over-year increase in fuel prices from $2.04 per gallon in
the nine months ending September 30, 2007 to $3.17 per gallon for the same
period in 2008. Fuel expense is the Company’s largest single expense
category and the price increase resulted in $2.6 billion in incremental
year-over-year fuel expense for the nine months ended September 30, 2008 (based
on the year-over-year increase in the average price per gallon multiplied by
gallons consumed). Continuing high fuel prices, additional increases in the
price of fuel and/or disruptions in the supply of fuel would further materially
adversely affect the Company’s financial condition and results of
operations.
(in
millions)
Operating
Expenses
|
|
Nine
Months Ended
September
30, 2008
|
|
|
Change
from 2007
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
Fuel
|
|
$ |
7,195 |
|
|
|
2,398 |
|
|
|
50.0 |
% |
(a)
|
Wages,
salaries and benefits
|
|
|
4,935 |
|
|
|
(112 |
) |
|
|
(2.2 |
) |
|
Other
rentals and landing fees
|
|
|
985 |
|
|
|
15 |
|
|
|
1.4 |
|
|
Depreciation
and amortization
|
|
|
922 |
|
|
|
30 |
|
|
|
3.3 |
|
|
Maintenance,
materials and repairs
|
|
|
943 |
|
|
|
153 |
|
|
|
19.3 |
|
(b)
|
Commissions,
booking fees and credit card expense
|
|
|
780 |
|
|
|
(7 |
) |
|
|
(0.9 |
) |
|
Aircraft
rentals
|
|
|
372 |
|
|
|
(79 |
) |
|
|
(17.4 |
) |
|
Food
service
|
|
|
395 |
|
|
|
(4 |
) |
|
|
(1.0 |
) |
|
Special
charges
|
|
|
1,191 |
|
|
|
1,191 |
|
|
|
* |
|
(c)
|
Other
operating expenses
|
|
|
2,272 |
|
|
|
187 |
|
|
|
9.2 |
|
|
Total
operating expenses
|
|
$ |
19,990 |
|
|
$ |
3,772 |
|
|
|
23.3 |
% |
|
(a)
|
Aircraft
fuel expense increased primarily due to a 55.4 percent increase in the
Company’s price per gallon of fuel (net of the impact of fuel hedging)
offset by a 3.5 percent decrease in the Company’s fuel consumption,
primarily due to reductions in available seat
miles.
|
(b)
|
Maintenance,
materials and repairs expense increased due to a heavier workscope of
scheduled airframe maintenance overhauls, repair costs and volume, and
contractual engine repair rates, which are driven by aircraft
age.
|
(c)
|
Special
charges are related to a non-cash 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. This
impairment charge was triggered by the record increase in fuel prices over
the last twelve months. In addition, the Company accrued $63
million for severance costs and $19 million related to the grounding of
leased Airbus A300 aircraft prior to lease expiration related to the
capacity reductions.
|
Other Income (Expense)
Interest
income decreased $119 million in nine months ended September 30, 2008 compared
to the same period in 2007 due primarily to decrease in interest
rates. Interest expense decreased
$134 million as a result of a decrease in the Company’s long-term debt
balance.
Income Tax
The
Company did not record a net tax provision (benefit) associated with its loss
for the nine months ended September 30, 2008 or its earnings for the nine months
ended September 30, 2007 to the
Company providing a valuation allowance, as discussed in Note 5 to the condensed
consolidated financial statements.
