|
|
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, 2007.
¨
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 – 249,121,904 shares as of October 12,
2007.
|
|
|
INDEX
AMR
CORPORATION
PART
I:FINANCIAL
INFORMATION
Item
1. Financial Statements
Consolidated
Statements of Operations -- Three and nine months ended September 30, 2007
and
2006
Condensed
Consolidated Balance Sheets -- September 30, 2007 and December 31,
2006
Condensed
Consolidated Statements of Cash Flows -- Nine months ended September 30,
2007
and 2006
Notes
to Condensed
Consolidated Financial Statements -- September 30, 2007
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
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- American Airlines
|
|
$ |
4,750
|
|
|
$ |
4,657
|
|
|
$ |
13,749
|
|
|
$ |
13,621
|
|
-
Regional Affiliates
|
|
|
648
|
|
|
|
644
|
|
|
|
1,864
|
|
|
|
1,915
|
|
Cargo
|
|
|
196
|
|
|
|
213
|
|
|
|
597
|
|
|
|
605
|
|
Other
revenues
|
|
|
352
|
|
|
|
333
|
|
|
|
1,042
|
|
|
|
1,025
|
|
Total
operating revenues
|
|
|
5,946
|
|
|
|
5,847
|
|
|
|
17,252
|
|
|
|
17,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
|
1,721
|
|
|
|
1,694
|
|
|
|
5,047
|
|
|
|
5,103
|
|
Aircraft
fuel
|
|
|
1,743
|
|
|
|
1,771
|
|
|
|
4,797
|
|
|
|
4,952
|
|
Other
rentals and landing fees
|
|
|
328
|
|
|
|
317
|
|
|
|
970
|
|
|
|
967
|
|
Depreciation
and amortization
|
|
|
307
|
|
|
|
290
|
|
|
|
892
|
|
|
|
868
|
|
Maintenance,
materials and repairs
|
|
|
274
|
|
|
|
252
|
|
|
|
790
|
|
|
|
726
|
|
Commissions,
booking fees and credit
card
expense
|
|
|
270
|
|
|
|
284
|
|
|
|
787
|
|
|
|
839
|
|
Aircraft
rentals
|
|
|
148
|
|
|
|
154
|
|
|
|
451
|
|
|
|
449
|
|
Food
service
|
|
|
139
|
|
|
|
133
|
|
|
|
399
|
|
|
|
386
|
|
Other
operating expenses
|
|
|
697
|
|
|
|
668
|
|
|
|
2,085
|
|
|
|
2,001
|
|
Total
operating expenses
|
|
|
5,627
|
|
|
|
5,563
|
|
|
|
16,218
|
|
|
|
16,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
319
|
|
|
|
284
|
|
|
|
1,034
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
90
|
|
|
|
80
|
|
|
|
257
|
|
|
|
201
|
|
Interest
expense
|
|
|
(227 |
) |
|
|
(259 |
) |
|
|
(703 |
) |
|
|
(780 |
) |
Interest
capitalized
|
|
|
3
|
|
|
|
7
|
|
|
|
17
|
|
|
|
21
|
|
Miscellaneous
– net
|
|
|
(10 |
) |
|
|
(97 |
) |
|
|
(32 |
) |
|
|
(103 |
) |
|
|
|
(144 |
) |
|
|
(269 |
) |
|
|
(461 |
) |
|
|
(661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
175
|
|
|
|
15
|
|
|
|
573
|
|
|
|
214
|
|
Income
tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
Earnings
|
|
$ |
175
|
|
|
$ |
15
|
|
|
$ |
573
|
|
|
$ |
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.70
|
|
|
$ |
0.07
|
|
|
$ |
2.35
|
|
|
$ |
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.61
|
|
|
$ |
0.06
|
|
|
$ |
1.98
|
|
|
$ |
0.91
|
|
The
accompanying
notes are an integral part of these financial statements.
AMR
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
millions)
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$ |
161
|
|
|
$ |
121
|
|
Short-term
investments
|
|
|
5,229
|
|
|
|
4,594
|
|
Restricted
cash and short-term investments
|
|
|
447
|
|
|
|
468
|
|
Receivables,
net
|
|
|
1,166
|
|
|
|
988
|
|
Inventories,
net
|
|
|
556
|
|
|
|
506
|
|
Other
current assets
|
|
|
503
|
|
|
|
225
|
|
Total
current assets
|
|
|
8,062
|
|
|
|
6,902
|
|
|
|
|
|
|
|
|
|
|
Equipment
and Property
|
|
|
|
|
|
|
|
|
Flight
equipment, net
|
|
|
14,157
|
|
|
|
14,507
|
|
Other
equipment and property, net
|
|
|
2,426
|
|
|
|
2,391
|
|
Purchase
deposits for flight equipment
|
|
|
178
|
|
|
|
178
|
|
|
|
|
16,761
|
|
|
|
17,076
|
|
|
|
|
|
|
|
|
|
|
Equipment
and Property Under Capital Leases
|
|
|
|
|
|
|
|
|
Flight
equipment, net
|
|
|
709
|
|
|
|
765
|
|
Other
equipment and property, net
|
|
|
83
|
|
|
|
100
|
|
|
|
|
792
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
Route
acquisition costs and airport operating and gate lease rights,
net
|
|
|
1,163
|
|
|
|
1,167
|
|
Other
assets
|
|
|
2,821
|
|
|
|
3,135
|
|
|
|
$ |
29,599
|
|
|
$ |
29,145
|
|
Liabilities
and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,269
|
|
|
$ |
1,073
|
|
Accrued
liabilities
|
|
|
2,236
|
|
|
|
2,301
|
|
Air
traffic liability
|
|
|
4,268
|
|
|
|
3,782
|
|
Current
maturities of long-term debt
|
|
|
1,325
|
|
|
|
1,246
|
|
Current
obligations under capital leases
|
|
|
138
|
|
|
|
103
|
|
Total
current liabilities
|
|
|
9,236
|
|
|
|
8,505
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
9,830
|
|
|
|
11,217
|
|
Obligations
under capital leases, less current obligations
|
|
|
698
|
|
|
|
824
|
|
Pension
and
postretirement benefits
|
|
|
5,235
|
|
|
|
5,341
|
|
Other
liabilities, deferred gains and deferred credits
|
|
|
3,772
|
|
|
|
3,864
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficit)
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
255
|
|
|
|
228
|
|
Additional
paid-in capital
|
|
|
3,470
|
|
|
|
2,718
|
|
Treasury
stock
|
|
|
(367 |
) |
|
|
(367 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,210 |
) |
|
|
(1,291 |
) |
Accumulated
deficit
|
|
|
(1,321 |
) |
|
|
(1,894 |
) |
|
|
|
828
|
|
|
|
(606 |
) |
|
|
$ |
29,599
|
|
|
$ |
29,145
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
1,945
|
|
|
$ |
1,729
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(515 |
) |
|
|
(348 |
) |
Net
increase in short-term investments
|
|
|
(635 |
) |
|
|
(1,264 |
) |
Net
decrease in restricted cash and short-term
investments
|
|
|
21
|
|
|
|
46
|
|
Proceeds
from sale of equipment and property
|
|
|
27
|
|
|
|
11
|
|
Other
|
|
|
7
|
|
|
|
(8 |
) |
Net
cash used by investing activities
|
|
|
(1,095 |
) |
|
|
(1,563 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(1,456 |
) |
|
|
(831 |
) |
Proceeds
from:
|
|
|
|
|
|
|
|
|
Issuance
of common stock, net of issuance costs
|
|
|
497
|
|
|
|
400
|
|
Reimbursement
from construction reserve account
|
|
|
61
|
|
|
|
107
|
|
Exercise
of stock options
|
|
|
88
|
|
|
|
134
|
|
Net
cash provided (used) by financing activities
|
|
|
(810 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
Net
increase
(decrease) in cash
|
|
|
40
|
|
|
|
(24 |
) |
Cash
at
beginning of period
|
|
|
121
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Cash
at end
of period
|
|
$ |
161
|
|
|
$ |
114
|
|
|
|
|
|
|
|
|
|
|
|
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/A
for the
year ended December 31, 2006 (2006 Form
10-K).
