UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 20202021
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| ☐ | 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
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| American Airlines Group Inc. | | |
| (Exact name of registrant as specified in its charter) | | |
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| | Delaware | Delaware | | | 75-1825172 | | | Delaware | | 75-1825172 | |
| (State or other jurisdiction of incorporation or organization) | (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | | | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| 1 Skyview Drive, | 1 Skyview Drive, | Fort Worth, | Texas | 76155 | | | | (817) | 963-1234 | | | 1 Skyview Drive, | Fort Worth, | Texas | 76155 | | | (682) | 278-9000 | |
| (Address of principal executive offices, including zip code) | (Address of principal executive offices, including zip code) | | | (Registrant’s telephone number, including area code) | | | (Address of principal executive offices, including zip code) | | (Registrant’s telephone number, including area code) | |
Commission file number 1-2691
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| American Airlines, Inc. | | |
| (Exact name of registrant as specified in its charter) | | |
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| | Delaware | Delaware | | | 13-1502798 | | | Delaware | | 13-1502798 | |
| (State or other jurisdiction of incorporation or organization) | (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | | | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| 1 Skyview Drive, | 1 Skyview Drive, | Fort Worth, | Texas | 76155 | | | | (817) | 963-1234 | | | 1 Skyview Drive, | Fort Worth, | Texas | 76155 | | | (682) | 278-9000 | |
| (Address of principal executive offices, including zip code) | (Address of principal executive offices, including zip code) | | | (Registrant’s telephone number, including area code) | | | (Address of principal executive offices, including zip code) | | (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | | AAL | | The Nasdaq Global Select Market |
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.
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| American Airlines Group Inc. | ☒ | Yes | | ☐ | No |
| American Airlines, Inc. | ☒ | Yes | | ☐ | No |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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| American Airlines Group Inc. | ☒ | Yes | | ☐ | No |
| American Airlines, Inc. | ☒ | Yes | | ☐ | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| American Airlines Group Inc. | ☒ | Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company |
| American Airlines, Inc. | ☐ | Large accelerated filer | ☐ | Accelerated filer | ☒
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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| American Airlines Group Inc. | ☐ | |
| American Airlines, Inc. | ☐ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| American Airlines Group Inc. | ☐ | Yes | | ☒ | No |
| American Airlines, Inc. | ☐ | Yes | | ☒ | No |
As of October 16, 2020,15, 2021, there were 508,631,777647,514,522 shares of American Airlines Group Inc. common stock outstanding.
As of October 16, 2020,15, 2021, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.
American Airlines Group Inc.
American Airlines, Inc.
Form 10-Q
Quarterly Period Ended September 30, 20202021
Table of Contents
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| PART I: FINANCIAL INFORMATION | | |
| Item 1A. | | |
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| Item 1B. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II: OTHER INFORMATION | | |
| Item 1. | | |
| Item 1A. | | |
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Item 2. | | |
Item 5. | | |
| Item 6. | | |
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General
This report is filed by American Airlines Group Inc. (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this report to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. References in this report to “mainline” refer to the operations of American only and exclude regional operations.
Glossary of Terms
For the convenience of the reader, the definitions of certain capitalized industry and other terms used in this report have been consolidated into a Glossary beginning on page 3.5. Note Concerning Forward-Looking Statements
Certain of the statements contained in this report should be considered forward-looking statements within the meaning of the Securities Act of 1933, as amended (the Securities Act), the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “would,” “continue,” “seek,” “target,” “guidance,” “outlook,” “if current trends continue,” “optimistic,” “forecast” and other similar words. Such statements include, but are not limited to, statements about our plans, objectives, expectations, intentions, estimates and strategies for the future, and other statements that are not historical facts. These forward-looking statements are based on our current objectives, beliefs and expectations, and they are subject to significant risks and uncertainties that may cause actual results and financial position and timing of certain events to differ materially from the information in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 1A. Risk Factors and other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission (the SEC).
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A. Risk Factors and elsewhere in this report. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. In particular, the consequences of the coronavirus outbreak to economic conditions and the travel industry in general and our financial position and operating results in particular have been material, are changing rapidly, and cannot be predicted. We do not assume any obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting such statements other than as required by law. Forward-lookingAny forward-looking statements speak only as of the date of this report or as of the dates indicated in the statements.
Summary of Risk Factors
Our business is subject to a number of risks and uncertainties that may affect our business, results of operations and financial condition, or the trading price of our common stock or other securities. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business. These risks are more fully described in Part II, Item 1A. Risk Factors. These risks include, among others, the following:
Risks Related to our Business
•The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has and will continue to adversely impact our business, operating results, financial condition and liquidity.
•Downturns in economic conditions and related depressed demand for air travel could adversely affect our business.
•We will need to obtain sufficient financing or other capital to operate successfully.
•Our high level of debt and other obligations may limit our ability to fund general corporate requirements and obtain additional financing, may limit our flexibility in responding to competitive developments and cause our business to be vulnerable to adverse economic and industry conditions.
•We have significant pension and other postretirement benefit funding obligations, which may adversely affect our liquidity, results of operations and financial condition.
•If our financial condition worsens, provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
•The loss of key personnel upon whom we depend to operate our business or the inability to attract and develop additional qualified personnel could adversely affect our business.
•Our business has been and will continue to be affected by many changing economic and other conditions beyond our control, including global events that affect travel behavior, and our results of operations could be volatile and fluctuate due to seasonality.
•Union disputes, employee strikes and other labor-related disruptions, or our inability to otherwise maintain labor costs at competitive levels may adversely affect our operations and financial performance.
•If we encounter problems with any of our third-party regional operators or third-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.
•Any damage to our reputation or brand image could adversely affect our business or financial results.
•We face challenges in integrating our computer, communications and other technology systems.
•Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.
•Our intellectual property rights, particularly our branding rights, are valuable, and any inability to protect them may adversely affect our business and financial results.
•We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity.
•Our ability to utilize our NOL Carryforwards may be limited.
•We have a significant amount of goodwill, which is assessed for impairment at least annually. In addition, we may never realize the full value of our intangible assets or long-lived assets, causing us to record material impairment charges.
Risks Related to the Airline Industry
•The airline industry is intensely competitive and dynamic.
•The commercial relationships that we have with other airlines, including any related equity investments, may not produce the returns or results we expect.
•Our business is very dependent on the price and availability of aircraft fuel and continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on consumer demand, our operating results and liquidity.
•Our business is subject to extensive government regulation, which may 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.
•We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control.
•We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns.
•We are subject to risks associated with climate change, including increased regulation of our CO2 emissions, changing consumer preferences and the potential increased impacts of severe weather events on our operations and infrastructure.
•We depend on a limited number of suppliers for aircraft, aircraft engines and parts.
•Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity, and failure of new aircraft to perform as expected, may adversely impact our business, results of operations and financial condition.
•We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could harm our business, results of operations and financial condition.
•Evolving data security and privacy requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition.
•We rely on third-party distribution channels and must manage effectively the costs, rights and functionality of these channels.
•If we are unable to obtain and maintain adequate facilities and infrastructure throughout our system and, at some airports, adequate slots, we may be unable to operate our existing flight schedule and to expand or change our route network in the future, which may have a material adverse impact on our operations.
•A shortage of pilots or other personnel could materially adversely affect our business.
GLOSSARY OF TERMS
“2013 Credit Agreement” means the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015, among American, AAG, the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto, as amended.
“2013 Revolving Facility” means the $750 million revolving credit facility provided for by the 2013 Credit Agreement.
“2013 Term Loan Facility” means the $1.9 billion term loan facility provided for under the 2013 Credit Agreement.
“2014 Credit Agreement” means the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American, AAG, the lenders from time to time party thereto, Citibank N.A., as administrative agent, and certain other parties thereto, as amended.
“2014 Credit Facilities” means the 2014 Revolving Facility and the 2014 Term Loan Facility provided for by the 2014 Credit Agreement.
“2014 Revolving Facility” means the $1.6 billion revolving credit facility provided for by the 2014 Credit Agreement.
“2014 Term Loan Facility” means the $1.3$1.2 billion term loan facility provided for by the 2014 Credit Agreement.
“2016 JFK Bonds” means special facility revenue bonds issued on behalf of American by NYTDC in June 2016.
“20192020 Form 10-K” means AAG’s and American’s Annual Report on Form 10-K for the year ended December 31, 2019.
“2019-1 Aircraft EETCs” means the three pass-through trusts created by American in August 2019 that have issued approximately $1.1 billion aggregate face amount of Series 2019-1 Class AA, Class A and Class B EETCs.2020.
“2020 JFK Bonds” means the approximately $360$298 million of special facility revenue bonds issued on behalf of American by NYTDC in June 2020.
“3.75% Senior Notes” mean 3.75% senior notes due 2025 with an aggregate principal amount of $500 million.
“5.000% senior notes”2021 JFK Bonds” means the 5.000% notes dueapproximately $150 million of special facility revenue bonds NYTDC issued in 2022 with an aggregate principal amount of $750 million.June 2021.
“10.75% Senior Secured2026 Notes” means the LGA/DCA Notes and the IP Notes.
“10.75% Senior Secured Notes Closing Date” means September 25, 2020.
“10.75% Senior Secured Notes Collateral” means the IP Collateral and LGA/DCA Collateral.
“10.75% Senior Secured Notes Indenture” means the IP Notes Indenture and the LGA/DCA Notes Indenture.
“10.75% Senior Secured Notes Trustee” means the Wilmington Trust, National Association as trustee.
“11.75% Senior Secured Notes” means the 11.75%AAdvantage Issuers' 5.50% senior secured notes due in 2025 with an aggregate principal amount of $2.5 billion.2026.
“2029 Notes” means the AAdvantage Issuers' 5.75% senior secured notes due 2029.
“AAdvantage” means the AAdvantage® frequent flyer program.
“AAdvantage Agreements” means the AAdvantage program agreements provided as collateral under the AAdvantage Financing.
“AAdvantage Collateral” means the AAdvantage Agreements (including all payments thereunder) and rights under an intercompany agreement and certain IP Licenses, certain rights under the AAdvantage program, certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other assets of Loyalty Issuer and the SPV Guarantors.
“AAdvantage Financing” means the AAdvantage Notes and the AAdvantage Term Loan Facility.
“AAdvantage Financing Closing Date” means March 24, 2021.
“AAdvantage Guarantees” means the AAdvantage Notes Guarantees, together with the full and unconditional guarantee of the AAdvantage Loans by the AAdvantage Guarantors.
“AAdvantage Guarantors” means the SPV Guarantors and AAG.
“AAdvantage Indenture” means the indenture, dated as of March 24, 2021, by and among the AAdvantage Issuers, the AAdvantage Guarantors and Wilmington Trust, National Association, as trustee and as collateral custodian.
“AAdvantage Issuers” means the Loyalty Issuer and American.
“AAdvantage Loans” means the $3.5 billion of term loans provided pursuant to the AAdvantage Term Loan Facility.
“AAdvantage Note Guarantees” means the full and unconditional guarantee of the AAdvantage Notes by the AAdvantage Guarantors.
“AAdvantage Notes” means, collectively, the 2026 Notes and the 2029 Notes.
“AAdvantage Payment Date” means, with respect to the payment of interest on the AAdvantage Notes and AAdvantage Loans, the 20th day of each January, April, July and October.
“AAdvantage Term Loan Facility” means the $3.5 billion term loan facility provided pursuant to the term loan credit and guaranty agreement, dated as of March 24, 2021, with Barclays Bank PLC, as administrative agent, Wilmington Trust, National Association, as collateral administrator, and the lenders party thereto.
“AAG”, “we”, “us”, “our” and similar terms means American Airlines Group Inc. and its consolidated subsidiaries.
“American” means American Airlines, Inc., a wholly-owned subsidiary of AAG.
“American Eagle” means our regional carriers, including our wholly-owned regional carriers Envoy, PSA and Piedmont, as well as third-party regional carriers including Mesa, Republic and SkyWest.
“���AMR” or “AMR Corporation” means AMR Corporation and is used to reference AAG during the period of time prior to its emergence from Chapter 11 and the Merger.
“AMT” means alternative minimum tax.
“AOCI” means accumulated other comprehensive income (loss).
“April 2016 Credit Agreement” means the Credit and Guaranty Agreement, dated as of April 29, 2016, among American, AAG, the lenders from time to time party thereto, Barclays Bank PLC, as administrative agent, and certain other parties thereto, as amended.
“April 2016 Credit Facilities” means the April 2016 Revolving Facility and April 2016 Term Loan Facility provided for by the 2016 Credit Agreement.
“April 2016 Revolving Facility” means the $450 million revolving credit facility provided for by the April 2016 Credit Agreement.
“April 2016 Spare Parts Term Loan Facility” means the $1,000 million$1.0 billion term loan facility provided for by the April 2016 Credit Agreement.
“ASC”ARP” means the FASB Accounting Standards Codification.
“ASC 350” means the FASB Accounting Standards Codification relating to “Intangibles - Goodwill and Other.”
“ASC 360” means the FASB Accounting Standards Codification relating to “Property, Plant, and Equipment.”American Rescue Plan Act of 2021.
“ASM” means available seat mile and is a basic measure of production. One ASM represents one seat flown one mile.
“ASU” means Accounting Standards Update.
“ATC” means air traffic control.
“ATC system” means the U.S. National Airspace System.
“Bankruptcy Court” means the United States Bankruptcy Court for the Southern District of New York.
“Base Indenture” means the indenture, dated as of June 25, 2020, between AAG and the Convertible Notes Trustee.
“Bylaws” means AAG’s Amended and Restated Bylaws, as amended.
“CARES Act” means the Coronavirus Air,Aid, Relief, and Economic Security Act, as amended.Act.
“CASM” means operating cost per available seat mile and is equal to operating expenses divided by ASMs.
“CBAs” means collective bargaining agreements.
“CEO” means Chief Executive Officer.
“CFO” means Chief Financial Officer.
“Chapter 11 Cases” means the voluntary petitions for relief filed on November 29, 2011 by the Debtors.
“China Southern Airlines” means China Southern Airlines Company Limited.
“CMA” means the United Kingdom Competition and Markets Authority.
“CO2” means carbon dioxide.
“Code” means the Internal Revenue Code of 1986, as amended.
“Company” means AAG and its consolidated subsidiaries.
“Convertible Notes” means AAG’s 6.50% convertible senior notes due 2025.
“Convertible Notes Indenture” means the Base Indentureindenture, dated as of June 25, 2020, between AAG and the Convertible Notes Supplemental Indenture.
“Convertible Notes Guarantee” means the full and unconditional guarantee of the Convertible NotesTrustee, as supplemented by American.
“Convertible Notes Supplemental Indenture” means the first supplemental indenture, dated as of June 25, 2020, among AAG, American and the Convertible Notes Trustee.
“Convertible Notes Trustee” means the Wilmington Trust, National Association, as trustee.
trustee with respect to the Convertible Notes.“CORSIA” means the Carbon Offsetting and Reduction Scheme for International Aviation.
“COVID-19” means coronavirus.refers to a respiratory illness first detected in 2019 and the ensuing global pandemic that remains ongoing as of the date of this report.
“DCA” means Ronald Reagan Washington National Airport.
“DCR” means disputed claims reserve, a reserve established by the Bankruptcy Court, pursuant to the Plan, to hold shares of AAG common stock for issuance to disputed claimholders as of the Effective Date or, alternatively, to former holders of AMR common stock or former holders of certain AMR convertible notes.
“DC Court” means the Federal District Court for the District of Columbia.
“Debtors” means AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries.
“December 2016 Credit Agreement” means the Credit and Guaranty Agreement dated as of December 15, 2016, among American, AAG, the lenders from time to time party thereto, Citibank N.A., as administrative agent, and certain other parties thereto, as amended.
“December 2016 Credit Facilities” means, collectively, the December 2016 Term Loan Facility and the revolving credit facility that may be established under the December 2016 Credit Agreement and December 2016 Term Loan Facility provided for by the December 2016 Credit Agreement.
“December 2016 Term Loan Facility” means the $1.2 billion term loan facility provided for under the December 2016 Credit Agreement.
“Delayed Draw Term Loan Credit Facility”DOJ” means the Credit and Guaranty Agreement dated asUnited States Department of March 18, 2020, among American, AAG, the lenders from time to time party thereto, Citibank N.A., as administrative agent, and certain other parties thereto, as amended.
“Disputed Claims Reserve” means a reserve established by the Bankruptcy Court, pursuant to the Plan, to hold shares of AAG common stock for issuance to disputed claimholders at the Effective Date.Justice.
“DOT” means the U.S.United States Department of Transportation.
“EC” means the European Commission.
“EETC” means enhanced equipment trust certificate.
“Effective Date” means December 9, 2013.
“Envoy” means Envoy Air Inc.
“EPA” means the U.S. Environmental Protection Agency.
“EPS” means earnings (loss) per common share.
“EU” means European Union.
"EWR"EU-UK Trade and Cooperation Agreement" means Newark Liberty International Airport.the trade and cooperation agreement, which was signed on December 30, 2020 between the EU and United Kingdom.
“Exchange Act” means Securities Exchange Act of 1934, as amended.
“Exercise Price” means $12.51 per share, pursuant to the PSP Warrant Agreement and the Treasury Loan Warrant Agreement.
“FAA” means Federal Aviation Administration.
“GAAP” means generally accepted accounting principles in the U.S.
“GDSs” means global distribution systems.
“GHG” means greenhouse gas.
“Guarantors” means the Subsidiaries as guarantors pursuant to the PSP Promissory Note.
“Holdback”holdback” means an amount of cash held by our credit card processors in certain circumstances (including, with respect to certain agreements, our failure to maintain certain levels of liquidity).
“HoldCo2” means AAdvantage Holdings 2, Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly owned subsidiary of American and the direct parent of Loyalty Issuer.
“HoldCo2 License” means the exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing license to use the Transferred AAdvantage IP granted to HoldCo2 from Loyalty Issuer.
“IAM” means International Association of Machinists & Aerospace Workers.
“IAM Pension Fund” means the IAM National Pension Fund.
“ICAO” means International Civil Aviation Organization.“IP Collateral”Licenses” means the certain intellectual property of American, including the “American Airlines” trademarkHoldCo2 License and the “aa.com” domain name inexclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing sublicense to use the United States and certain foreign jurisdictions,Transferred AAdvantage IP granted by HoldCo2 to which American has given a first lien security interest to secure the IP Notes.American.
“IP Notes” means American’s $1.0 billion in initial principal amount of PIK10.75% senior secured IP notes.
“IP Notes Indenture”JetBlue” means the indenture, dated as of September 25, 2020, by and among American, AAG and Wilmington Trust, National Association, as trustee and as collateral trustee, pursuant to which the IP Notes were issued.
“Installment” means the financial assistance payment, in installments, by Treasury pursuant to the PSP agreement.
“JBAs” means joint business agreements.JetBlue Airways Corporation.
“JFK” means John F. Kennedy International Airport.
“LAX” means Los Angeles International Airport.
“LGA/DCA Collateral” means certain slots related to American’s operations at LGA and DCA and certain other assets that are used as (a) a first-lien security interest to secure the December 2016 Credit Facilities, (b) a first lien security interest to secure the LGA/DCA Notes and (c) a second lien security interest to secure the IP Notes.
“LGA/DCA Notes” means American’s $200 million in initial principal amount of PIK10.75% senior secured notes.
“LGA/DCA Notes Indenture” means the indenture, dated as of September 25, 2020, by and among American, AAG and Wilmington Trust, National Association, as trustee and as collateral trustee, pursuant to which the LGA/DCA Notes were issued.notes.
“LGA” means LaGuardia Airport.
“LGW” or “London Gatwick” means London Gatwick Airport.
“LHR” or “London Heathrow” means London Heathrow Airport.
“LIBOR” means the London interbank offered rate for deposits of U.S. dollars.
“Loyalty Program Revenues”Issuer” means the revenues received byAAdvantage Loyalty IP Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly owned subsidiary of American and AAG fromco-issuer of the AAdvantage loyalty program.Notes.
“LTV” means loan to value ratio.
“Mainline” means the operations of American and excludes regional operations.
“Merger” means the merger of US Airways Group and AMR Corporation on December 9, 2013.
“Mesa” means Mesa Airlines, Inc.
"NEA" means Northeast Alliance arrangement between American and JetBlue.
“NMB” means National Mediation Board.
“NOL Carryforwards” means a deduction in any taxable year for net operating losses carried over from prior taxable years.
“NOLs” means net operating losses.
“NYTDC” means the New York Transportation Development Corporation.
“ORD” means Chicago O’Hare International Airport.
“OTAs” means online travel agents.
“Passenger load factor” means the percentage of available seats that are filled with revenue passengers.
“Payroll Support Program” means the payroll support program under the CARES Act.
“PEB” means Presidential Emergency Board.
“Piedmont” means Piedmont Airlines, Inc.
“Plan” means the Debtors’ fourth amended joint plan of reorganization.
“PRASM” means passenger revenue per available seat mile and is equal to passenger revenues divided by ASMs.
“PSA” means PSA Airlines, Inc.
“PSPPSP1” means the payroll support program established under the CARES Act.
“PSP1 Agreement” means the Payroll Support Program Agreement entered into by the Subsidiaries with Treasury on the PSP Closing Date.
“PSP Closing Date” means April 20, 2020.
"PSP Financial Assistance" means the portion of financial assistance received from Treasury pursuant to the PSP Agreement that is not allocated to the PSP Warrants or PSP Promissory Note.
“PSP Maturity Date” means the tenth anniversary of the PSP Closing Date.
“PSPPSP1 Promissory Note” means the promissory note issued to Treasury in connection with the Payroll Support Program.PSP1.
“PSPPSP1 Warrant Agreement” means the agreement entered into between AAG and Treasury in connection with the PSPPSP1 Agreement, pursuant to which AAG issued PSPPSP1 Warrants to Treasury to purchase up to an aggregate of approximately 14.1 million shares of AAG common stock.
“PSP1 Warrants” means the warrants issued or to be issued to Treasury pursuant to the PSP1 Warrant Agreement.
“PSP2” means the payroll support program established under the PSP Extension Law.
“PSP2 Agreement” means the Payroll Support Program Extension Agreement entered into by the Subsidiaries with Treasury on the PSP2 Closing Date.
“PSP2 Closing Date” means January 15, 2021.
“PSP2 Financial Assistance” means the portion of financial assistance received from Treasury pursuant to the PSP2 Agreement that is not allocated to the PSP2 Warrants or PSP2 Promissory Note.
“PSP2 Maturity Date” means the tenth anniversary of the PSP2 Closing Date.
“PSP2 Promissory Note” means the promissory note issued to Treasury in connection with PSP2.
“PSP2 Warrant Agreement” means the agreement entered into between AAG and Treasury in connection with the PSP2 Agreement, pursuant to which AAG issued PSP2 Warrants to Treasury to purchase the PSP2 Warrant Shares.
“PSP2 Warrant Shares” means up to an aggregate of approximately 14.16.6 million shares of AAG common stock which Treasury will have the right to purchase pursuant to PSPPSP2 Warrants issued or to be issued by AAG in accordance with the PSPPSP2 Warrant Agreement.
“PSPPSP2 Warrants” means the warrants issued or to be issued to Treasury pursuant to the PSPPSP2 Warrant Agreement.
“PSP3” means the payroll support program established under the ARP.
“PSP3 Agreement” means the Payroll Support Program Agreement entered into by the Subsidiaries with Treasury on the PSP3 Closing Date.
“PSP3 Closing Date” means April 23, 2021.
“PSP3 Financial Assistance” means the portion of financial assistance received from Treasury pursuant to the PSP3 Agreement that is not allocated to the PSP3 Warrants or PSP3 Promissory Note.
“PSP3 Maturity Date” means the tenth anniversary of the PSP3 Closing Date.
“PSP3 Promissory Note” means the promissory note issued to Treasury in connection with PSP3.
“PSP3 Warrant Agreement” means the agreement entered into between AAG and Treasury in connection with the PSP3 Agreement, pursuant to which AAG issued PSP3 Warrants to Treasury to purchase the PSP3 Warrant Shares.
“PSP3 Warrant Shares” means up to an aggregate of approximately 4.4 million shares of AAG common stock which Treasury will have the right to purchase pursuant to PSP3 Warrants issued or to be issued by AAG in accordance with the PSP3 Warrant Agreement.
“PSP3 Warrants” means the warrants issued or to be issued to Treasury pursuant to the PSP3 Warrant Agreement.
“PSP Extension Law” means Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021.
“Republic” means Republic Airways Inc.
“RLA” means Railway Labor Act.
“ROU” means right-of-use.
“RPM” or “RPMs” means revenue passenger mile or miles and is a basic measure of sales volume. One RPM represents one passenger flown one mile.
“SEC” means Securities and Exchange Commission.
“Section 382” means Section 382 of the Internal Revenue Code.
“Securities Act” means Securities Act of 1933, as amended.
“SkyWest” means SkyWest Airlines, Inc.
“Slots”slots” means landing and take-off rights and authorizations, as required by certain airports.
“SOFR” means the Secured Overnight Financing Rate.
“SPV Guarantors” means AAdvantage Holdings 1, Ltd. and HoldCo2.
“Subsidiaries” means each of AAG's wholly-owned subsidiaries, PSA, American, Envoy, PSA and Piedmont.Piedmont, each a wholly-owned subsidiary of AAG.
“Terminal” means the passenger terminal facility used by American at JFK.
“Transferred AAdvantage IP” means, among other things, American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions).
“TRASM” means the total revenue per available seat mile and is equal to the total revenues divided by total mainline and third-party regional carrier ASMs.
“Treasury” means the U.S. Department of the Treasury.
“Treasury Collateral” means American's rights under U.S. co-branded credit card agreements and certain other loyalty program partner participation agreements (including rights to receive cash flows thereunder), documents, deposit accounts, securities accounts, books and records and intellectual property related to American's AAdvantage loyalty program and all proceeds, accessions, rents or profits related to the foregoing.
“Treasury Loan Agreement” means the Loan and Guarantee Agreement, dated as of September 25, 2020, between AAG, American and Treasury which provides for the Treasury Term Loan Facility.
“Treasury Loan Closing Date” means September 25, 2020.
“Treasury Loan Restatement Agreement” means the Restatement Agreement, dated as of October 21, 2020, to the Term Loan Agreement.
“Treasury Loan Warrant Agreement” means the warrant agreement, dated as of September 25, 2020, between AAG and Treasury entered into in connection with the Treasury Loan Agreement, pursuant to which AAG will issue Treasury Loan Warrants to Treasury to purchase shares of AAG common stock.
“Treasury Loan Warrants” means the warrants issued or to be issued to Treasury pursuant to the Treasury Loan Warrant Agreement.
“Treasury Loan Warrant Shares” means shares of AAG common stock which Treasury will have the right to purchase pursuant to Treasury Loan Warrants issued by AAG in accordance with the Treasury Loan Warrant Agreement.
“Treasury Term Loan Facility” means the term loan facility provided for under the Treasury Loan Agreement.
“Treasury Term Loan Maturity Date” means June 30, 2025.
“TWU-IAM Association” means Transport Workers Union and International Association of Machinists & Aerospace Workers.
“US Airways” means US Airways, Inc.
“US Airways Group” means US Airways Group, Inc. and its consolidated subsidiaries.
“USTR” means the Office of the U.S. Trade Representative.
“Withdrawal Agreement” means the agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community.
“WTO” means World Trade Organization.
“Yield” means a measure of airline revenue derived by dividing passenger revenue by RPMs.
PART I: FINANCIAL INFORMATION
This report on Form 10-Q is filed by both AAG and American and includes the Condensed Consolidated Financial Statements of each company in Item 1A and Item 1B, respectively.