Operating
Statistics
The
following table provides statistical information for American and Regional
Affiliates for the nine months ended September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
101,378 |
|
|
|
104,534 |
|
Available
seat miles (millions)
|
|
|
124,735 |
|
|
|
127,609 |
|
Cargo
ton miles (millions)
|
|
|
1,547 |
|
|
|
1,574 |
|
Passenger
load factor
|
|
|
81.3 |
% |
|
|
81.9 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
13.87 |
|
|
|
13.15 |
|
Passenger
revenue per available seat mile (cents)
|
|
|
11.27 |
|
|
|
10.77 |
|
Cargo
revenue yield per ton mile (cents)
|
|
|
43.83 |
|
|
|
37.91 |
|
Operating
expenses per available seat mile, excluding Regional Affiliates (cents)
(*)
|
|
|
14.15 |
|
|
|
11.17 |
|
Fuel
consumption (gallons, in millions)
|
|
|
2,058 |
|
|
|
2,129 |
|
Fuel
price per gallon (cents)
|
|
|
315.9 |
|
|
|
203.0 |
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
6,835 |
|
|
|
7,468 |
|
Available
seat miles (millions)
|
|
|
9,685 |
|
|
|
10,096 |
|
Passenger
load factor
|
|
|
70.6 |
% |
|
|
74.0 |
% |
|
|
|
|
|
|
|
|
|
(*)
|
Excludes
$2.4 billion and $2.1 billion of expense incurred related to Regional
Affiliates in 2008 and 2007,
respectively.
|
Outlook
Capacity
for American’s mainline jet operations is expected to decline 8.3 percent in the
fourth quarter compared to the fourth quarter of 2007, with domestic mainline
jet capacity expected
to decline by 12.5 percent and international capacity to decrease 0.6 percent
year over year. The Company expects mainline capacity to
decline approximately 3.7 percent for the full
year 2008 compared to 2007, with a 6.2 percent reduction in domestic capacity
and a 0.6 percent decrease in international capacity.
Mainline
capacity is expected to decline approximately 5.5 percent compared to 2008
levels, with domestic capacity expected to decrease by 8.5 percent in 2009
compared to 2008. International
capacity is expected to decline by approximately 1% in 2009 versus
2008.
The
Company currently expects fourth quarter 2008 mainline unit costs to increase
approximately 8.6 percent year over year. The fourth quarter 2008
unit cost expectations reflect cost pressures associated with the Company’s
previously announced capacity reductions. Full year 2008 mainline unit costs are
expected to increase approximately 22.0 percent year over year, primarily due to
the increase in the price of fuel. 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
are still very high and volatile by historical standards.
Critical Accounting Policies
and Estimates
The
preparation of the Company’s financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The Company believes its estimates
and assumptions are reasonable; however, actual results and the timing of the
recognition of such amounts could differ from those estimates. The
Company has identified the following critical accounting policies and estimates
used by management in the preparation of the Company’s financial statements:
accounting for long-lived assets, routes, passenger revenue, frequent flyer
program, stock compensation, pensions and retiree medical and other benefits,
income taxes and derivatives accounting. These policies and estimates
are described in the 2007 Form 10-K, except as updated below.
Fair value
– The Company has adopted Statement of Financial Accounting Standard No. 157
“Fair Value Measurements” (SFAS 157) as it applies to financial assets and
liabilities effective January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles (GAAP) and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. For additional information on the fair value of certain
financial assets and liabilities, see Note 7 to the condensed consolidated
financial statements for additional information.
Under
SFAS 157, AMR utilizes several valuation techniques in order to assess the fair
value of the Company’s financial assets and liabilities. The
Company’s fuel derivative contracts, which primarily consist of commodity
options and collars, are valued using energy and commodity market data which is
derived by combining raw inputs with quantitative models and processes to
generate forward curves and volatilities. The Company’s short-term
investments primarily utilize broker quotes in a non-active market for valuation
of these securities.
Long-lived
assets – The recorded value of the Company’s fixed assets is impacted by
a number of estimates made by the Company, including estimated useful lives,
salvage values and the Company’s determination as to whether aircraft are
temporarily or permanently grounded. In accordance with Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (SFAS 144), the Company records impairment
charges on long-lived assets used in operations when events and circumstances
indicate that the assets may be impaired, the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those
assets and the net book value of the assets exceeds their estimated fair value.
In making these determinations, the Company uses certain assumptions, including,
but not limited to: (i) estimated fair value of the assets; and (ii) estimated
future cash flows expected to be generated by the assets, generally evaluated at
a fleet level, which are based on additional assumptions such as asset
utilization, length of service and estimated salvage values. A change in the
Company's fleet plan has been the primary indicator that has resulted in an
impairment charge in the past.