|
2.
|
During
the
three months ended September 30, 2007, the Company recorded a charge
of
$40 million to correct certain vacation accruals included in Wages,
salaries and benefits expense. Of this amount, $30 million
related to the years 2003 through 2006 and $10 million related
to the six
months ended June 30, 2007. The adjustment was made in the 2007
third quarter as the amount of the adjustment was not material
to prior
periods, expected 2007 results or the trend of earnings in any
period. This materiality evaluation included, among other
things, the consideration of an individually immaterial out-of-period
correction previously recorded in the second quarter of 2007 that
had an
offsetting impact of approximately $14 million. The immaterial
adjustment from the second quarter of 2007 related to a revenue
related
estimate.
|
3.
|
In
March 2007,
American announced its intent to pull forward the delivery
of 47
Boeing 737 aircraft that American had previously committed to acquire
in
2013 through 2016. During the third quarter, American
accelerated the delivery of three of these aircraft into the second
half
of 2009. Any decisions to accelerate additional deliveries will
depend on a number of factors, including future economic industry
conditions and the financial conditions of the Company. As of
September 30, 2007, the Company had commitments to acquire twelve
Boeing
737-800s in 2009 and an aggregate of 35 Boeing 737 aircraft and
seven
Boeing 777 aircraft in 2013 through 2016. Future payments for all
aircraft, including the estimated amounts for price escalation,
are
currently estimated to be approximately $2.8 billion, with the
majority
occurring in 2011 through 2016. However, if the Company commits
to accelerating the delivery dates of a significant number of aircraft
in
the future, a significant portion of the $2.8 billion commitment
will be
accelerated into earlier periods, including 2008 and 2009. The
obligation in 2008 and 2009 for the twelve aircraft already pulled
forward
is approximately $370 million. This amount is net of purchase
deposits currently held by the manufacturer. On October 1,
2007, American exercised an option to purchase an incremental Boeing
737
aircraft for delivery in early
2009.
|
4.
|
Accumulated
depreciation of owned equipment and property at September 30, 2007
and
December 31, 2006 was $11.8 billion and $11.1 billion,
respectively. Accumulated amortization of equipment and
property under capital leases was $1.2 billion and $1.1 billion
at
September 30, 2007 and December 31, 2006,
respectively.
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
5.
|
In
April
2007, the United States and the European Union approved an “open skies”
air services agreement that provides airlines from the United States
and
E.U. member states open access to each other’s markets, with freedom of
pricing and unlimited rights to fly beyond the United States and
beyond
each E.U. member state. The provisions of the agreement will
take effect on March 30, 2008. Under the agreement, every U.S.
and E.U. airline is authorized to operate between airports in the
United
States and London’s Heathrow Airport. Only three airlines
besides American were previously allowed to provide that Heathrow
service. The agreement will result in the Company facing
increased competition in serving Heathrow as additional carriers
are able
to obtain necessary slots and terminal facilities. However, the
Company believes that American and the other carriers who currently
have
existing authorities and the related slots and facilities will
continue to
hold a significant advantage after the advent of open
skies. The Company has recorded route acquisition costs
(including international routes and slots) of $846 million as of
September
30, 2007, including a significant amount related to operations
at
Heathrow. The Company considers these assets indefinite life
assets under Statement of Financial Accounting Standard No. 142
“Goodwill
and Other Intangibles” and as a result they are not amortized but instead
are tested for impairment annually or more frequently if events
or changes
in circumstances indicate that the asset might be impaired. The
Company completed an impairment analysis on the Heathrow routes
(including
slots) effective March 31, 2007 and concluded that no impairment
exists. The Company believes its estimates and assumptions are
reasonable, however, the market for LHR slots is still developing
and only
a limited number of comparable transactions have occurred to
date. The Company will continue to evaluate future transactions
involving purchases of slots at LHR and the potential impact of
those
transactions on the value of the Company’s routes and
slots.
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
6.
|
On
January 1,
2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN
48). FIN 48 prescribes a recognition threshold that a tax
position is required to meet before being recognized in the financial
statements and provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition issues.
|
|
The
Company
has an unrecognized tax benefit of approximately $40 million which
did not
change significantly during the nine months ended September 30,
2007. The application of FIN 48 would have resulted in an
increase in retained earnings of $39 million, except that the increase
was
fully offset by the application of a valuation allowance. In
addition, future changes in the unrecognized tax benefit will have
no
impact on the effective tax rate due to the existence of the valuation
allowance. Accrued interest on tax positions is recorded as a
component of interest expense but is not significant at September
30,
2007. The Company does not reasonably estimate that the
unrecognized tax benefit will change significantly within the next
twelve
months.
|
|
The
Company
files its tax returns as prescribed by the tax laws of the jurisdictions
in which it operates. The Company is currently under audit by
the Internal Revenue Service for its 2001 through 2003 tax years
with an
anticipated closing date in 2008. The Company’s 2004 and 2005
tax years are still subject to examination. Various state and
foreign jurisdiction tax years remain open to examination as well,
though
the Company believes any additional assessment will be immaterial
to its
consolidated financial statements.
|
|
As
discussed
in Note 8 to the consolidated financial statements in the 2006
Form 10-K,
the Company has a valuation allowance against the full amount of
its net
deferred tax asset. The Company 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
decreased approximately $95 million during the nine months ended
September
30, 2007 to $1.2 billion, including the impact of comprehensive
income for
the nine months ended September 30, 2007, changes described above
from
applying FIN 48 and certain other
adjustments.
|
Under
special tax
rules (the "Section 382 Limitation"), cumulative stock purchases by material
shareholders exceeding 50% during a 3-year period can potentially limit a
company’s future use of net operating losses (NOL’s). Such limitation is
increased by “built-in gains”, as provided by current IRS guidance.
The Company is not currently subject to the "Section 382
Limitation". If triggered in a future period, under current tax rules,
such limitation is not expected to significantly impact the recorded value
or
timing of utilization of AMR’s NOL's.
Various
taxes and
fees assessed on the sale of tickets to end customers are collected by the
Company as an agent and remitted to taxing authorities. These taxes and fees
have been presented on a net basis in the accompanying consolidated statement
of
operations and recorded as a liability until remitted to the appropriate
taxing
authority.
AMR
CORPORATION
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7.
|
As
of
September 30, 2007, AMR had issued guarantees covering approximately
$1.4
billion of American’s tax-exempt bond debt and American had issued
guarantees covering approximately $1.1 billion of AMR’s unsecured
debt. In addition, as of September 30, 2007, AMR and American
had issued guarantees covering approximately $347 million of AMR
Eagle’s
secured debt and AMR has issued guarantees covering an additional
$2.3
billion of AMR Eagle’s secured
debt.
|
On
March 30, 2007,
American paid in full the principal balance of its senior secured revolving
credit facility. As of September 30, 2007, the $441 million term loan
facility under the same bank credit facility was still outstanding and the
$265
million balance of the revolving credit facility remains available to American
through maturity. The revolving credit facility amortizes at a rate
of $10 million quarterly through December 17, 2007. American’s
obligations under the credit facility are guaranteed by AMR.