ITEM 1A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share and per share amounts)(Unaudited)
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Operating revenues: | Operating revenues: | | | | | | Operating revenues: | | | | | | | |
| Passenger | Passenger | $ | 2,540 | | | $ | 10,995 | | | $ | 11,328 | | | $ | 31,663 | | Passenger | $ | 7,957 | | | $ | 2,540 | | | $ | 17,682 | | | $ | 11,328 | |
| Cargo | Cargo | 207 | | | 208 | | | 484 | | | 647 | | Cargo | 332 | | | 207 | | | 973 | | | 484 | |
| Other | Other | 426 | | | 708 | | | 1,497 | | | 2,145 | | Other | 680 | | | 426 | | | 1,800 | | | 1,497 | |
| Total operating revenues | Total operating revenues | 3,173 | | | 11,911 | | | 13,309 | | | 34,455 | | Total operating revenues | 8,969 | | | 3,173 | | | 20,455 | | | 13,309 | |
| Operating expenses: | Operating expenses: | | Operating expenses: | |
| Aircraft fuel and related taxes | Aircraft fuel and related taxes | 453 | | | 1,989 | | | 2,065 | | | 5,710 | | Aircraft fuel and related taxes | 1,952 | | | 611 | | | 4,596 | | | 2,703 | |
| Salaries, wages and benefits | Salaries, wages and benefits | 2,705 | | | 3,219 | | | 8,384 | | | 9,509 | | Salaries, wages and benefits | 3,018 | | | 2,763 | | | 8,611 | | | 8,592 | |
| Regional expenses | Regional expenses | 914 | | | 1,933 | | | 3,638 | | | 5,582 | | Regional expenses | 887 | | | 529 | | | 2,148 | | | 2,161 | |
| Maintenance, materials and repairs | Maintenance, materials and repairs | 337 | | | 610 | | | 1,253 | | | 1,745 | | Maintenance, materials and repairs | 548 | | | 337 | | | 1,383 | | | 1,253 | |
| Other rent and landing fees | Other rent and landing fees | 367 | | | 530 | | | 1,149 | | | 1,568 | | Other rent and landing fees | 694 | | | 472 | | | 1,950 | | | 1,495 | |
| Aircraft rent | Aircraft rent | 336 | | | 335 | | | 1,004 | | | 996 | | Aircraft rent | 358 | | | 336 | | | 1,064 | | | 1,004 | |
| Selling expenses | Selling expenses | 70 | | | 424 | | | 418 | | | 1,194 | | Selling expenses | 318 | | | 97 | | | 745 | | | 540 | |
| Depreciation and amortization | Depreciation and amortization | 498 | | | 499 | | | 1,557 | | | 1,469 | | Depreciation and amortization | 480 | | | 498 | | | 1,439 | | | 1,557 | |
| Special items, net | Special items, net | (295) | | | 228 | | | (657) | | | 487 | | Special items, net | (990) | | | (295) | | | (3,986) | | | (657) | |
| Other | Other | 659 | | | 1,336 | | | 2,404 | | | 3,859 | | Other | 1,109 | | | 696 | | | 2,784 | | | 2,567 | |
| Total operating expenses | Total operating expenses | 6,044 | | | 11,103 | | | 21,215 | | | 32,119 | | Total operating expenses | 8,374 | | | 6,044 | | | 20,734 | | | 21,215 | |
| Operating income (loss) | Operating income (loss) | (2,871) | | | 808 | | | (7,906) | | | 2,336 | | Operating income (loss) | 595 | | | (2,871) | | | (279) | | | (7,906) | |
| Nonoperating income (expense): | Nonoperating income (expense): | | Nonoperating income (expense): | |
| Interest income | Interest income | 5 | | | 34 | | | 36 | | | 103 | | Interest income | 5 | | | 5 | | | 13 | | | 36 | |
| Interest expense, net | Interest expense, net | (340) | | | (284) | | | (851) | | | (830) | | Interest expense, net | (476) | | | (340) | | | (1,332) | | | (851) | |
| Other income (expense), net | 111 | | | (1) | | | 77 | | | 76 | | |
| Other income, net | | Other income, net | 82 | | | 111 | | | 241 | | | 77 | |
| Total nonoperating expense, net | Total nonoperating expense, net | (224) | | | (251) | | | (738) | | | (651) | | Total nonoperating expense, net | (389) | | | (224) | | | (1,078) | | | (738) | |
| Income (loss) before income taxes | Income (loss) before income taxes | (3,095) | | | 557 | | | (8,644) | | | 1,685 | | Income (loss) before income taxes | 206 | | | (3,095) | | | (1,357) | | | (8,644) | |
| Income tax provision (benefit) | Income tax provision (benefit) | (696) | | | 132 | | | (1,937) | | | 413 | | Income tax provision (benefit) | 37 | | | (696) | | | (296) | | | (1,937) | |
| Net income (loss) | Net income (loss) | $ | (2,399) | | | $ | 425 | | | $ | (6,707) | | | $ | 1,272 | | Net income (loss) | $ | 169 | | | $ | (2,399) | | | $ | (1,061) | | | $ | (6,707) | |
| | Earnings (loss) per common share: | Earnings (loss) per common share: | | Earnings (loss) per common share: | |
| Basic | Basic | $ | (4.71) | | | $ | 0.96 | | | $ | (14.76) | | | $ | 2.85 | | Basic | $ | 0.26 | | | $ | (4.71) | | | $ | (1.65) | | | $ | (14.76) | |
| Diluted | Diluted | $ | (4.71) | | | $ | 0.96 | | | $ | (14.76) | | | $ | 2.84 | | Diluted | $ | 0.25 | | | $ | (4.71) | | | $ | (1.65) | | | $ | (14.76) | |
| Weighted average shares outstanding (in thousands): | Weighted average shares outstanding (in thousands): | | Weighted average shares outstanding (in thousands): | |
| Basic | Basic | 509,049 | | | 441,915 | | | 454,523 | | | 446,291 | | Basic | 648,564 | | | 509,049 | | | 642,432 | | | 454,523 | |
| Diluted | Diluted | 509,049 | | | 442,401 | | | 454,523 | | | 447,139 | | Diluted | 721,142 | | | 509,049 | | | 642,432 | | | 454,523 | |
| Cash dividends declared per common share | Cash dividends declared per common share | $ | 0 | | | $ | 0.10 | | | $ | 0.10 | | | $ | 0.30 | | Cash dividends declared per common share | $ | — | | | $ | — | | | $ | — | | | $ | 0.10 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)(Unaudited)
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | Net income (loss) | $ | (2,399) | | | $ | 425 | | | $ | (6,707) | | | $ | 1,272 | | Net income (loss) | $ | 169 | | | $ | (2,399) | | | $ | (1,061) | | | $ | (6,707) | |
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | |
| Pension, retiree medical and other postretirement benefits | Pension, retiree medical and other postretirement benefits | (14) | | | (19) | | | (145) | | | (53) | | Pension, retiree medical and other postretirement benefits | 40 | | | (14) | | | 146 | | | (145) | |
| Investments | Investments | 1 | | | 0 | | | 0 | | | 3 | | Investments | — | | | 1 | | | — | | | — | |
| Total other comprehensive loss, net of tax | (13) | | | (19) | | | (145) | | | (50) | | |
| Total other comprehensive income (loss), net of tax | | Total other comprehensive income (loss), net of tax | 40 | | | (13) | | | 146 | | | (145) | |
| Total comprehensive income (loss) | Total comprehensive income (loss) | $ | (2,412) | | | $ | 406 | | | $ | (6,852) | | | $ | 1,222 | | Total comprehensive income (loss) | $ | 209 | | | $ | (2,412) | | | $ | (915) | | | $ | (6,852) | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value)
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| | | (Unaudited) | | | | (Unaudited) | | |
| ASSETS | ASSETS | | | ASSETS | |
| Current assets | Current assets | | Current assets | |
| Cash | Cash | $ | 253 | | | $ | 280 | | Cash | $ | 293 | | | $ | 245 | |
| Short-term investments | Short-term investments | 8,031 | | | 3,546 | | Short-term investments | 14,243 | | | 6,619 | |
| Restricted cash and short-term investments | Restricted cash and short-term investments | 508 | | | 158 | | Restricted cash and short-term investments | 923 | | | 609 | |
| Accounts receivable, net | Accounts receivable, net | 1,135 | | | 1,750 | | Accounts receivable, net | 1,332 | | | 1,342 | |
| Aircraft fuel, spare parts and supplies, net | Aircraft fuel, spare parts and supplies, net | 1,633 | | | 1,851 | | Aircraft fuel, spare parts and supplies, net | 1,851 | | | 1,614 | |
| Prepaid expenses and other | Prepaid expenses and other | 780 | | | 621 | | Prepaid expenses and other | 553 | | | 666 | |
| Total current assets | Total current assets | 12,340 | | | 8,206 | | Total current assets | 19,195 | | | 11,095 | |
| Operating property and equipment | Operating property and equipment | | Operating property and equipment | |
| Flight equipment | Flight equipment | 37,576 | | | 42,537 | | Flight equipment | 37,689 | | | 37,816 | |
| Ground property and equipment | Ground property and equipment | 9,451 | | | 9,443 | | Ground property and equipment | 9,114 | | | 9,194 | |
| Equipment purchase deposits | Equipment purchase deposits | 1,899 | | | 1,674 | | Equipment purchase deposits | 626 | | | 1,446 | |
| Total property and equipment, at cost | Total property and equipment, at cost | 48,926 | | | 53,654 | | Total property and equipment, at cost | 47,429 | | | 48,456 | |
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (16,670) | | | (18,659) | | Less accumulated depreciation and amortization | (17,632) | | | (16,757) | |
| Total property and equipment, net | Total property and equipment, net | 32,256 | | | 34,995 | | Total property and equipment, net | 29,797 | | | 31,699 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 7,979 | | | 8,737 | | Operating lease right-of-use assets | 7,804 | | | 8,039 | |
| Other assets | Other assets | | Other assets | |
| Goodwill | Goodwill | 4,091 | | | 4,091 | | Goodwill | 4,091 | | | 4,091 | |
| Intangibles, net of accumulated amortization of $734 and $704, respectively | 2,039 | | | 2,084 | | |
| Intangibles, net of accumulated amortization of $775 and $745, respectively | | Intangibles, net of accumulated amortization of $775 and $745, respectively | 1,998 | | | 2,029 | |
| Deferred tax asset | Deferred tax asset | 2,425 | | | 645 | | Deferred tax asset | 3,582 | | | 3,239 | |
| Other assets | Other assets | 1,643 | | | 1,237 | | Other assets | 1,970 | | | 1,816 | |
| Total other assets | Total other assets | 10,198 | | | 8,057 | | Total other assets | 11,641 | | | 11,175 | |
| Total assets | Total assets | $ | 62,773 | | | $ | 59,995 | | Total assets | $ | 68,437 | | | $ | 62,008 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | |
| Current liabilities | Current liabilities | | Current liabilities | |
| Current maturities of long-term debt and finance leases | Current maturities of long-term debt and finance leases | $ | 2,710 | | | $ | 2,861 | | Current maturities of long-term debt and finance leases | $ | 2,550 | | | $ | 2,797 | |
| Accounts payable | Accounts payable | 1,077 | | | 2,062 | | Accounts payable | 1,835 | | | 1,196 | |
| Accrued salaries and wages | Accrued salaries and wages | 1,919 | | | 1,541 | | Accrued salaries and wages | 1,501 | | | 1,716 | |
| Air traffic liability | Air traffic liability | 4,903 | | | 4,808 | | Air traffic liability | 6,450 | | | 4,757 | |
| Loyalty program liability | Loyalty program liability | 2,051 | | | 3,193 | | Loyalty program liability | 2,791 | | | 2,033 | |
| Operating lease liabilities | Operating lease liabilities | 1,736 | | | 1,708 | | Operating lease liabilities | 1,490 | | | 1,651 | |
| Other accrued liabilities | Other accrued liabilities | 2,188 | | | 2,138 | | Other accrued liabilities | 2,321 | | | 2,419 | |
| Total current liabilities | Total current liabilities | 16,584 | | | 18,311 | | Total current liabilities | 18,938 | | | 16,569 | |
| Noncurrent liabilities | Noncurrent liabilities | | Noncurrent liabilities | |
| Long-term debt and finance leases, net of current maturities | Long-term debt and finance leases, net of current maturities | 30,076 | | | 21,454 | | Long-term debt and finance leases, net of current maturities | 36,047 | | | 29,796 | |
| Pension and postretirement benefits | Pension and postretirement benefits | 6,310 | | | 6,052 | | Pension and postretirement benefits | 6,495 | | | 7,069 | |
| Loyalty program liability | Loyalty program liability | 7,043 | | | 5,422 | | Loyalty program liability | 6,404 | | | 7,162 | |
| Operating lease liabilities | Operating lease liabilities | 6,683 | | | 7,421 | | Operating lease liabilities | 6,568 | | | 6,777 | |
| Other liabilities | Other liabilities | 1,605 | | | 1,453 | | Other liabilities | 1,422 | | | 1,502 | |
| Total noncurrent liabilities | Total noncurrent liabilities | 51,717 | | | 41,802 | | Total noncurrent liabilities | 56,936 | | | 52,306 | |
| Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity (deficit) | Stockholders’ equity (deficit) | | Stockholders’ equity (deficit) | |
| Common stock, $0.01 par value; 1,750,000,000 shares authorized, 508,603,895 shares issued and outstanding at September 30, 2020; 428,202,506 shares issued and outstanding at December 31, 2019 | 5 | | | 4 | | |
| Common stock, $0.01 par value; 1,750,000,000 shares authorized, 647,477,469 shares issued and outstanding at September 30, 2021; 621,479,522 shares issued and outstanding at December 31, 2020 | | Common stock, $0.01 par value; 1,750,000,000 shares authorized, 647,477,469 shares issued and outstanding at September 30, 2021; 621,479,522 shares issued and outstanding at December 31, 2020 | 6 | | | 6 | |
| Additional paid-in capital | Additional paid-in capital | 5,430 | | | 3,945 | | Additional paid-in capital | 7,221 | | | 6,894 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (6,476) | | | (6,331) | | Accumulated other comprehensive loss | (6,957) | | | (7,103) | |
| Retained earnings (deficit) | (4,487) | | | 2,264 | | |
| Retained deficit | | Retained deficit | (7,707) | | | (6,664) | |
| Total stockholders’ deficit | Total stockholders’ deficit | (5,528) | | | (118) | | Total stockholders’ deficit | (7,437) | | | (6,867) | |
| Total liabilities and stockholders’ equity (deficit) | Total liabilities and stockholders’ equity (deficit) | $ | 62,773 | | | $ | 59,995 | | Total liabilities and stockholders’ equity (deficit) | $ | 68,437 | | | $ | 62,008 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)(Unaudited)
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | (3,680) | | | $ | 3,215 | | Net cash provided by (used in) operating activities | $ | 1,904 | | | $ | (3,680) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
| Capital expenditures and aircraft purchase deposits | (1,810) | | | (3,129) | | |
| Capital expenditures, net of aircraft purchase deposit returns | | Capital expenditures, net of aircraft purchase deposit returns | (25) | | | (1,810) | |
| Proceeds from sale-leaseback transactions | Proceeds from sale-leaseback transactions | 433 | | | 629 | | Proceeds from sale-leaseback transactions | 168 | | | 433 | |
| Proceeds from sale of property and equipment | Proceeds from sale of property and equipment | 251 | | | 42 | | Proceeds from sale of property and equipment | 181 | | | 251 | |
| Purchases of short-term investments | Purchases of short-term investments | (7,086) | | | (2,878) | | Purchases of short-term investments | (15,159) | | | (7,086) | |
| Sales of short-term investments | Sales of short-term investments | 2,603 | | | 2,524 | | Sales of short-term investments | 7,540 | | | 2,603 | |
| Increase in restricted short-term investments | Increase in restricted short-term investments | (317) | | | (2) | | Increase in restricted short-term investments | (330) | | | (317) | |
| Other investing activities | Other investing activities | (112) | | | (68) | | Other investing activities | (96) | | | (112) | |
| Net cash used in investing activities | Net cash used in investing activities | (6,038) | | | (2,882) | | Net cash used in investing activities | (7,721) | | | (6,038) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | 11,564 | | | 3,550 | | Proceeds from issuance of long-term debt | 12,096 | | | 11,564 | |
| Payments on long-term debt and finance leases | Payments on long-term debt and finance leases | (3,018) | | | (2,835) | | Payments on long-term debt and finance leases | (6,639) | | | (3,018) | |
| Proceeds from issuance of equity | Proceeds from issuance of equity | 1,527 | | | 0 | | Proceeds from issuance of equity | 460 | | | 1,527 | |
| Deferred financing costs | Deferred financing costs | (132) | | | (51) | | Deferred financing costs | (176) | | | (132) | |
| Treasury stock repurchases | (173) | | | (825) | | |
| Treasury stock repurchases and shares withheld for taxes pursuant to employee stock plans | | Treasury stock repurchases and shares withheld for taxes pursuant to employee stock plans | (13) | | | (173) | |
| Dividend payments | Dividend payments | (43) | | | (135) | | Dividend payments | — | | | (43) | |
| | Net cash provided by (used in) financing activities | 9,725 | | | (296) | | |
| Other financing activities | | Other financing activities | 121 | | | — | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 5,849 | | | 9,725 | |
| Net increase in cash and restricted cash | Net increase in cash and restricted cash | 7 | | | 37 | | Net increase in cash and restricted cash | 32 | | | 7 | |
| Cash and restricted cash at beginning of period | Cash and restricted cash at beginning of period | 290 | | | 286 | | Cash and restricted cash at beginning of period | 399 | | | 290 | |
Cash and restricted cash at end of period (1) | Cash and restricted cash at end of period (1) | $ | 297 | | | $ | 323 | | Cash and restricted cash at end of period (1) | $ | 431 | | | $ | 297 | |
| | Non-cash transactions: | Non-cash transactions: | | Non-cash transactions: | |
| Right-of-use (ROU) assets acquired through operating leases | Right-of-use (ROU) assets acquired through operating leases | $ | 468 | | | $ | 854 | | Right-of-use (ROU) assets acquired through operating leases | $ | 914 | | | $ | 468 | |
| Payroll Support Program Warrants | 63 | | | 0 | | |
| Property and equipment acquired through finance leases | | Property and equipment acquired through finance leases | 127 | | | — | |
| Operating lease conversion to finance lease | | Operating lease conversion to finance lease | 102 | | | — | |
| Settlement of bankruptcy obligations | Settlement of bankruptcy obligations | 56 | | | 7 | | Settlement of bankruptcy obligations | — | | | 56 | |
| Treasury Loan Warrants | 25 | | | 0 | | |
| Deferred financing costs paid through issuance of debt | Deferred financing costs paid through issuance of debt | 17 | | | 0 | | Deferred financing costs paid through issuance of debt | — | | | 17 | |
| Property and equipment acquired through finance leases | 0 | | | 46 | | |
| Supplemental information: | Supplemental information: | | Supplemental information: | |
| Interest paid, net | Interest paid, net | 715 | | | 817 | | Interest paid, net | 1,306 | | | 715 | |
| Income taxes paid | Income taxes paid | 2 | | | 5 | | Income taxes paid | 2 | | | 2 | |
(1)The following table provides a reconciliation of cash and restricted cash to amounts reported within the condensed consolidated balance sheets:
| | | | | | | | | | | |
| Cash | $ | 253 | | | $ | 312 | |
| Restricted cash included in restricted cash and short-term investments | 44 | | | 11 | |
| Total cash and restricted cash | $ | 297 | | | $ | 323 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In millions, except share amounts)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Deficit) | | Total |
| Balance at December 31, 2019 | $ | 4 | | | $ | 3,945 | | | $ | (6,331) | | | $ | 2,264 | | | $ | (118) | |
| Net loss | — | | | — | | | — | | | (2,241) | | | (2,241) | |
| Other comprehensive loss, net | — | | | — | | | (149) | | | — | | | (149) | |
| Purchase and retirement of 6,378,025 shares of AAG common stock | — | | | (145) | | | — | | | — | | | (145) | |
| Dividends declared on AAG common stock ($0.10 per share) | — | | | — | | | — | | | (44) | | | (44) | |
| Issuance of 1,062,052 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (13) | | | — | | | — | | | (13) | |
| Settlement of single-dip unsecured claims held in Disputed Claims Reserve | — | | | 56 | | | — | | | — | | | 56 | |
| Share-based compensation expense | — | | | 18 | | | — | | | — | | | 18 | |
| Balance at March 31, 2020 | 4 | | | 3,861 | | | (6,480) | | | (21) | | | (2,636) | |
| Net loss | — | | | — | | | — | | | (2,067) | | | (2,067) | |
| Other comprehensive income, net | — | | | — | | | 17 | | | — | | | 17 | |
| Payroll Support Program Warrants | — | | | 55 | | | — | | | — | | | 55 | |
| Equity component of convertible debt issued, net of tax and offering costs | — | | | 320 | | | — | | | — | | | 320 | |
| Issuance of 85,215,000 shares of AAG common stock pursuant to a public stock offering, net of offering costs | 1 | | | 1,112 | | | — | | | — | | | 1,113 | |
| Issuance of 454,621 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (2) | | | — | | | — | | | (2) | |
| Share-based compensation expense | — | | | 31 | | | — | | | — | | | 31 | |
| Balance at June 30, 2020 | 5 | | | 5,377 | | | (6,463) | | | (2,088) | | | (3,169) | |
| Net loss | — | | | — | | | — | | | (2,399) | | | (2,399) | |
| Other comprehensive loss, net | — | | | — | | | (13) | | | — | | | (13) | |
| Payroll Support Program Warrants | — | | | 8 | | | — | | | — | | | 8 | |
| Treasury Loan Warrants | — | | | 25 | | | — | | | — | | | 25 | |
| Issuance of 47,741 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | 0 | | | — | | | — | | | 0 | |
| Share-based compensation expense | — | | | 20 | | | — | | | — | | | 20 | |
| Balance at September 30, 2020 | $ | 5 | | | $ | 5,430 | | | $ | (6,476) | | | $ | (4,487) | | | $ | (5,528) | |
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In millions, except share amounts)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
| Balance at December 31, 2018 | $ | 5 | | | $ | 4,964 | | | $ | (5,896) | | | $ | 758 | | | $ | (169) | |
| Net income | — | | | — | | | — | | | 185 | | | 185 | |
| Other comprehensive loss, net | — | | | — | | | (13) | | | — | | | (13) | |
| Purchase and retirement of 16,947,393 shares of AAG common stock | — | | | (610) | | | — | | | — | | | (610) | |
| Dividends declared on AAG common stock ($0.10 per share) | — | | | — | | | — | | | (46) | | | (46) | |
| Issuance of 552,752 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (8) | | | — | | | — | | | (8) | |
| Share-based compensation expense | — | | | 25 | | | — | | | — | | | 25 | |
| Balance at March 31, 2019 | 5 | | | 4,371 | | | (5,909) | | | 897 | | | (636) | |
| Net income | — | | | — | | | — | | | 662 | | | 662 | |
| Other comprehensive loss, net | — | | | — | | | (18) | | | — | | | (18) | |
| Dividends declared on AAG common stock ($0.10 per share) | — | | | — | | | — | | | (45) | | | (45) | |
| Issuance of 1,046,122 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (17) | | | — | | | — | | | (17) | |
| Settlement of single-dip unsecured claims held in Disputed Claims Reserve | — | | | 7 | | | — | | | — | | | 7 | |
| Share-based compensation expense | — | | | 25 | | | — | | | — | | | 25 | |
| Balance at June 30, 2019 | 5 | | | 4,386 | | | (5,927) | | | 1,514 | | | (22) | |
| Net income | — | | | — | | | — | | | 425 | | | 425 | |
| Other comprehensive loss, net | — | | | — | | | (19) | | | — | | | (19) | |
| Purchase and retirement of 7,275,610 shares of AAG common stock | (1) | | | (200) | | | — | | | — | | | (201) | |
| Dividends declared on AAG common stock ($0.10 per share) | — | | | — | | | — | | | (45) | | | (45) | |
| Issuance of 48,547 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | 0 | | | — | | | — | | | 0 | |
| Share-based compensation expense | — | | | 22 | | | — | | | — | | | 22 | |
| Balance at September 30, 2019 | $ | 4 | | | $ | 4,208 | | | $ | (5,946) | | | $ | 1,894 | | | $ | 160 | |
| | | | | | | | | | | |
| Cash | $ | 293 | | | $ | 253 | |
| Restricted cash included in restricted cash and short-term investments | 138 | | | 44 | |
| Total cash and restricted cash | $ | 431 | | | $ | 297 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In millions, except share amounts)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained
Deficit | | Total |
| Balance at December 31, 2020 | $ | 6 | | | $ | 6,894 | | | $ | (7,103) | | | $ | (6,664) | | | $ | (6,867) | |
| Net loss | — | | | — | | | — | | | (1,250) | | | (1,250) | |
| Other comprehensive income, net | — | | | — | | | 67 | | | — | | | 67 | |
| Impact of adoption of Accounting Standards Update (ASU) 2020-06 related to convertible instruments (see Note 1(c)) | — | | | (320) | | | — | | | 19 | | | (301) | |
| Issuance of 18,194,573 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs | — | | | 316 | | | — | | | — | | | 316 | |
| Issuance of PSP2 Warrants (see Note 1(b)) | — | | | 65 | | | — | | | — | | | 65 | |
| Issuance of 1,700,380 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (13) | | | — | | | — | | | (13) | |
| Share-based compensation expense | — | | | 38 | | | — | | | — | | | 38 | |
| Balance at March 31, 2021 | 6 | | | 6,980 | | | (7,036) | | | (7,895) | | | (7,945) | |
| Net income | — | | | — | | | — | | | 19 | | | 19 | |
| Other comprehensive income, net | — | | | — | | | 39 | | | — | | | 39 | |
| Issuance of 5,956,191 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs | — | | | 144 | | | — | | | — | | | 144 | |
| Issuance of PSP2 and PSP3 Warrants (see Note 1(b)) | — | | | 56 | | | — | | | — | | | 56 | |
| Issuance of 115,833 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | — | | | — | | | — | | | — | |
| Share-based compensation expense | — | | | 20 | | | — | | | — | | | 20 | |
| Balance at June 30, 2021 | 6 | | | 7,200 | | | (6,997) | | | (7,876) | | | (7,667) | |
| Net income | — | | | — | | | — | | | 169 | | | 169 | |
| Other comprehensive income, net | — | | | — | | | 40 | | | — | | | 40 | |
| Issuance of 30,970 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | — | | | — | | | — | | | — | |
| Share-based compensation expense | — | | | 21 | | | — | | | — | | | 21 | |
| Balance at September 30, 2021 | $ | 6 | | | $ | 7,221 | | | $ | (6,957) | | | $ | (7,707) | | | $ | (7,437) | |
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In millions, except share amounts)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Deficit) | | Total |
| Balance at December 31, 2019 | $ | 4 | | | $ | 3,945 | | | $ | (6,331) | | | $ | 2,264 | | | $ | (118) | |
| Net loss | — | | | — | | | — | | | (2,241) | | | (2,241) | |
| Other comprehensive loss, net | — | | | — | | | (149) | | | — | | | (149) | |
| Purchase and retirement of 6,378,025 shares of AAG common stock | — | | | (145) | | | — | | | — | | | (145) | |
| Dividends declared on AAG common stock ($0.10 per share) | — | | | — | | | — | | | (44) | | | (44) | |
| Issuance of 1,062,052 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (13) | | | — | | | — | | | (13) | |
| Settlement of single-dip unsecured claims held in disputed claims reserve (DCR) | — | | | 56 | | | — | | | — | | | 56 | |
| Share-based compensation expense | — | | | 18 | | | — | | | — | | | 18 | |
| Balance at March 31, 2020 | 4 | | | 3,861 | | | (6,480) | | | (21) | | | (2,636) | |
| Net loss | — | | | — | | | — | | | (2,067) | | | (2,067) | |
| Other comprehensive income, net | — | | | — | | | 17 | | | — | | | 17 | |
| Issuance of PSP1 Warrants | — | | | 55 | | | — | | | — | | | 55 | |
| Equity component of convertible debt issued, net of tax and offering costs | — | | | 320 | | | — | | | — | | | 320 | |
| Issuance of 85,215,000 shares of AAG common stock pursuant to a public stock offering, net of offering costs | 1 | | | 1,112 | | | — | | | — | | | 1,113 | |
| Issuance of 454,621 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (2) | | | — | | | — | | | (2) | |
| Share-based compensation expense | — | | | 31 | | | — | | | — | | | 31 | |
| Balance at June 30, 2020 | 5 | | | 5,377 | | | (6,463) | | | (2,088) | | | (3,169) | |
| Net loss | — | | | — | | | — | | | (2,399) | | | (2,399) | |
| Other comprehensive loss, net | — | | | — | | | (13) | | | — | | | (13) | |
| Issuance of PSP1 Warrants | — | | | 8 | | | — | | | — | | | 8 | |
| Issuance of Treasury Loan Warrants | — | | | 25 | | | — | | | — | | | 25 | |
| Issuance of 47,741 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | — | | | — | | | — | | | — | |
| Share-based compensation expense | — | | | 20 | | | — | | | — | | | 20 | |
| Balance at September 30, 2020 | $ | 5 | | | $ | 5,430 | | | $ | (6,476) | | | $ | (4,487) | | | $ | (5,528) | |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation. See Note 10 for further information.
(b) Impact of Coronavirus (COVID-19)
COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, “shelter in place”“stay at home” orders and business closures. As a result, we have experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in our revenues. While our business performed largely as expected in Januaryglobal vaccination efforts are underway and February of 2020, a severe reduction indemand for air travel starting in March 2020 resulted inhas begun to return, our total operating revenues decreasing approximately 20% incontinued to improve during the first quarter of 2020, 86% in the second quarter of 2020 and 73% in the third quarter of 2020 as compared to the first, second and third quarters of 2019, respectively. While2021, although recovery was weaker than previous expectations, primarily due to the lengthrise in COVID-19 cases associated with the delta variant and severitythe continuation or reimposition of restrictions on global travel. The continued impact of the reductionCOVID-19 pandemic, including any increases in demand dueinfection rates, new variants and renewed governmental action to slow the spread of COVID-19 is uncertain, we expect our results of operations for the remainder of 2020 tocannot be severely impacted.estimated.
We have taken aggressive actions to mitigate the effecteffects of the COVID-19 pandemic on our business, including deep capacity reductions, structural changes to our fleet, cost reductions, and steps to preserve cash and improve our overall liquidity position. We remain extremely focused on taking all self-help measures available to manage our business during this unprecedented time,position, consistent with the terms of the financial assistance we have received from the U.S. Government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.Act (CARES Act), Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) and Section 7301 of the American Rescue Plan Act of 2021 (the ARP).
Capacity Reductions
We have significantly reduced ourOur capacity (as measured by available seat miles), continues to be significantly reduced compared to pre-COVID-19 pandemic levels, with flying during the third quarter of 2020 flying decreased by 59% year-over-year and fourth2021 down 19.4% as compared to the third quarter of 2020 flying expected to decrease by more than 50% year-over-year, with long-haul2019. Domestic capacity in the third quarter of 2021 was down 4.7% while international capacity was down approximately 75% year-over-year. The45.9% versus the third quarter of 2019.
While demand environmentfor domestic and short-haul international markets has largely recovered to 2019 levels, uncertainty continues to be uncertain as COVID-19 cases have continued to fluctuate in jurisdictions to which we fly and travel restrictions have generally remained in place. Due to this uncertainty, weexist. We will continue to adjustmatch our futureforward capacity to match developingwith observed booking trends in bookings for future travel and make further adjustments to our capacity as needed.
FleetCost Reductions
To better alignWe have reduced our network with lower passenger demand, we accelerated2021 operating expenditures as a result of permanent non-volume cost reductions and other efficiency measures. These reductions include labor productivity enhancements, management salaries and benefits and other permanent cost reductions. Also, during the first quarter of 2021, an additional 1,600 represented team members opted into a voluntary early retirement of Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. These retirements remove complexity from our operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types. See Note 13 for further information on the accounting for our fleet retirements. Due to the inherent uncertainties of the current operating environment, we will continue to evaluate our current fleet and may decide to permanently retire additional aircraft. In addition, we have placed a number of Boeing 737-800 and certain regional aircraft into temporary storage.program.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Cost Reductions
We are moving quickly to better align our costs with our reduced schedule. In aggregate, we estimate that we have reduced our 2020 operating and capital expenditures by approximately $17.0 billion. These savings have been achieved primarily through capacity reductions. In addition, we have implemented a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing all non-critical facility investments and information technology projects. We have also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs, decreased our management and support staff team, including officers, by approximately 5,100 positions, or 30%, and, as necessary, undertaken furloughs, to reduce our labor costs consistent with our obligations under the CARES Act. In total, more than 20,000 team members have opted for an early retirement or long-term paid leave and approximately 19,000 team members were furloughed starting October 1, 2020. Additionally, we have made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.
Liquidity
AtAs of September 30, 2020,2021, we had $13.6$17.9 billion in total available liquidity, consisting of $8.3$14.5 billion in unrestricted cash and short-term investments, $4.9$2.8 billion in an undrawn term loan facilitycapacity under the CARES Actrevolving credit facilities and $400a total of $570 million in an undrawn short-term revolving facility.and other facilities.
During the first nine months of 2020,2021, we completed the following financing transactions (see Note 65 for further information):
•refinanced the $1.2issued $3.5 billion 2014 Term Loan Facility at a lower interest rate and extended the maturity from 2021 to 2027;
•raised $1.0 billion from a senior secured delayed draw term loan credit facility;
•issued $500 million in aggregate principal amount of 3.75% unsecured senior notes5.50% Senior Secured Notes due 20252026 and repaid $500 million$3.0 billion in aggregate principal amount of 4.625% unsecured senior notes that matured in March 2020;5.75% Senior Secured Notes due 2029 and entered into the $3.5 billion AAdvantage Term Loan Facility of which the full amount of term loans was drawn at closing;
•borrowedrepaid in full $750 million under the 2013 Revolving Facility, $1.6 billion under the 2014 Revolving Facility and $450 million under the April 2016 Revolving Facility;Facility, all of which was borrowed in the second quarter of 2020 in response to the COVID-19 pandemic;
•issued $1.0 billion in aggregate principal amount of 6.50% convertible senior notes due 2025;
•issued 85.2 million shares of AAG common stock at a price of $13.50 per share pursuant to a public offering of common stock for net proceeds of $1.1 billion;
•issued $2.5 billion in aggregate principal amount of 11.75% senior secured notes due 2025 and repaid the $1.0 billion senior secured delayed draw term loan credit facility that we borrowed in March 2020;
•issued approximately $360$550 million in special facility revenue bonds, of which $47 million was used to fundoutstanding loans under, and terminated, the redemption of certain outstanding bonds;
•entered into a $5.5$7.5 billion secured term loan facility with the U.S. Department of the Treasury (Treasury), of which we borrowed $550 million (see below for additional information on the (the Treasury Loan Agreement);
•issued $1.2 billion in aggregate principal amount24.2 million shares of two seriesAAG common stock at an average price of 10.75% senior secured notes due 2026 secured by various collateral;$19.26 per share pursuant to an at-the-market offering for net proceeds of $460 million (approximately $650 million of at-the-market authorization remains available at September 30, 2021);
•raised $392issued approximately $150 million from aircraft sale-leaseback transactions;in special facility revenue bonds related to John F. Kennedy International Airport (JFK), of which $62 million was used to fund the redemption of other bonds related to JFK;
•repaid in full $950 million of the outstanding balance under, and terminated, the April 2016 Spare Parts Term Loan Facility; and
•raised $323$168 million principally from enhanced equipment trust certificates (EETCs) and other aircraft and flight equipment financings, of which $17 million was used to repay existing indebtedness.sale-leaseback transactions.