The
majority of American’s fleet types are depreciated over 30 years. It
is possible that the ultimate lives of the Company’s aircraft will be
significantly different than the current estimate due to unforeseen events in
the future that impact the Company’s fleet plan, including positive or negative
developments in the areas described above. For example, operating the
aircraft for a longer period will result in higher maintenance, fuel and other
operating costs than if the Company replaced the aircraft. At some
point in the future, higher operating costs, including higher fuel expense,
and/or improvement in the Company’s economic condition, could change the
Company’s analysis of the impact of retaining aircraft versus replacing them
with new aircraft.
During
the quarter ended September 30, 2008, the Company entered into amendments to its
737-800 purchase agreement with the Boeing Company. Giving effect to
the amendment, the Company is now committed to take delivery of a total of 36
737-800 aircraft in 2009 and 40 737-800 aircraft in
2010. Furthermore, in October of 2008, the Company entered into a new
purchase agreement with Boeing for the acquisition of 42 Boeing 787-9 aircraft
scheduled to be delivered between 2012 and 2018. The agreement
also includes purchase rights to acquire up to 58 additional Boeing 787
aircraft, with deliveries between 2015 and 2020.
See
further discussion of aircraft commitments and the fleet replacement plan in
subsection entitled “Significant Indebtedness and Future Financing” under Item
2. Management’s Discussion and Analysis and Note 3 to the condensed consolidated
financial statements.
In the
second quarter of 2008, in connection with the May 21, 2008 announcement
regarding capacity reductions and related matters, the Company concluded a
triggering event had occurred and impairment testing was
necessary. As a result of that testing, the Company recorded
impairment charges related to its McDonnell Douglas MD-80 aircraft and Embraer
RJ-135 aircraft. See Note 9 to the condensed consolidated financial
statements for additional information with respect to these impairment
charges.
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 Company’s 2007 Form
10-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 10 percent increase in the September 30,
2008 cost per gallon of fuel. Based on projected 2008 and 2009 fuel
usage through September 30, 2009, such an increase would result in an increase
to aircraft fuel expense of approximately $696 million in the twelve months
ended September 30, 2009, inclusive of the impact of effective fuel hedge
instruments outstanding at September 30, 2008, and assumes the Company’s fuel
hedging program remains effective under Financial Accounting Standard No. 133,
“Accounting for Derivative Instruments and Hedging
Activities”. Comparatively, based on projected 2008 fuel usage, such
an increase would have resulted in an increase to aircraft fuel expense of
approximately $649 million in the twelve months ended December 31, 2008,
inclusive of the impact of fuel hedge instruments outstanding at December 31,
2007. The change in market risk is primarily due to the increase 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”, 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
September 30, 2008, the Company had effective hedges, including option contracts
and collars, covering approximately 38 percent of its estimated remaining 2008
fuel requirements. The consumption hedged for the remainder of 2008
is capped at an average price of approximately $3.33 per gallon of jet fuel, and
the Company’s collars have an average floor price of approximately $2.69 per
gallon of jet fuel (both the capped and floor price exclude taxes and
transportation costs). The Company’s collars represent approximately
26 percent of its estimated remaining 2008 fuel requirements. A
deterioration of the Company’s financial position could negatively affect the
Company’s ability to hedge fuel in the future, and a continued decline in the
price of jet fuel will decrease the efficacy of such fuel hedge positions in
offsetting the price of jet fuel.
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 September 30, 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 September
30, 2008. During the quarter ending on September 30, 2008, 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,
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.