8.
|
On
January
16, 2007, the AMR Board of Directors approved the amendment and
restatement of the 2005-2007 Performance Share Plan for Officers
and Key
Employees and the 2005 Deferred Share Award Agreement to permit
settlement
in a combination of cash and/or stock. However, the amendments
did not impact the fair value of the awards. As a result,
certain awards under these plans have been accounted for as equity
awards
since that date and the Company reclassified $122 million from
Accrued
liabilities to Additional paid-in-capital in accordance with Statement
of
Financial Accounting Standard No. 123 (revised 2004), “Share-Based
Payment”.
|
On
January 26,
2007, AMR completed a public offering of 13 million shares of its common
stock. The Company realized $497 million from the sale of
equity.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
(Unaudited)
9.
|
The
following
tables provide the components of net periodic benefit cost for
the three
and nine months ended September 30, 2007 and 2006 (in
millions):
|
|
|
Pension
Benefits
|
|
|
|
Three
Months
Ended
September
30,
|
|
|
Nine
Months
Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of
net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
93
|
|
|
$ |
100
|
|
|
$ |
278
|
|
|
$ |
299
|
|
Interest
cost
|
|
|
168
|
|
|
|
160
|
|
|
|
504
|
|
|
|
481
|
|
Expected
return on assets
|
|
|
(187 |
) |
|
|
(167 |
) |
|
|
(561 |
) |
|
|
(502 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service
cost
|
|
|
4
|
|
|
|
4
|
|
|
|
12
|
|
|
|
12
|
|
Unrecognized
net loss
|
|
|
6
|
|
|
|
20
|
|
|
|
19
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic
benefit cost
|
|
$ |
84
|
|
|
$ |
117
|
|
|
$ |
252
|
|
|
$ |
350
|
|
|
|
Other
Postretirement Benefits
|
|
|
|
Three
Months
Ended
September
30,
|
|
|
Nine
Months
Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of
net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
18
|
|
|
$ |
20
|
|
|
$ |
53
|
|
|
$ |
58
|
|
Interest
cost
|
|
|
49
|
|
|
|
49
|
|
|
|
145
|
|
|
|
145
|
|
Expected
return on assets
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(13 |
) |
|
|
(11 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service
cost
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
|
|
(7 |
) |
Unrecognized
net (gain) loss
|
|
|
(1 |
) |
|
|
-
|
|
|
|
(5 |
) |
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic
benefit cost
|
|
$ |
59
|
|
|
$ |
64
|
|
|
$ |
170
|
|
|
$ |
186
|
|
The
Company
completed its required 2007 calendar year funding by contributing $380 million
to its defined benefit pension plans during the nine month period ended
September 30, 2007.
|
The
Company
expects to contribute approximately $350 million to its defined
benefit
pension plans in 2008. This amount is significantly higher than
the Company’s minimum required contribution and could be impacted by,
among other things, pending pension legislation, the financial
position of
the Company and other economic factors. The Company’s estimates
of its defined benefit pension plan contributions reflect the provisions
of the Pension Funding Equity Act of 2004 and the Pension Protection
Act
of 2006.
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
10.
|
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. The following table summarizes the components
and remaining accruals for these charges (in
millions):
|
|
|
Aircraft
Charges
|
|
Facility
Exit
Costs
|
|
Total
|
|
|
Remaining
accrual at
December 31, 2006
|
$ 128
|
|
$ 19
|
|
$ 147
|
|
|
Payments
|
(11)
|
|
(1)
|
|
(12)
|
|
|
Remaining
accrual at
September 30, 2007
|
$ 117
|
|
$ 18
|
|
$ 135
|
|
|
|
|
|
|
|
|
|
|
Cash
outlays
related to the accruals for aircraft charges and facility exit
costs will
occur through 2017 and 2018,
respectively.
|
11.
|
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
months ended September 30, 2007 and 2006, comprehensive income
(loss) was
$184 million and $(31) million, respectively, and for the nine
months
ended September 30, 2007 and 2006, comprehensive income was $654
million
and $200 million, respectively. The difference between net earnings
and comprehensive income for the three and nine months ended September
30,
2007 and 2006 is due primarily to the accounting for the Company’s
derivative financial instruments.
|
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
a result of its
second quarter 2006 effectiveness assessment, the Company determined that
the
majority of its outstanding derivatives, primarily crude oil related contracts,
were no longer expected to be highly effective in offsetting changes in
forecasted jet fuel purchases. Effective July 1, 2006, all subsequent
changes in the fair value of those particular hedge contracts were recognized
directly in earnings rather than being deferred in Accumulated other
comprehensive loss. For the three month period ended September 30,
2006, a charge of $99 million was recognized in Other income (expense)
reflecting the change in market value of the derivative contracts that no
longer
qualified for hedge accounting.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
12.
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
- numerator for basic earnings per share
|
|
$ |
175
|
|
|
$ |
15
|
|
|
$ |
573
|
|
|
$ |
214
|
|
Interest
on
senior convertible notes
|
|
|
7
|
|
|
|
-
|
|
|
|
21
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
adjusted for interest on senior convertible notes - numerator for
diluted
earnings per share
|
|
$ |
182
|
|
|
$ |
15
|
|
|
$ |
594
|
|
|
$ |
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share – weighted-average shares
|
|
|
249
|
|
|
|
213
|
|
|
|
244
|
|
|
|
201
|
|
Effect
of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
Employee
options and shares
|
|
|
30
|
|
|
|
41
|
|
|
|
37
|
|
|
|
44
|
|
Assumed
treasury shares purchased
|
|
|
(11 |
) |
|
|
(17 |
) |
|
|
(13 |
) |
|
|
(18 |
) |
Dilutive
potential common shares
|
|
|
51
|
|
|
|
24
|
|
|
|
56
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - adjusted weighted-average
shares
|
|
|
300
|
|
|
|
237
|
|
|
|
300
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.70
|
|
|
$ |
0.07
|
|
|
$ |
2.35
|
|
|
$ |
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.61
|
|
|
$ |
0.06
|
|
|
$ |
1.98
|
|
|
$ |
0.91
|
|
|
Approximately
nine million and 13 million shares related to employee stock options
were
not added to the denominator for the three months ended September
30, 2007
and 2006, respectively, because the options’ exercise prices were greater
than the average market price of the common
shares. Additionally, approximately 32 million shares related
to convertible notes were not added to the denominator for the
three
months ended September 30, 2006 because inclusion of such shares
would
have been antidilutive.
|
|
For
the nine
months ended September 30, 2007 and 2006, approximately five million
and
12 million shares 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.
|
13.
|
On
July 3,
2007, American entered into an agreement to sell all of its shares
in
ARINC Incorporated. Upon closing, which is expected to occur
during the fourth quarter of 2007, American expects to receive
proceeds of
approximately $194 million and to record a gain on the sale of
approximately $140 million. The closing of the transaction is
subject to the satisfaction of a number of conditions, many of
which are
beyond American’s control, and no assurance can be given that such closing
will occur.
|
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,” and similar expressions are
intended to identify forward-looking statements. Similarly, statements that
describe our 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, 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 and reorganizing
carriers; low fare levels by historical standards and the Company’s reduced
pricing power; the Company’s potential need to raise 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 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 2006
Form 10-K (see in particular Item 1A “Risk Factors” in the 2006 Form
10-K).