In addition to the foregoing financings, during the first quarter of 2021, we were initially approved to receivereceived an aggregate of $5.8approximately $3.1 billion in financial assistance to be paid in installments through the payroll support program (Payroll Support Program)(PSP2) established under the CARES Act, all of which was received by the end of July 2020. On September 30, 2020,PSP Extension Law. In April 2021, we received an additional installment of $168$463 million for a totalan aggregate of $6.0$3.5 billion of such financial assistance and, asunder PSP2. In connection with our receipt of this financial assistance, AAG issued a result, the promissory note (the PSPPSP2 Promissory Note) previously issued to Treasury for $1.7 billion was revised upwards to $1.8$1.0 billion in aggregate principal
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
amount and warrants to purchase up to an aggregate of approximately 13.76.6 million shares (the PSP2 Warrant Shares) of AAG common stock were revised upwardsstock.
In the second quarter of 2021, we received an aggregate of approximately $3.3 billion in financial assistance through the payroll support program (PSP3) established under the ARP. In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP3 Promissory Note) to 14.1Treasury for $946 million in aggregate principal amount and warrants to purchase up to an aggregate of approximately 4.4 million shares (the PSPPSP3 Warrant Shares) of AAG common stock. See below for further discussion on the Payroll Support Program.PSP2 and PSP3.
Also, we are permitted to, and will, defer payment of the employerA significant portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022). This deferral is expected to provide approximately $300 million in additional liquidity during 2020. Additionally, we have suspended our capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act are applicable.
We continue to evaluate future financing opportunities and work with third-party appraisers on valuations of our remaining unencumbered assets.
Certain of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value, andcollateral coverage and/or debt service coverage ratio covenants.
Given the above actions and our current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings and funds from government assistance obtained pursuant to the CARES Act)financings), and projected cash flows from operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
PSP2
On April 20, 2020January 15, 2021 (the PSPPSP2 Closing Date), American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries), each our wholly-owned subsidiary, entered into a Payroll Support Program Extension Agreement (the PSPPSP2 Agreement) with Treasury, with respect to the Payroll Support ProgramPSP2 as provided pursuant to the CARES Act.PSP Extension Law. In connection with our entry into the PSPPSP2 Agreement, on the PSPPSP2 Closing Date, weAAG also entered into a warrant agreement (the PSPPSP2 Warrant Agreement) with Treasury and we issued the PSPPSP2 Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).guarantors.
Payroll Support ProgramPSP2 Agreement
In connection with the Payroll Support Program,PSP2, we are required to comply with the relevant provisions of the PSP Extension Law, which are substantially similar to the restrictions contained in the Payroll Support Program Agreement entered into by the Subsidiaries with Treasury in connection with the payroll support program established under the CARES Act including(the PSP1 Agreement), but are in effect for a longer time period. These provisions include the requirement that funds provided pursuant to the PSPPSP2 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the requirementprohibition against involuntary furloughs and reductions in employee pay rates and benefits which expired on September 30, 2020, the requirement that certain levels of commercial air service be maintained andthrough March 31, 2021, the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through September 30, 2021, as well as thoseat least March 31, 2022, the provisions that restrict the payment of certain executive compensation until March 24, 2022. The PSPat least October 1, 2022, and a requirement to recall employees involuntarily terminated or furloughed after September 30, 2020. As was the case with PSP1, the PSP2 Agreement also imposes substantial reporting obligations on us. As of September 30, 2020, we also received a secured loan from Treasury under the loan program that is due June 2025 and, as a result, the stock repurchase, dividend and executive compensation restrictions will remain in place through the date that is one year after such secured loan is fully repaid. See below for additional information on the Treasury Loan Agreement.
Pursuant to the PSPPSP2 Agreement, Treasury provided us financial assistance which was paid in three installments (each, an Installment) and totaled an aggregate oftotaling approximately $5.8$3.5 billion initially and was subsequently increased to $6.0 billion, and all of which has been received as of September 30, 2020.in the aggregate. As partial compensation to the U.S. Government for the provision of financial assistance under PSP2, AAG issued the Payroll Support Program, we issued a totalPSP2 Promissory Note in the aggregate principal amount of approximately $1.8$1.0 billion under the PSP Promissory Note and issued warrants (each a PSPPSP2 Warrant and, collectively, the PSPPSP2 Warrants) to Treasury to purchase up to an aggregate of approximately 14.16.6 million PSP Warrant Shares.shares of AAG common stock for an exercise price of $15.66 per share, subject to adjustment. See Note 65 for further information on the PSPPSP2 Promissory Note and below for more information on the PSPPSP2 Warrant Agreement and the PSPPSP2 Warrants.
For accounting purposes, the $6.0$3.5 billion of aggregate financial assistance we received pursuant to the PSPPSP2 Agreement is allocated to the PSPPSP2 Promissory Note, the PSPPSP2 Warrants and other Payroll Support ProgramPSP2 financial assistance (the PSPPSP2 Financial Assistance). The $1.0 billion aggregate principal amount of approximately $1.8 billion of PSPthe PSP2 Promissory Note was recorded as unsecured long-term debt, and the $76 million total fair value of the PSPPSP2 Warrants, of $63 million, estimated using a
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Black-Scholes option pricing model, was recorded in stockholders' equitydeficit in the condensed consolidated balance sheet. The remaining amount of approximately $4.2$2.4 billion of PSPPSP2 Financial Assistance was recognized as a credit to special items, net in the condensed consolidated statement of operations primarily in the second and third quartersfirst quarter of 2020,2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required. The third installment was received and recognized as a credit to special items, net in the second quarter of 2021. For the three and nine months ended September 30, 2020,2021, approximately $2.1$2.4 billion and $4.2 billion, respectively,of PSP2 Financial Assistance was recognized as a credit to special items, net in the condensed consolidated statement of operations.
PSPPSP2 Warrant Agreement and PSPPSP2 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSPPSP2 Agreement, and pursuant to the PSPPSP2 Warrant Agreement, we agreed to issue warrantsAAG issued the PSP2 Warrants to Treasury to purchase up to an aggregate of approximately 14.1 million PSPPSP2 Warrant Shares of AAG common stock.Shares. The exercise price of the PSPPSP2 Warrant Shares is $12.51$15.66 per share, (which was the closing price of AAG common stock on The Nasdaq Global Select Market on April 9, 2020) (the Exercise Price) subject to certain anti-dilution provisions provided for in the PSP Warrant.PSP2 Warrants.
Pursuant to the PSPPSP2 Warrant Agreement, on the PSP Closing Date, May 29, 2020, June 30, 2020, July 30, 2020 and September 30, 2020, weAAG issued to Treasury a PSP WarrantPSP2 Warrants to purchase up to an aggregate of approximately 6.76.6 million shares 2.8 million shares, 2.8 million shares, 1.4 million shares and 0.4 million shares, respectively, of AAG common stock based on the terms described herein.for an exercise price of $15.66 per share, subject to adjustment.
The PSPPSP2 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSPPSP2 Warrant expires on the fifth anniversary of the date of issuance of such PSPPSP2 Warrant. The PSPPSP2 Warrants will be exercisable either through net share settlement or cash, at our option. The PSPPSP2 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSPPSP2 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSPPSP2 Warrants or will be received upon exercise thereof.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
PSP3
On September 25, 2020April 23, 2021 (the Treasury LoanPSP3 Closing Date), AAGAmerican, Envoy, Piedmont and AmericanPSA (collectively, the Subsidiaries), entered into a Loan and GuaranteePayroll Support Program 3 Agreement (the Treasury LoanPSP3 Agreement) with Treasury, with respect to PSP3 as provided pursuant to the ARP. In connection with our entry into the PSP3 Agreement, on the PSP3 Closing Date, AAG also entered into a warrant agreement (the PSP3 Warrant Agreement) with Treasury and issued the PSP3 Promissory Note to Treasury, with the Subsidiaries as guarantors.
PSP3 Agreement
In connection with PSP3, we are required to comply with the relevant provisions of the ARP, which providesare substantially similar to the restrictions contained in the PSP1 Agreement, but are in effect for a secured term loan facility (the Treasury Term Loan Facility)longer time period. These provisions include the requirement that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, AAG and American entered into an amendmentfunds provided pursuant to the Treasury LoanPSP3 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits through at least September 30, 2021, the provisions that permits American to borrow up to $7.5 billion. The Treasury Loan Agreement will involveprohibit the issuance of additional warrants to purchase up to an aggregate of approximately 60.0 million sharesrepurchase of AAG common stock assumingand the Treasury Term Loan Facility is fully drawn. Aspayment of common stock dividends through at least September 30, 2020, American borrowed $5502022, and the provisions that restrict the payment of certain executive compensation until April 1, 2023. As was the case with PSP1 and PSP2, the PSP3 Agreement also imposes substantial reporting obligations on us.
Pursuant to the PSP3 Agreement, Treasury provided us financial assistance in two installments totaling approximately $3.3 billion in the aggregate. As partial compensation to the U.S. Government for the provision of financial assistance under PSP3, AAG issued the PSP3 Promissory Note in the aggregate principal amount of $946 million under the Treasury Term Loan Facility, which is scheduled to mature on June 30, 2025, and issued warrants (each a PSP3 Warrant and, collectively, the PSP3 Warrants) to Treasury to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock.stock for an exercise price of $21.75 per share, subject to adjustment. See Note 65 for further information on the Treasury Loan AgreementPSP3 Promissory Note and below for more information on the Treasury LoanPSP3 Warrant Agreement and Treasury LoanPSP3 Warrants.
Treasury LoanFor accounting purposes, the $3.3 billion of aggregate financial assistance we received pursuant to the PSP3 Agreement is allocated to the PSP3 Promissory Note, the PSP3 Warrants and other PSP3 financial assistance (the PSP3 Financial Assistance). The $946 million aggregate principal amount of the PSP3 Promissory Note was recorded as unsecured long-term debt, and the $46 million total fair value of the PSP3 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in the condensed consolidated balance sheet. The remaining amount of approximately $2.3 billion of PSP3 Financial Assistance was recognized as a credit to special items, net in the condensed consolidated statements of operations in the second and third quarters of 2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required. For the three and nine months ended September 30, 2021, approximately $1.1 billion and $2.3 billion of PSP3 Financial Assistance, respectively, was recognized as a credit to special items, net in the condensed consolidated statements of operations.
PSP3 Warrant Agreement and PSP3 Warrants
In connection with the Treasury Loan Agreement, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury. PursuantAs partial compensation to the Treasury LoanU.S. Government for the provision of financial assistance under the PSP3 Agreement, and pursuant to the PSP3 Warrant Agreement, AAG agreed to issue warrants (each a Treasury Loan Warrant and, collectively,issued the Treasury Loan Warrants)PSP3 Warrants to Treasury to purchase up to an aggregate of approximately 60.0 million shares (the Treasury LoanPSP3 Warrant Shares) of AAG's common stock based on the $7.5 billion commitment amount under the Treasury Term Loan Facility.Shares. The exercise price of the Treasury LoanPSP3 Warrant Shares is $12.51$21.75 per share, (the Exercise Price) subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement. For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Term Loan Facility in the condensed consolidated balance sheet.PSP3 Warrants.
Pursuant to the Treasury LoanPSP3 Warrant Agreement, on the Treasury Loan Closing Date, AAG issued to Treasury a Treasury Loan WarrantPSP3 Warrants to purchase up to an aggregate of approximately 4.4 million Treasury Loan Warrant Shares based on the terms described herein. On the dateshares of each additional borrowing under the Treasury Loan Agreement, AAG will issuecommon stock for an exercise price of $21.75 per share, subject to Treasury an additional Treasury Loan Warrant for a number of Treasury Loan Warrant Shares equal to 10% of such borrowing, divided by the Exercise Price.adjustment.
The Treasury LoanPSP3 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each Treasury LoanPSP3 Warrant expires on the fifth anniversary of the date of issuance of such Treasury LoanPSP3 Warrant. The PSP3 Warrants will be exercisable either through net share settlement or cash, at our option. The PSP3 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP3 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP3 Warrants or will be received upon exercise thereof.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Treasury Loan Warrants will be exercisable either through net share settlement or cash, at AAG's option. The Treasury Loan Warrants were issued solely as compensation to the U.S. Government related to entry into the Treasury Loan Agreement. No separate proceeds were received upon issuance of the Treasury Loan Warrants or will be received upon exercise thereof.
(c) Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2016-13: Measurement of Credit Losses on Financial Instruments
This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. We adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on our condensed consolidated financial statements.
ASU 2020-06: Accounting for Convertible Instruments and Contracts In An Entity's Own Equity (the New Convertible Debt Standard)
This ASUThe New Convertible Debt Standard simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature orand for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, this ASUthe New Convertible Debt Standard amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt this ASUthe New Convertible Debt Standard using either a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning after December 15, 2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020. This ASUThe New Convertible Debt Standard is applicable to our 6.50% convertible senior notes due 2025 (the Convertible Notes). We early adopted the New Convertible Debt Standard as of January 1, 2021 using the modified retrospective method to recognize the Convertible Notes as a single liability instrument. As of January 1, 2021, we recorded a $415 million ($320 million net of tax) reduction to additional paid-in capital to remove the equity component of the Convertible Notes from our balance sheet and wea $19 million cumulative effect adjustment credit, net of tax, to retained deficit related to non-cash debt discount amortization recognized in periods prior to adoption resulting in a corresponding reduction of $389 million to the debt discount associated with the Convertible Notes.
ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740)
This standard simplifies the accounting and disclosure requirements for income taxes by clarifying the existing guidance to improve consistency in the application of Accounting Standards Codification 740. This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly-owned subsidiaries that are assessing thenot subject to income tax. We adopted this standard effective January 1, 2021, and it did not have a material impact the adoption of this ASU will have on our condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
2. Special Items, Net
Special items, net in the condensed consolidated statements of operations consisted of the following (in millions):
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
PSP Financial Assistance (1) | PSP Financial Assistance (1) | $ | (1,908) | | | $ | 0 | | | $ | (3,710) | | | $ | 0 | | PSP Financial Assistance (1) | $ | (992) | | | $ | (1,908) | | | $ | (4,162) | | | $ | (3,710) | |
Severance expenses (2) | Severance expenses (2) | 871 | | | 0 | | | 1,408 | | | 0 | | Severance expenses (2) | — | | | 871 | | | 168 | | | 1,408 | |
Fleet impairment (3) | 742 | | | 201 | | | 1,484 | | | 201 | | |
Labor contract expenses (4) | 0 | | | 0 | | | 228 | | | 0 | | |
Mark-to-market adjustments on bankruptcy obligations, net (5) | 0 | | | (22) | | | (49) | | | (18) | | |
Fleet restructuring expenses (6) | 0 | | | 72 | | | 0 | | | 232 | | |
| Litigation reserve adjustments | 0 | | | (53) | | | 0 | | | (53) | | |
| Merger integration expenses | 0 | | | 29 | | | 0 | | | 106 | | |
Mark-to-market adjustments on bankruptcy obligations, net (3) | | Mark-to-market adjustments on bankruptcy obligations, net (3) | (1) | | | — | | | 5 | | | (49) | |
Fleet impairment (4) | | Fleet impairment (4) | — | | | 742 | | | — | | | 1,484 | |
Labor contract expenses (5) | | Labor contract expenses (5) | — | | | — | | | — | | | 228 | |
| Other operating special items, net | Other operating special items, net | 0 | | | 1 | | | (18) | | | 19 | | Other operating special items, net | 3 | | | — | | | 3 | | | (18) | |
| Mainline operating special items, net | Mainline operating special items, net | (295) | | | 228 | | | (657) | | | 487 | | Mainline operating special items, net | (990) | | | (295) | | | (3,986) | | | (657) | |
| PSP Financial Assistance (1) | PSP Financial Assistance (1) | (228) | | | 0 | | | (444) | | | 0 | | PSP Financial Assistance (1) | (128) | | | (228) | | | (539) | | | (444) | |
Regional pilot retention program (6) | | Regional pilot retention program (6) | 61 | | | — | | | 61 | | | — | |
Fleet impairment (4) | | Fleet impairment (4) | — | | | — | | | 27 | | | 117 | |
Severance expenses (2) | Severance expenses (2) | 4 | | | 0 | | | 18 | | | 0 | | Severance expenses (2) | — | | | 4 | | | 2 | | | 18 | |
Fleet impairment (3) | 0 | | | 0 | | | 117 | | | 0 | | |
| Other operating special items, net | 0 | | | 6 | | | 0 | | | 6 | | |
| | Regional operating special items, net | Regional operating special items, net | (224) | | | 6 | | | (309) | | | 6 | | Regional operating special items, net | (67) | | | (224) | | | (449) | | | (309) | |
| Operating special items, net | Operating special items, net | (519) | | | 234 | | | (966) | | | 493 | | Operating special items, net | (1,057) | | | (519) | | | (4,435) | | | (966) | |
| Mark-to-market adjustments on equity and other investments, net (7) | Mark-to-market adjustments on equity and other investments, net (7) | (21) | | | 45 | | | 159 | | | 37 | | Mark-to-market adjustments on equity and other investments, net (7) | 16 | | | (21) | | | 3 | | | 159 | |
| Debt refinancing, extinguishment and other charges | 0 | | | (1) | | | 48 | | | 6 | | |
| Debt refinancing, extinguishment and other, net | | Debt refinancing, extinguishment and other, net | 2 | | | — | | | 28 | | | 48 | |
| | Nonoperating special items, net | Nonoperating special items, net | (21) | | | 44 | | | 207 | | | 43 | | Nonoperating special items, net | 18 | | | (21) | | | 31 | | | 207 | |
|
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP Agreement.PSP2 and PSP3 Agreements. See Note 11(b) for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2)Severance expenses principally include salary and medical costs primarily associated with certain team members who opted in tointo voluntary early retirement programs offered as a result of reductions to our operation due to COVID-19. These expenses inthe COVID-19 pandemic. Cash payments primarily related to our voluntary early retirement programs were approximately $190 million and $480 million for the three and nine months ended September 30, 2020 also include salary2021, respectively, and medical costs associated with team members who were notified in the third quarter of 2020 they were being involuntarily furloughed starting October 1, 2020, subsequent to the expiration of the Payroll Support Program requirement against involuntary furloughs. Cash payments related to these chargesapproximately $120 million and $170 million for the three and nine months ended September 30, 2020, were approximately $120 million and $170 million, respectively.
(3)Bankruptcy obligations that will be settled in shares of our common stock are marked-to-market based on our stock price.
(4)Fleet impairment charges resulted from our decision to retirethe retirement of certain aircraft earlier than planned driven primarily by the severe decline in air travel due to COVID-19. the COVID-19 pandemic. In the first nine months of 2021, we retired our remaining Embraer 140 fleet resulting in a non-cash write-down of these regional aircraft.
Aircraft retired includein 2020 included the entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft. See Note 13 for further information related to these charges.
TheDuring the three months ended September 30, 2020, includedwe recorded a $709 million non-cash write-down of Airbus A330-200 aircraft and associated spare parts and $33 million in cash charges primarily for lease return and other costs.
The During the nine months ended September 30, 2020, includedwe recorded a $1.5 billion non-cash write-down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
(4)(5)Labor contract expenses primarily relaterelated to one-time charges resulting fromdue to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers for our maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(5)Bankruptcy obligations that will be settled in shares of our common stock are marked-to-market based on our stock price.(6)
(6)Fleet restructuring expenses principally included accelerated depreciation and rent expenseOur regional pilot retention program provides for, aircraft and related equipment expectedamong other things, a cash retention bonus to be retired earlier than planned.paid in the fourth quarter of 2021 to eligible captains at our wholly-owned regional airlines included on the pilot seniority list as of September 1, 2021.
(7)Mark-to-market adjustments on equity and other investments, net primarily relatesrelated to net unrealized gains and losses associated with our equity investment in China Southern Airlines Company Limited (China Southern Airlines) and certain treasury rate lock derivative instruments.
3. Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share (EPS) (in millions, except share and per share amounts):
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Basic EPS: | Basic EPS: | | | | | | | | Basic EPS: | | | | | | | |
| Net income (loss) | Net income (loss) | $ | (2,399) | | | $ | 425 | | | $ | (6,707) | | | $ | 1,272 | | Net income (loss) | $ | 169 | | | $ | (2,399) | | | $ | (1,061) | | | $ | (6,707) | |
| Weighted average common shares outstanding (in thousands) | Weighted average common shares outstanding (in thousands) | 509,049 | | | 441,915 | | | 454,523 | | | 446,291 | | Weighted average common shares outstanding (in thousands) | 648,564 | | | 509,049 | | | 642,432 | | | 454,523 | |
| Basic EPS | Basic EPS | $ | (4.71) | | | $ | 0.96 | | | $ | (14.76) | | | $ | 2.85 | | Basic EPS | $ | 0.26 | | | $ | (4.71) | | | $ | (1.65) | | | $ | (14.76) | |
| | Diluted EPS: | Diluted EPS: | | Diluted EPS: | |
| Net income (loss) | | Net income (loss) | $ | 169 | | | $ | (2,399) | | | $ | (1,061) | | | $ | (6,707) | |
| Interest expense on 6.50% convertible senior notes | | Interest expense on 6.50% convertible senior notes | 14 | | | — | | | — | | | — | |
| Net income (loss) for purposes of computing diluted EPS | Net income (loss) for purposes of computing diluted EPS | $ | (2,399) | | | $ | 425 | | | $ | (6,707) | | | $ | 1,272 | | Net income (loss) for purposes of computing diluted EPS | $ | 183 | | | $ | (2,399) | | | $ | (1,061) | | | $ | (6,707) | |
| Share computation for diluted EPS (in thousands): | Share computation for diluted EPS (in thousands): | | Share computation for diluted EPS (in thousands): | | | | | | | |
| Basic weighted average common shares outstanding | Basic weighted average common shares outstanding | 509,049 | | | 441,915 | | | 454,523 | | | 446,291 | | Basic weighted average common shares outstanding | 648,564 | | | 509,049 | | | 642,432 | | | 454,523 | |
| Dilutive effect of stock awards | 0 | | | 486 | | | 0 | | | 848 | | |
| Dilutive effect of stock awards and warrants | | Dilutive effect of stock awards and warrants | 10,850 | | | — | | | — | | | — | |
| Assumed conversion of 6.50% convertible senior notes | | Assumed conversion of 6.50% convertible senior notes | 61,728 | | | — | | | — | | | — | |
| Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | 509,049 | | | 442,401 | | | 454,523 | | | 447,139 | | Diluted weighted average common shares outstanding | 721,142 | | | 509,049 | | | 642,432 | | | 454,523 | |
| Diluted EPS | Diluted EPS | $ | (4.71) | | | $ | 0.96 | | | $ | (14.76) | | | $ | 2.84 | | Diluted EPS | $ | 0.25 | | | $ | (4.71) | | | $ | (1.65) | | | $ | (14.76) | |
Securities that could potentially dilute EPS in the future, and which were excluded from the calculation of diluted EPS because inclusion of such shares would be antidilutive, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Restricted stock unit awards | 4,559 | | | 2,590 | | | 5,091 | | | 2,648 | |
| PSP Warrants | 25 | | | 0 | | | 2,131 | | | 0 | |
| Treasury Loan Warrants | 1 | | | 0 | | | 0 | | | 0 | |
| 6.50% convertible senior notes | 61,728 | | | 0 | | | 21,933 | | | 0 | |
4. Share Repurchase Programs and Cash Dividends
During the nine months ended September 30, 2020, we repurchased 6.4 million shares of AAG common stock for $145 million at a weighted average cost per share of $22.77, all of which were purchased in the first quarter of 2020.
In January 2020, our Board of Directors declared a cash dividend of $0.10 per share for stockholders of record as of February 5, 2020 and paid on February 19, 2020, totaling $43 million.
We have suspended our capital return program, including share repurchases and the payment of future dividends. In connection with our receipt of financial assistance under the Payroll Support Program, we agreed not to repurchase | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| 6.50% convertible senior notes | — | | | 61,728 | | | 61,728 | | | 21,933 | |
| PSP1 Warrants | — | | | 25 | | | 5,555 | | | 2,131 | |
| Restricted stock unit awards | 1,172 | | | 4,559 | | | 3,272 | | | 5,091 | |
| Treasury Loan Warrants | — | | | 1 | | | 1,731 | | | — | |
| PSP3 Warrants | 4,350 | | | — | | | 1,472 | | | — | |
| PSP2 Warrants | — | | | — | | | 1,329 | | | — | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
shares of or make dividend payments in respect of AAG common stock through September 30, 2021. As of September 30, 2020, we also entered into the Treasury Loan Agreement and, as a result, we will be prohibited from repurchasing shares of AAG common stock and paying dividends on AAG common stock through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.
5.4. Revenue Recognition
Revenue
The following are the significant categories comprising our reported operating revenues (in millions):
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Passenger revenue: | Passenger revenue: | | | | | | | | Passenger revenue: | | | | | | | |
| Passenger travel | Passenger travel | $ | 2,407 | | | $ | 10,226 | | | $ | 10,491 | | | $ | 29,215 | | Passenger travel | $ | 7,287 | | | $ | 2,407 | | | $ | 16,177 | | | $ | 10,491 | |
Loyalty revenue - travel (1) | Loyalty revenue - travel (1) | 133 | | | 769 | | | 837 | | | 2,448 | | Loyalty revenue - travel (1) | 670 | | | 133 | | | 1,505 | | | 837 | |
| Total passenger revenue | Total passenger revenue | 2,540 | | | 10,995 | | | 11,328 | | | 31,663 | | Total passenger revenue | 7,957 | | | 2,540 | | | 17,682 | | | 11,328 | |
| Cargo | Cargo | 207 | | | 208 | | | 484 | | | 647 | | Cargo | 332 | | | 207 | | | 973 | | | 484 | |
| Other: | Other: | | Other: | |
Loyalty revenue - marketing services | Loyalty revenue - marketing services | 389 | | | 570 | | | 1,317 | | | 1,742 | | Loyalty revenue - marketing services | 585 | | | 389 | | | 1,571 | | | 1,317 | |
| Other revenue | Other revenue | 37 | | | 138 | | | 180 | | | 403 | | Other revenue | 95 | | | 37 | | | 229 | | | 180 | |
| Total other revenue | Total other revenue | 426 | | | 708 | | | 1,497 | | | 2,145 | | Total other revenue | 680 | | | 426 | | | 1,800 | | | 1,497 | |
| Total operating revenues | Total operating revenues | $ | 3,173 | | | $ | 11,911 | | | $ | 13,309 | | | $ | 34,455 | | Total operating revenues | $ | 8,969 | | | $ | 3,173 | | | $ | 20,455 | | | $ | 13,309 | |
(1)Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners.
(2)During the three months ended September 30, 2021 and 2020, cash payments from co-branded credit card and other partners were $835 million and $526 million, respectively. During the nine months ended September 30, 2021 and 2020, cash payments from co-branded credit card and other partners were $2.6 billion and $2.4 billion, respectively.
The following is our total passenger revenue by geographic region (in millions):
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Domestic | Domestic | $ | 2,296 | | | $ | 7,814 | | | $ | 9,102 | | | $ | 23,048 | | Domestic | $ | 6,547 | | | $ | 2,296 | | | $ | 14,646 | | | $ | 9,102 | |
| Latin America | Latin America | 172 | | | 1,218 | | | 1,386 | | | 3,829 | | Latin America | 957 | | | 172 | | | 2,375 | | | 1,386 | |
| Atlantic | Atlantic | 56 | | | 1,596 | | | 621 | | | 3,677 | | Atlantic | 408 | | | 56 | | | 555 | | | 621 | |
| Pacific | Pacific | 16 | | | 367 | | | 219 | | | 1,109 | | Pacific | 45 | | | 16 | | | 106 | | | 219 | |
| Total passenger revenue | Total passenger revenue | $ | 2,540 | | | $ | 10,995 | | | $ | 11,328 | | | $ | 31,663 | | Total passenger revenue | $ | 7,957 | | | $ | 2,540 | | | $ | 17,682 | | | $ | 11,328 | |
We attribute passenger revenue by geographic region based upon the origin and destination of each flight segment.
Contract Balances
Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on the condensed consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on the condensed consolidated balance sheets.
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| | (In millions) | | | (In millions) |
| Loyalty program liability | Loyalty program liability | $ | 9,094 | | | $ | 8,615 | | Loyalty program liability | $ | 9,195 | | | $ | 9,195 | |
| Air traffic liability | Air traffic liability | 4,903 | | | 4,808 | | Air traffic liability | 6,450 | | | 4,757 | |
| Total | Total | $ | 13,997 | | | $ | 13,423 | | Total | $ | 15,645 | | | $ | 13,952 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
| | | | | |
Balance at December 31, 20192020 | $ | 8,6159,195 | |
| Deferral of revenue | 1,4561,544 | |
Recognition of revenue (1) | (977)(1,544) | |
Balance at September 30, 20202021 (2) | $ | 9,0949,195 | |
(1)Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.
(2)Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. In response to the COVID-19 pandemic, we suspended the expiration of mileage credits through December 31, 2020.2021 and eliminated mileage reinstatement fees for canceled award tickets. As of September 30, 2020,2021, our current loyalty program liability was $2.1$2.8 billion and represents our current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter. Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, we will continue to monitor redemption patterns and may adjust our estimates in the future.