Approximately
44 purported class action lawsuits have been filed in the U.S. against the
Company and certain foreign and domestic air carriers alleging that the
defendants violated U.S. antitrust laws by illegally conspiring to set prices
and surcharges on cargo shipments. These cases, along with other
purported class action lawsuits in which the Company was not named, were
consolidated in the United States District Court for the Eastern District of New
York as In re Air
Cargo Shipping Services Antitrust Litigation, 06-MD-1775 on June 20,
2006. Plaintiffs are
seeking trebled money damages and injunctive relief. The Company has
not been named as a defendant in the consolidated complaint filed by the
plaintiffs. However, the plaintiffs have not released any claims that
they may have against the Company, and the Company may later be added as a
defendant in the litigation. If the Company is sued on these claims, it will
vigorously defend the suit, but any adverse judgment could have a material
adverse impact on the Company. Also, on January 23, 2007, the
Company was served with a purported class action complaint filed against the
Company, American, and certain foreign and domestic air carriers in the Supreme
Court of British Columbia in Canada (McKay v. Ace Aviation
Holdings, et al.). The plaintiff alleges that the defendants violated
Canadian competition laws by illegally conspiring to set prices and surcharges
on cargo shipments. The complaint seeks compensatory and punitive damages
under Canadian law. On June 22, 2007, the plaintiffs agreed to dismiss
their claims against the Company. The dismissal is without prejudice
and the Company could be brought back into the litigation at a future
date. If litigation is recommenced against the Company in the
Canadian courts, the Company will vigorously defend itself; however, any adverse
judgment could have a material adverse impact on the Company.
On June
20, 2006, the DOJ served the Company with a grand jury subpoena as part of an
ongoing investigation into possible criminal violations of the antitrust laws by
certain domestic and foreign passenger carriers. At this time, the Company does
not believe it is a target of the DOJ investigation. The Company intends
to cooperate fully with this investigation. On September 4, 2007, the Attorney
General of the State of Florida served 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 Germany, respectively. Plaintiffs in the Turner and LaFlamme cases are
seeking trebled money damages and injunctive relief. The Company
vigorously will 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. (a wholly-owned subsidiary of the Company), in the United
States District Court for the Eastern District of Texas (Ronald A. Katz Technology
Licensing, L.P. v. American Airlines, Inc., et al.). This case
has been consolidated in the Central District of California for pre-trial
purposes with numerous other cases brought by the plaintiff against other
defendants. The plaintiff alleges that American and American Beacon
infringe a number of the plaintiff’s patents, each of which relates to automated
telephone call processing systems. The plaintiff is seeking past and
future royalties, injunctive relief, costs and attorneys'
fees. Although the Company believes that the plaintiff’s claims are
without merit and is vigorously defending the lawsuit, a final adverse court
decision awarding substantial money damages or placing material restrictions on
existing automated telephone call system operations would have a material
adverse impact on the Company.
Item 1A. Risk
Factors
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 $857 million in 2005, $751 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 $504 million in 2007 and $231
million in 2006, we lost a total of $1.7 billion (which included a
$1.1 billion non-cash impairment charge) in the first three quarters of
2008. Because of our weakened financial condition, we are vulnerable both to
unexpected events (such as additional terrorist attacks or additional spikes in
jet fuel prices) and to deterioration of the operating environment (such as a
recession or significant increased competition).
We are being adversely affected by
increases in fuel prices, and we would be adversely affected by disruptions in
the supply of fuel.
Our
results are very significantly affected by the price and availability of jet
fuel, which are in turn affected by a number of factors beyond our control. Fuel
prices are volatile, have increased significantly in 2007 and 2008, and are
currently very high by historical standards.
Due to
the competitive nature of the airline industry, we may not be able to pass on
increased fuel prices to customers by increasing fares. Although we have had
some recent success in raising fares and imposing fuel surcharges, these fare
increases and surcharges have not kept pace with the recent extraordinary
increases in the price of fuel. Furthermore, if fuel prices decline in the
future, increased fare competition and lower revenues may offset any potential
benefit of lower fuel prices.
While we
do not currently anticipate a significant reduction in fuel availability,
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, or a continuation
of current high prices for a significant period of time, 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. High fuel prices make it more
imperative that we continue to execute our fleet renewal plans. However, due to
the machinist strike at Boeing, the Company may experience delays in the
delivery of some of the Boeing 737-800 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.
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 and if fuel prices were to persist for an extended period at
recent historic high levels.