Overview
The
Company
recorded net income of $175 million during the third quarter of 2007 compared
to
net income of $15 million in the same period last year. The Company’s
third quarter 2007 results were impacted by an improvement in unit revenues
(passenger revenue per available seat mile), fuel prices that remain high
by
historical standards and a $40 million charge for the correction of certain
salary and benefit accruals (see Note 2 to the condensed consolidated financial
statements). The 2006 results were impacted by a $99 million charge
to mark to market certain derivatives that no longer qualified for hedge
accounting under SFAS 133 (see Note 11 to the condensed consolidated financial
statements).
Mainline
passenger
unit revenues increased 5.0 percent for the third quarter due to a 2.2 point
load factor increase and a 2.3 percent increase in passenger yield (passenger
revenue per passenger mile) compared to the same period in 2006. Although
load
factor performance and passenger yield showed year-over-year improvement,
passenger yield remains low by historical standards. The Company
believes this is the result of excess industry capacity and its reduced pricing
power resulting from a number of factors, including greater cost sensitivity
on
the part of travelers (especially business travelers), increased competition
from LCC’s and pricing transparency resulting from the use of the
internet.
In
June 2007, the
Company announced a change to its AAdvantage frequent flyer
program. Effective December 15, 2007, mileage balances will expire
from AAdvantage accounts that have not had miles either earned or redeemed
within the previous 18 month period. The Company expects to record a
one-time benefit in the fourth quarter as a result of the change. The
amount of the impact on the Company’s frequent flyer liability will depend on
the number of miles that expire on December 15, 2007 and the impact of the
policy change on other related accounting estimates.
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 2006 Form 10-K. In addition, four of
the Company’s largest domestic competitors have filed for bankruptcy in the last
several years and have used this process to significantly reduce contractual
labor and other costs. In order to remain competitive and to improve
its financial condition, the Company must continue to take steps to generate
additional revenues and to reduce its costs. Although the Company has a number
of initiatives underway to address its cost and revenue challenges, the ultimate
success of these initiatives is not known at this time and cannot be
assured.
LIQUIDITY
AND CAPITAL RESOURCES
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
2006 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
foreseeable future, 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, as well as ongoing pension funding
obligations, the Company may need access to additional funding. The Company
continues to evaluate the economic benefits and other aspects of replacing
some
of the older aircraft in its fleet prior to 2013 and also continues to evaluate
the appropriate mix of aircraft in its fleet. The Company’s possible
financing sources primarily include: (i) a limited amount of additional secured
aircraft debt or sale-leaseback transactions involving owned aircraft
(a very large majority of the Company’s owned aircraft are encumbered); (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. However, the availability and level of these financing
sources cannot be assured, particularly in light of the Company’s and American’s
recent financial results, substantial indebtedness, current credit ratings,
high
fuel prices and the financial difficulties that have been experienced in
the
airline industry. The inability of the Company to obtain additional funding
on
acceptable terms would have a material adverse impact on the ability of the
Company to sustain its operations over the long-term.
The
Company’s
substantial indebtedness and other obligations could have important
consequences. For example, they could: (i) limit the Company’s
ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes, or adversely affect
the terms on which such financing could be obtained; (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;
(iv) limit the Company’s ability to withstand competitive pressures and reduce
its flexibility in responding to changing business and economic conditions;
and
(v) limit the Company’s flexibility in planning for, or reacting to, changes in
its business and the industry in which it operates.
Credit
Facility Covenants
American
has a
secured bank credit facility which consists of a $265 million revolving credit
facility, with a final maturity on June 17, 2009, and a fully drawn $441
million
term loan facility, with a final maturity on December 17, 2010 (the Revolving
Facility and the Term Loan Facility, respectively, and collectively, the
Credit
Facility). On March 30, 2007, American paid
in full the
principal balance of the Revolving Facility and as of September 30, 2007,
it
remained undrawn. American’s obligations under the Credit Facility
are guaranteed by AMR.
The
Credit
Facility contains a covenant (the Liquidity Covenant) requiring American
to
maintain, as defined, unrestricted cash, unencumbered short term investments
and
amounts available for drawing under committed revolving credit facilities
of not
less than $1.25 billion for each quarterly period through the life of the
Credit
Facility. In addition, the Credit Facility contains a covenant (the EBITDAR
Covenant) requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized interest),
income taxes, depreciation and amortization and rentals, adjusted for certain
gains or losses and non-cash items) to fixed charges (comprising interest
expense (less capitalized interest) and rentals). The required ratio
was 1.35 to 1.00 for the four quarter period ending September 30, 2007, and
will
increase gradually for each four quarter period ending on each fiscal quarter
thereafter until it reaches 1.50 to 1.00 for the four quarter period ending
June
30, 2009. AMR and American were in compliance with the Liquidity Covenant
and
the EBITDAR covenant as of September 30, 2007 and expect to be able to continue
to comply with these covenants. However, given fuel prices that are
high by historical standards and the volatility of fuel prices and revenues,
it
is difficult to assess whether AMR and American will, in fact, be able to
continue to comply with these covenants, and there are no assurances that
AMR
and American will be able to do so. Failure to comply with these
covenants would result in a default under the Credit Facility which - - if
the
Company did not take steps to obtain a waiver of, or otherwise mitigate,
the
default - - could result in a default under a significant amount of the
Company’s other debt and lease obligations and otherwise have a material adverse
impact on the Company.
Pension
Funding Obligation
The
Company
completed its required 2007 calendar year funding by contributing $380 million
to its defined benefit pension plans during the nine month period ended
September 30, 2007.
The
Company expects
to contribute approximately $350 million to its defined benefit pension plans
in
2008. This amount is significantly higher than the Company’s minimum
required contribution and could be impacted by, among other things, pending
pension legislation, the financial position of the Company and other economic
factors. The Company’s estimates of its defined benefit pension plan
contributions reflect the provisions of the Pension Funding Equity Act of
2004
and the Pension Protection Act of 2006.
The
U.S. Congress
is currently considering legislation that would allow commercial airline
pilots
to fly until age 65. The Federal Aviation Administration currently
requires commercial pilots to retire once they reach age 60. The U.S.
Congress is also considering legislation that would amend the Pension Protection
Act of 2006. The Company has not completed its evaluation of the
impact of the proposed legislation on its financial statements; however,
the
proposed legislation could have a material impact on the Company’s valuation of
its liability for pension and postretirement benefits and its minimum required
contributions to its defined benefit pension plans.
Compensation
As
described in
Note 8 to the condensed consolidated financial statements, during 2006 and
January 2007, the AMR Board of Directors approved the amendment and restatement
of all of the outstanding performance share plans, the related performance
share
agreements and deferred share agreements that required settlement in cash.
The plans were amended to permit settlement in cash and/or stock; however,
the amendments did not impact the fair value of the awards under the plans.
These changes were made in connection with a grievance filed by the
Company’s three labor unions which asserted that a cash settlement may be
contrary to a component of the Company’s 2003 Annual Incentive Program agreement
with the unions.
American
has a profit sharing program that provides variable compensation that rewards
frontline employees when American achieves certain financial
targets. Generally, the profit sharing plan provides for a profit
sharing pool for eligible employees equal to 15 percent of pre-tax income
of
American in excess of $500 million. Based on current conditions, the
Company’s condensed consolidated financial statements include an accrual for
profit sharing. There can be no assurance that the Company’s
forecasts will approximate actual results. Additionally, reductions
in the Company’s forecasts of income for 2007 could result in the reversal of a
portion or all of the previously recorded profit sharing expense.
Cash
Flow Activity
At
September 30,
2007, the Company had $5.4 billion in unrestricted cash and short-term
investments, an increase of $675 million from December 31,
2006. Net cash provided by operating activities in the
nine-month period ended September 30, 2007 was $1.9 billion, an increase
of $216
million over the same period in 2006. The increase was primarily the
result of improved economic conditions which allowed the industry to increase
fare levels. The Company contributed $380 million to its defined
benefit pension plans in the first nine months of 2007 compared to $184 million
during the first nine months of 2006.