The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel. The balance in our air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is generally one year. Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months. For the nine months ended September 30, 2020, $2.82021, $1.5 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2019.2020. In response to the COVID-19 pandemic, we extended the contract duration for certain tickets to DecemberMarch 31, 2021,2022, principally those with traveltickets which were scheduled to expire from March 1, 2020 through DecemberMarch 31, 2020.2021. Additionally, we have eliminated change fees for most domestic and international tickets. As of September 30, 2020,2021, the air traffic liability included approximately $2.5$1.2 billion of travel credits related to these unused tickets for travel prior to September 30, 2020. Accordingly, any revenue associated with these tickets will be recognized within the next 15 months.tickets. Given this change in contract duration and uncertainty surrounding the future demand for air travel, our estimates of revenue that will be recognized from the air traffic liability for future flown or unused tickets as well as our estimates of refunds may be subject to variability and differ from historical experience.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
6.5. Debt
Long-term debt included in the condensed consolidated balance sheets consisted of (in millions):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Secured | | | |
| 2013 Term Loan Facility, variable interest rate of 1.89%, installments through 2025 | $ | 1,788 | | | $ | 1,807 | |
| 2013 Revolving Facility, variable interest rate of 2.16%, due 2024 | 750 | | | 0 | |
| 2014 Term Loan Facility, variable interest rate of 1.90%, installments through 2027 | 1,220 | | | 1,202 | |
| 2014 Revolving Facility, variable interest rate of 2.16%, due 2024 | 1,643 | | | 0 | |
| April 2016 Term Loan Facility, variable interest rate of 2.15%, installments through 2023 | 960 | | | 970 | |
| April 2016 Revolving Facility, variable interest rate of 2.16%, due 2024 | 450 | | | 0 | |
| December 2016 Term Loan Facility, variable interest rate of 2.15%, installments through 2023 | 1,213 | | | 1,213 | |
| 11.75% senior secured notes, interest only payments until due in July 2025 | 2,500 | | | 0 | |
| Treasury Term Loan Facility, variable interest rate of 3.73%, due June 2025 | 550 | | | 0 | |
| 10.75% senior secured IP notes, interest only payments until due in February 2026 | 1,000 | | | 0 | |
| 10.75% senior secured LGA/DCA notes, interest only payments until due in February 2026 | 200 | | | 0 | |
| Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 8.39%, averaging 3.99%, maturing from 2021 to 2032 | 11,146 | | | 11,933 | |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.33% to 5.83%, averaging 1.88%, maturing from 2020 to 2032 | 4,484 | | | 4,727 | |
| Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2021 to 2036 | 1,064 | | | 754 | |
| 28,968 | | | 22,606 | |
| Unsecured | | | |
| PSP Promissory Note | 1,765 | | | 0 | |
| 6.50% convertible senior notes, interest only payments until due in July 2025 | 1,000 | | | 0 | |
| 5.000% senior notes, interest only payments until due in June 2022 | 750 | | | 750 | |
| 3.75% senior notes, interest only payments until due in March 2025 | 500 | | | 0 | |
| 4.625% senior notes | 0 | | | 500 | |
| 4,015 | | | 1,250 | |
| Total long-term debt | 32,983 | | | 23,856 | |
| Less: Total unamortized debt discount, premium and issuance costs | 780 | | | 211 | |
| Less: Current maturities | 2,610 | | | 2,749 | |
| Long-term debt, net of current maturities | $ | 29,593 | | | $ | 20,896 | |
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Secured | | | |
| 2013 Term Loan Facility, variable interest rate of 1.84%, installments through 2025 | $ | 1,770 | | | $ | 1,788 | |
| 2013 Revolving Facility | — | | | 750 | |
| 2014 Term Loan Facility, variable interest rate of 1.84%, installments through 2027 | 1,208 | | | 1,220 | |
| 2014 Revolving Facility | — | | | 1,643 | |
| April 2016 Spare Parts Term Loan Facility | — | | | 960 | |
| April 2016 Revolving Facility | — | | | 450 | |
| December 2016 Term Loan Facility, variable interest rate of 2.08%, installments through 2023 | 1,200 | | | 1,200 | |
| 11.75% senior secured notes, interest only payments until due in July 2025 | 2,500 | | | 2,500 | |
| 10.75% senior secured IP notes, interest only payments until due in February 2026 | 1,000 | | | 1,000 | |
| 10.75% senior secured LGA/DCA notes, interest only payments until due in February 2026 | 200 | | | 200 | |
| Treasury Term Loan Facility | — | | | 550 | |
| 5.50% senior secured notes, installments beginning in July 2023 until due in April 2026 | 3,500 | | | — | |
| 5.75% senior secured notes, installments beginning in July 2026 until due in April 2029 | 3,000 | | | — | |
| AAdvantage Term Loan Facility, variable interest rate of 5.50%, installments beginning in July 2023 through April 2028 | 3,500 | | | — | |
| Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 8.39%, averaging 3.87%, maturing from 2021 to 2032 | 9,679 | | | 11,013 | |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.21% to 4.64%, averaging 1.82%, maturing from 2022 to 2032 | 3,661 | | | 4,417 | |
| Special facility revenue bonds, fixed interest rates ranging from 2.25% to 5.38%, maturing from 2026 to 2036 | 1,129 | | | 1,064 | |
| 32,347 | | | 28,755 | |
| Unsecured | | | |
| PSP1 Promissory Note | 1,765 | | | 1,765 | |
| PSP2 Promissory Note | 1,035 | | | — | |
| PSP3 Promissory Note | 946 | | | — | |
| 6.50% convertible senior notes, interest only payments until due in July 2025 | 1,000 | | | 1,000 | |
| 5.000% senior notes, interest only payments until due in June 2022 | 750 | | | 750 | |
| 3.75% senior notes, interest only payments until due in March 2025 | 500 | | | 500 | |
| 5,996 | | | 4,015 | |
| Total long-term debt | 38,343 | | | 32,770 | |
| Less: Total unamortized debt discount, premium and issuance costs | 468 | | | 749 | |
| Less: Current maturities | 2,405 | | | 2,697 | |
| Long-term debt, net of current maturities | $ | 35,470 | | | $ | 29,324 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
The table below showsAs of September 30, 2021, the maximum availability under our revolving credit and other facilities is as of September 30, 2020follows (in millions):
| | | | | |
Treasury Term Loan2013 Revolving Facility | $ | 4,927750 | |
Other Short-term2014 Revolving Facility | 4001,643 | |
| April 2016 Revolving Facility | 450 | |
| Short-term Revolving and Other Facilities | 570 | |
| Total | $ | 5,3273,413 | |
Pursuant to the Treasury Loan Agreement (as defined below), at September 30, 2020, we had a $5.5 billion Treasury Term Loan Facility (as defined below) of which we have drawn $550 million. In addition, we haveAmerican has an undrawn $400$500 million short-term revolving credit facility, we entered into in December 2019, which was set to expire at the endbeginning of December 2020October 2021 but which we havehas been extended throughto the beginning of July 2021.January 2022. American has the option to extend further a portion of this short-term revolving credit facility to January 2023. American also currently has approximately $70 million of available borrowing base under a cargo receivables facility that was entered into in December 2020. The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future.
Secured financings and revolving credit facilities are collateralized by assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities and airport slots, and certain pre-delivery payments, as well as certain intellectual property and loyalty program assets.
20206.50% Convertible Senior Notes
At September 30, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $267 million. The last reported sale price per share of our common stock (as defined in the Convertible Notes Indenture) did not exceed 130% of the conversion price of the Convertible Notes for at least 20 of the 30 consecutive trading days ending on September 30, 2021. Accordingly, pursuant to the terms of the Convertible Notes Indenture, the holders of the Convertible Notes cannot convert at their option at any time during the quarter ending December 31, 2021. Each $1,000 principal amount of Convertible Notes is convertible at a rate of 61.7284 shares of our common stock, subject to adjustment as provided in the Convertible Notes Indenture. We may settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
2021 Financing Activities
2013, 2014 Creditand April 2016 Revolving Facilities
In January 2020,March 2021, American and AAG entered intorepaid in full the eighth amendment to$750 million of revolving loans outstanding under the Amended and Restated Credit and Guaranty Agreement, amending2013 Revolving Facility, the Amended and Restated Credit and Guaranty Agreement dated as$1.6 billion of April 20, 2015 (as previously amended, the 2014 Credit Agreement; the revolving credit facility established thereunder, the 2014 Revolving Facility; the term loan facility established thereunder, the 2014 Term Loan Facility; and collectively, the 2014 Credit Facilities), pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amountloans outstanding to $1.2 billion, reducing the LIBOR margin from 2.00% to 1.75%, with a LIBOR floor of 0%, and reducing the base rate margin from 1.00% to 0.75%. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021.
In April and May 2020, American borrowed $1.6 billion under the 2014 Revolving Facility. The 2014 Revolving Facility bears interest at LIBOR plus a margin of 2.00% and has a final maturity date of October 2024. Following the April and May draws, American had 0 remaining borrowing capacity available under the 2014 Revolving Facility.
2013 Revolving Facility and April 2016 Revolving Facility
In April 2020, American borrowed $750the $450 million under the 2013 Revolving Facility. The 2013 Revolving Facility bears interest at LIBOR plus a margin of 2.00% and has a final maturity date of October 2024. Following the April draw, American had 0 remaining borrowing capacity available under the 2013 Revolving Facility.
In April 2020, American borrowed $450 millionrevolving loans outstanding under the April 2016 Revolving Facility. The April 2016Following the March 2021 repayment, American is able to draw upon the commitments under these revolving facilities again as needed upon the terms of the underlying credit agreements or leave them undrawn, in each case, until such commitments expire, which is currently scheduled to occur in 2024 for substantially all of such commitments. As of September 30, 2021, there were no borrowings or letters of credit outstanding under any of the 2013 Revolving Facility, bears interest at LIBOR plus a margin of 2.00% and has a final maturity date of October 2024. Following the April draw, American had 0 remaining borrowing capacity available under2014 Revolving Facility or the April 2016 Revolving Facility.
Delayed DrawApril 2016 Spare Parts Term Loan Credit Facility
In March 2020,On July 22, 2021, American and AAG entered into a Credit and Guaranty Agreement which provided for a $1.0 billion senior secured delayed draw term loan credit facility (the Delayed Draw Term Loan Credit Facility), which was scheduled to be due and payablerepaid in a single installment onfull the maturity date in March 2021. In connection with the issuance of the 11.75% senior secured notes due 2025, as described below, the Delayed Draw Term Loan Credit Facility was repaid and the Delayed Draw Term Loan Credit Facility and all of the security documents and other loan documents related thereto were terminated as of June 30, 2020.
11.75% Senior Secured Notes
In June 2020, American issued $2.5 billion$950 million aggregate principal amount of 11.75% senior secured notes due 2025 (the 11.75% Senior Secured Notes) at a price equal to 99% of theiroutstanding term loans under, and terminated, the April 2016 Spare Parts Term Loan Facility. The April 2016 Revolving Facility, in an available aggregate principal amount. The 11.75% Senior Secured Notes bear interest atamount of $450 million, none of which was drawn or outstanding as of September 30, 2021, and which has a ratefinal maturity of 11.75% per annum (subjectOctober 2024, remains in place.
PSP2 Promissory Note
As partial compensation to increase if a certain collateral coverage ratio is not met). Interest on the 11.75% Senior Secured Notes is payable semiannually in arrears on January 15 and July 15U.S. Government for the provision of each year, beginning on January 15, 2021. The 11.75% Senior Secured Notes will mature on July 15, 2025. The obligations of Americanfinancial assistance under the 11.75% Senior Secured Notes are fullyPSP2 Agreement, AAG issued the PSP2 Promissory Note to Treasury, which provides for our unconditional promise to pay to Treasury the principal sum of $1.0 billion, and unconditionally guaranteed on a senior unsecured basisthe guarantee of our obligations under the PSP2 Promissory Note by AAG. The proceeds from the 11.75% Senior Secured Notes were used to repay and terminate the Delayed Draw TermSubsidiaries.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Loan Credit Facility (and to terminate all security documents and all other loan documents related thereto) with the remaining amount for general corporate purposes and to enhance our liquidity position.
American may redeem the 11.75% Senior Secured Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the notes being redeemed plus a make whole premium, together with accrued and unpaid interest, if any, to (but not including) the redemption date.
The 11.75% Senior Secured Notes are American’s senior secured obligations. Subject to certain limitations and exceptions, the 11.75% Senior Secured Notes are secured on a first-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland. American’s obligations with respect to the 11.75% Senior Secured Notes are also secured on a second-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in the European Union and the United Kingdom. American may be required to pledge additional collateral in the future under the terms of the 11.75% Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral as a replacement for existing collateral. The collateral that secures the 11.75% Senior Secured Notes on a second-lien basis presently secures the 2014 Credit Facilities, on a first-lien basis.
Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction on a $344 million investment to upgrade New York's John F. Kennedy International Airport (JFK) Terminal 8.
In June 2020, the New York Transportation Development Corporation (NYTDC) issued approximately $360 million of special facility revenue bonds (the 2020 JFK Bonds) on behalf of American. A portion of the net proceeds from the 2020 JFK Bonds have been or will be used to fund costs of issuance of the 2020 JFK Bonds, to fund a substantial portion of the cost of the renovation and expansion of a passenger terminal facility (the Terminal) leased and utilized by American at JFK and to fund the August 2020 maturity of the outstanding bonds issued by NYTDC on behalf of American in 2016 (the 2016 JFK Bonds).
American is required to pay debt service on the 2020 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2020 JFK Bonds. American continues to pay debt service on the outstanding 2016 JFK Bonds and American and AAG continue to guarantee the 2016 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.
The 2020 JFK Bonds, in aggregate, were priced at approximately 98% of par value. The gross proceeds from the issuance of the 2020 JFK Bonds were approximately $353 million. Of this amount, approximately $8 million was used to fund the costs of issuance of the 2020 JFK Bonds, approximately $47 million was used to fund the redemption of the 2016 JFK Bonds due August 2020 and approximately $17 million was reimbursed to American for the Terminal construction costs incurred, with the remaining amount of proceeds received to be held in restricted cash and short-term investments on the condensed consolidated balance sheet and to be used to finance a substantial portion of the cost of the renovation and expansion of the Terminal. The 2020 JFK Bonds are comprised of term bonds, $214 million of which bear interest at 5.25% per annum and mature on August 1, 2031, and $146 million of which bear interest at 5.375% per annum and mature on August 1, 2036.
PSP Promissory Note
In April 2020, as partial compensation to the U.S. Government for the provision of financial assistance under the PSP Agreement, we issued the PSP Promissory Note to Treasury, which provides for our unconditional promise to pay to Treasury 30% of the total amount of financial assistance disbursed under the PSP Agreement, and the guarantee of our obligations by the Guarantors. The total financial assistance we received pursuant to the PSP Agreement is approximately $6.0 billion. As of September 30, 2020, the principal amount of the PSP Promissory Note was approximately $1.8 billion.
The PSPPSP2 Promissory Note bears interest on the outstanding principal amount at a rate equal to 1.00% per annum until the fifth anniversary of the PSPPSP2 Closing Date and 2.00% plus an interest rate based on the secured overnight financing rate (SOFR) per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00%) thereafter until the tenth anniversary of the PSPPSP2 Closing Date (the PSPPSP2 Maturity Date), and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, beginningwhich began on
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
September 30, 2020. March 31, 2021. The aggregate principal amount outstanding under the PSPPSP2 Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the PSPPSP2 Promissory Note, will be due and payable on the PSPPSP2 Maturity Date.
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSPPSP2 Promissory Note, in whole or in part, without penalty or premium. Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSPPSP2 Promissory Note, at such time, together with any accrued interest or other amounts owing under the PSPPSP2 Promissory Note at such time.time.
The PSPPSP2 Promissory Note is our senior unsecured obligation and each guarantee of the PSPPSP2 Promissory Note is the senior unsecured obligation of each of the Guarantors, respectively.Subsidiaries, respectively.
The PSPPSP2 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness. Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the PSPPSP2 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.
6.50% Convertible Senior NotesPSP3 Promissory Note
In June 2020, AAG completed the public offering of $1.0 billion aggregate principal amount of AAG’s 6.50% convertible senior notes due 2025 (the Convertible Notes). The Convertible Notes are fully and unconditionally guaranteed by American (the Convertible Notes Guarantee). The net proceeds to us from the Convertible Notes were approximately $970 million, after deducting the underwriters’ discounts and commissions and our estimated offering expenses. The net proceeds from the Convertible Notes are being used for general corporate purposes and to enhance our liquidity position.
The Convertible Notes were issued pursuant to an indenture, dated as of June 25, 2020 (the Base Indenture), between AAG and Wilmington Trust, National Association as trustee (the Convertible Notes Trustee), as supplemented by that certain first supplemental indenture, dated as of June 25, 2020, among AAG, American and the Convertible Notes Trustee (the Convertible Notes Supplemental Indenture and, together with the Base Indenture, the Convertible Notes Indenture). The Convertible Notes bear interest at a rate of 6.50% per annum. Interest on the Convertible Notes is payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021. The Convertible Notes will mature on July 1, 2025, unless earlier converted or redeemed or repurchased by us.
The Convertible Notes were priced to investors in the offering at 100% of their principal amount. The Convertible Notes and the Convertible Notes Guarantee will rank pari passu in right of payment with all of AAG’s and American's respective existing and future senior indebtedness and senior in right of payment to all of AAG’s and American's respective future subordinated indebtedness. The Convertible Notes and the Convertible Notes Guarantee will be effectively subordinated to all of AAG's and American's respective existing and future secured indebtednessAs partial compensation to the extent of the value of the assets pledged to secure those obligations. The Convertible Notes will also be structurally subordinated to all existing and future indebtedness of AAG’s non-guarantor subsidiaries.
Upon conversion, AAG will pay or deliver, as the case may be, cash, shares of AAG common stock or a combination of cash and shares of AAG common stock, at AAG’s election. The initial conversion rate is 61.7284 shares of AAG common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $16.20 per share of AAG common stock). The conversion rate is subject to adjustment in some events as described in the Convertible Notes Indenture.
Holders may convert their Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of AAG common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of AAG common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on AAG common stock; (4) if AAG calls such Convertible Notes for redemption; and (5) at any time from, and including, April 1, 2025 until the close of business on the scheduled trading day immediately before the maturity date of the Convertible Notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
In addition, following certain corporate events that occur prior to the maturity date or upon AAG’s issuance of a notice of redemption, AAG will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or during the related redemption period in certain circumstances by a specified number of shares of AAG common stock as described in the Convertible Notes Indenture.
AAG will not have the right to redeem the Convertible Notes prior to July 5, 2023. On or after July 5, 2023 and on or before the 20th scheduled trading day immediately before the maturity date, AAG may redeem the Convertible Notes, in whole or in part, if the last reported sale price of AAG common stock has been at least 130% of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the date AAG sends the related redemption notice; and (2) the trading day immediately before the date AAG sends such notice. In the case of any optional redemption, AAG will redeem the Convertible Notes at a redemption price equal to 100% of the principal amount of such Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If AAG undergoes a fundamental change described in the Convertible Notes Indenture prior to the maturity date of the Convertible Notes, except as described in the Convertible Notes Indenture, holders of the Convertible Notes may require AAG to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Convertible Notes Indenture provides for customary terms and covenants, including that upon certain events of default, either the Convertible Notes Trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes then outstanding may declare the unpaid principal amount of the Convertible Notes and accrued and unpaid interest, if any, thereon immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization, the principal amount of the Convertible Notes together with accrued and unpaid interest, if any, thereon will automatically become and be immediately due and payable.
As the Convertible Notes can be settled in cash upon conversion, for accounting purposes, the Convertible Notes were bifurcated into a debt component that was recorded at fair value and an equity component. The following table details the debt and equity components recognized related to the Convertible Notes as of September 30, 2020 (in millions):
| | | | | |
| September 30, 2020 |
Principal amount of 6.50% convertible senior notes | $ | 1,000 | |
Unamortized debt discount | (430) | |
Net carrying amount of 6.50% convertible senior notes | 570 | |
Additional paid-in capital | 415 | |
The effective interest rate on the liability componentU.S. Government for the third quarterprovision of 2020 approximated 20%. We recognized $30 million of interest expense infinancial assistance under the third quarter of 2020 including $14 million of non-cash amortization ofPSP3 Agreement, AAG issued the debt discount as well as $16 million of contractual coupon interest. The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is five years as follows: $13 million in 2020, $63 million in 2021, $77 million in 2022, $95 million in 2023, $116 million in 2024 and $66 million in 2025.
At September 30, 2020, the if-converted value of the Convertible Notes did not exceed the principal amount.
Treasury Loan Agreement
On September 25, 2020, American and AAG entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) withPSP3 Promissory Note to Treasury, which provides for a secured term loan facility (theour unconditional promise to pay to Treasury Term Loan Facility) that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, Americanthe principal sum of $946 million, and AAG entered into an amendment to the Treasury Loan Agreement that permits American to borrow up to $7.5 billion.
Asguarantee of September 30, 2020, American borrowed $550 millionour obligations under the Treasury Term Loan Facility and may, at its option, borrow additional amounts in up to 2 subsequent borrowings until March 26, 2021. PSP3 Promissory Note by the Subsidiaries.
The proceeds from the Treasury Term Loan Facility will be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the Treasury Loan Agreement and the applicable provisions of the CARES Act.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
The Treasury Term Loan Facility will bear interest at a variable rate per annum equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b) 3.50%. AccruedPSP3 Promissory Note bears interest on the loansoutstanding principal amount at a rate equal to 1.00% per annum until the fifth anniversary of the PSP3 Closing Date and 2.00% plus an interest rate based on SOFR per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00%) thereafter until the tenth anniversary of the PSP3 Closing Date (the PSP3 Maturity Date), and interest accrued thereon will be payable in arrears on the firstlast business day following the 14th dayof March and September of each March, June, September and December, beginning with September 15, 2021, andyear, which began on June 30, 2025 (the Treasury Term Loan Maturity Date). As of September 30, 2020, the applicable interest rate for the $550 million loan drawn2021. The aggregate principal amount outstanding under the Treasury Term Loan Facility will be 3.73% per annum through September 15, 2021 at which time thePSP3 Promissory Note, together with all accrued and unpaid interest rate will reset.
All advancesthereon and all other amounts payable under the Treasury Term Loan FacilityPSP3 Promissory Note, will be in the form of term loans, all of which will mature and be due and payable in a single installment on the Treasury Term LoanPSP3 Maturity Date. American
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the Treasury Loan Agreement,PSP3 Promissory Note, in whole or in part, without penalty or premium. Amounts prepaid may not be reborrowed. Mandatory prepaymentsWithin 30 days of loans under the Treasury Term Loan Facility are required, without penalty or premium, to the extent necessary to comply with American's covenants regarding the expiry of certain agreements constituting Treasury Collateral (as defined below), the debt service coverage ratio, certain dispositions of Treasury Collateral, certain debt issuances secured by liens on the Treasury Collateral and certain indemnity, termination, liquidated damages or insurance payments related to the Treasury Collateral, in addition to the occurrence of acertain change inof control of AAG.
American's obligations under the Treasury Loan Agreementtriggering events, we are secured by a first priority security interest on American's rights under U.S. co-branded credit card agreements and certain other loyalty program partner participation agreements (including rights to receive cash flows thereunder), documents, deposit accounts, securities accounts, books and records and intellectual property related to American's AAdvantage loyalty program and all proceeds, accessions, rents or profits related to the foregoing (collectively, the Treasury Collateral). American is permitted under the Treasury Loan Agreement to add certain types of assets to the Treasury Collateral and, subject to certain conditions, release Treasury Collateral, in each case from time to time at its discretion.
The Treasury Loan Agreement requires American, under certain circumstances, including within 10 business days prior to the last business day of March and September of each year, beginning March 2021, to appraise the value of the Treasury Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.6 to 1.0, American will be required either to provide additional Treasury Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan Agreement or repay the term loans under the Treasury Term Loan Facility, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Treasury Collateral or repayment, is at least 1.6 to 1.0. Based on the appraisal American submitted in connection with the execution of the Treasury Loan Agreement, the appraised value of the Treasury Collateral is presently significantly in excess of the 2.0 to 1.0 collateral coverage ratio necessary to access the amount under the Treasury Term Loan Facility, including any contemplated increase.
The Treasury Loan Agreement also requires American to calculate the debt service coverage ratio on a quarterly basis. If the calculated debt service coverage ratio is less than 1.75 to 1.00, then AAG and its subsidiaries will be required to place an amount equal to at least 50% of certain revenues received from the AAdvantage loyalty program (the Loyalty Program Revenues) into a blocked account to be held for the benefit of the lenders who may choose to use such funds to prepay the aggregate outstanding term loans untilprincipal amount of the debt service coverage ratio is recalculated to be greater thanPSP3 Promissory Note, together with any accrued interest or equal to 1.75 to 1.00. Ifother amounts owing under the calculated debt service coverage ratio is less than or equal to 1.50 to 1.00, but greater than 1.25 to 1.00, then all amounts previously deposited into the blocked account will be used to prepay outstanding term loans and an amount equal toPSP3 Promissory Note at least 50% of all future Loyalty Program Revenues will be transferred into the payment account and used to prepay outstanding term loans until the debt service coverage ratio is recalculated to be greater than 1.50 to 1.00. If the calculated debt service coverage ratio is less than or equal to 1.25 to 1.00, then all amounts previously deposited into the blocked account will be used to prepay outstanding term loans and an amount equal to at least 75% of all future Loyalty Program Revenues will be transferred into the payment account and used to prepay outstanding term loans until the debt service coverage ratio is recalculated to be greater than 1.25 to 1.00.such time.
The Treasury Loan Agreement also includes affirmative, negativePSP3 Promissory Note is our senior unsecured obligation and financial covenants that, among other things, limit AAG's ability to pay dividends, repurchase common stock of AAG or make certain other payments, make certain investments, incur liens on the Treasury Collateral, disposeeach guarantee of the Treasury Collateral, amend material AAdvantage loyalty program agreements, enter into certain affiliate transactions and engage in certain business activities, inPSP3 Promissory Note is the senior unsecured obligation of each case subject to certain exceptions. In addition, under the Treasury Loan Agreement, AAG must maintain a minimum aggregate liquidity of $2.0 billion.
The Treasury Loan Agreement requires AAG and American to comply with the relevant provisions of the CARES Act, including, but not limited to, the provisions that prohibit the repurchase of AAG’s common stock, the payment of common
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
stock dividends and those that restrict the payment of certain executive compensation, in each case, through the date that is 12 months after the date on which all amounts of loan outstanding under the Treasury Term Loan Facility have been repaid in full.
Subsidiaries, respectively. The Treasury Loan AgreementPSP3 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness. Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the Treasury Loan AgreementPSP3 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.
10.75% Senior Secured NotesAAdvantage Financing
On September 25, 2020March 24, 2021 (the 10.75% Senior Secured NotesAAdvantage Financing Closing Date), American and AAdvantage Loyalty IP Ltd., a newly formed Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American (Loyalty Issuer and, together with American, the AAdvantage Issuers), completed its previously announced salethe offering of $1.0$3.5 billion in initialaggregate principal amount of PIK senior secured IP notes5.50% Senior Secured Notes due 2026 (the IP2026 Notes) and $200 million in initial$3.0 billion aggregate principal amount of PIK senior secured notes5.75% Senior Secured Notes due 2029 (the LGA/DCA2029 Notes, and together with the IP2026 Notes, the 10.75% Senior SecuredAAdvantage Notes). The obligations of American under the 10.75% Senior SecuredAAdvantage Notes are fully and unconditionally guaranteed (the 10.75% Senior Secured NotesAAdvantage Note Guarantees) on a senior unsecured basis by AAG. The 10.75% Senior Secured Notes bear interest at a rate of 10.75% per annum in cash. For any interest period on or prior to September 1, 2022, American may, at its election, pay interest at a rate of 12.00% per annum payable one-half in cash and one-half in kind.
American expects to use the proceeds from the 10.75% Senior Secured Notes to pay transaction-related fees and expenses and for general corporate purposes.
The 10.75% Senior Secured Notes were each issued pursuant to a separate indenture, dated as of September 25, 2020 (individually, the IP Notes Indenture and the LGA/DCA Notes Indenture and collectively, the 10.75% Senior Secured Notes Indentures), by and among American, AAG and Wilmington Trust, National Association, as trusteefully and as collateral trustee (the 10.75% Senior Secured Notes Trustee). The IP Notes areunconditionally guaranteed on a senior secured basis, jointly and severally, by AAdvantage Holdings 1, Ltd., a first lien security interest on certain intellectual propertynewly formed Cayman Islands exempted company incorporated with limited liability and a direct wholly-owned subsidiary of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral)AAdvantage Holdings 2, Ltd., and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75% Senior Secured Notes Collateral). Subject to certain conditions, American will be permitted to incur up to $4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes. The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral. American may be required to pledge additional collateral in the future under the terms of the 10.75% Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral including as a replacement for existing collateral. The LGA/DCA Collateral presently secures (and will continue to secure), on a first-lien basis the December 2016 Credit Facilities.
Interest on the 10.75% Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, beginning on March 1, 2021. The 10.75% Senior Secured Notes will mature on February 15, 2026.
On or prior to the fourth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 100% of the principal amount of the 10.75% Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest. After the fourth anniversary of the 10.75% Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 105.375% of the principal amount of the 10.75% Senior Secured Notes redeemed, together with accrued and unpaid interest. After the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at par, together with accrued and unpaid interest.
In the event of a specified change of control, each holder of 10.75% Senior Secured Notes may require American to repurchase its 10.75% Senior Secured Notes, in whole or in part, at a repurchase price of 101% of the aggregate principal amount of the 10.75% Senior Secured Notes so repurchased, plus accrued and unpaid interest, if any, to (but not including) the repurchase date.
The 10.75% Senior Secured Notes Indentures contain covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to: (i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 10.75% Senior Secured Notes Collateral and dispose of or release the 10.75% Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans andnewly formed Cayman
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets,Islands exempted company incorporated with limited liability and (vii) designate subsidiaries as unrestricted. These covenants are subject to a numberan indirect wholly-owned subsidiary of important exceptionsAmerican and qualifications set forth in the 10.75% Senior Secured Notes Indentures.
Upon the occurrencedirect parent of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American)Loyalty Issuer (HoldCo2 and, together with AAdvantage Holdings 1, Ltd., the 10.75% Senior Secured Notes may be declared to be due and payable immediately. Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting AAG or certain of its subsidiaries (including American), all outstanding 10.75% Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 10.75% Senior Secured Notes Trustee or any holder of the 10.75% Senior Secured Notes.
2019-1 Aircraft EETCs
In August 2019, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2019-1 Class AA, Class A and Class B EETCs (the 2019-1 Aircraft EETCs) in connection with the financing of 35 aircraft previously delivered or scheduled to be delivered to American through September 2020 (the 2019-1 Aircraft). In 2019, $804 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of 28 aircraft under the 2019-1 Aircraft EETCs, of which $608 million was used to repay existing indebtedness. During the third quarter of 2020, $126 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of 3 aircraft under the 2019-1 Aircraft EETCs. Interest and principal payments on equipment notes issued in connection with the 2019-1 Aircraft EETCs are payable semiannually in February and August of each year, which interest payments began in February 2020 and which principal payments began or are scheduled to begin (i) in the case of equipment notes with respect to any 2019-1 Aircraft owned by American at the time of issuance of the 2019-1 Aircraft EETCs, in February 2020 and (ii) in the case of equipment notes with respect to the Embraer E175 aircraftSPV Guarantors, and the Airbus A321neo aircraft scheduledSPV Guarantors together with AAG, the AAdvantage Guarantors). The AAdvantage Notes were issued pursuant to be delivered afteran indenture, dated as of March 24, 2021 (the AAdvantage Indenture), by and among the AAdvantage Issuers, the AAdvantage Guarantors and Wilmington Trust, National Association, as trustee and as collateral custodian.