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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•
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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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•
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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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•
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actual
or potential disruptions to the air traffic control systems;
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•
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increases
in costs of safety, security and environmental
measures;
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•
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outbreaks
of diseases that affect travel behavior; and
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•
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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.
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. 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 financing for working capital, capital
expenditures, acquisitions and general corporate purposes, and adversely
affect the terms on which such financing 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.
As of
September 30, 2008 American had a secured bank credit facility (the Credit
Facility) consisting of a fully drawn $255 million revolving credit
facility with a final maturity on June 17, 2009, and a fully drawn
$437 million term loan facility with a final maturity on December 17,
2010. The Credit Facility contains a liquidity covenant and a covenant that
requires AMR to maintain certain minimum ratios of cash flow to fixed charges
(the EBITDAR covenant). We complied with the liquidity covenant as of
September 30, 2008. In May 2008, we entered into an amendment to the
Credit Facility which waived compliance with the EBITDAR covenant for periods
ending on any date from and including June 30, 2008 and through
March 31, 2009, and which reduced the minimum ratios AMR is required to
satisfy thereafter. Given fuel prices that are very high by historical standards
and the volatility of fuel prices and revenues, it is difficult to assess
whether we will be able to continue to comply with these covenants, and there
are no assurances that we will be able to do so. Failure to comply with these
covenants would result in a default under the Credit Facility which — if we did
not take steps to obtain a waiver of, or otherwise mitigate, the default — could
result in a default under a significant amount of our other debt and lease
obligations, and otherwise have a material adverse impact on us.
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 (currently the third largest U.S. air carrier) and Northwest
(currently the sixth largest U.S. air carrier), announced that they had agreed
to merge. In addition, another two of our largest competitors, United (currently
the second largest U.S. air carrier) and Continental (currently the fifth
largest U.S. air carrier) 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.
We
recently announced that we have entered into a joint business agreement and
related marketing arrangements with British Airways and Iberia, which provide
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.
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 planned
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.
We compete with reorganized carriers,
which results in competitive disadvantages for us.
We must
compete with air carriers that have recently reorganized under the protection of
Chapter 11 of the U.S. Bankruptcy Code, including United, Delta, Northwest
and U.S. Airways (currently the seventh largest U.S. air carrier). 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.
While we
have recently been able to implement some fare increases on certain domestic and
international routes, our passenger yield remains low by historical standards.
We believe 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 the
current high jet fuel prices; and fare simplification efforts by certain
carriers. We believe that our reduced pricing power could persist
indefinitely.
We will need to raise substantial
additional funds to meet our commitments and to maintain sufficient liquidity,
but we may be unable to do so, or to do so on acceptable
terms.
To
maintain sufficient liquidity as we continue to implement our restructuring and
cost reduction initiatives, and because we have significant debt, lease, and
other obligations in the next several years, as well as significant pension
funding obligations, we will need continued access to substantial additional
funding. While we have arranged financing that, subject to certain terms and
conditions, covers a majority of our 2009 deliveries and have arranged backstop
financing which could be used for the remainder of our 2009 deliveries, as well
as a significant portion of our 2010 deliveries, we will also need additional
financing 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 of the U.S. Bankruptcy
Code) have been encumbered. Also, the market value of our aircraft assets has
declined in recent years, and those assets may not maintain their current market
value.
Since the
terrorist attacks of September 2001, which we refer to as the Terrorist
Attacks, our credit ratings have been lowered to significantly below investment
grade. These reductions have increased our borrowing costs and otherwise
adversely affected borrowing terms, and limited borrowing options. Additional
reductions in our credit ratings could further increase borrowing or other costs
and further restrict the availability of future financing.
A number
of other factors, including our financial results in recent years, our
substantial indebtedness, the difficult revenue environment we face, our reduced
credit ratings, historically high fuel prices, and the financial difficulties
experienced in the airline industry, adversely affect the availability and terms
of financing for us. In addition, recent disruptions in the credit markets have
resulted in greater volatility, less liquidity, widening of credit spreads, and
more limited availability of financing. As a result of these factors, there can
be no assurance that financing will be available to us on acceptable terms, if
at all. An inability to obtain necessary additional financing on acceptable
terms would have a material adverse impact on us and on our ability to sustain
our operations.