Capital
expenditures
for the first nine months of 2007 were $515 million and primarily included
aircraft modifications and the cost of improvements at New York’s John F.
Kennedy airport (JFK). A significant portion of the Company’s
construction costs at JFK have been reimbursed through a fund established
from a
previous financing transaction.
On
January 26,
2007, AMR completed a public offering of 13 million shares of its common
stock. The Company realized $497 million from the sale of
equity.
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
OPERATIONS
For
the
Three Months Ended September 30, 2007 and 2006
Revenues
The
Company’s
revenues increased approximately $99 million, or 1.7 percent, to $5.9 billion
in
the third quarter of 2007 compared to the same period in
2006. American’s passenger revenues increased by 2.0 percent, or $93
million, despite a capacity (available seat mile) (ASM) decrease of 2.8
percent. American’s passenger load factor increased 2.2 points to
83.9 percent and passenger revenue yield per passenger mile increased by
2.3
percent to 13.09 cents. This resulted in an increase in American’s
passenger revenue per available seat mile (RASM) of 5.0 percent to 10.98
cents.
Following is additional information regarding American’s domestic and
international RASM and capacity based on geographic areas defined by the
Department of Transportation (DOT):
|
|
Three
Months
Ended September 30, 2007
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
10.7
|
|
|
|
4.8 |
% |
|
|
27.4
|
|
|
|
(2.5 |
)% |
International
|
|
|
11.5
|
|
|
|
5.3
|
|
|
|
15.8
|
|
|
|
(3.3 |
) |
DOT
Latin America
|
|
|
11.6
|
|
|
|
3.5
|
|
|
|
7.3
|
|
|
|
0.1
|
|
DOT
Atlantic
|
|
|
11.7
|
|
|
|
2.7
|
|
|
|
6.8
|
|
|
|
(0.2 |
) |
DOT
Pacific
|
|
|
10.9
|
|
|
|
21.0
|
|
|
|
1.7
|
|
|
|
(24.2 |
) |
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 $4 million,
or
0.6 percent, to $648 million as a result of increased load factors and despite
decreases in passenger yield and capacity. Regional Affiliates’
traffic increased 1.3 percent to 2.6 billion revenue passenger miles (RPMs)
and
capacity decreased 0.9 percent to 3.4 billion ASMs, resulting in a 1.7 point
increase in the passenger load factor to 75.9 percent.
Operating
Expenses
The
Company’s total
operating expenses increased 1.2 percent, or $64 million, to $5.6 billion
in the
third quarter of 2007 compared to the third quarter of
2006. American’s mainline operating expenses per ASM in the third
quarter of 2007 increased 3.9 percent compared to the prior year third quarter
to 11.45 cents. These increases are due primarily to investments to improve
customer experience, accelerated depreciation to reflect cabin refurbishment
programs and approximately $40 million related to a correction for additional
salary and benefit expense from prior periods as discussed in Note 2 to the
condensed consolidated financial statements. The Company’s operating
and financial results are significantly affected by the price of jet fuel.
Continuing high fuel prices, additional increases in the price of fuel, or
disruptions in the supply of fuel, would further adversely affect the Company’s
financial condition and results of operations.
(in
millions)
Operating
Expenses
|
|
Three
Months
Ended
September
30,
2007
|
|
|
Increase
/
(Decrease) from 2006
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
$ |
1,721
|
|
|
$ |
27
|
|
|
|
1.6 |
% |
Aircraft
fuel
|
|
|
1,743
|
|
|
|
(28 |
) |
|
|
(1.6 |
) |
Other
rentals
and landing fees
|
|
|
328
|
|
|
|
11
|
|
|
|
3.5
|
|
Depreciation
and amortization
|
|
|
307
|
|
|
|
17
|
|
|
|
5.9
|
|
Maintenance,
materials and repairs
|
|
|
274
|
|
|
|
22
|
|
|
|
8.7
|
|
Commissions,
booking fees and credit card expense
|
|
|
270
|
|
|
|
(14 |
) |
|
|
(4.9 |
) |
Aircraft
rentals
|
|
|
148
|
|
|
|
(6 |
) |
|
|
(3.9 |
) |
Food
service
|
|
|
139
|
|
|
|
6
|
|
|
|
4.5
|
|
Other
operating expenses
|
|
|
697
|
|
|
|
29
|
|
|
|
4.3
|
|
Total
operating expenses
|
|
$ |
5,627
|
|
|
$ |
64
|
|
|
|
1.2 |
% |
Other
income
(expense), historically a net expense, decreased $125 million due primarily
to
the prior year impact of certain ineffective fuel derivatives as discussed
in
Note 11 to the condensed consolidated financial statements. Interest
income
increased $10 million in the third quarter of 2007 compared to the third
quarter
of 2006 due primarily to an increase in short-term investment
balances. Interest expense decreased $32 million as a result of a
decrease in the Company’s long-term debt balance.
The
Company did not
record a net tax provision (benefit) associated with its third quarter 2007
and
2006 earnings (losses) due to the Company providing a valuation allowance,
as
discussed in Note 6 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, 2007 and 2006.
|
|
|
|
|
|
|
|
|
Three
Months
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
36,290
|
|
|
|
36,382
|
|
Available
seat miles (millions)
|
|
|
43,271
|
|
|
|
44,532
|
|
Cargo
ton miles (millions)
|
|
|
514
|
|
|
|
557
|
|
Passenger
load factor
|
|
|
83.9 |
% |
|
|
81.7 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
13.09
|
|
|
|
12.80
|
|
Passenger
revenue per available seat mile (cents)
|
|
|
10.98
|
|
|
|
10.46
|
|
Cargo
revenue yield per ton mile (cents)
|
|
|
38.14
|
|
|
|
38.32
|
|
Operating
expenses per available seat mile, excluding Regional Affiliates
(cents)
(*)
|
|
|
11.45
|
|
|
|
11.02
|
|
Fuel
consumption (gallons, in millions)
|
|
|
725
|
|
|
|
741
|
|
Fuel
price per gallon (cents)
|
|
|
216.5
|
|
|
|
215.8
|
|
Operating
aircraft at period-end
|
|
|
684
|
|
|
|
699
|
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
2,611
|
|
|
|
2,578
|
|
Available
seat miles (millions)
|
|
|
3,442
|
|
|
|
3,475
|
|
Passenger
load factor
|
|
|
75.9 |
% |
|
|
74.2 |
% |
|
(*)Excludes
$701 million and $702 million of expense incurred related to Regional
Affiliates in 2007 and 2006,
respectively.
|
Operating
aircraft
at September 30, 2007, included:
|
|
|
|
|
|
|
|
American
Airlines Aircraft
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
Airbus
A300-600R
|
|
|
34
|
|
Bombardier
CRJ-700
|
|
|
25
|
|
Boeing
737-800
|
|
|
77
|
|
Embraer
135
|
|
|
39
|
|
Boeing
757-200
|
|
|
128
|
|
Embraer
140
|
|
|
59
|
|
Boeing
767-200 Extended Range
|
|
|
15
|
|
Embraer
145
|
|
|
108
|
|
Boeing
767-300 Extended Range
|
|
|
58
|
|
Super
ATR
|
|
|
39
|
|
Boeing
777-200 Extended Range
|
|
|
47
|
|
Saab
340
|
|
|
36
|
|
McDonnell
Douglas MD-80
|
|
|
325
|
|
Total
|
|
|
306
|
|
Total
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
average
aircraft age for American’s and AMR Eagle’s aircraft is 14.7 years and 7.4
years, respectively.