Concurrent with the issuance of the 2019-1 Aircraft EETCs, in August 2020AAdvantage Notes, the AAdvantage Issuers, as co-borrowers, entered into a term loan credit and Augustguaranty agreement, dated March 24, 2021, respectively. The remaining proceeds of approximately $168 millionwith Barclays Bank PLC, as of September 30, 2020 were being held in escrow withadministrative agent, Wilmington Trust, National Association, as collateral administrator, and the lenders party thereto, providing for a depositary for the benefit of the holders of the 2019-1 Aircraft EETCs until such time as American issues additional equipment notes with respect to the remaining 2019-1 Aircraft to the pass-through trusts, which will purchase such additional equipment notes$3.5 billion term loan facility (the AAdvantage Term Loan Facility and collectively with the escrowed funds. These escrowed funds are not guaranteed by AmericanAAdvantage Notes, the AAdvantage Financing) and are not reported as debtpursuant to which the full $3.5 billion of term loans (the AAdvantage Loans) were drawn on its condensed consolidated balance sheet because the proceeds held by the depositary for the benefit of the holders of the 2019-1 Aircraft EETCs are not American’s assets.
Certain information regarding the 2019-1 Aircraft EETC equipment notes and remaining escrowed proceeds, as of September 30, 2020, is set forth in the table below.
| | | | | | | | | | | | | | | | | |
| | 2019-1 Aircraft EETCs | | | | |
| | Series AA | | Series A | | Series B |
| Aggregate principal issued | $579 | | $289 | | $229 |
| Remaining escrowed proceeds | $89 | | $44 | | $35 |
| Fixed interest rate per annum | 3.15% | | 3.50% | | 3.85% |
| Maturity date | February 2032 | | February 2032 | | February 2028 |
3.75% Senior Notes
In February 2020, AAG issued $500 million aggregate principal amount of 3.75% senior notes due 2025 (the 3.75% Senior Notes). These notes bear interest at a rate of 3.75% per annum, payable semiannually in arrears in March and September of each year, beginning in September 2020.AAdvantage Financing Closing Date. The 3.75% Senior Notes are senior unsecured obligations of AAG andAAdvantage Loans are fully and unconditionally guaranteed (together with the AAdvantage Note Guarantees, the AAdvantage Guarantees) by American. The 3.75% Seniorthe AAdvantage Guarantors.
Subject to certain permitted liens and other exceptions, the AAdvantage Notes, matureAAdvantage Loans and AAdvantage Guarantees provided by the SPV Guarantors will be secured by a first-priority security interest in, March 2025.and pledge of, various agreements with respect to the AAdvantage program (the AAdvantage Agreements) (including all payments thereunder) and rights under an intercompany agreement and certain IP Licenses (as defined below), certain rights under the AAdvantage program, certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other assets of Loyalty Issuer and the SPV Guarantors (collectively, the AAdvantage Collateral).
EquipmentPayment Terms of the AAdvantage Notes and OtherAAdvantage Loans under the AAdvantage Term Loan Facility
Interest on the AAdvantage Notes Payable Issuedis payable in 2020cash, quarterly in arrears on the 20th day of each January, April, July and October (each, an AAdvantage Payment Date), which began on July 20, 2021. The 2026 Notes will mature on April 20, 2026, and the 2029 Notes will mature on April 20, 2029. The outstanding principal on the 2026 Notes will be repaid in quarterly installments of $292 million on each AAdvantage Payment Date, beginning on July 20, 2023. The outstanding principal on the 2029 Notes will be repaid in quarterly installments of $250 million on each AAdvantage Payment Date, beginning on July 20, 2026.
InThe AAdvantage Issuers may redeem the nine months ended September 30, 2020,AAdvantage Notes, at their option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the AAdvantage Notes redeemed plus a “make-whole” premium, together with accrued and unpaid interest to the date of redemption.
The scheduled maturity date of the AAdvantage Loans under the AAdvantage Term Loan Facility is April 20, 2028. The AAdvantage Loans bear interest at a variable rate equal to LIBOR (but not less than 0.75% per annum), plus a margin of 4.75% per annum, payable on each AAdvantage Payment Date. The outstanding principal on the AAdvantage Loans will be repaid in quarterly installments of $175 million, on each AAdvantage Payment Date beginning with the AAdvantage Payment Date in July 2023. These amortization payments (as well as those for the AAdvantage Notes) will be subject to the occurrence of certain early amortization events, including the failure to satisfy a minimum debt service coverage ratio at specified determination dates.
Prepayment of some or all of the AAdvantage Loans outstanding under the AAdvantage Term Loan Facility is permitted, although payment of an applicable premium is required as specified in the AAdvantage Term Loan Facility.
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain mandatory prepayment provisions triggered upon (i) the issuance or incurrence by Loyalty Issuer or the SPV Guarantors of certain indebtedness or (ii) the receipt by American entered into agreements under which it borrowed $197or its subsidiaries of net proceeds from pre-paid frequent flyer (i.e., AAdvantage) mile purchases exceeding $500 million, with prepayment required only in respect of net proceeds from such purchases exceeding $505 million in connection with the financing or refinancing, as the case may be,aggregate. Each of certain aircraft,these prepayments would also require payment of which $17 million was used to repay existing indebtedness. Debt incurred under these agreements matures in 2029 through 2032 and bears interest at variable rates (comprised of LIBOR plus an applicable margin) averaging 1.88% at September 30, 2020.premium. Certain other events, including the occurrence of a change of control with respect to AAG and certain AAdvantage Collateral sales exceeding a specified threshold, will also trigger mandatory repurchase or mandatory prepayment provisions under the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively.
Other Terms of the AAdvantage Indenture and the AAdvantage Term Loan Facility
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain certain covenants that limit the ability of Loyalty Issuer, the SPV Guarantors and, in certain circumstances, American and AAG, to among other things, (i) incur additional indebtedness and make restricted payments, (ii) incur certain liens on the AAdvantage Collateral, (iii) merge,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
7.consolidate or sell substantially all of their assets, (iv) dispose of the AAdvantage Collateral, (v) sell pre-paid frequent flyer (i.e. AAdvantage) miles in excess of $550 million in the aggregate, and (vi) terminate, amend, waive, supplement or modify the IP Licenses, or exercise rights and remedies thereunder, except under certain circumstances. American and Loyalty Issuer are also prohibited from substantially reducing the AAdvantage program business or modifying the terms of the AAdvantage program in a manner that would reasonably be expected to materially impair repayment of the AAdvantage Financing obligations (described as a Payment Material Adverse Effect in each of the AAdvantage Indenture and the AAdvantage Term Loan Facility), and AAG and its subsidiaries are prohibited from changing the policies and procedures of the AAdvantage program in a manner that would reasonably be expected to have a Payment Material Adverse Effect or operating a competing loyalty program. Notwithstanding these restrictions, the AAdvantage program is expected to operate as it has in the past, and the entry into the AAdvantage Financing is not expected to have any impact on the benefits offered to AAdvantage members.
In addition, subject to certain exceptions, the AAdvantage Indenture and the AAdvantage Term Loan Facility restrict the ability of American, Loyalty Issuer or any Guarantor to terminate, or modify certain terms within, the intercompany agreement governing the relationship between American and Loyalty Issuer with respect to the AAdvantage program.
The AAdvantage Indenture and the AAdvantage Term Loan Facility also require the AAdvantage Issuers to comply with certain affirmative covenants, including (i) certain reporting requirements and (ii) the use of commercially reasonable efforts to cause sufficient counterparties to AAdvantage Agreements to direct payments with respect to the AAdvantage program into a collections account, such that at least 90% of such cash receipts in a quarterly reporting period are deposited directly into this collection account, with amounts to be distributed from this collection account for the payment of fees, principal and interest on the AAdvantage Notes and the AAdvantage Loans pursuant to a payment waterfall described in the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively. In addition, the AAdvantage Indenture and the AAdvantage Term Loan Facility require AAG to maintain minimum liquidity, defined as the sum of (a) unrestricted cash and cash equivalents and (b) the aggregate principal amount committed and available to be drawn under all of AAG's revolving credit and other facilities, at the close of any business day of at least $2.0 billion.
Subject to certain materiality thresholds, qualifications, exceptions, “baskets” and grace and cure periods, the AAdvantage Indenture and the AAdvantage Term Loan Facility contain various events of default, including payment defaults, covenant defaults, cross-defaults to certain other indebtedness, termination of certain agreements related to the AAdvantage program, bankruptcy events of Loyalty Issuer or any SPV Guarantor, and a change of control of Loyalty Issuer or any SPV Guarantor. A bankruptcy event of American is not itself an event of default; following an American bankruptcy, an event of default would only occur if American failed to satisfy certain enumerated bankruptcy case milestones, including an assumption of the AAdvantage Financing by a certain date. Upon the occurrence of an event of default, the outstanding obligations under the AAdvantage Indenture and the AAdvantage Term Loan Facility may (or, with respect to the bankruptcy events noted above, shall) be accelerated and become due and payable immediately.
Terms of Certain Intercompany Agreements Related to the AAdvantage Financing
In connection with the issuance of the AAdvantage Notes and entry into the AAdvantage Term Loan Facility, American, Loyalty Issuer and the SPV Guarantors entered into a series of transactions that resulted in the transfer to Loyalty Issuer of, among other things, American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions) (such assets, the Transferred AAdvantage IP) and certain rights of American under specified AAdvantage Agreements. Loyalty Issuer has entered into a license agreement with HoldCo2 pursuant to which Loyalty Issuer has granted to HoldCo2 an exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing license to use the Transferred AAdvantage IP (the HoldCo2 License), and HoldCo2 has in turn granted to American an exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing sublicense to use the Transferred AAdvantage IP (together with the HoldCo2 License, the IP Licenses). The IP Licenses would be terminated, and American’s right to use the Transferred AAdvantage IP would cease, upon specified termination events, including, but not limited to, the occurrence of an event of default under the AAdvantage Indenture or the AAdvantage Term Loan Facility. In certain circumstances, such a termination would trigger a liquidated damages payment in an amount that is greater than the initial principal amount of the AAdvantage Notes and the AAdvantage Loans.
In addition, proceeds from the AAdvantage Financing were loaned by Loyalty Issuer to American pursuant to an intercompany note that was guaranteed by AAG. The borrowings under this intercompany note are payable on demand by Loyalty Issuer or, after the occurrence and during the continuance of an event of default under the AAdvantage Financing, by the master collateral agent under the AAdvantage Financing.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Treasury Loan Agreement
On September 25, 2020, American and AAG entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, American and AAG entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $7.5 billion. American had borrowed $550 million under the Treasury Term Loan Facility in September 2020. On March 24, 2021, American used proceeds from the AAdvantage Financing to prepay in full the $550 million outstanding under the Treasury Term Loan Facility and terminated the Treasury Loan Agreement.
JFK Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8 (the Terminal). The renovation projects at the Terminal include: (i) the reconfiguration or elimination of certain existing gates and the construction of jumbo gates, (ii) the construction of approximately 51,000 square feet of new terminal building space and the refurbishment of 73,300 square feet of existing terminal space, (iii) the expansion of the baggage system capacity of the Terminal, (iv) improvements to the premium passenger lounges, check-in and, potentially, security access areas, and (v) bathroom refreshment, new signage, and other upgrades. The construction project is currently scheduled to be completed in 2023 and is estimated to cost $439 million, of which $298 million was funded with proceeds of the special facility revenue bonds issued by the New York Transportation Development Corporation (NYTDC) on behalf of American in June 2020 (the 2020 JFK Bonds) and approximately $84 million of which will be funded with proceeds of the approximately $150 million of special facility revenue bonds NYTDC issued in June 2021 (the 2021 JFK Bonds).
American is required to pay debt service on the 2021 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2021 JFK Bonds. American continues to pay debt service on the outstanding bonds issued by NYTDC on behalf of American in 2016 and 2020 (the 2016 and 2020 JFK Bonds) and American and AAG continue to guarantee the 2016 and 2020 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.
The 2021 JFK Bonds, in aggregate, were priced at par value. The gross proceeds from the issuance of the 2021 JFK Bonds were approximately $150 million. Of this amount, $4 million was used to fund the costs of issuance of the 2021 JFK Bonds, $62 million was used to fund the redemption of the 2016 and 2020 JFK Bonds due August 2021, with the remaining amount of proceeds received to be held in restricted cash and short-term investments on the condensed consolidated balance sheet and to be used to finance a portion of the cost of the renovation and expansion of the Terminal. The 2021 JFK Bonds are comprised of term bonds, $70 million of which bear interest at 2.25% per annum and mature on August 1, 2026, and $80 million of which bear interest at 3.00% per annum and mature on August 1, 2031. As of September 30, 2021, $264 million of proceeds funded by the issuance of the 2020 and 2021 JFK Bonds are included in restricted cash and short-term investments on the accompanying condensed consolidated balance sheet.
6. Income Taxes
At December 31, 2019,2020, we had approximately $9.1$16.5 billion of federal net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards)available to reduce future federal taxable income. The federal NOL Carryforwardsincome, of which $8.5 billion will expire beginning in 2023 if unused.unused and $8.0 billion can be carried forward indefinitely (NOL Carryforwards). We also had approximately $3.0$5.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2019,2020, which will expire in taxable years 2020 through 20392040 if unused.
Our ability to use our NOL Carryforwards depends on the amount of taxable income generated in future periods. We presently do not haveprovide a valuation allowance for our deferred tax assets, which include our NOLs, when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. We presently have a $34 million valuation allowance on ourcertain net deferred tax assets.assets related to state NOL Carryforwards. There can be no assurance that aan additional valuation allowance on our net deferred tax assets will not be required in the future.required. Such valuation allowance could be material.
At December 31, 2019, we had an Alternative Minimum Tax (AMT) credit carryforward of approximately $170 million available for federal income tax purposes, which was fully refunded as of September 30, 2020 as a result of the CARES Act enacted in March of 2020.
During the three and nine months ended September 30, 2020,2021, we recorded an income tax provision of $37 million and an income tax benefit of $696$296 million, and $1.9 billion, respectively.
8.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
7. Fair Value Measurements and Other Investments
Assets Measured at Fair Value on a Recurring Basis
We utilize the market approach to measure the fair value of our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2020.2021.
Assets measured at fair value on a recurring basis are summarized below (in millions):
| | | | Fair Value Measurements as of September 30, 2020 | | | Fair Value Measurements as of September 30, 2021 |
| | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Short-term investments (1), (2): | Short-term investments (1), (2): | | | | | | | | Short-term investments (1), (2): | | | | | | | |
| Money market funds | Money market funds | $ | 2,828 | | | $ | 2,828 | | | $ | 0 | | | $ | 0 | | Money market funds | $ | 944 | | | $ | 944 | | | $ | — | | | $ | — | |
| Corporate obligations | Corporate obligations | 2,454 | | | 0 | | | 2,454 | | | 0 | | Corporate obligations | 9,002 | | | — | | | 9,002 | | | — | |
| Bank notes/certificates of deposit/time deposits | Bank notes/certificates of deposit/time deposits | 1,974 | | | 0 | | | 1,974 | | | 0 | | Bank notes/certificates of deposit/time deposits | 3,182 | | | — | | | 3,182 | | | — | |
| Repurchase agreements | Repurchase agreements | 775 | | | 0 | | | 775 | | | 0 | | Repurchase agreements | 1,115 | | | — | | | 1,115 | | | ��� | |
| | 8,031 | | | 2,828 | | | 5,203 | | | 0 | | | 14,243 | | | 944 | | | 13,299 | | | — | |
Restricted cash and short-term investments (1), (4)(3) | Restricted cash and short-term investments (1), (4)(3) | 508 | | | 385 | | | 123 | | | 0 | | Restricted cash and short-term investments (1), (4)(3) | 923 | | | 688 | | | 235 | | | — | |
Long-term investments (3)(4) | Long-term investments (3)(4) | 146 | | | 146 | | | 0 | | | 0 | | Long-term investments (3)(4) | 153 | | | 153 | | | — | | | — | |
| Total | Total | $ | 8,685 | | | $ | 3,359 | | | $ | 5,326 | | | $ | 0 | | Total | $ | 15,319 | | | $ | 1,785 | | | $ | 13,534 | | | $ | — | |
(1)All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period. There were no credit losses.
(2)Our short-term investments mature in one year or less except for $286 millionless.
(3)Restricted cash and short-term investments primarily include collateral associated with the payment of bank notes/certificatescertain fees and interest in respect to the AAdvantage Financing and money market funds to be used to finance a substantial portion of deposit/time depositsthe cost of the renovation and $70 millionexpansion of corporatethe Terminal at JFK as well as collateral held to support workers' compensation obligations.
(3)(4)Long-term investments primarily include our equity investment in China Southern Airlines, in which we presently own a 1.8% equity interest, and are classified in other assets on the condensed consolidated balance sheet.
(4)Restricted cash and short-term investments primarily includes money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK and collateral held to support workers' compensation obligations.
Fair Value of Debt
The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 except for $3.7 billion and $2.3 billion as of September 30, 2021 and December 31, 2020, respectively, which would have been classified as Level 3 in the fair value hierarchy. The fair value of the Convertible Notes was $1.6 billion and $1.2 billion as of September 30, 2021 and December 31, 2020, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Long-term debt, including current maturities | $ | 37,875 | | | $ | 39,233 | | | $ | 32,021 | | | $ | 30,454 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | | | December 31, 2019 | | |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Long-term debt, including current maturities | $ | 32,203 | | | $ | 28,047 | | | $ | 23,645 | | | $ | 24,508 | |
(Unaudited)
9.8. Employee Benefit Plans
The following table provides the components of net periodic benefit cost (income) (in millions):
| | | | | Pension Benefits | | | Retiree Medical and Other
Postretirement Benefits | | | | Pension Benefits | | Retiree Medical and Other
Postretirement Benefits |
| Three Months Ended September 30, | Three Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 | Three Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| Service cost | Service cost | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 1 | | Service cost | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Interest cost | Interest cost | | 154 | | | 175 | | | 8 | | | 9 | | Interest cost | | 132 | | | 154 | | | 8 | | | 8 | |
| Expected return on assets | Expected return on assets | | (253) | | | (204) | | | (3) | | | (4) | | Expected return on assets | | (269) | | | (253) | | | (3) | | | (3) | |
| Special termination benefits | Special termination benefits | | 0 | | | 0 | | | 410 | | | 0 | | Special termination benefits | | — | | | — | | | — | | | 410 | |
| Settlements | | 0 | | | 0 | | | 0 | | | 0 | | |
| | Amortization of: | Amortization of: | | Amortization of: | |
| Prior service cost (benefit) | Prior service cost (benefit) | | 7 | | | 7 | | | (33) | | | (59) | | Prior service cost (benefit) | | 7 | | | 7 | | | (3) | | | (33) | |
| Unrecognized net loss (gain) | Unrecognized net loss (gain) | | 41 | | | 37 | | | (5) | | | (8) | | Unrecognized net loss (gain) | | 54 | | | 41 | | | (6) | | | (5) | |
| Net periodic benefit cost (income) | Net periodic benefit cost (income) | | $ | (50) | | | $ | 16 | | | $ | 379 | | | $ | (61) | | Net periodic benefit cost (income) | | $ | (75) | | | $ | (50) | | | $ | (2) | | | $ | 379 | |
| | | | | Pension Benefits | | | Retiree Medical and Other
Postretirement Benefits | | | | Pension Benefits | | Retiree Medical and Other
Postretirement Benefits |
| Nine Months Ended September 30, | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 | Nine Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| Service cost | Service cost | | $ | 3 | | | $ | 2 | | | $ | 5 | | | $ | 3 | | Service cost | | $ | 3 | | | $ | 3 | | | $ | 7 | | | $ | 5 | |
| Interest cost | Interest cost | | 461 | | | 527 | | | 22 | | | 26 | | Interest cost | | 394 | | | 461 | | | 23 | | | 22 | |
| Expected return on assets | Expected return on assets | | (757) | | | (611) | | | (9) | | | (12) | | Expected return on assets | | (813) | | | (757) | | | (9) | | | (9) | |
| Special termination benefits | Special termination benefits | | 0 | | | 0 | | | 410 | | | 0 | | Special termination benefits | | — | | | — | | | 139 | | | 410 | |
| Settlements | Settlements | | 4 | | | 0 | | | 0 | | | 0 | | Settlements | | — | | | 4 | | | — | | | — | |
| Amortization of: | Amortization of: | | Amortization of: | |
| Prior service cost (benefit) | Prior service cost (benefit) | | 21 | | | 21 | | | (139) | | | (177) | | Prior service cost (benefit) | | 21 | | | 21 | | | (10) | | | (139) | |
| Unrecognized net loss (gain) | Unrecognized net loss (gain) | | 124 | | | 113 | | | (17) | | | (24) | | Unrecognized net loss (gain) | | 159 | | | 124 | | | (17) | | | (17) | |
| Net periodic benefit cost (income) | Net periodic benefit cost (income) | | $ | (144) | | | $ | 52 | | | $ | 272 | | | $ | (184) | | Net periodic benefit cost (income) | | $ | (236) | | | $ | (144) | | | $ | 133 | | | $ | 272 | |
Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen.
The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income (expense), net in the condensed consolidated statements of operations.
During the first quarter of 2021 and the third quarter of 2020, we remeasured our retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted in tointo voluntary early retirement programs offered as a result of reductions to our operation due to COVID-19.the COVID-19 pandemic. For the nine months ended September 30, 2021, we recognized a $139 million special charge for these enhanced healthcare benefits and increased our postretirement benefits obligation by $139 million. For the three and nine months ended September 30, 2020, we recognized a $410 million special charge for these enhanced healthcare benefits and increased our postretirement benefits obligation by $410 million.
In January 2021, we made $241 million as of September 30, 2020.
Pursuant to the CARES Act, minimum required pensionin contributions to be made inour pension plans, including a contribution of $130 million for the 2020 calendar year 2020 canthat was permitted to be deferred to January 1,4, 2021 with interest accruing fromas provided under the original due dateCARES Act. On March 11, 2021, the ARP was enacted, which included funding relief provisions benefiting single employer qualified retirement benefit pension plans such as those sponsored by us. Based on our current understanding of the ARP provisions applicable to the new payment date. We expect to defer our $133 million 2020 minimum required contributions to January 1, 2021, whichpension plans, we intend to pay or otherwise satisfy on or prior to December 31, 2020.will have no additional funding requirements for 2021.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
10.9. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss (AOCI) are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension, Retiree
Medical and
Other
Postretirement
Benefits | | Unrealized Loss on Investments | | Income Tax Benefit (Provision) (1) | | Total |
| Balance at December 31, 2019 | $ | (5,238) | | | $ | (2) | | | $ | (1,091) | | | $ | (6,331) | |
Other comprehensive income (loss) before
reclassifications | (180) | | | 0 | | | 41 | | | (139) | |
| Amounts reclassified from AOCI | (7) | | | 0 | | | 1 | | (2) | (6) | |
Net current-period other comprehensive income
(loss) | (187) | | | 0 | | | 42 | | | (145) | |
| Balance at September 30, 2020 | $ | (5,425) | | | $ | (2) | | | $ | (1,049) | | | $ | (6,476) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension,
Retiree
Medical and
Other
Postretirement
Benefits | | Unrealized Gain (Loss) on Investments | | Income Tax
Benefit
(Provision) (1) | | Total |
| Balance at December 31, 2020 | $ | (6,236) | | | $ | (2) | | | $ | (865) | | | $ | (7,103) | |
| Other comprehensive income (loss) before reclassifications | 35 | | | — | | | (8) | | | 27 | |
| Amounts reclassified from AOCI | 153 | | | — | | | (34) | | (2) | 119 | |
| Net current-period other comprehensive income (loss) | 188 | | | — | | | (42) | | | 146 | |
| Balance at September 30, 2021 | $ | (6,048) | | | $ | (2) | | | $ | (907) | | | $ | (6,957) | |
(1)Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income (loss)loss until the obligations are fully extinguished.
(2)Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision (benefit)benefit on the condensed consolidated statement of operations.
Reclassifications out of AOCI are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amounts reclassified from AOCI | | | | | | | | Affected line items on the
condensed consolidated
statements of operations |
| AOCI Components | | Three Months Ended September 30, | | | | Nine Months Ended
September 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
Amortization of pension, retiree medical
and other postretirement benefits: | | | | | | | | | | |
| Prior service benefit | | $ | (20) | | | $ | (40) | | | $ | (91) | | | $ | (121) | | | Nonoperating other income (expense), net |
| Actuarial loss | | 28 | | | 22 | | | 85 | | | 69 | | | Nonoperating other income (expense), net |
Total reclassifications for the period,
net of tax | | $ | 8 | | | $ | (18) | | | $ | (6) | | | $ | (52) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amounts reclassified from AOCI | | Affected line items on the
condensed consolidated
statements of operations |
| AOCI Components | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| 2021 | | 2020 | | 2021 | | 2020 | |
Amortization of pension, retiree medical
and other postretirement benefits: | | | | | | | | | | |
| Prior service cost (benefit) | | $ | 3 | | | $ | (20) | | | $ | 9 | | | $ | (91) | | | Nonoperating other income (expense), net |
| Actuarial loss | | 37 | | | 28 | | | 110 | | | 85 | | | Nonoperating other income (expense), net |
Total reclassifications for the period,
net of tax | | $ | 40 | | | $ | 8 | | | $ | 119 | | | $ | (6) | | | |
11.10. Regional Expenses
Our regional carriers provide scheduled air transportation under the brand name “American Eagle.” The American Eagle carriers include our wholly-owned regional carriers as well as third-party regional carriers. Substantially all of our regional carrier arrangements are in the form of capacity purchase agreements. Expenses associated with American Eagle operations are classified as regional expenses on the condensed consolidated statements of operations.
Beginning in the first quarter of 2021, aircraft fuel and related taxes as well as certain salaries, wages and benefits, other rent and landing fees, selling and other expenses are no longer allocated to regional expenses on our condensed consolidated statements of operations. The three and nine months ended September 30, 2020 condensed consolidated statements of operations have been recast to conform to the 2021 presentation. This statement of operations presentation change has no impact on total operating expenses or net loss.
Regional expenses consistfor the three months ended September 30, 2021 and 2020 include $78 million and $79 million of depreciation and amortization, respectively, and $1 million and $3 million of aircraft rent, respectively. Regional expenses for the following (in millions):nine months ended September 30, 2021 and 2020 include $236 million and $247 million of depreciation and amortization, respectively, and $5 million and $11 million of aircraft rent, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Aircraft fuel and related taxes | $ | 158 | | | $ | 485 | | | $ | 638 | | | $ | 1,395 | |
| Salaries, wages and benefits | 379 | | | 461 | | | 1,218 | | | 1,310 | |
Capacity purchases from third-party regional carriers (1) | 233 | | | 354 | | | 765 | | | 1,046 | |
| Maintenance, materials and repairs | 72 | | | 108 | | | 244 | | | 303 | |
| Other rent and landing fees | 112 | | | 167 | | | 369 | | | 495 | |
| Aircraft rent | 3 | | | 8 | | | 11 | | | 23 | |
| Selling expenses | 27 | | | 102 | | | 121 | | | 299 | |
| Depreciation and amortization | 79 | | | 84 | | | 247 | | | 246 | |
| Special items, net | (224) | | | 6 | | | (309) | | | 6 | |
| Other | 75 | | | 158 | | | 334 | | | 459 | |
| Total regional expenses | $ | 914 | | | $ | 1,933 | | | $ | 3,638 | | | $ | 5,582 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
(1)During the three months ended September 30, 20202021 and 2019,2020, we recognized $102$125 million and $150$102 million, respectively, of expense under our capacity purchase agreement with Republic Airways Inc. (Republic). During the nine months ended September 30, 20202021 and 2019,2020, we recognized $313$343 million and $442$313 million, respectively, of expense under our capacity purchase agreement with Republic. We hold a 25% equity interest in Republic Airways Holdings Inc., the parent company of Republic.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
12.(Unaudited)
11. Legal Proceedings
Chapter 11 Cases. On November 29, 2011, AMR Corporation (AMR), American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the acquisition of US Airways Group, Inc. by AMR (the Merger).
Pursuant to rulings of the Bankruptcy Court, theThe Plan established a disputed claims reserve (the Disputed Claims Reserve)DCR to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. The shares of AAG common stock issued to the Disputed Claims ReserveDCR were originally issued on December 13, 2013 and have at all times since been included in the number of shares issued and outstanding as reported from time to time in our quarterly and annual reports, including for calculating earnings per common share. As disputed claims are resolved, the claimants receive distributions of shares from the Disputed Claims Reserve.DCR. We are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims ReserveDCR are not sufficient to fully pay any additional allowed unsecured claims. If any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders under the Plan. In February 2020, 2.2 million shares of AAG common stock were distributed from the Disputed Claims Reserve. After giving effect to this distribution, asAs of September 30, 2020,2021, the Disputed Claims ReserveDCR held approximately 4.8 million shares of AAG common stock.
We have filed a motion to close the bankruptcy case, which is set for a hearing on November 4, 2021. If granted, the order will allow us to settle various bankruptcy-related claims from the DCR, distribute all remaining shares (and accumulated dividends) thereunder and facilitate an end to the bankruptcy case.
Private Party Antitrust Action Related to Passenger Capacity. We, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court). On June 15, 2018, we reached a settlement agreement with the plaintiffs in the amount of $45 million to resolve all class claims in the U.S. lawsuits. That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia. We believe these appeals are without merit and intend to vigorously defend against them.
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the Bankruptcy Court. The complaint named as defendants US Airways Group, Inc., US Airways, Inc., AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019. The2019 and the parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019, and we are awaiting2019. On January 29, 2021, the Bankruptcy Court's decision.Court published its decision finding in our favor. The plaintiffs have appealed this ruling to the U.S. District Court, which remains pending. We believe this lawsuit is without merit and intend to continue to vigorously defend against it, including against plaintiffs' appeal of the allegations.Bankruptcy Court's January 29, 2021 ruling.
Government Antitrust Action Related to the Northeast Alliance. On September 21, 2021, the United States Department of Justice (DOJ), joined by Attorneys General from six states and the District of Columbia, filed an antitrust complaint against American and JetBlue Airways Corporation (JetBlue) alleging that American and JetBlue violated U.S. antitrust laws in connection with the previously disclosed Northeast Alliance (NEA) arrangement. We believe the complaint is without merit and intend to defend against it vigorously.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Also on September 21, 2021, the United States Department of Transportation (DOT) published a Clarification Notice relating to the agreement that had been reached between the DOT, American, and JetBlue in January 2021, at the conclusion of the DOT’s review of the NEA (DOT Agreement). The DOT Clarification Notice stated, among other things, that the DOT Agreement remains in force during the pendency of the DOJ action against the NEA and, while the DOT retains independent statutory authority to prohibit unfair methods of competition in air transportation, the DOT intends to defer to DOJ to resolve the antitrust concerns that DOJ has identified with respect to the NEA. The DOT simultaneously published a Notice Staying Proceeding in relation to a complaint by Spirit Airlines, Inc. regarding the NEA, pending resolution of the DOJ action described above.
General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material.
13. Impairment
Long-lived Assets
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
Accounting Standards Codification (ASC) 360 - Property, Plant, and Equipment (ASC 360) requires long-lived assets to be assessed for impairment when events and circumstances indicate that the assets may be impaired. Long-lived assets consist of owned flight and ground equipment, ROU assets and definite-lived intangible assets such as certain domestic airport slots and gate leasehold rights, customer relationships and marketing agreements.