Our corporate or business strategy
may change.
In light
of the rapid changes in the airline industry, we evaluate our assets on an
ongoing basis with a view to maximizing their value to us and determining which
are core to our operations. We also regularly evaluate our corporate and
business strategies, and they are influenced by factors beyond our control,
including changes in the competitive landscape we face. Our corporate and
business strategies are, therefore, subject to change.
In
October 2007, we announced that we were conducting a strategic value review
involving, among other things, AMR Eagle, our regional airline, American Beacon
Advisors, our investment advisory subsidiary and AAdvantage, 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, we announced on November 28, 2007 that we planned to
divest AMR Eagle. On July 16, 2008 we announced that, given the current
industry environment, we have decided to place that planned divestiture on hold
until industry conditions are more favorable and stable. Also pursuant to the
review, on April 16, 2008 we announced that we had reached a definitive
agreement to sell American Beacon Advisors to a third party; this transaction
closed on September 12, 2008.
In the
future, we may consider and engage in discussions with third parties regarding
the divestiture of AMR Eagle and other separation transactions, and we may
decide to proceed with one or more such transactions. There can be no assurance
that we 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 European Commission is currently seeking to impose
emissions controls on all flights coming into Europe. Laws or regulations
similar to those described above or other U.S. or foreign governmental actions
in the future may adversely affect our business and financial
results.
The
results of our operations, demand for air travel, and the manner in which we
conduct our business each may be affected by changes in law and future actions
taken by governmental agencies, including:
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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 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 European Union (EU), which took effect on March 30, 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 will result in American facing increased competition in these markets,
including Heathrow (to the extent that additional carriers are able to obtain
necessary slots and terminal facilities at Heathrow), which could have an
adverse impact on us.
We could be adversely affected by an
outbreak of a disease that affects travel behavior.
In 2003,
there was an outbreak of Severe Acute Respiratory Syndrome (SARS), which had an
adverse impact primarily on our Asia operations. More recently, there have been
concerns about a potential outbreak of avian flu. If there were another outbreak
of a disease (such as SARS or avian flu) that affects travel behavior, it could
have a material adverse impact on us.
Our labor costs are higher than those
of our competitors.
Wages,
salaries and benefits constitute a significant percentage of our total operating
expenses. In 2007, they constituted approximately 31 percent of our total
operating expenses. All of the major hub-and-spoke carriers with whom American
competes have achieved significant labor cost savings through or outside of
bankruptcy proceedings. We believe American’s labor costs are higher than those
of its primary competitors, and it is unclear how long this labor cost
disadvantage may persist.
We could be adversely affected if we
are unable to 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 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 until December 31, 2008, covering losses to employees, passengers,
third parties and aircraft. If the U.S. government does not extend the policy
beyond December 31, 2008, or if the U.S. government at any time thereafter
ceases to provide such insurance, or reduces the coverage provided by such
insurance, we will attempt to purchase similar coverage with narrower scope from
commercial insurers at an additional cost. To the extent this coverage is not
available at commercially reasonable rates, we would be adversely
affected.
While the
price of commercial insurance 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.
Item
6. Exhibits
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The
following exhibits are included
herein:
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10.1 Purchase
Agreement No. 1977 Supplement No. 29 dated as of July 29,
2008
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10.2
Purchase Agreement No. 1977 Supplement No. 30 dated as of August 8,
2008
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10.3
Purchase Agreement No. 1977 Supplement No. 31 dated as of September 15,
2008
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Computation of ratio of earnings to fixed charges for the three and nine
months ended September 30, 2008 and
2007.
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31.1
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Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
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31.2
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Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
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32
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Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States
Code).
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Signature
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AMR CORPORATION
Date: October
16, 2008 BY: /s/ Thomas W.
Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
(Principal Financial
and Accounting Officer)