Of
the operating
aircraft listed above, 25 McDonnell Douglas MD-80 aircraft - - 12 owned,
eight
operating leased and five capital leased - - and 10 operating leased Saab
340
aircraft were in temporary storage as of September 30, 2007.
Owned
and leased
aircraft not operated by the Company at September 30, 2007,
included:
American
Airlines Aircraft
|
|
|
|
AMR
Eagle Aircraft
|
|
|
|
Boeing
757-200
|
|
|
8
|
|
Embraer
145
|
|
|
10
|
|
Boeing
767-200 Extended Range
|
|
|
1
|
|
Saab
340
|
|
|
26
|
|
Fokker
100
|
|
|
4
|
|
Total
|
|
|
36
|
|
McDonnell
Douglas MD-80
|
|
|
13
|
|
|
|
|
|
|
Total
|
|
|
26
|
|
|
|
|
|
|
AMR
Eagle has
leased its 10 owned Embraer 145s that are not operated by AMR Eagle to Trans
States Airlines, Inc.
For
the
Nine Months Ended September 30, 2007 and 2006
Revenues
The
Company’s
revenues increased approximately $86 million, or 0.5 percent, to $17.3 billion
for the nine months ended September 30, 2007 from the same period last
year. American’s passenger revenues increased 0.9 percent, or $128
million, while capacity (ASM) decreased by 3.2 percent. American’s
passenger load factor increased 1.3 points to 81.9 percent and passenger
revenue
yield per passenger mile increased by 2.6 percent to 13.15
cents. This resulted in an increase in American’s passenger RASM of
4.3 percent to 10.77 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, 2007
|
|
|
|
RASM
(cents)
|
|
|
Y-O-Y
Change
|
|
|
ASMs
(billions)
|
|
|
Y-O-Y
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOT
Domestic
|
|
|
10.6
|
|
|
|
2.6 |
% |
|
|
81.4
|
|
|
|
(3.4 |
)% |
International
|
|
|
11.1
|
|
|
|
7.3
|
|
|
|
46.3
|
|
|
|
(2.9 |
) |
DOT
Latin America
|
|
|
11.3
|
|
|
|
5.8
|
|
|
|
22.3
|
|
|
|
0.4
|
|
DOT
Atlantic
|
|
|
11.1
|
|
|
|
4.8
|
|
|
|
18.9
|
|
|
|
(1.2 |
) |
DOT
Pacific
|
|
|
10.2
|
|
|
|
21.9
|
|
|
|
5.1
|
|
|
|
(19.8 |
) |
Regional
Affiliates’ passenger revenues, which are based on industry standard proration
agreements for flights connecting to American flights, decreased $51 million,
or
2.7 percent, to $1.9 billion as a result of decreased capacity and passenger
yield and a load factor that was approximately flat. Regional
Affiliates’ traffic decreased 0.7 percent to 7.5 billion revenue passenger miles
(RPMs) and capacity decreased 0.7 percent to 10.1 billion ASMs, resulting
in a
flat passenger load factor of 74.0 percent.
Operating
Expenses
The
Company’s total
operating expenses decreased 0.4 percent, or $73 million, to $16.2 billion
for
the nine months ended September 30, 2007 compared to the same period in
2006. American’s mainline operating expenses per ASM in the nine
months ended September 30, 2007 increased 2.5 percent compared to the same
period in 2006 to 11.17 cents. These changes are due primarily to weather
related cancellations in 2007.
(in
millions)
Operating
Expenses
|
|
Nine
Months
Ended
September
30,
2007
|
|
|
Increase
/
(Decrease) from 2006
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
Wages,
salaries and benefits
|
|
$ |
5,047
|
|
|
$ |
(56 |
) |
|
|
(1.1 |
)% |
Aircraft
fuel
|
|
|
4,797
|
|
|
|
(155 |
) |
|
|
(3.1 |
) |
Other
rentals
and landing fees
|
|
|
970
|
|
|
|
3
|
|
|
|
0.3
|
|
Depreciation
and amortization
|
|
|
892
|
|
|
|
24
|
|
|
|
2.8
|
|
Maintenance,
materials and repairs
|
|
|
790
|
|
|
|
64
|
|
|
|
8.8
|
|
Commissions,
booking fees and credit card expense
|
|
|
787
|
|
|
|
(52 |
) |
|
|
(6.2 |
) |
Aircraft
rentals
|
|
|
451
|
|
|
|
2
|
|
|
|
0.4
|
|
Food
service
|
|
|
399
|
|
|
|
13
|
|
|
|
3.4
|
|
Other
operating expenses
|
|
|
2,085
|
|
|
|
84
|
|
|
|
4.2
|
|
Total
operating expenses
|
|
$ |
16,218
|
|
|
$ |
(73 |
) |
|
|
(0.4 |
)% |
Other
income
(expense), historically a net expense, decreased $200 million due primarily
to
the prior year impact of certain ineffective fuel derivatives as discussed
in
Note 11 to the condensed consolidated financial
statements. Interest income increased $56 million in nine
months ended September 30, 2007 compared to the same period in 2006 due
primarily to an increase in short-term investment balances. Interest
expense decreased $77 million as a result of a decrease in the Company’s
long-term debt balance.
The
Company did not
record a net tax provision (benefit) associated with its earnings (losses)
for
the nine months ended September 30, 2007 and 2006 due to the Company providing
a
valuation allowance, as discussed in Note 6 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, 2007 and 2006.
|
|
|
|
|
|
|
|
|
Nine
Months
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
American
Airlines, Inc. Mainline Jet Operations
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
104,534
|
|
|
|
106,253
|
|
Available
seat miles (millions)
|
|
|
127,609
|
|
|
|
131,883
|
|
Cargo
ton miles (millions)
|
|
|
1,574
|
|
|
|
1,640
|
|
Passenger
load factor
|
|
|
81.9 |
% |
|
|
80.6 |
% |
Passenger
revenue yield per passenger mile (cents)
|
|
|
13.15
|
|
|
|
12.82
|
|
Passenger
revenue per available seat mile (cents)
|
|
|
10.77
|
|
|
|
10.33
|
|
Cargo
revenue yield per ton mile (cents)
|
|
|
37.91
|
|
|
|
36.88
|
|
Operating
expenses per available seat mile, excluding Regional Affiliates
(cents)
(*)
|
|
|
11.17
|
|
|
|
10.90
|
|
Fuel
consumption (gallons, in millions)
|
|
|
2,129
|
|
|
|
2,183
|
|
Fuel
price per gallon (cents)
|
|
|
203.0
|
|
|
|
205.0
|
|
|
|
|
|
|
|
|
|
|
Regional
Affiliates
|
|
|
|
|
|
|
|
|
Revenue
passenger miles (millions)
|
|
|
7,468
|
|
|
|
7,522
|
|
Available
seat miles (millions)
|
|
|
10,096
|
|
|
|
10,168
|
|
Passenger
load factor
|
|
|
74.0 |
% |
|
|
74.0 |
% |
|
(*)
|
Excludes
$2.1
billion and $2.0 billion of expense incurred related to Regional
Affiliates in 2007 and 2006,
respectively.
|
The
Company
currently expects fourth quarter mainline unit costs to increase approximately
4.5 percent year over year. Capacity for American’s mainline jet
operations in the fourth quarter is expected to increase approximately 0.9
percent year over year.
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
2006 Form 10-K. The change in market risk for aircraft fuel is
discussed below for informational purposes due to the sensitivity of the
Company’s financial results to changes in fuel prices.