As previously discussed, in the first nine months of 2020, our operations, liquidity and stock price were significantly impacted by decreased passenger demand and government travel restrictions due to COVID-19. Additionally, we decided to retire certain mainline aircraft earlier than planned including Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. As a result of these events and circumstances, in each of the first three quarters of 2020, we performed impairment tests on our long-lived assets in connection with the preparation of our financial statements.
In accordance with ASC 360, an impairment of a long-lived asset or group of long-lived assets exists only when the sum of the estimated undiscounted future cash flows expected to be generated directly by the assets are less than the carrying value of the assets. We group assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for which identifiable cash flows exist. Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including our current fleet plan.
As a result of the impairment tests performed on our long-lived assets, we determined the sum of the estimated undiscounted future cash flows exceeded the $42.0 billion carrying value for our long-lived assets except for the aircraft being retired earlier than planned as discussed above. For those aircraft and certain related spare parts, we recorded impairment charges reflecting the difference between the carrying values of these assets and their fair values of $714 million and $1.5 billion for the three and nine months ended September 30, 2020, respectively. Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable. Due to the inherent uncertainties of the current operating environment, we will continue to evaluate our current fleet (including aircraft in temporary storage) and may decide to permanently retire additional aircraft.
Goodwill and Indefinite-lived Intangible Assets
ASC 350 - Intangibles - Goodwill and Other (ASC 350) requires goodwill and indefinite-lived intangible assets to be assessed for impairment annually or more frequently if events or circumstances indicate that the fair values of goodwill and indefinite-lived intangible assets may be lower than their carrying values. Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the merger with US Airways Group, Inc. We have 1 reporting unit. Indefinite-lived intangible assets consist of certain domestic airport slots and international slots and route authorities.
In each of the first three quarters of 2020, we performed interim impairment tests on our goodwill and indefinite-lived intangible assets as a result of the events and circumstances previously discussed due to the impact of COVID-19 on our business. In accordance with ASC 350, for goodwill, we performed a quantitative analysis by using a market approach. Under the market approach, the fair value of the reporting unit was determined based on quoted market prices for equity and the fair value of debt as described in Note 8. The fair value exceeded the carrying value of the reporting unit, and our $4.1 billion of goodwill was not impaired.
Additionally, we performed interim qualitative impairment tests on our $1.8 billion of indefinite-lived intangible assets and determined there was no material impairment.
As discussed above, due to the inherent uncertainties of the current operating environment, we will continue to evaluate our goodwill and indefinite-lived intangible assets for events or circumstances that indicate that their fair values may be lower than their carrying values.
14. Subsequent Events
On October 21, 2020, we entered into a Restatement Agreement (the Treasury Loan Restatement Agreement) to the Treasury Loan Agreement. The Treasury Loan Restatement Agreement increased the commitment under the Treasury Term Loan Facility to $7.5 billion, representing an increase of approximately $2.0 billion beyond the approximately $5.5 billion of commitment under the Treasury Term Loan Facility as of the date of execution of the Treasury Loan Agreement. No additional borrowing was made by American on October 21, 2020 in connection with the entry into the Treasury Loan Restatement Agreement. Due to the increase in the commitment under the Treasury Term Loan Facility to $7.5 billion,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
AAG may now issue up to an aggregate of approximately 60.0 million Treasury Loan Warrant Shares, assuming the Treasury Term Loan Facility, as amended by the Restatement Agreement, is fully drawn.
ITEM 1B. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)(Unaudited)
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Operating revenues: | Operating revenues: | | | | | | | Operating revenues: | | | | | | | |
| Passenger | Passenger | $ | 2,540 | | | $ | 10,995 | | | $ | 11,328 | | | $ | 31,663 | | Passenger | $ | 7,957 | | | $ | 2,540 | | | $ | 17,682 | | | $ | 11,328 | |
| Cargo | Cargo | 207 | | | 208 | | | 484 | | | 647 | | Cargo | 332 | | | 207 | | | 973 | | | 484 | |
| Other | Other | 425 | | | 707 | | | 1,496 | | | 2,139 | | Other | 679 | | | 425 | | | 1,799 | | | 1,496 | |
| Total operating revenues | Total operating revenues | 3,172 | | | 11,910 | | | 13,308 | | | 34,449 | | Total operating revenues | 8,968 | | | 3,172 | | | 20,454 | | | 13,308 | |
| Operating expenses: | Operating expenses: | | Operating expenses: | |
| Aircraft fuel and related taxes | Aircraft fuel and related taxes | 453 | | | 1,989 | | | 2,065 | | | 5,710 | | Aircraft fuel and related taxes | 1,952 | | | 611 | | | 4,596 | | | 2,703 | |
| Salaries, wages and benefits | Salaries, wages and benefits | 2,704 | | | 3,217 | | | 8,380 | | | 9,503 | | Salaries, wages and benefits | 3,017 | | | 2,762 | | | 8,607 | | | 8,589 | |
| Regional expenses | Regional expenses | 852 | | | 1,913 | | | 3,500 | | | 5,616 | | Regional expenses | 789 | | | 467 | | | 2,053 | | | 2,022 | |
| Maintenance, materials and repairs | Maintenance, materials and repairs | 337 | | | 610 | | | 1,253 | | | 1,745 | | Maintenance, materials and repairs | 548 | | | 337 | | | 1,383 | | | 1,253 | |
| Other rent and landing fees | Other rent and landing fees | 367 | | | 530 | | | 1,149 | | | 1,568 | | Other rent and landing fees | 694 | | | 472 | | | 1,950 | | | 1,495 | |
| Aircraft rent | Aircraft rent | 336 | | | 335 | | | 1,004 | | | 996 | | Aircraft rent | 358 | | | 336 | | | 1,064 | | | 1,004 | |
| Selling expenses | Selling expenses | 70 | | | 424 | | | 418 | | | 1,194 | | Selling expenses | 318 | | | 97 | | | 745 | | | 540 | |
| Depreciation and amortization | Depreciation and amortization | 498 | | | 499 | | | 1,557 | | | 1,469 | | Depreciation and amortization | 480 | | | 498 | | | 1,439 | | | 1,557 | |
| Special items, net | Special items, net | (295) | | | 228 | | | (657) | | | 487 | | Special items, net | (990) | | | (295) | | | (3,986) | | | (657) | |
| Other | Other | 659 | | | 1,337 | | | 2,425 | | | 3,860 | | Other | 1,109 | | | 696 | | | 2,785 | | | 2,588 | |
| Total operating expenses | Total operating expenses | 5,981 | | | 11,082 | | | 21,094 | | | 32,148 | | Total operating expenses | 8,275 | | | 5,981 | | | 20,636 | | | 21,094 | |
| Operating income (loss) | Operating income (loss) | (2,809) | | | 828 | | | (7,786) | | | 2,301 | | Operating income (loss) | 693 | | | (2,809) | | | (182) | | | (7,786) | |
| Nonoperating income (expense): | Nonoperating income (expense): | | Nonoperating income (expense): | |
| Interest income | Interest income | 72 | | | 131 | | | 268 | | | 389 | | Interest income | 8 | | | 72 | | | 26 | | | 268 | |
| Interest expense, net | Interest expense, net | (310) | | | (281) | | | (825) | | | (835) | | Interest expense, net | (435) | | | (310) | | | (1,214) | | | (825) | |
| Other income (expense), net | 111 | | | (10) | | | 78 | | | 69 | | |
| Other income, net | | Other income, net | 82 | | | 111 | | | 239 | | | 78 | |
| Total nonoperating expense, net | Total nonoperating expense, net | (127) | | | (160) | | | (479) | | | (377) | | Total nonoperating expense, net | (345) | | | (127) | | | (949) | | | (479) | |
| Income (loss) before income taxes | Income (loss) before income taxes | (2,936) | | | 668 | | | (8,265) | | | 1,924 | | Income (loss) before income taxes | 348 | | | (2,936) | | | (1,131) | | | (8,265) | |
| Income tax provision (benefit) | Income tax provision (benefit) | (660) | | | 160 | | | (1,852) | | | 472 | | Income tax provision (benefit) | 68 | | | (660) | | | (247) | | | (1,852) | |
| Net income (loss) | Net income (loss) | $ | (2,276) | | | $ | 508 | | | $ | (6,413) | | | $ | 1,452 | | Net income (loss) | $ | 280 | | | $ | (2,276) | | | $ | (884) | | | $ | (6,413) | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | $ | 280 | | | $ | (2,276) | | | $ | (884) | | | $ | (6,413) | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Pension, retiree medical and other postretirement benefits | 40 | | | (15) | | | 145 | | | (146) | |
| Investments | — | | | 1 | | | — | | | — | |
| Total other comprehensive income (loss), net of tax | 40 | | | (14) | | | 145 | | | (146) | |
| Total comprehensive income (loss) | $ | 320 | | | $ | (2,290) | | | $ | (739) | | | $ | (6,559) | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | $ | (2,276) | | | $ | 508 | | | $ | (6,413) | | | $ | 1,452 | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Pension, retiree medical and other postretirement benefits | (15) | | | (19) | | | (146) | | | (53) | |
| Investments | 1 | | | 0 | | | 0 | | | 3 | |
| Total other comprehensive loss, net of tax | (14) | | | (19) | | | (146) | | | (50) | |
| Total comprehensive income (loss) | $ | (2,290) | | | $ | 489 | | | $ | (6,559) | | | $ | 1,402 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value)
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| | (Unaudited) | | | | (Unaudited) | | |
| ASSETS | ASSETS | | ASSETS | |
| Current assets | Current assets | | Current assets | |
| Cash | Cash | $ | 243 | | | $ | 267 | | Cash | $ | 282 | | | $ | 231 | |
| Short-term investments | Short-term investments | 8,029 | | | 3,543 | | Short-term investments | 14,227 | | | 6,617 | |
| Restricted cash and short-term investments | Restricted cash and short-term investments | 508 | | | 158 | | Restricted cash and short-term investments | 923 | | | 609 | |
| Accounts receivable, net | Accounts receivable, net | 1,129 | | | 1,770 | | Accounts receivable, net | 1,314 | | | 1,334 | |
| Receivables from related parties, net | Receivables from related parties, net | 9,183 | | | 12,451 | | Receivables from related parties, net | 5,487 | | | 7,877 | |
| Aircraft fuel, spare parts and supplies, net | Aircraft fuel, spare parts and supplies, net | 1,535 | | | 1,754 | | Aircraft fuel, spare parts and supplies, net | 1,752 | | | 1,520 | |
| Prepaid expenses and other | Prepaid expenses and other | 727 | | | 584 | | Prepaid expenses and other | 524 | | | 633 | |
| Total current assets | Total current assets | 21,354 | | | 20,527 | | Total current assets | 24,509 | | | 18,821 | |
| Operating property and equipment | Operating property and equipment | | Operating property and equipment | |
| Flight equipment | Flight equipment | 37,252 | | | 42,213 | | Flight equipment | 37,357 | | | 37,485 | |
| Ground property and equipment | Ground property and equipment | 9,088 | | | 9,089 | | Ground property and equipment | 8,752 | | | 8,836 | |
| Equipment purchase deposits | Equipment purchase deposits | 1,899 | | | 1,674 | | Equipment purchase deposits | 626 | | | 1,446 | |
| Total property and equipment, at cost | Total property and equipment, at cost | 48,239 | | | 52,976 | | Total property and equipment, at cost | 46,735 | | | 47,767 | |
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (16,318) | | | (18,335) | | Less accumulated depreciation and amortization | (17,241) | | | (16,393) | |
| Total property and equipment, net | Total property and equipment, net | 31,921 | | | 34,641 | | Total property and equipment, net | 29,494 | | | 31,374 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 7,942 | | | 8,694 | | Operating lease right-of-use assets | 7,762 | | | 7,994 | |
| Other assets | Other assets | | Other assets | |
| Goodwill | Goodwill | 4,091 | | | 4,091 | | Goodwill | 4,091 | | | 4,091 | |
| Intangibles, net of accumulated amortization of $734 and $704, respectively | 2,039 | | | 2,084 | | |
| Intangibles, net of accumulated amortization of $775 and $745, respectively | | Intangibles, net of accumulated amortization of $775 and $745, respectively | 1,998 | | | 2,029 | |
| Deferred tax asset | Deferred tax asset | 2,450 | | | 689 | | Deferred tax asset | 3,440 | | | 3,235 | |
| Other assets | Other assets | 1,521 | | | 1,164 | | Other assets | 1,761 | | | 1,671 | |
| Total other assets | Total other assets | 10,101 | | | 8,028 | | Total other assets | 11,290 | | | 11,026 | |
| Total assets | Total assets | $ | 71,318 | | | $ | 71,890 | | Total assets | $ | 73,055 | | | $ | 69,215 | |
| LIABILITIES AND STOCKHOLDER’S EQUITY | LIABILITIES AND STOCKHOLDER’S EQUITY | | | | LIABILITIES AND STOCKHOLDER’S EQUITY | | | |
| Current liabilities | Current liabilities | | Current liabilities | |
| Current maturities of long-term debt and finance leases | Current maturities of long-term debt and finance leases | $ | 2,713 | | | $ | 2,358 | | Current maturities of long-term debt and finance leases | $ | 1,804 | | | $ | 2,800 | |
| Accounts payable | Accounts payable | 999 | | | 1,990 | | Accounts payable | 1,695 | | | 1,116 | |
| Accrued salaries and wages | Accrued salaries and wages | 1,859 | | | 1,461 | | Accrued salaries and wages | 1,366 | | | 1,661 | |
| Air traffic liability | Air traffic liability | 4,903 | | | 4,808 | | Air traffic liability | 6,450 | | | 4,757 | |
| Loyalty program liability | Loyalty program liability | 2,051 | | | 3,193 | | Loyalty program liability | 2,791 | | | 2,033 | |
| Operating lease liabilities | Operating lease liabilities | 1,724 | | | 1,695 | | Operating lease liabilities | 1,480 | | | 1,641 | |
| Other accrued liabilities | Other accrued liabilities | 2,093 | | | 2,055 | | Other accrued liabilities | 2,196 | | | 2,300 | |
| Total current liabilities | Total current liabilities | 16,342 | | | 17,560 | | Total current liabilities | 17,782 | | | 16,308 | |
| Noncurrent liabilities | Noncurrent liabilities | | Noncurrent liabilities | |
| Long-term debt and finance leases, net of current maturities | Long-term debt and finance leases, net of current maturities | 26,478 | | | 20,684 | | Long-term debt and finance leases, net of current maturities | 30,830 | | | 26,182 | |
| Pension and postretirement benefits | Pension and postretirement benefits | 6,267 | | | 6,008 | | Pension and postretirement benefits | 6,455 | | | 7,027 | |
| Loyalty program liability | Loyalty program liability | 7,043 | | | 5,422 | | Loyalty program liability | 6,404 | | | 7,162 | |
| Operating lease liabilities | Operating lease liabilities | 6,655 | | | 7,388 | | Operating lease liabilities | 6,533 | | | 6,739 | |
| Other liabilities | Other liabilities | 1,545 | | | 1,406 | | Other liabilities | 1,363 | | | 1,449 | |
| Total noncurrent liabilities | Total noncurrent liabilities | 47,988 | | | 40,908 | | Total noncurrent liabilities | 51,585 | | | 48,559 | |
| Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | 0 | | 0 |
| Stockholder’s equity | Stockholder’s equity | | Stockholder’s equity | |
| Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding | Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding | 0 | | | 0 | | Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding | — | | | — | |
| Additional paid-in capital | Additional paid-in capital | 17,028 | | | 16,903 | | Additional paid-in capital | 17,129 | | | 17,050 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (6,569) | | | (6,423) | | Accumulated other comprehensive loss | (7,049) | | | (7,194) | |
| Retained earnings (deficit) | (3,471) | | | 2,942 | | |
| Retained deficit | | Retained deficit | (6,392) | | | (5,508) | |
| Total stockholder's equity | Total stockholder's equity | 6,988 | | | 13,422 | | Total stockholder's equity | 3,688 | | | 4,348 | |
| Total liabilities and stockholder’s equity | Total liabilities and stockholder’s equity | $ | 71,318 | | | $ | 71,890 | | Total liabilities and stockholder’s equity | $ | 73,055 | | | $ | 69,215 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)(Unaudited)
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | (90) | | | $ | 2,910 | | Net cash provided by (used in) operating activities | $ | 4,392 | | | $ | (90) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
| Capital expenditures and aircraft purchase deposits | (1,781) | | | (3,043) | | |
| Capital expenditures, net of aircraft purchase deposit returns | | Capital expenditures, net of aircraft purchase deposit returns | (1) | | | (1,781) | |
| Proceeds from sale-leaseback transactions | Proceeds from sale-leaseback transactions | 433 | | | 629 | | Proceeds from sale-leaseback transactions | 168 | | | 433 | |
| Proceeds from sale of property and equipment | Proceeds from sale of property and equipment | 251 | | | 42 | | Proceeds from sale of property and equipment | 181 | | | 251 | |
| Purchases of short-term investments | Purchases of short-term investments | (7,086) | | | (2,878) | | Purchases of short-term investments | (15,145) | | | (7,086) | |
| Sales of short-term investments | Sales of short-term investments | 2,603 | | | 2,524 | | Sales of short-term investments | 7,540 | | | 2,603 | |
| Increase in restricted short-term investments | Increase in restricted short-term investments | (317) | | | (2) | | Increase in restricted short-term investments | (330) | | | (317) | |
| Other investing activities | Other investing activities | (112) | | | (68) | | Other investing activities | (96) | | | (112) | |
| Net cash used in investing activities | Net cash used in investing activities | (6,009) | | | (2,796) | | Net cash used in investing activities | (7,683) | | | (6,009) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | 8,743 | | | 2,800 | | Proceeds from issuance of long-term debt | 10,115 | | | 8,743 | |
| Payments on long-term debt and finance leases | Payments on long-term debt and finance leases | (2,512) | | | (2,835) | | Payments on long-term debt and finance leases | (6,615) | | | (2,512) | |
| Deferred financing costs | Deferred financing costs | (122) | | | (41) | | Deferred financing costs | (174) | | | (122) | |
| Net cash provided by (used in) financing activities | 6,109 | | | (76) | | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 3,326 | | | 6,109 | |
| Net increase in cash and restricted cash | Net increase in cash and restricted cash | 10 | | | 38 | | Net increase in cash and restricted cash | 35 | | | 10 | |
| Cash and restricted cash at beginning of period | Cash and restricted cash at beginning of period | 277 | | | 276 | | Cash and restricted cash at beginning of period | 385 | | | 277 | |
Cash and restricted cash at end of period (1) | Cash and restricted cash at end of period (1) | $ | 287 | | | $ | 314 | | Cash and restricted cash at end of period (1) | $ | 420 | | | $ | 287 | |
| | Non-cash transactions: | Non-cash transactions: | | Non-cash transactions: | |
Right-of-use (ROU) assets acquired through operating leases
| Right-of-use (ROU) assets acquired through operating leases
| $ | 459 | | | $ | 853 | | Right-of-use (ROU) assets acquired through operating leases | $ | 909 | | | $ | 459 | |
| Property and equipment acquired through finance leases | | Property and equipment acquired through finance leases | 127 | | | — | |
| Operating lease conversion to finance lease | | Operating lease conversion to finance lease | 102 | | | — | |
| Settlement of bankruptcy obligations | Settlement of bankruptcy obligations | 56 | | | 7 | | Settlement of bankruptcy obligations | — | | | 56 | |
| Deferred financing costs paid through issuance of debt | Deferred financing costs paid through issuance of debt | 17 | | | 0 | | Deferred financing costs paid through issuance of debt | — | | | 17 | |
| Property and equipment acquired through finance leases | 0 | | | 46 | | |
| Supplemental information: | Supplemental information: | | Supplemental information: | |
| Interest paid, net | Interest paid, net | 668 | | | 772 | | Interest paid, net | 1,174 | | | 668 | |
| Income taxes paid | Income taxes paid | 2 | | | 5 | | Income taxes paid | 1 | | | 2 | |
(1)The following table provides a reconciliation of cash and restricted cash to amounts reported within the condensed consolidated balance sheets:
| | Cash | Cash | $ | 243 | | | $ | 303 | | Cash | $ | 282 | | | $ | 243 | |
| Restricted cash included in restricted cash and short-term investments | Restricted cash included in restricted cash and short-term investments | 44 | | | 11 | | Restricted cash included in restricted cash and short-term investments | 138 | | | 44 | |
| Total cash and restricted cash | Total cash and restricted cash | $ | 287 | | | $ | 314 | | Total cash and restricted cash | $ | 420 | | | $ | 287 | |
See accompanying notes to condensed consolidated financial statements.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In millions)(Unaudited)
| | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings (Deficit) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Deficit | | Total |
| Balance at December 31, 2019 | $ | 0 | | | $ | 16,903 | | | $ | (6,423) | | | $ | 2,942 | | | $ | 13,422 | | |
| Net loss | — | | | — | | | — | | | (2,169) | | | (2,169) | | |
| Other comprehensive loss, net | — | | | — | | | (149) | | | — | | | (149) | | |
| Share-based compensation expense | — | | | 18 | | | — | | | — | | | 18 | | |
| Intercompany equity transfer | — | | | 56 | | | — | | | — | | | 56 | | |
| Balance at March 31, 2020 | 0 | | | 16,977 | | | (6,572) | | | 773 | | | 11,178 | | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | — | | | $ | 17,050 | | | $ | (7,194) | | | $ | (5,508) | | | $ | 4,348 | |
| Net loss | Net loss | — | | | — | | | — | | | (1,968) | | | (1,968) | | Net loss | — | | | — | | | — | | | (1,215) | | | (1,215) | |
| Other comprehensive income, net | Other comprehensive income, net | — | | | — | | | 17 | | | — | | | 17 | | Other comprehensive income, net | — | | | — | | | 66 | | | — | | | 66 | |
| Share-based compensation expense | Share-based compensation expense | — | | | 31 | | | — | | | — | | | 31 | | Share-based compensation expense | — | | | 38 | | | — | | | — | | | 38 | |
| Balance at June 30, 2020 | 0 | | | 17,008 | | | (6,555) | | | (1,195) | | | 9,258 | | |
| Net loss | — | | | — | | | — | | | (2,276) | | | (2,276) | | |
| Other comprehensive loss, net | — | | | — | | | (14) | | | — | | | (14) | | |
| Balance at March 31, 2021 | | Balance at March 31, 2021 | — | | | 17,088 | | | (7,128) | | | (6,723) | | | 3,237 | |
| Net income | | Net income | — | | | — | | | — | | | 51 | | | 51 | |
| Other comprehensive income, net | | Other comprehensive income, net | — | | | — | | | 39 | | | — | | | 39 | |
| Share-based compensation expense | Share-based compensation expense | — | | | 20 | | | — | | | — | | | 20 | | Share-based compensation expense | — | | | 20 | | | — | | | — | | | 20 | |
| Balance at September 30, 2020 | $ | 0 | | | $ | 17,028 | | | $ | (6,569) | | | $ | (3,471) | | | $ | 6,988 | | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | — | | | 17,108 | | | (7,089) | | | (6,672) | | | 3,347 | |
| Net income | | Net income | — | | | — | | | — | | | 280 | | | 280 | |
| Other comprehensive income, net | | Other comprehensive income, net | — | | | — | | | 40 | | | — | | | 40 | |
| Share-based compensation expense | | Share-based compensation expense | — | | | 21 | | | — | | | — | | | 21 | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | — | | | $ | 17,129 | | | $ | (7,049) | | | $ | (6,392) | | | $ | 3,688 | |
| | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings
(Deficit) | | Total |
| Balance at December 31, 2018 | $ | 0 | | | $ | 16,802 | | | $ | (5,992) | | | $ | 960 | | | $ | 11,770 | | |
| Net income | — | | | — | | | — | | | 230 | | | 230 | | |
| Other comprehensive loss, net | — | | | — | | | (13) | | | — | | | (13) | | |
| Share-based compensation expense | — | | | 25 | | | — | | | — | | | 25 | | |
| Balance at March 31, 2019 | 0 | | | 16,827 | | | (6,005) | | | 1,190 | | | 12,012 | | |
| Net income | — | | | — | | | — | | | 714 | | | 714 | | |
| Balance at December 31, 2019 | | Balance at December 31, 2019 | $ | — | | | $ | 16,903 | | | $ | (6,423) | | | $ | 2,942 | | | $ | 13,422 | |
| Net loss | | Net loss | — | | | — | | | — | | | (2,169) | | | (2,169) | |
| Other comprehensive loss, net | Other comprehensive loss, net | — | | | — | | | (18) | | | — | | | (18) | | Other comprehensive loss, net | — | | | — | | | (149) | | | — | | | (149) | |
| Share-based compensation expense | Share-based compensation expense | — | | | 25 | | | — | | | — | | | 25 | | Share-based compensation expense | — | | | 18 | | | — | | | — | | | 18 | |
| Intercompany equity transfer | Intercompany equity transfer | — | | | 7 | | | — | | | — | | | 7 | | Intercompany equity transfer | — | | | 56 | | | — | | | — | | | 56 | |
| Balance at June 30, 2019 | 0 | | | 16,859 | | | (6,023) | | | 1,904 | | | 12,740 | | |
| Net income | — | | | — | | | — | | | 508 | | | 508 | | |
| Balance at March 31, 2020 | | Balance at March 31, 2020 | — | | | 16,977 | | | (6,572) | | | 773 | | | 11,178 | |
| Net loss | | Net loss | — | | | — | | | — | | | (1,968) | | | (1,968) | |
| Other comprehensive income, net | | Other comprehensive income, net | — | | | — | | | 17 | | | — | | | 17 | |
| Share-based compensation expense | | Share-based compensation expense | — | | | 31 | | | — | | | — | | | 31 | |
| Balance at June 30, 2020 | | Balance at June 30, 2020 | — | | | 17,008 | | | (6,555) | | | (1,195) | | | 9,258 | |
| Net loss | | Net loss | — | | | — | | | — | | | (2,276) | | | (2,276) | |
| Other comprehensive loss, net | Other comprehensive loss, net | — | | | — | | | (19) | | | — | | | (19) | | Other comprehensive loss, net | — | | | — | | | (14) | | | — | | | (14) | |
| Share-based compensation expense | Share-based compensation expense | — | | | 22 | | | — | | | — | | | 22 | | Share-based compensation expense | — | | | 20 | | | — | | | — | | | 20 | |
| Intercompany equity transfer | — | | | 0 | | | — | | | 9 | | | 9 | | |
| Balance at September 30, 2019 | $ | 0 | | | $ | 16,881 | | | $ | (6,042) | | | $ | 2,421 | | | $ | 13,260 | | |
| Balance at September 30, 2020 | | Balance at September 30, 2020 | $ | — | | | $ | 17,028 | | | $ | (6,569) | | | $ | (3,471) | | | $ | 6,988 | |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Airlines, Inc. (American) should be read in conjunction with the consolidated financial statements contained in American’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation. See Note 9 for further information.
(b) Impact of Coronavirus (COVID-19)
COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, “shelter in place”“stay at home” orders and business closures. As a result, American has experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in its revenues. While American's business performed largely as expected in Januaryglobal vaccination efforts are underway and February of 2020, a severe reduction indemand for air travel starting in March 2020 resulted in its total operatinghas begun to return, American's revenues decreasing approximately 20% incontinued to improve during the first quarter of 2020, 86% in the second quarter of 2020 and 73% in the third quarter of 2020 as compared to the first, second and third quarters of 2019, respectively. While2021, although recovery was weaker than previous expectations, primarily due to the lengthrise in COVID-19 cases associated with the delta variant and severitythe continuation or reimposition of restrictions on global travel. The continued impact of the reductionCOVID-19 pandemic, including any increases in demand dueinfection rates, new variants and renewed governmental action to slow the spread of COVID-19 is uncertain, American expects its results of operations for the remainder of 2020 tocannot be severely impacted.estimated.
American has taken aggressive actions to mitigate the effecteffects of the COVID-19 pandemic on its business, including deep capacity reductions, structural changes to its fleet, cost reductions, and steps to preserve cash and improve its overall liquidity position. American remains extremely focused on taking all self-help measures available to manage its business during this unprecedented time,position, consistent with the terms of the financial assistance it has received from the U.S. Government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.Act (CARES Act), Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) and Section 7301 of the American Rescue Plan Act of 2021 (the ARP).
Capacity Reductions
American has significantly reduced itsAmerican's capacity (as measured by available seat miles), continues to be significantly reduced compared to pre-COVID-19 pandemic levels, with flying during the third quarter of 2020 flying decreased by 59% year-over-year and fourth2021 down 19.4% as compared to the third quarter of 2020 flying expected to decrease by more than 50% year-over-year, with long-haul2019. Domestic capacity in the third quarter of 2021 was down 4.7% while international capacity was down approximately 75% year-over-year. The45.9% versus the third quarter of 2019.
While demand environmentfor domestic and short-haul international markets has largely recovered to 2019 levels, uncertainty continues to be uncertain as COVID-19 cases have continued to fluctuate in jurisdictions to which American flies and travel restrictions have generally remained in place. Due to this uncertainty,exist. American will continue to adjustmatch its futureforward capacity to match developingwith observed booking trends in bookings for future travel and make further adjustments to itsAmerican's capacity as needed.
FleetCost Reductions
To better align American’s network with lower passenger demand, American accelerated the retirement of Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. These retirements remove complexity from its operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types. See Note 12 for further information on the accounting for American's fleet retirements. Due to the inherent uncertainties of the current operating environment, American will continue to evaluate its current fleet and may decide to permanently retire additional aircraft. In addition, American has placedreduced its 2021 operating expenditures as a numberresult of Boeing 737-800permanent non-volume cost reductions and certain regional aircraftother efficiency measures. These reductions include labor productivity enhancements, management salaries and benefits and other permanent cost reductions. Also, during the first quarter of 2021, an additional 1,600 represented team members opted into temporary storage.a voluntary early retirement program.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Cost Reductions
American is moving quickly to better align its costs with its reduced schedule. In aggregate, American estimates that it has reduced its 2020 operating and capital expenditures by approximately $17.0 billion. These savings have been achieved primarily through capacity reductions. In addition, American has implemented a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing all non-critical facility investments and information technology projects. American has also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs, decreased its management and support staff team, including officers, by approximately 5,100 positions, or 30%, and, as necessary, undertaken furloughs, to reduce its labor costs consistent with its obligations under the CARES Act. In total, more than 20,000 team members have opted for an early retirement or long-term paid leave and approximately 19,000 team members were furloughed starting October 1, 2020. Additionally, American has made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.
Liquidity
AtAs of September 30, 2020,2021, American had $13.6$17.9 billion in total available liquidity, consisting of $8.3$14.5 billion in unrestricted cash and short-term investments, $4.9$2.8 billion in an undrawn term loan facilitycapacity under the CARES Actrevolving credit facilities and $400a total of $570 million in an undrawn short-term revolving facility.and other facilities.