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, heating oil, and crude oil hedging
contracts. Market risk is estimated as a hypothetical 10 percent
increase in the September 30, 2007 cost per gallon of fuel. Based on
projected 2007 and 2008 fuel usage through September 30, 2008, such an increase
would result in an increase to aircraft fuel expense of approximately $563
million in the twelve months ended September 30, 2008, inclusive of the impact
of effective fuel hedge instruments outstanding at September 30,
2007. Comparatively, based on projected 2007 fuel usage, such an
increase would have resulted in an increase to aircraft fuel expense of
approximately $531 million in the twelve months ended December 31, 2007,
inclusive of the impact of effective fuel hedge instruments outstanding at
December 31, 2006. 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
a result of its
second quarter 2006 effectiveness assessment, the Company determined that
the
majority of its outstanding derivatives, primarily crude oil related contracts,
were no longer expected to be highly effective in offsetting changes in
forecasted jet fuel purchases. Effective July 1, 2006, all subsequent
changes in the fair value of those particular hedge contracts were recognized
directly in earnings rather than being deferred in Accumulated other
comprehensive loss. For the three month period ended September 30,
2006, a charge of $99 million was recognized in Other income (expense)
reflecting the change in market value of the derivative contracts that no
longer
qualified for hedge accounting.
As
of September 30,
2007, the Company had effective hedges, primarily collars, covering
approximately 40 percent of its estimated remaining 2007 fuel requirements
and
14 percent of its 2008 fuel requirements. The consumption hedged for
the remainder of 2007 is capped at an average price of approximately $69
per
barrel of crude oil. A deterioration of the Company’s financial
position could negatively affect the Company’s ability to hedge fuel in the
future.
Item
4.Controls and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, or the Exchange Act. This term refers
to
the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it
files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the participation
of the
Company’s management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the Company’s disclosure
controls and procedures as of September 30, 2007. 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, 2007. During the quarter ending on September 30, 2007, 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
On
July 26, 1999, a
class action lawsuit was filed, and in November 1999 an amended complaint
was
filed, against AMR, American, AMR Eagle, Airlines Reporting Corporation,
and the
Sabre Group Holdings, Inc. in the United States District Court for the Central
District of California, Western Division (Westways World Travel, Inc. v. AMR
Corp., et al.). The lawsuit alleges that requiring travel
agencies to pay debit memos to American for violations of American’s fare rules
(by customers of the agencies): (1) breaches the Agent Reporting
Agreement between American and AMR Eagle and the plaintiffs;
(2) constitutes unjust enrichment; and (3) violates the Racketeer
Influenced and Corrupt Organizations Act of 1970 (RICO). On July 9,
2003, the court certified a class that included all travel agencies who have
been or will be required to pay money to American for debit memos for fare
rules
violations from July 26, 1995 to the present. The plaintiffs sought
to enjoin American from enforcing the pricing rules in question and to recover
the amounts paid for debit memos, plus treble damages, attorneys’ fees, and
costs. On February 24, 2005, the court decertified the class. The
claims against Airlines Reporting Corporation have been dismissed, and in
September 2005, the Court granted Summary Judgment in favor of the Company
and
all other defendants. Plaintiffs have filed an appeal to the United
States Court of Appeals for the Ninth Circuit. Although the Company
believes that the litigation is without merit, a final adverse court decision
could impose restrictions on the Company’s relationships with travel agencies,
which could have a material adverse impact on the Company.
Between
April 3,
2003 and June 5, 2003, three lawsuits were filed by travel agents, some of
whom
opted out of a prior class action (now dismissed) to pursue their claims
individually against American, other airline defendants, and in one case
against
certain airline defendants and Orbitz LLC. The cases, Tam Travel et.
al., v. Delta Air Lines et. al., in the United States District Court for the
Northern District of California, San Francisco (51 individual agencies),
Paula Fausky d/b/a Timeless Travel v. American Airlines, et. al, in the
United States District Court for the Northern District of Ohio, Eastern Division
(29 agencies) and Swope Travel et al. v. Orbitz et. al. in the United
States District Court for the Eastern District of Texas, Beaumont Division
(71
agencies) were consolidated for pre-trial purposes in the United States District
Court for the Northern District of Ohio, Eastern Division. Collectively,
these lawsuits seek damages and injunctive relief alleging that the certain
airline defendants and Orbitz LLC: (i) conspired to prevent travel agents
from
acting as effective competitors in the distribution of airline tickets to
passengers in violation of Section 1 of the Sherman Act; (ii) conspired to
monopolize the distribution of common carrier air travel between airports
in the
United States in violation of Section 2 of the Sherman Act; and that (iii)
between 1995 and the present, the airline defendants conspired to reduce
commissions paid to U.S.-based travel agents in violation of Section 1 of
the
Sherman Act. On September 23, 2005, the Fausky plaintiffs dismissed
their claims with prejudice. On September 14, 2006, the court dismissed
with prejudice 28 of the Swope plaintiffs. 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.
Miami-Dade
County
(the County) is currently investigating and remediating various environmental
conditions at the Miami International Airport (MIA) and funding the remediation
costs through landing fees and various cost recovery
methods. American and AMR Eagle have been named as potentially
responsible parties (PRPs) for the contamination at MIA. During the
second quarter of 2001, the County filed a lawsuit against 17 defendants,
including American, in an attempt to recover its past and future cleanup
costs
(Miami-Dade County, Florida v. Advance Cargo Services, Inc., et al. in
the Florida Circuit Court). On August 27, 2007, American and the County entered
into an agreement settling all claims in the litigation. The
settlement agreement has been approved by the court.
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 the American’s flight attendants
(Ann M. Marcoux, et al., v. American Airlines Inc., et al. in the United
States District Court for the Eastern District of New York). While a class
has
not yet been certified, the lawsuit seeks on behalf of all of American’s flight
attendants or various subclasses to set aside, and to obtain damages allegedly
resulting from, the April 2003 Collective Bargaining Agreement referred to
as
the Restructuring Participation Agreement (RPA). The RPA was one of three
labor
agreements American successfully reached with its unions in order to avoid
filing for bankruptcy in 2003. In a related case (Sherry Cooper,
et al. v. TWA Airlines, LLC, et al., also in the United States District
Court for the Eastern District of New York), the court denied a preliminary
injunction against implementation of the RPA on June 30, 2003. The
Marcoux suit alleges various claims against the APFA and American
relating to the RPA and the ratification vote on the RPA by individual APFA
members, including: violation of the Labor Management Reporting and Disclosure
Act (LMRDA) and the APFA’s Constitution and By-laws, violation by the APFA of
its duty of fair representation to its members, violation by American of
provisions of the Railway Labor Act (RLA) through improper coercion of flight
attendants into voting or changing their vote for ratification, and violations
of the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
On
March 28, 2006, the district court dismissed all of various state law claims
against American, all but one of the LMRDA claims against the APFA, and the
claimed violations of RICO. This left the claimed violations of the
RLA and the duty of fair representation against American and the APFA (as
well
as one LMRDA claim and one claim against the APFA of a breach of its
constitution). By letter dated February 9, 2007, plaintiffs’ counsel
informed counsel for the defendants that plaintiffs do not intend to pursue
the
LMRDA claim against APFA further. Although the Company believes the
case against it is without merit and both American and the APFA are vigorously
defending the lawsuit, a final adverse court decision invalidating the RPA
and
awarding substantial money damages would have a material adverse impact on
the
Company.