During the first nine months of 2020,2021, American completed the following financing transactions (see Note 4 for further information):
•refinancedissued $3.5 billion in aggregate principal amount of 5.50% Senior Secured Notes due 2026 and $3.0 billion in aggregate principal amount of 5.75% Senior Secured Notes due 2029 and entered into the $1.2$3.5 billion 2014AAdvantage Term Loan Facility of which the full amount of term loans was drawn at a lower interest rate and extended the maturity from 2021 to 2027;closing;
•raised $1.0 billion from a senior secured delayed draw term loan credit facility;
•borrowedrepaid in full $750 million under the 2013 Revolving Facility, $1.6 billion under the 2014 Revolving Facility and $450 million under the April 2016 Revolving Facility;Facility, all of which was borrowed in the second quarter of 2020 in response to the COVID-19 pandemic;
•issued $2.5 billion in aggregate principal amount of 11.75% senior secured notes due 2025 and repaid the $1.0 billion senior secured delayed draw term loan credit facility that American borrowed in March 2020;
•issued approximately $360$550 million in special facility revenue bonds, of which $47 million was used to fundoutstanding loans under, and terminated, the redemption of certain outstanding bonds;
•entered into a $5.5$7.5 billion secured term loan facility with the U.S. Department of the Treasury (Treasury), of which American borrowed $550 million (see below for additional information on the (the Treasury Loan Agreement);
•issued $1.2 billionapproximately $150 million in aggregate principal amountspecial facility revenue bonds related to John F. Kennedy International Airport (JFK), of two serieswhich $62 million was used to fund the redemption of 10.75% senior secured notes due 2026 secured by various collateral;other bonds related to JFK;
•raised $392repaid in full $950 million from aircraft sale-leaseback transactions;of the outstanding balance under, and terminated, the April 2016 Spare Parts Term Loan Facility; and
•raised $323$168 million principally from enhanced equipment trust certificates (EETCs) and other aircraft and flight equipment financings, of which $17 million was used to repay existing indebtedness.sale-leaseback transactions.
In addition to the foregoing financings, during the first quarter of 2021, AAG and the Subsidiaries (as defined below) were initially approved to receivereceived an aggregate of $5.8approximately $3.1 billion in financial assistance to be paid in installments through the payroll support program (Payroll Support Program)(PSP2) established under the CARES Act, all of which was received by the end of July 2020. On September 30, 2020,PSP Extension Law. In April 2021, AAG and the Subsidiaries received an additional installment of $168$463 million for a totalan aggregate of $6.0$3.5 billion of such financial assistance under PSP2. In connection with AAG and asthe Subsidiaries receipt of this financial assistance, AAG issued a result, the promissory note (the PSPPSP2 Promissory Note) previously issued to Treasury for $1.7 billion was revised upwards to $1.8$1.0 billion in aggregate principal amount and warrants to purchase up to an aggregate of approximately 13.76.6 million shares (the PSP2 Warrant Shares) of AAG common stock were revised upwardsstock.
In the second quarter of 2021, AAG and the Subsidiaries received an aggregate of approximately $3.3 billion in financial assistance through the payroll support program (PSP3) established under the ARP. In connection with AAG and the Subsidiaries receipt of this financial assistance, AAG issued a promissory note (the PSP3 Promissory Note) to 14.1Treasury for $946 million in aggregate principal amount and warrants to purchase up to an aggregate of approximately 4.4 million shares (the PSPPSP3 Warrant Shares) of AAG common stock. See below for further discussion on the Payroll Support Program.PSP2 and PSP3.
Also, American is permitted to, and will, defer payment of the employerA significant portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022). This
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
deferral is expected to provide approximately $300 million in additional liquidity during 2020. Additionally, AAG has suspended its capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act are applicable.
American continues to evaluate future financing opportunities and work with third-party appraisers on valuations of its remaining unencumbered assets.
Certain of American’s debt financing agreements contain covenants requiring it to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value, andcollateral coverage and/or debt service coverage ratio covenants.
Given the above actions and American’s current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, American expects to meet its cash obligations as well as remain in compliance with the debt covenants in its existing financing agreements for the next 12 months based on its current level of unrestricted cash and short-term investments, its anticipated access to liquidity (including via proceeds from financings and funds from government assistance obtained pursuant to the CARES Act)financings), and projected cash flows from operations.
Payroll Support ProgramPSP2
On April 20, 2020January 15, 2021 (the PSPPSP2 Closing Date), American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries), each a wholly-owned subsidiary of AAG, entered into a Payroll Support Program Extension Agreement (the PSPPSP2 Agreement) with Treasury, with respect to the Payroll Support ProgramPSP2 as provided pursuant to the CARES Act.PSP Extension Law. In connection with AAG and the Subsidiaries'Subsidiaries’ entry into the PSPPSP2 Agreement, on the PSPPSP2 Closing Date, AAG also entered into a warrant agreement (the PSPPSP2 Warrant Agreement) with Treasury and AAG issued the PSPPSP2 Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).guarantors.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
PSP2 Agreement
In connection with the Payroll Support Program,PSP2, AAG and the Subsidiaries are required to comply with the relevant provisions of the PSP Extension Law, which are substantially similar to the restrictions contained in the Payroll Support Program Agreement entered into by the Subsidiaries with Treasury in connection with the payroll support program established under the CARES Act including(the PSP1 Agreement), but are in effect for a longer time period. These provisions include the requirement that funds provided pursuant to the PSPPSP2 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the requirementprohibition against involuntary furloughs and reductions in employee pay rates and benefits which expired on September 30, 2020, the requirement that certain levels of commercial air service be maintained andthrough March 31, 2021, the provisions that prohibit the repurchase of AAG common stock and the payment of common stock dividends through September 30, 2021, as well as thoseat least March 31, 2022, the provisions that restrict the payment of certain executive compensation until March 24, 2022. The PSPat least October 1, 2022, and a requirement to recall employees involuntarily terminated or furloughed after September 30, 2020. As was the case with PSP1, the PSP2 Agreement also imposes substantial reporting obligations on AAG and theits Subsidiaries. As of September 30, 2020, AAG and the Subsidiaries received a secured loan from Treasury under the loan program that is due June 2025 and, as a result, the stock repurchase, dividend and executive compensation restrictions will remain in place through the date that is one year after such secured loan is fully repaid. See below for additional information on the Treasury Loan Agreement.
Pursuant to the PSPPSP2 Agreement, Treasury provided to AAG and theits Subsidiaries financial assistance which was paid in three installments (each, an Installment) and totaled an aggregate oftotaling approximately $5.8$3.5 billion initially and was subsequently increased to $6.0 billion, and all of which has been received as of September 30, 2020.in the aggregate. As partial compensation to the U.S. Government for the provision of financial assistance under the Payroll Support Program,PSP2, AAG issued a totalthe PSP2 Promissory Note in the aggregate principal amount of approximately $1.8$1.0 billion under the PSP Promissory Note and issued warrants (each a PSPPSP2 Warrant and, collectively, the PSPPSP2 Warrants) to Treasury to purchase up to an aggregate of approximately 14.16.6 million PSP Warrant Shares.shares of AAG common stock for an exercise price of $15.66 per share, subject to adjustment. See Note 6 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the PSP Promissory Note and below for more information on the PSPPSP2 Warrant Agreement and the PSPPSP2 Warrants.
For accounting purposes, the $6.0$3.5 billion of aggregate financial assistance AAG and the Subsidiaries received pursuant to the PSPPSP2 Agreement is allocated to the PSPPSP2 Promissory Note, the PSPPSP2 Warrants and other Payroll Support ProgramPSP2 financial assistance (the PSPPSP2 Financial Assistance). The $1.0 billion aggregate principal amount of approximately $1.8 billion of PSPthe PSP2 Promissory Note was recorded as unsecured long-term debt, and the $76 million total fair value of the PSPPSP2 Warrants, of $63 million, estimated using a Black-Scholes option pricing model, was recorded in stockholders' equitydeficit in AAG's condensed consolidated balance sheet. The remaining amount of approximately $4.2$2.4 billion of PSPPSP2 Financial Assistance was recognized as a credit to special items, net in the condensed consolidated statement of operations primarily in the second and third quartersfirst quarter of 2020,2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
required. The third installment was received and recognized as a credit to special items, net in the second quarter of 2021. For the three and nine months ended September 30, 2020,2021, approximately $2.1$2.4 billion and $4.2 billion, respectively,of PSP2 Financial Assistance was recognized as a credit to special items, net in the condensed consolidated statement of operations.
PSPPSP2 Warrant Agreement and PSPPSP2 Warrants
As partial compensation to the U.S. Government for the provision of financial assistance under the PSPPSP2 Agreement, and pursuant to the PSPPSP2 Warrant Agreement, AAG has agreed to issue warrantsissued the PSP2 Warrants to Treasury to purchase up to an aggregate of approximately 14.1 million PSPPSP2 Warrant Shares of AAG common stock.Shares. The exercise price of the PSPPSP2 Warrant Shares is $12.51$15.66 per share, (which was the closing price of AAG common stock on The Nasdaq Global Select Market on April 9, 2020) (the Exercise Price) subject to certain anti-dilution provisions provided for in the PSP Warrant.PSP2 Warrants.
Pursuant to the PSPPSP2 Warrant Agreement, on the PSP Closing Date, May 29, 2020, June 30, 2020, July 30, 2020 and September 30, 2020, AAG issued to Treasury a PSP WarrantPSP2 Warrants to purchase up to an aggregate of approximately 6.76.6 million shares 2.8 million shares, 2.8 million shares, 1.4 million shares and 0.4 million shares, respectively, of AAG common stock based on the terms described herein.for an exercise price of $15.66 per share, subject to adjustment.
The PSPPSP2 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSPPSP2 Warrant expires on the fifth anniversary of the date of issuance of such PSPPSP2 Warrant. The PSPPSP2 Warrants will be exercisable either through net share settlement or cash, at AAG'sAAG’s option. The PSPPSP2 Warrants were issued solely as compensation to the U.S. Government related to entry into the PSPPSP2 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSPPSP2 Warrants or will be received upon exercise thereof.
Treasury Loan AgreementPSP3
On September 25, 2020April 23, 2021 (the Treasury LoanPSP3 Closing Date), AAGAmerican, Envoy, Piedmont and AmericanPSA (collectively, the Subsidiaries), entered into a Loan and GuaranteePayroll Support Program 3 Agreement (the Treasury LoanPSP3 Agreement) with Treasury, with respect to PSP3 as provided pursuant to the ARP. In connection with AAG and the Subsidiaries’ entry into the PSP3 Agreement, on the PSP3 Closing Date, AAG also entered into a warrant agreement (the PSP3 Warrant Agreement) with Treasury and issued the PSP3 Promissory Note to Treasury, with the Subsidiaries as guarantors.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
PSP3 Agreement
In connection with PSP3, AAG and the Subsidiaries are required to comply with the relevant provisions of the ARP, which providesare substantially similar to the restrictions contained in the PSP1 Agreement, but are in effect for a secured term loan facility (the Treasury Term Loan Facility)longer time period. These provisions include the requirement that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, AAG and American entered into an amendmentfunds provided pursuant to the Treasury LoanPSP3 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits through at least September 30, 2021, the provisions that permits American to borrow up to $7.5 billion. The Treasury Loan Agreement will involveprohibit the issuance of additional warrants to purchase up to an aggregate of approximately 60.0 million sharesrepurchase of AAG common stock assumingand the Treasury Term Loan Facility is fully drawn. Aspayment of common stock dividends through at least September 30, 2020, American borrowed $5502022, and the provisions that restrict the payment of certain executive compensation until April 1, 2023. As was the case with PSP1 and PSP2, the PSP3 Agreement also imposes substantial reporting obligations on AAG and the Subsidiaries.
Pursuant to the PSP3 Agreement, Treasury provided AAG and the Subsidiaries financial assistance in two installments totaling approximately $3.3 billion in the aggregate. As partial compensation to the U.S. Government for the provision of financial assistance under PSP3, AAG issued the PSP3 Promissory Note in the aggregate principal amount of $946 million under the Treasury Term Loan Facility, which is scheduled to mature on June 30, 2025, and issued warrants (each a PSP3 Warrant and, collectively, the PSP3 Warrants) to Treasury to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock.stock for an exercise price of $21.75 per share, subject to adjustment. See Note 4 for further information on the Treasury Loan Agreement and below for more information on the Treasury LoanPSP3 Warrant Agreement and Treasury LoanPSP3 Warrants.
Treasury LoanFor accounting purposes, the $3.3 billion of aggregate financial assistance AAG and the Subsidiaries received pursuant to the PSP3 Agreement is allocated to the PSP3 Promissory Note, the PSP3 Warrants and other PSP3 financial assistance (the PSP3 Financial Assistance). The $946 million aggregate principal amount of the PSP3 Promissory Note was recorded as unsecured long-term debt, and the $46 million total fair value of the PSP3 Warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in AAG's condensed consolidated balance sheet. The remaining amount of approximately $2.3 billion of PSP3 Financial Assistance was recognized as a credit to special items, net in the condensed consolidated statements of operations in the second and third quarters of 2021, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required. For the three and nine months ended September 30, 2021, approximately $1.1 billion and $2.3 billion of PSP3 Financial Assistance, respectively, was recognized as a credit to special items, net in the condensed consolidated statements of operations.
PSP3 Warrant Agreement and PSP3 Warrants
In connection with the Treasury Loan Agreement, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury. PursuantAs partial compensation to the Treasury LoanU.S. Government for the provision of financial assistance under the PSP3 Agreement, and pursuant to the PSP3 Warrant Agreement, AAG agreed to issue warrants (each a Treasury Loan Warrant and, collectively,issued the Treasury Loan Warrants)PSP3 Warrants to Treasury to purchase up to an aggregate of approximately 60.0 million shares (the Treasury LoanPSP3 Warrant Shares) of AAG's common stock based on the $7.5 billion commitment amount under the Treasury Term Loan Facility.Shares. The exercise price of the Treasury LoanPSP3 Warrant Shares is $12.51$21.75 per share, (the Exercise Price) subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement. For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity in AAG's condensed consolidated balance sheet with an offsetting debt discount to the Treasury Term Loan Facility in American's condensed consolidated balance sheet.PSP3 Warrants.
Pursuant to the Treasury LoanPSP3 Warrant Agreement, on the Treasury Loan Closing Date, AAG issued to Treasury a Treasury Loan WarrantPSP3 Warrants to purchase up to an aggregate of approximately 4.4 million Treasury Loan Warrant Shares based on the terms described herein. On the dateshares of each additional borrowing under the Treasury Loan Agreement, AAG will issuecommon stock for an exercise price of $21.75 per share, subject to Treasury an additional Treasury Loan Warrant for a number of Treasury Loan Warrant Shares equal to 10% of such borrowing, divided by the Exercise Price.adjustment.
The Treasury LoanPSP3 Warrants do not have any voting rights and are freely transferrable, with registration rights. Each Treasury LoanPSP3 Warrant expires on the fifth anniversary of the date of issuance of such Treasury LoanPSP3 Warrant. The Treasury LoanPSP3 Warrants will be exercisable either through net share settlement or cash, at AAG's option. The Treasury LoanPSP3 Warrants were issued solely as compensation to the U.S. Government related to entry into the Treasury LoanPSP3 Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the Treasury LoanPSP3 Warrants or will be received upon exercise thereof.
(c) Recent Accounting Pronouncement
Accounting Standards Update 2019-12: Simplifying the Accounting for Income Taxes (Topic 740)
This standard simplifies the accounting and disclosure requirements for income taxes by clarifying the existing guidance to improve consistency in the application of Accounting Standards Codification 740. This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly-owned subsidiaries that are not subject to income tax. American adopted this standard effective January 1, 2021, and it did not have a material impact on its condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
(c) Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2016-13: Measurement of Credit Losses on Financial Instruments
This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. American adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on American's condensed consolidated financial statements.
ASU 2020-06: Accounting for Convertible Instruments and Contracts In An Entity's Own Equity
This ASU simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, this ASU amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt this ASU using either a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning after December 15, 2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020. This ASU is applicable to AAG's 6.50% convertible senior notes due 2025, and AAG is assessing the impact the adoption of this ASU will have on its condensed consolidated financial statements.
2. Special Items, Net
Special items, net in the condensed consolidated statements of operations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
PSP Financial Assistance (1) | $ | (1,908) | | | $ | 0 | | | $ | (3,710) | | | $ | 0 | |
Severance expenses (2) | 871 | | | 0 | | | 1,408 | | | 0 | |
Fleet impairment (3) | 742 | | | 201 | | | 1,484 | | | 201 | |
Labor contract expenses (4) | 0 | | | 0 | | | 228 | | | 0 | |
Mark-to-market adjustments on bankruptcy obligations, net (5) | 0 | | | (22) | | | (49) | | | (18) | |
Fleet restructuring expenses (6) | 0 | | | 72 | | | 0 | | | 232 | |
| Litigation reserve adjustments | 0 | | | (53) | | | 0 | | | (53) | |
| Merger integration expenses | 0 | | | 29 | | | 0 | | | 106 | |
| Other operating special items, net | 0 | | | 1 | | | (18) | | | 19 | |
| Mainline operating special items, net | (295) | | | 228 | | | (657) | | | 487 | |
| | | | | | | |
PSP Financial Assistance (1) | (228) | | | 0 | | | (444) | | | 0 | |
Fleet impairment (3) | 0 | | | 0 | | | 106 | | | 0 | |
| Regional operating special items, net | (228) | | | 0 | | | (338) | | | 0 | |
| Operating special items, net | (523) | | | 228 | | | (995) | | | 487 | |
| | | | | | | |
Mark-to-market adjustments on equity and other investments, net (7) | (21) | | | 45 | | | 159 | | | 37 | |
| Debt refinancing, extinguishment and other charges | 0 | | | 7 | | | 48 | | | 14 | |
| Nonoperating special items, net | (21) | | | 52 | | | 207 | | | 51 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
PSP Financial Assistance (1) | $ | (992) | | | $ | (1,908) | | | $ | (4,162) | | | $ | (3,710) | |
Severance expenses (2) | — | | | 871 | | | 168 | | | 1,408 | |
Mark-to-market adjustments on bankruptcy obligations, net (3) | (1) | | | — | | | 5 | | | (49) | |
Fleet impairment (4) | — | | | 742 | | | — | | | 1,484 | |
Labor contract expenses (5) | — | | | — | | | — | | | 228 | |
| Other operating special items, net | 3 | | | — | | | 3 | | | (18) | |
| Mainline operating special items, net | (990) | | | (295) | | | (3,986) | | | (657) | |
| | | | | | | |
PSP Financial Assistance (1) | (128) | | | (228) | | | (539) | | | (444) | |
Fleet impairment (4) | — | | | — | | | 27 | | | 106 | |
| Regional operating special items, net | (128) | | | (228) | | | (512) | | | (338) | |
| Operating special items, net | (1,118) | | | (523) | | | (4,498) | | | (995) | |
| | | | | | | |
Mark-to-market adjustments on equity and other investments, net (6) | 16 | | | (21) | | | 3 | | | 159 | |
| Debt refinancing, extinguishment and other, net | 2 | | | — | | | 28 | | | 48 | |
| Nonoperating special items, net | 18 | | | (21) | | | 31 | | | 207 | |
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP Agreement.PSP2 and PSP3 Agreements. See Note 11(b) for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2)Severance expenses principally include salary and medical costs primarily associated with certain team members who opted in tointo voluntary early retirement programs offered as a result of reductions to American's operation due to COVID-19.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
These expenses inthe COVID-19 pandemic. Cash payments primarily related to American's voluntary early retirement programs were approximately $190 million and $480 million for the three and nine months ended September 30, 2020 also include salary2021, respectively, and medical costs associated with team members who were notified in the third quarter of 2020 they were being involuntarily furloughed starting October 1, 2020, subsequent to the expiration of the Payroll Support Program requirement against involuntary furloughs. Cash payments related to these chargesapproximately $120 million and $170 million for the three and nine months ended September 30, 2020, were approximately $120 million and $170 million, respectively.
(3)Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG's stock price.
(4)Fleet impairment charges resulted from American's decision to retirethe retirement of certain aircraft earlier than planned driven primarily by the severe decline in air travel due to COVID-19. the COVID-19 pandemic. In the first nine months of 2021, American retired its remaining Embraer 140 fleet resulting in a non-cash write-down of these regional aircraft.
Aircraft retired includein 2020 included the entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft. See Note 12 for further information related to these charges.
TheDuring the three months ended September 30, 2020, includedAmerican recorded a $709 million non-cash write-down of Airbus A330-200 aircraft and associated spare parts and $33 million in cash charges primarily for lease return and other costs.
The During the nine months ended September 30, 2020, includedAmerican recorded a $1.5 billion non-cash write-down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.
(4)(5)Labor contract expenses primarily relaterelated to one-time charges resulting fromdue to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers for American's maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(6)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.
(7)(6)Mark-to-market adjustments on equity and other investments, net primarily relatesrelated to net unrealized gains and losses associated with American's equity investment in China Southern Airlines Company Limited (China Southern Airlines) and certain treasury rate lock derivative instruments.
3. Revenue Recognition
Revenue
The following are the significant categories comprising American's reported operating revenues (in millions):
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Passenger revenue: | Passenger revenue: | | | | | | | | Passenger revenue: | | | | | | | |
| Passenger travel | Passenger travel | $ | 2,407 | | | $ | 10,226 | | | $ | 10,491 | | | $ | 29,215 | | Passenger travel | $ | 7,287 | | | $ | 2,407 | | | $ | 16,177 | | | $ | 10,491 | |
Loyalty revenue - travel (1) | Loyalty revenue - travel (1) | 133 | | | 769 | | | 837 | | | 2,448 | | Loyalty revenue - travel (1) | 670 | | | 133 | | | 1,505 | | | 837 | |
| Total passenger revenue | Total passenger revenue | 2,540 | | | 10,995 | | | 11,328 | | | 31,663 | | Total passenger revenue | 7,957 | | | 2,540 | | | 17,682 | | | 11,328 | |
| Cargo | Cargo | 207 | | | 208 | | | 484 | | | 647 | | Cargo | 332 | | | 207 | | | 973 | | | 484 | |
| Other: | Other: | | | | | Other: | |
Loyalty revenue - marketing services | Loyalty revenue - marketing services | 389 | | | 570 | | | 1,317 | | | 1,742 | | Loyalty revenue - marketing services | 585 | | | 389 | | | 1,571 | | | 1,317 | |
| Other revenue | Other revenue | 36 | | | 137 | | | 179 | | | 397 | | Other revenue | 94 | | | 36 | | | 228 | | | 179 | |
| Total other revenue | Total other revenue | 425 | | | 707 | | | 1,496 | | | 2,139 | | Total other revenue | 679 | | | 425 | | | 1,799 | | | 1,496 | |
| Total operating revenues | Total operating revenues | $ | 3,172 | | | $ | 11,910 | | | $ | 13,308 | | | $ | 34,449 | | Total operating revenues | $ | 8,968 | | | $ | 3,172 | | | $ | 20,454 | | | $ | 13,308 | |
(1)Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
The following is American's total passenger revenue by geographic region (in millions):
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Domestic | Domestic | $ | 2,296 | | | $ | 7,814 | | | $ | 9,102 | | | $ | 23,048 | | Domestic | $ | 6,547 | | | $ | 2,296 | | | $ | 14,646 | | | $ | 9,102 | |
| Latin America | Latin America | 172 | | | 1,218 | | | 1,386 | | | 3,829 | | Latin America | 957 | | | 172 | | | 2,375 | | | 1,386 | |
| Atlantic | Atlantic | 56 | | | 1,596 | | | 621 | | | 3,677 | | Atlantic | 408 | | | 56 | | | 555 | | | 621 | |
| Pacific | Pacific | 16 | | | 367 | | | 219 | | | 1,109 | | Pacific | 45 | | | 16 | | | 106 | | | 219 | |
| Total passenger revenue | Total passenger revenue | $ | 2,540 | | | $ | 10,995 | | | $ | 11,328 | | | $ | 31,663 | | Total passenger revenue | $ | 7,957 | | | $ | 2,540 | | | $ | 17,682 | | | $ | 11,328 | |
American attributes passenger revenue by geographic region based upon the origin and destination of each flight segment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Contract Balances
American's significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on the condensed consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on the condensed consolidated balance sheets.
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| | (In millions) | | | (In millions) |
| Loyalty program liability | Loyalty program liability | $ | 9,094 | | | $ | 8,615 | | Loyalty program liability | $ | 9,195 | | | $ | 9,195 | |
| Air traffic liability | Air traffic liability | 4,903 | | | 4,808 | | Air traffic liability | 6,450 | | | 4,757 | |
| Total | Total | $ | 13,997 | | | $ | 13,423 | | Total | $ | 15,645 | | | $ | 13,952 | |
The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
| | | | | |
Balance at December 31, 20192020 | $ | 8,6159,195 | |
| Deferral of revenue | 1,4561,544 | |
Recognition of revenue (1) | (977)(1,544) | |
Balance at September 30, 20202021 (2) | $ | 9,0949,195 | |
(1)Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.
(2)Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. In response to the COVID-19 pandemic, American suspended the expiration of mileage credits through December 31, 2020.2021 and eliminated mileage reinstatement fees for canceled award tickets. As of September 30, 2020,2021, American's current loyalty program liability was $2.1$2.8 billion and represents American's current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter. Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, American will continue to monitor redemption patterns and may adjust its estimates in the future.
The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel. The balance in American's air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is generally one year. Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months. For the nine months ended September 30, 2020, $2.82021, $1.5 billion of revenue was recognized in passenger revenue that was included in American's air
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
traffic liability at December 31, 2019.2020. In response to the COVID-19 pandemic, American extended the contract duration for certain tickets to DecemberMarch 31, 2021,2022, principally those with traveltickets which were scheduled to expire from March 1, 2020 through DecemberMarch 31, 2020.2021. Additionally, American has eliminated change fees for most domestic and international tickets. As of September 30, 2020,2021, the air traffic liability included approximately $2.5$1.2 billion of travel credits related to these unused tickets for travel prior to September 30, 2020. Accordingly, any revenue associated with these tickets will be recognized within the next 15 months.tickets. Given this change in contract duration and uncertainty surrounding the future demand for air travel, American's estimates of revenue that will be recognized from the air traffic liability for future flown or unused tickets as well as American's estimates of refunds may be subject to variability and differ from historical experience.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
4. Debt
Long-term debt included in the condensed consolidated balance sheets consisted of (in millions):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Secured | | | |
| 2013 Term Loan Facility, variable interest rate of 1.89%, installments through 2025 | $ | 1,788 | | | $ | 1,807 | |
| 2013 Revolving Facility, variable interest rate of 2.16%, due 2024 | 750 | | | 0 | |
| 2014 Term Loan Facility, variable interest rate of 1.90%, installments through 2027 | 1,220 | | | 1,202 | |
| 2014 Revolving Facility, variable interest rate of 2.16%, due 2024 | 1,643 | | | 0 | |
| April 2016 Term Loan Facility, variable interest rate of 2.15%, installments through 2023 | 960 | | | 970 | |
| April 2016 Revolving Facility, variable interest rate of 2.16%, due 2024 | 450 | | | 0 | |
| December 2016 Term Loan Facility, variable interest rate of 2.15%, installments through 2023 | 1,213 | | | 1,213 | |
| 11.75% senior secured notes, interest only payments until due in July 2025 | 2,500 | | | 0 | |
| Treasury Term Loan Facility, variable interest rate of 3.73%, due June 2025 | 550 | | | 0 | |
| 10.75% senior secured IP notes, interest only payments until due in February 2026 | 1,000 | | | 0 | |
| 10.75% senior secured LGA/DCA notes, interest only payments until due in February 2026 | 200 | | | 0 | |
| Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 8.39%, averaging 3.99%, maturing from 2021 to 2032 | 11,146 | | | 11,933 | |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.33% to 5.83%, averaging 1.88%, maturing from 2020 to 2032 | 4,484 | | | 4,727 | |
| Special facility revenue bonds, fixed interest rates ranging from 5.00% to 5.38%, maturing from 2021 to 2036 | 1,040 | | | 725 | |
| Total long-term debt | 28,944 | | | 22,577 | |
| Less: Total unamortized debt discount, premium and issuance costs | 337 | | | 205 | |
| Less: Current maturities | 2,612 | | | 2,246 | |
| Long-term debt, net of current maturities | $ | 25,995 | | | $ | 20,126 | |
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Secured | | | |
| 2013 Term Loan Facility, variable interest rate of 1.84%, installments through 2025 | $ | 1,770 | | | $ | 1,788 | |
| 2013 Revolving Facility | — | | | 750 | |
| 2014 Term Loan Facility, variable interest rate of 1.84%, installments through 2027 | 1,208 | | | 1,220 | |
| 2014 Revolving Facility | — | | | 1,643 | |
| April 2016 Spare Parts Term Loan Facility | — | | | 960 | |
| April 2016 Revolving Facility | — | | | 450 | |
| December 2016 Term Loan Facility, variable interest rate of 2.08%, installments through 2023 | 1,200 | | | 1,200 | |
| 11.75% senior secured notes, interest only payments until due in July 2025 | 2,500 | | | 2,500 | |
| 10.75% senior secured IP notes, interest only payments until due in February 2026 | 1,000 | | | 1,000 | |
| 10.75% senior secured LGA/DCA notes, interest only payments until due in February 2026 | 200 | | | 200 | |
| Treasury Term Loan Facility | — | | | 550 | |
| 5.50% senior secured notes, installments beginning in July 2023 until due in April 2026 | 3,500 | | | — | |
| 5.75% senior secured notes, installments beginning in July 2026 until due in April 2029 | 3,000 | | | — | |
| AAdvantage Term Loan Facility, variable interest rate of 5.50%, installments beginning in July 2023 through April 2028 | 3,500 | | | — | |
| Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 8.39%, averaging 3.87%, maturing from 2021 to 2032 | 9,679 | | | 11,013 | |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.21% to 4.64%, averaging 1.82%, maturing from 2022 to 2032 | 3,661 | | | 4,417 | |
| Special facility revenue bonds, fixed interest rates ranging from 2.25% to 5.38%, maturing from 2026 to 2036 | 1,129 | | | 1,040 | |
| Total long-term debt | 32,347 | | | 28,731 | |
| Less: Total unamortized debt discount, premium and issuance costs | 436 | | | 321 | |
| Less: Current maturities | 1,658 | | | 2,700 | |
| Long-term debt, net of current maturities | $ | 30,253 | | | $ | 25,710 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
The table below showsAs of September 30, 2021, the maximum availability under American's revolving credit and other facilities is as of September 30, 2020follows (in millions):
| | | | | |
Treasury Term Loan2013 Revolving Facility | $ | 4,927750 | |
Other Short-term2014 Revolving Facility | 4001,643 | |
| April 2016 Revolving Facility | 450 | |
| Short-term Revolving and Other Facilities | 570 | |
| Total | $ | 5,3273,413 | |
Pursuant to the Treasury Loan Agreement (as defined below), at September 30, 2020, American had a $5.5 billion Treasury Term Loan Facility (as defined below) of which it has drawn $550 million. In addition, American has an undrawn $400$500 million short-term revolving credit facility, it entered into in December 2019, which was set to expire at the endbeginning of December 2020October 2021 but which American has been extended throughto the beginning of July 2021.January 2022. American has the option to extend further a portion of this short-term revolving credit facility to January 2023. American also currently has approximately $70 million of available borrowing base under a cargo receivables facility that was entered into in December 2020. The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future.
Secured financings are collateralized by assets, primarily aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots and certain pre-delivery payments, as well as certain intellectual property and loyalty program assets.