On
February 14,
2006, the Antitrust Division of the United States Department of Justice (the
“DOJ”) served the Company with a grand jury subpoena as part of an ongoing
investigation into possible criminal violations of the antitrust laws by
certain
domestic and foreign air cargo carriers. At this time, the Company does not
believe it is a target of the DOJ investigation. The New Zealand Commerce
Commission notified the Company on February 17, 2006 that it is also
investigating whether the Company and certain other cargo carriers entered
into
agreements relating to fuel surcharges, security surcharges, war risk
surcharges, and customs clearance surcharges. On February 22, 2006, the
Company received a letter from the Swiss Competition Commission informing
the
Company that it too is investigating whether the Company and certain other
cargo
carriers entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On
December 19, 2006 and June 12, 2007, the Company received requests for
information from the European Commission, seeking information regarding the
Company’s corporate structure, revenue and pricing announcements for air cargo
shipments to and from the European Union. On January 23, 2007, the
Brazilian competition authorities, as part of an ongoing investigation,
conducted an unannounced search of the Company’s cargo facilities in Sao Paulo,
Brazil. The Brazilian authorities are investigating whether the Company
and certain other foreign and domestic air carriers violated Brazilian
competition laws by illegally conspiring to set fuel surcharges on cargo
shipments. On June 27, 2007, the Company received a request 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 4, 2007, the Attorney General of the State
of Florida served American with a Civil Investigative Demand as part of its
investigation of possible violations of federal and Florida antitrust laws
regarding the pricing of air cargo services. The Company intends to
cooperate fully with these investigations and inquiries. In the event that
these
or other investigations uncover violations of the U.S. antitrust laws or
the
competition laws of some other jurisdiction, such findings and related legal
proceedings could have a material adverse impact on the
Company. Approximately 44 purported class action lawsuits have been
filed in the U.S. against the Company and certain foreign and domestic air
carriers alleging that the defendants violated U.S. antitrust laws by illegally
conspiring to set prices and surcharges on cargo shipments. These
cases, along with other purported class action lawsuits in which the Company
was
not named, were consolidated in the United States District Court for the
Eastern
District of New York as In re Air Cargo Shipping Services Antitrust
Litigation, 06-MD-1775 on June 20, 2006. Plaintiffs are
seeking
trebled money damages and injunctive relief. The Company has not been
named as a defendant in the consolidated complaint filed by the
plaintiffs. However, the plaintiffs have not released any claims that
they may have against the Company, and the Company may later be added as
a
defendant in the litigation. If the Company is sued on these claims,
it will vigorously defend the suit, but any adverse judgment could have a
material adverse impact on the Company. Also, on January 23, 2007,
the Company was served with a purported class action complaint filed against
the
Company, American, and certain foreign and domestic air carriers in the Supreme
Court of British Columbia in Canada (McKay v. Ace Aviation Holdings, et
al.). The plaintiff alleges that the defendants violated Canadian
competition laws by illegally conspiring to set prices and surcharges on
cargo
shipments. The complaint seeks compensatory and punitive damages under
Canadian law. On June 22, 2007, the plaintiffs agreed to dismiss their
claims against the Company. The dismissal is without prejudice, and the Company
could be brought back into the litigation at a future date. If litigation
is
recommenced against the Company in the Canadian courts, the Company will
vigorously defend itself; however, any adverse judgment could have a material
adverse impact on the Company.
On
June 20, 2006,
the DOJ served the Company with a grand jury subpoena as part of an ongoing
investigation into possible criminal violations of the antitrust laws by
certain
domestic and foreign passenger carriers. At this time, the Company does not
believe it is a target of the DOJ investigation. The Company intends to
cooperate fully with this investigation. On September 4, 2007, the
Attorney General of the State of Florida served American with a Civil
Investigative Demand as part of its investigation of possible violations
of
federal and Florida antitrust laws regarding the pricing of air passenger
transportation. In the event that this or other investigations
uncover violations of the U.S. antitrust laws or the competition laws of
some
other jurisdiction, such findings and related legal proceedings could have
a
material adverse impact on the Company. Approximately 52 purported
class action lawsuits have been filed in the U.S. against the Company and
certain foreign and domestic air carriers alleging that the defendants violated
U.S. antitrust laws by illegally conspiring to set prices and surcharges
for
passenger transportation. These cases, along with other purported
class action lawsuits in which the Company was not named, were consolidated
in
the United States District Court for the Northern District of California
as
In re International Air Transportation Surcharge Antitrust Litigation, M
06-01793 on October 25, 2006. On July 9, 2007, the Company was named
as a defendant in the consolidated complaint. Plaintiffs are seeking
trebled money damages and injunctive relief. American will vigorously defend
these lawsuits; however, any adverse judgment could have a material adverse
impact on the Company.
American
is
defending a lawsuit (Love Terminal Partners, L.P. et al. v. The City of
Dallas, Texas et al.) filed on July 17, 2006 in the United States District
Court in Dallas. The suit was brought by two lessees of facilities at
Dallas Love Field Airport against American, the cities of Fort Worth and
Dallas,
Southwest Airlines, Inc., and the Dallas/Fort Worth International Airport
Board.
The suit alleges that an agreement by and between the five defendants with
respect to Dallas Love Field violates Sections 1 and 2 of the Sherman Act.
Plaintiffs seek injunctive relief and compensatory and statutory damages.
American will vigorously defend this lawsuit; however, any adverse judgment
could have a material adverse impact on the Company.
On
August 21, 2006,
a patent infringement lawsuit was filed against American and American Beacon
Advisors, Inc. (a wholly-owned subsidiary of the Company), in the United
States
District Court for the Eastern District of Texas (Ronald A. Katz Technology
Licensing, L.P. v. American Airlines, Inc., et al.). This case
has been consolidated in the Central District of California for pre-trial
purposes with numerous other cases brought by the plaintiff against other
defendants. The plaintiff alleges that American and American Beacon
infringe a number of the plaintiff’s patents, each of which relates to automated
telephone call processing systems. The plaintiff is seeking past and
future royalties, injunctive relief, costs and attorneys'
fees. Although the Company believes that the plaintiff’s claims are
without merit and is vigorously defending the lawsuit, a final adverse court
decision awarding substantial money damages or placing material restrictions
on
existing automated telephone call system operations would have a material
adverse impact on the Company.
American
is
defending a lawsuit (Kelley Kivilaan v. American Airlines, Inc.), filed
on September 16, 2004 in the United States District Court for the Middle
District of Tennessee. The suit was brought by a flight attendant who
seeks to represent a purported class of current and former flight
attendants. The suit alleges that several of the Company’s medical
benefits plans discriminate against females on the basis of their gender
in not
providing coverage in all circumstances for prescription contraceptives.
Plaintiff seeks injunctive relief and monetary damages. A motion for class
certification has been filed, but the case has not yet been certified as
a class
action. American will vigorously defend this lawsuit; however, any adverse
judgment could have a material adverse impact on the Company.
Item
6. Exhibits
|
|
|
The
following
exhibits are included herein:
|
|
10.1
|
Stock
purchase agreement dated as of July 3, 2007 between American
Airlines, Inc., Radio Acquisition Corp., ARINC Incorporated, and the
other parties identified therein. Portions
of
this Exhibit have been omitted and filed separately with the Securities
and Exchange Commission pursuant to a confidential treatment request
under
Rule 24b-2 of the Securities and Exchange Act of 1934, as
amended.
|
|
12
|
Computation
of ratio of earnings to fixed charges for the three and nine months
ended
September 30, 2007 and 2006.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a).
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a).
|
|
32
|
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).
|
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.
Date: October
18, 2007
|
BY:
|
/s/
Thomas W.
Horton
|
|
|
|
Thomas
W.
Horton
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|