2020 Financing Activities
2014 Credit Facilities
In January 2020, American and AAG entered into the eighth amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (as previously amended, the 2014 Credit Agreement; the revolving credit facility established thereunder, the 2014 Revolving Facility; the term loan facility established thereunder, the 2014 Term Loan Facility; and collectively, the 2014 Credit Facilities), pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amount outstanding to $1.2 billion, reducing the LIBOR margin from 2.00% to 1.75%, with a LIBOR floor of 0%, and reducing the base rate margin from 1.00% to 0.75%. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021.
In April and May 2020, American borrowed $1.6 billion under the 2014 Revolving Facility. The 2014 Revolving Facility bears interest at LIBOR plus a margin of 2.00% and has a final maturity date of October 2024. Following the April and May draws, American had 0 remaining borrowing capacity available under the 2014 Revolving Facility.
2013 Revolving Facility and April 2016 Revolving Facility
In April 2020, American borrowed $750 million under the 2013 Revolving Facility. The 2013 Revolving Facility bears interest at LIBOR plus a margin of 2.00% and has a final maturity date of October 2024. Following the April draw, American had 0 remaining borrowing capacity available under the 2013 Revolving Facility.
In April 2020, American borrowed $450 million under the April 2016 Revolving Facility. The April 2016 Revolving Facility bears interest at LIBOR plus a margin of 2.00% and has a final maturity date of October 2024. Following the April draw, American had 0 remaining borrowing capacity available under the April 2016 Revolving Facility.
Delayed Draw Term Loan Credit Facility
In March 2020, American and AAG entered into a Credit and Guaranty Agreement which provided for a $1.0 billion senior secured delayed draw term loan credit facility (the Delayed Draw Term Loan Credit Facility), which was scheduled to be due and payable in a single installment on the maturity date in March 2021. In connection with the issuance of the 11.75% senior secured notes due 2025, as described below, the Delayed Draw Term Loan Credit Facility was repaid and the Delayed Draw Term Loan Credit Facility and all of the security documents and other loan documents related thereto were terminated as of June 30, 2020.
11.75% Senior Secured Notes
In June 2020, American issued $2.5 billion aggregate principal amount of 11.75% senior secured notes due 2025 (the 11.75% Senior Secured Notes) at a price equal to 99% of their aggregate principal amount. The 11.75% Senior Secured Notes bear interest at a rate of 11.75% per annum (subject to increase if a certain collateral coverage ratio is not met). Interest on the 11.75% Senior Secured Notes is payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2021. The 11.75% Senior Secured Notes will mature on July 15, 2025. The obligations of American under the 11.75% Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Secured financings and revolving credit facilities are collateralized by AAG.assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities and airport slots, as well as certain intellectual property and loyalty program assets.
2021 Financing Activities
2013, 2014 and April 2016 Revolving Facilities
In March 2021, American repaid in full the $750 million of revolving loans outstanding under the 2013 Revolving Facility, the $1.6 billion of revolving loans outstanding under the 2014 Revolving Facility and the $450 million of revolving loans outstanding under the April 2016 Revolving Facility. Following the March 2021 repayment, American is able to draw upon the commitments under these revolving facilities again as needed upon the terms of the underlying credit agreements or leave them undrawn, in each case, until such commitments expire, which is currently scheduled to occur in 2024 for substantially all of such commitments. As of September 30, 2021, there were no borrowings or letters of credit outstanding under any of the 2013 Revolving Facility, the 2014 Revolving Facility or the April 2016 Revolving Facility.
April 2016 Spare Parts Term Loan Facility
On July 22, 2021, American repaid in full the $950 million aggregate principal amount of outstanding term loans under, and terminated, the April 2016 Spare Parts Term Loan Facility. The proceeds fromApril 2016 Revolving Facility, in an available aggregate principal amount of $450 million, none of which was drawn or outstanding as of September 30, 2021, and which has a final maturity of October 2024, remains in place.
AAdvantage Financing
On March 24, 2021 (the AAdvantage Financing Closing Date), American and AAdvantage Loyalty IP Ltd., a newly formed Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American (Loyalty Issuer and, together with American, the 11.75%AAdvantage Issuers), completed the offering of $3.5 billion aggregate principal amount of 5.50% Senior Secured Notes due 2026 (the 2026 Notes) and $3.0 billion aggregate principal amount of 5.75% Senior Secured Notes due 2029 (the 2029 Notes, and together with the 2026 Notes, the AAdvantage Notes). The AAdvantage Notes are fully and unconditionally guaranteed (the AAdvantage Note Guarantees) on a senior unsecured basis by AAG and fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by AAdvantage Holdings 1, Ltd., a newly formed Cayman Islands exempted company incorporated with limited liability and a direct wholly-owned subsidiary of American, and AAdvantage Holdings 2, Ltd., a newly formed Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American and the direct parent of Loyalty Issuer (HoldCo2 and, together with AAdvantage Holdings 1, Ltd., the SPV Guarantors, and the SPV Guarantors together with AAG, the AAdvantage Guarantors). The AAdvantage Notes were usedissued pursuant to repayan indenture, dated as of March 24, 2021 (the AAdvantage Indenture), by and terminateamong the Delayed DrawAAdvantage Issuers, the AAdvantage Guarantors and Wilmington Trust, National Association, as trustee and as collateral custodian.
Concurrent with the issuance of the AAdvantage Notes, the AAdvantage Issuers, as co-borrowers, entered into a term loan credit and guaranty agreement, dated March 24, 2021, with Barclays Bank PLC, as administrative agent, Wilmington Trust, National Association, as collateral administrator, and the lenders party thereto, providing for a $3.5 billion term loan facility (the AAdvantage Term Loan Credit Facility (andand collectively with the AAdvantage Notes, the AAdvantage Financing) and pursuant to terminatewhich the full $3.5 billion of term loans (the AAdvantage Loans) were drawn on the AAdvantage Financing Closing Date. The AAdvantage Loans are fully and unconditionally guaranteed (together with the AAdvantage Note Guarantees, the AAdvantage Guarantees) by the AAdvantage Guarantors.
Subject to certain permitted liens and other exceptions, the AAdvantage Notes, AAdvantage Loans and AAdvantage Guarantees provided by the SPV Guarantors will be secured by a first-priority security interest in, and pledge of, various agreements with respect to the AAdvantage program (the AAdvantage Agreements) (including all security documentspayments thereunder) and rights under an intercompany agreement and certain IP Licenses (as defined below), certain rights under the AAdvantage program, certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other loan documents related thereto) withassets of Loyalty Issuer and the remaining amount for general corporate purposesSPV Guarantors (collectively, the AAdvantage Collateral).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Payment Terms of the AAdvantage Notes and to enhance American's liquidity position.AAdvantage Loans under the AAdvantage Term Loan Facility
AmericanInterest on the AAdvantage Notes is payable in cash, quarterly in arrears on the 20th day of each January, April, July and October (each, an AAdvantage Payment Date), which began on July 20, 2021. The 2026 Notes will mature on April 20, 2026, and the 2029 Notes will mature on April 20, 2029. The outstanding principal on the 2026 Notes will be repaid in quarterly installments of $292 million on each AAdvantage Payment Date, beginning on July 20, 2023. The outstanding principal on the 2029 Notes will be repaid in quarterly installments of $250 million on each AAdvantage Payment Date, beginning on July 20, 2026.
The AAdvantage Issuers may redeem the 11.75% Senior SecuredAAdvantage Notes, at their option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the notes beingAAdvantage Notes redeemed plus a make whole“make-whole” premium, together with accrued and unpaid interest if any, to the date of redemption.
The scheduled maturity date of the AAdvantage Loans under the AAdvantage Term Loan Facility is April 20, 2028. The AAdvantage Loans bear interest at a variable rate equal to LIBOR (but not including)less than 0.75% per annum), plus a margin of 4.75% per annum, payable on each AAdvantage Payment Date. The outstanding principal on the redemption date.AAdvantage Loans will be repaid in quarterly installments of $175 million, on each AAdvantage Payment Date beginning with the AAdvantage Payment Date in July 2023. These amortization payments (as well as those for the AAdvantage Notes) will be subject to the occurrence of certain early amortization events, including the failure to satisfy a minimum debt service coverage ratio at specified determination dates.
Prepayment of some or all of the AAdvantage Loans outstanding under the AAdvantage Term Loan Facility is permitted, although payment of an applicable premium is required as specified in the AAdvantage Term Loan Facility.
The 11.75% Senior Secured NotesAAdvantage Indenture and the AAdvantage Term Loan Facility contain mandatory prepayment provisions triggered upon (i) the issuance or incurrence by Loyalty Issuer or the SPV Guarantors of certain indebtedness or (ii) the receipt by American or its subsidiaries of net proceeds from pre-paid frequent flyer (i.e., AAdvantage) mile purchases exceeding $500 million, with prepayment required only in respect of net proceeds from such purchases exceeding $505 million in the aggregate. Each of these prepayments would also require payment of an applicable premium. Certain other events, including the occurrence of a change of control with respect to AAG and certain AAdvantage Collateral sales exceeding a specified threshold, will also trigger mandatory repurchase or mandatory prepayment provisions under the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively.
Other Terms of the AAdvantage Indenture and the AAdvantage Term Loan Facility
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain certain covenants that limit the ability of Loyalty Issuer, the SPV Guarantors and, in certain circumstances, American and AAG, to among other things, (i) incur additional indebtedness and make restricted payments, (ii) incur certain liens on the AAdvantage Collateral, (iii) merge, consolidate or sell substantially all of their assets, (iv) dispose of the AAdvantage Collateral, (v) sell pre-paid frequent flyer (i.e. AAdvantage) miles in excess of $550 million in the aggregate, and (vi) terminate, amend, waive, supplement or modify the IP Licenses, or exercise rights and remedies thereunder, except under certain circumstances. American and Loyalty Issuer are American’s senior secured obligations. Subjectalso prohibited from substantially reducing the AAdvantage program business or modifying the terms of the AAdvantage program in a manner that would reasonably be expected to materially impair repayment of the AAdvantage Financing obligations (described as a Payment Material Adverse Effect in each of the AAdvantage Indenture and the AAdvantage Term Loan Facility), and AAG and its subsidiaries are prohibited from changing the policies and procedures of the AAdvantage program in a manner that would reasonably be expected to have a Payment Material Adverse Effect or operating a competing loyalty program. Notwithstanding these restrictions, the AAdvantage program is expected to operate as it has in the past, and the entry into the AAdvantage Financing is not expected to have any impact on the benefits offered to AAdvantage members.
In addition, subject to certain limitations and exceptions, the 11.75% Senior Secured Notes are secured on a first-lien basis by security interests inAAdvantage Indenture and the AAdvantage Term Loan Facility restrict the ability of American, Loyalty Issuer or any Guarantor to terminate, or modify certain assets, rightsterms within, the intercompany agreement governing the relationship between American and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland. American’s obligationsLoyalty Issuer with respect to the 11.75% Senior SecuredAAdvantage program.
The AAdvantage Indenture and the AAdvantage Term Loan Facility also require the AAdvantage Issuers to comply with certain affirmative covenants, including (i) certain reporting requirements and (ii) the use of commercially reasonable efforts to cause sufficient counterparties to AAdvantage Agreements to direct payments with respect to the AAdvantage program into a collections account, such that at least 90% of such cash receipts in a quarterly reporting period are deposited directly into this collection account, with amounts to be distributed from this collection account for the payment of fees, principal and interest on the AAdvantage Notes are also secured onand the AAdvantage Loans pursuant to a second-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airportspayment waterfall
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
described in the United States and certain airports in the European UnionAAdvantage Indenture and the United Kingdom.AAdvantage Term Loan Facility, respectively. In addition, the AAdvantage Indenture and the AAdvantage Term Loan Facility require AAG to maintain minimum liquidity, defined as the sum of (a) unrestricted cash and cash equivalents and (b) the aggregate principal amount committed and available to be drawn under all of AAG's revolving credit and other facilities, at the close of any business day of at least $2.0 billion.
Subject to certain materiality thresholds, qualifications, exceptions, “baskets” and grace and cure periods, the AAdvantage Indenture and the AAdvantage Term Loan Facility contain various events of default, including payment defaults, covenant defaults, cross-defaults to certain other indebtedness, termination of certain agreements related to the AAdvantage program, bankruptcy events of Loyalty Issuer or any SPV Guarantor, and a change of control of Loyalty Issuer or any SPV Guarantor. A bankruptcy event of American may be requiredis not itself an event of default; following an American bankruptcy, an event of default would only occur if American failed to pledge additional collateral insatisfy certain enumerated bankruptcy case milestones, including an assumption of the futureAAdvantage Financing by a certain date. Upon the occurrence of an event of default, the outstanding obligations under the termsAAdvantage Indenture and the AAdvantage Term Loan Facility may (or, with respect to the bankruptcy events noted above, shall) be accelerated and become due and payable immediately.
Terms of Certain Intercompany Agreements Related to the 11.75% Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral as a replacement for existing collateral. The collateral that secures the 11.75% Senior Secured Notes on a second-lien basis presently secures the 2014 Credit Facilities, on a first-lien basis.
Special Facility Revenue BondsAAdvantage Financing
In January 2020, American and British Airways announced the start of construction on a $344 million investment to upgrade New York's John F. Kennedy International Airport (JFK) Terminal 8.
In June 2020, the New York Transportation Development Corporation (NYTDC) issued approximately $360 million of special facility revenue bonds (the 2020 JFK Bonds) on behalf of American. A portion of the net proceeds from the 2020 JFK Bonds have been or will be used to fund costs of issuance of the 2020 JFK Bonds, to fund a substantial portion of the cost of the renovation and expansion of a passenger terminal facility (the Terminal) leased and utilized by American at JFK and to fund the August 2020 maturity of the outstanding bonds issued by NYTDC on behalf of American in 2016 (the 2016 JFK Bonds).
American is required to pay debt service on the 2020 JFK Bonds through payments under a loan agreementconnection with NYTDC (as amended), and American and AAG guarantee the 2020 JFK Bonds. American continues to pay debt service on the outstanding 2016 JFK Bonds and American and AAG continue to guarantee the 2016 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.
The 2020 JFK Bonds, in aggregate, were priced at approximately 98% of par value. The gross proceeds from the issuance of the 2020 JFK Bonds were approximately $353 million. Of thisAAdvantage Notes and entry into the AAdvantage Term Loan Facility, American, Loyalty Issuer and the SPV Guarantors entered into a series of transactions that resulted in the transfer to Loyalty Issuer of, among other things, American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions) (such assets, the Transferred AAdvantage IP) and certain rights of American under specified AAdvantage Agreements. Loyalty Issuer has entered into a license agreement with HoldCo2 pursuant to which Loyalty Issuer has granted to HoldCo2 an exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing license to use the Transferred AAdvantage IP (the HoldCo2 License), and HoldCo2 has in turn granted to American an exclusive, irrevocable (subject to certain termination rights), perpetual, worldwide, royalty-bearing sublicense to use the Transferred AAdvantage IP (together with the HoldCo2 License, the IP Licenses). The IP Licenses would be terminated, and American’s right to use the Transferred AAdvantage IP would cease, upon specified termination events, including, but not limited to, the occurrence of an event of default under the AAdvantage Indenture or the AAdvantage Term Loan Facility. In certain circumstances, such a termination would trigger a liquidated damages payment in an amount approximately $8 million was used to fundthat is greater than the costs of issuanceinitial principal amount of the 2020 JFK Bonds, approximately $47 million was used to fundAAdvantage Notes and the redemption ofAAdvantage Loans.
In addition, proceeds from the 2016 JFK Bonds due August 2020 and approximately $17 million was reimbursedAAdvantage Financing were loaned by Loyalty Issuer to American forpursuant to an intercompany note that was guaranteed by AAG. The borrowings under this intercompany note are payable on demand by Loyalty Issuer or, after the Terminal construction costs incurred, withoccurrence and during the remaining amountcontinuance of proceeds received to be held in restricted cash and short-term investments onan event of default under the condensed consolidated balance sheet and to be used to finance a substantial portion ofAAdvantage Financing, by the cost ofmaster collateral agent under the renovation and expansion of the Terminal. The 2020 JFK Bonds are comprised of term bonds, $214 million of which bear interest at 5.25% per annum and mature on August 1, 2031, and $146 million of which bear interest at 5.375% per annum and mature on August 1, 2036.AAdvantage Financing.
Treasury Loan Agreement
On September 25, 2020, American and AAG entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which providesprovided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, American and AAG entered into an amendment to the Treasury Loan Agreement, that permits Americanwhich increased the borrowing amount to borrow up to $7.5 billion.
As of September 30, 2020, American had borrowed $550 million under the Treasury Term Loan Facility and may, at its option, borrow additional amounts in up to 2 subsequent borrowings untilSeptember 2020. On March 26, 2021. The24, 2021, American used proceeds from the AAdvantage Financing to prepay in full the $550 million outstanding under the Treasury Term Loan Facility will be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions ofterminated the Treasury Loan AgreementAgreement.
JFK Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8 (the Terminal). The renovation projects at the Terminal include: (i) the reconfiguration or elimination of certain existing gates and the applicable provisionsconstruction of jumbo gates, (ii) the construction of approximately 51,000 square feet of new terminal building space and the refurbishment of 73,300 square feet of existing terminal space, (iii) the expansion of the CARES Act.baggage system capacity of the Terminal, (iv) improvements to the premium passenger lounges, check-in and, potentially, security access areas, and (v) bathroom refreshment, new signage, and other upgrades. The construction project is currently scheduled to be completed in 2023 and is estimated to cost $439 million, of which $298 million was funded with proceeds of the special facility revenue bonds issued by the New York Transportation Development Corporation (NYTDC) on behalf of American in June 2020 (the 2020 JFK Bonds) and approximately $84 million of which will be funded with proceeds of the approximately $150 million of special facility revenue bonds NYTDC issued in June 2021 (the 2021 JFK Bonds).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
American is required to pay debt service on the 2021 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2021 JFK Bonds. American continues to pay debt service on the outstanding bonds issued by NYTDC on behalf of American in 2016 and 2020 (the 2016 and 2020 JFK Bonds) and American and AAG continue to guarantee the 2016 and 2020 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.
The Treasury Term Loan Facility will2021 JFK Bonds, in aggregate, were priced at par value. The gross proceeds from the issuance of the 2021 JFK Bonds were approximately $150 million. Of this amount, $4 million was used to fund the costs of issuance of the 2021 JFK Bonds, $62 million was used to fund the redemption of the 2016 and 2020 JFK Bonds due August 2021, with the remaining amount of proceeds received to be held in restricted cash and short-term investments on the condensed consolidated balance sheet and to be used to finance a portion of the cost of the renovation and expansion of the Terminal. The 2021 JFK Bonds are comprised of term bonds, $70 million of which bear interest at a variable rate2.25% per annum equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b) 3.50%. Accruedand mature on August 1, 2026, and $80 million of which bear interest at 3.00% per annum and mature on the loans will be payable in arrears on the first business day following the 14th day of each March, June, September and December, beginning with September 15, 2021, and on June 30, 2025 (the Treasury Term Loan Maturity Date).August 1, 2031. As of September 30, 2020, the applicable interest rate for the $550 million loan drawn under the Treasury Term Loan Facility will be 3.73% per annum through September 15, 2021, at which time the interest rate will reset.
All advances under the Treasury Term Loan Facility will be in the form of term loans, all of which will mature and be due and payable in a single installment on the Treasury Term Loan Maturity Date. American may, at any time and from time to time, voluntarily prepay amounts outstanding under the Treasury Loan Agreement, in whole or in part, without penalty or premium. Amounts prepaid may not be reborrowed. Mandatory prepayments of loans under the Treasury Term Loan Facility are required, without penalty or premium, to the extent necessary to comply with American's covenants regarding the expiry of certain agreements constituting Treasury Collateral (as defined below), the debt service coverage ratio, certain dispositions of Treasury Collateral, certain debt issuances secured by liens on the Treasury Collateral and certain indemnity, termination, liquidated damages or insurance payments related to the Treasury Collateral, in addition to the occurrence of a change in control of AAG.
American's obligations under the Treasury Loan Agreement are secured by a first priority security interest on American's rights under U.S. co-branded credit card agreements and certain other loyalty program partner participation agreements (including rights to receive cash flows thereunder), documents, deposit accounts, securities accounts, books and records and intellectual property related to American's AAdvantage loyalty program and all proceeds, accessions, rents or profits related to the foregoing (collectively, the Treasury Collateral). American is permitted under the Treasury Loan Agreement to add certain types of assets to the Treasury Collateral and, subject to certain conditions, release Treasury Collateral, in each case from time to time at its discretion.
The Treasury Loan Agreement requires American, under certain circumstances, including within 10 business days prior to the last business day of March and September of each year, beginning March 2021, to appraise the value of the Treasury Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.6 to 1.0, American will be required either to provide additional Treasury Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan Agreement or repay the term loans under the Treasury Term Loan Facility, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Treasury Collateral or repayment, is at least 1.6 to 1.0. Based on the appraisal American submitted in connection with the execution of the Treasury Loan Agreement, the appraised value of the Treasury Collateral is presently significantly in excess of the 2.0 to 1.0 collateral coverage ratio necessary to access the amount under the Treasury Term Loan Facility, including any contemplated increase.
The Treasury Loan Agreement also requires American to calculate the debt service coverage ratio on a quarterly basis. If the calculated debt service coverage ratio is less than 1.75 to 1.00, then AAG and its subsidiaries will be required to place an amount equal to at least 50% of certain revenues received from the AAdvantage loyalty program (the Loyalty Program Revenues) into a blocked account to be held for the benefit of the lenders who may choose to use such funds to prepay the outstanding term loans until the debt service coverage ratio is recalculated to be greater than or equal to 1.75 to 1.00. If the calculated debt service coverage ratio is less than or equal to 1.50 to 1.00, but greater than 1.25 to 1.00, then all amounts previously deposited into the blocked account will be used to prepay outstanding term loans and an amount equal to at least 50% of all future Loyalty Program Revenues will be transferred into the payment account and used to prepay outstanding term loans until the debt service coverage ratio is recalculated to be greater than 1.50 to 1.00. If the calculated debt service coverage ratio is less than or equal to 1.25 to 1.00, then all amounts previously deposited into the blocked account will be used to prepay outstanding term loans and an amount equal to at least 75% of all future Loyalty Program Revenues will be transferred into the payment account and used to prepay outstanding term loans until the debt service coverage ratio is recalculated to be greater than 1.25 to 1.00.
The Treasury Loan Agreement also includes affirmative, negative and financial covenants that, among other things, limit AAG's ability to pay dividends, repurchase common stock of AAG or make certain other payments, make certain investments, incur liens on the Treasury Collateral, dispose of the Treasury Collateral, amend material AAdvantage loyalty program agreements, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions. In addition, under the Treasury Loan Agreement, AAG must maintain a minimum aggregate liquidity of $2.0 billion.
The Treasury Loan Agreement requires AAG and American to comply with the relevant provisions of the CARES Act, including, but not limited to, the provisions that prohibit the repurchase of AAG’s common stock, the payment of common
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
stock dividends and those that restrict the payment of certain executive compensation, in each case, through the date that is 12 months after the date on which all amounts of loan outstanding under the Treasury Term Loan Facility have been repaid in full.
The Treasury Loan Agreement contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness. Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the Treasury Loan Agreement may be accelerated and become due and payable immediately.
10.75% Senior Secured Notes
On September 25, 2020 (the 10.75% Senior Secured Notes Closing Date), American completed its previously announced sale of $1.0 billion in initial principal amount of PIK senior secured IP notes (the IP Notes) and $200 million in initial principal amount of PIK senior secured notes (the LGA/DCA Notes and together with the IP Notes, the 10.75% Senior Secured Notes). The obligations of American under the 10.75% Senior Secured Notes are fully and unconditionally guaranteed (the 10.75% Senior Secured Notes Guarantees) on a senior unsecured basis by AAG. The 10.75% Senior Secured Notes bear interest at a rate of 10.75% per annum in cash. For any interest period on or prior to September 1, 2022, American may, at its election, pay interest at a rate of 12.00% per annum payable one-half in cash and one-half in kind.
American expects to use the proceeds from the 10.75% Senior Secured Notes to pay transaction-related fees and expenses and for general corporate purposes.
The 10.75% Senior Secured Notes were each issued pursuant to a separate indenture, dated as of September 25, 2020 (individually, the IP Notes Indenture and the LGA/DCA Notes Indenture and collectively, the 10.75% Senior Secured Notes Indentures), by and among American, AAG and Wilmington Trust, National Association, as trustee and as collateral trustee (the 10.75% Senior Secured Notes Trustee). The IP Notes are secured by a first lien security interest on certain intellectual property of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral), and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75% Senior Secured Notes Collateral). Subject to certain conditions, American will be permitted to incur up to $4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes. The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral. American may be required to pledge additional collateral in the future under the terms of the 10.75% Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral including as a replacement for existing collateral. The LGA/DCA Collateral presently secures (and will continue to secure), on a first-lien basis the December 2016 Credit Facilities.
Interest on the 10.75% Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, beginning on March 1, 2021. The 10.75% Senior Secured Notes will mature on February 15, 2026.
On or prior to the fourth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 100% of the principal amount of the 10.75% Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest. After the fourth anniversary of the 10.75% Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 105.375% of the principal amount of the 10.75% Senior Secured Notes redeemed, together with accrued and unpaid interest. After the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at par, together with accrued and unpaid interest.
In the event of a specified change of control, each holder of 10.75% Senior Secured Notes may require American to repurchase its 10.75% Senior Secured Notes, in whole or in part, at a repurchase price of 101% of the aggregate principal amount of the 10.75% Senior Secured Notes so repurchased, plus accrued and unpaid interest, if any, to (but not including) the repurchase date.
The 10.75% Senior Secured Notes Indentures contain covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to: (i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 10.75% Senior Secured Notes Collateral and dispose of or release the 10.75% Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, and (vii) designate subsidiaries as unrestricted. These covenants are subject to a number of important exceptions and qualifications set forth in the 10.75% Senior Secured Notes Indentures.
Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 10.75% Senior Secured Notes may be declared to be due and payable immediately. Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting AAG or certain of its subsidiaries (including American), all outstanding 10.75% Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 10.75% Senior Secured Notes Trustee or any holder of the 10.75% Senior Secured Notes.
2019-1 Aircraft EETCs
In August 2019, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2019-1 Class AA, Class A and Class B EETCs (the 2019-1 Aircraft EETCs) in connection with the financing of 35 aircraft previously delivered or scheduled to be delivered to American through September 2020 (the 2019-1 Aircraft). In 2019, $804$264 million of the proceeds had been used to purchase equipment notes issuedfunded by American in connection with the financing of 28 aircraft under the 2019-1 Aircraft EETCs, of which $608 million was used to repay existing indebtedness. During the third quarter of 2020, $126 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of 3 aircraft under the 2019-1 Aircraft EETCs. Interest and principal payments on equipment notes issued in connection with the 2019-1 Aircraft EETCs are payable semiannually in February and August of each year, which interest payments began in February 2020 and which principal payments began or are scheduled to begin (i) in the case of equipment notes with respect to any 2019-1 Aircraft owned by American at the time of issuance of the 2019-1 Aircraft EETCs, in February 2020 and (ii) in the case of equipment notes with respect to the Embraer E175 aircraft and the Airbus A321neo aircraft scheduled to be delivered after the issuance of the 2019-1 Aircraft EETCs, in August 2020 and August 2021 respectively. The remaining proceeds of approximately $168 million as of September 30, 2020 were being heldJFK Bonds are included in escrow with a depositary forrestricted cash and short-term investments on the benefit of the holders of the 2019-1 Aircraft EETCs until such time as American issues additional equipment notes with respect to the remaining 2019-1 Aircraft to the pass-through trusts, which will purchase such additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on itsaccompanying condensed consolidated balance sheet because the proceeds held by the depositary for the benefit of the holders of the 2019-1 Aircraft EETCs are not American’s assets.sheet.
Certain information regarding the 2019-1 Aircraft EETC equipment notes and remaining escrowed proceeds, as of September 30, 2020, is set forth in the table below.
| | | | | | | | | | | | | | | | | |
| | 2019-1 Aircraft EETCs | | | | |
| | Series AA | | Series A | | Series B |
| Aggregate principal issued | $579 | | $289 | | $229 |
| Remaining escrowed proceeds | $89 | | $44 | | $35 |
| Fixed interest rate per annum | 3.15% | | 3.50% | | 3.85% |
| Maturity date | February 2032 | | February 2032 | | February 2028 |
Equipment Notes and Other Notes Payable Issued in 2020
In the nine months ended September 30, 2020, American entered into agreements under which it borrowed $197 million in connection with the financing or refinancing, as the case may be, of certain aircraft, of which $17 million was used to repay existing indebtedness. Debt incurred under these agreements matures in 2029 through 2032 and bears interest at variable rates (comprised of LIBOR plus an applicable margin) averaging 1.88% at September 30, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
5. Income Taxes
At December 31, 2019,2020, American had approximately $9.2$16.5 billion of federal net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards)available to reduce future federal taxable income.income, of which $8.9 billion will expire beginning in 2023 if unused and $7.6 billion can be carried forward indefinitely (NOL Carryforwards). American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $9.1$16.5 billion to reduce AAG's future federal taxable income. The federal NOL Carryforwards will expire beginning in 2023 if unused. American also had approximately $2.9$5.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2019,2020, which will expire in taxable years 2020 through 20392040 if unused.
American's ability to use its NOL Carryforwards depends on the amount of taxable income generated in future periods. American presently does not haveprovides a valuation allowance for its deferred tax assets, which include the NOLs, when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond its control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. American presently has a $24 million valuation allowance on itscertain net deferred tax assets.assets related to state NOL Carryforwards. There can be no assurance that aan additional valuation allowance on American's net deferred tax assets will not be required in the future.required. Such valuation allowance could be material.
At December 31, 2019, American had an Alternative Minimum Tax (AMT) credit carryforward of approximately $226 million available for federal income tax purposes, which was fully refunded as of September 30, 2020 as a result of the CARES Act enacted in March of 2020.
During the three and nine months ended September 30, 2020,2021, American recorded an income tax provision of $68 million and an income tax benefit of $660$247 million, and $1.9 billion, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
6. Fair Value Measurements and Other Investments
Assets Measured at Fair Value on a Recurring Basis
American utilizes the market approach to measure the fair value of its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. American’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2020.2021.
Assets measured at fair value on a recurring basis are summarized below (in millions):
| | | | Fair Value Measurements as of September 30, 2020 | | | Fair Value Measurements as of September 30, 2021 |
| | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Short-term investments (1), (2): | Short-term investments (1), (2): | | | | | | | | Short-term investments (1), (2): | | | | | | | |
| Money market funds | Money market funds | $ | 2,827 | | | $ | 2,827 | | | $ | 0 | | | $ | 0 | | Money market funds | $ | 929 | | | $ | 929 | | | $ | — | | | $ | — | |
| Corporate obligations | Corporate obligations | 2,454 | | | 0 | | | 2,454 | | | 0 | | Corporate obligations | 9,002 | | | — | | | 9,002 | | | — | |
| Bank notes/certificates of deposit/time deposits | Bank notes/certificates of deposit/time deposits | 1,973 | | | 0 | | | 1,973 | | | 0 | | Bank notes/certificates of deposit/time deposits | 3,181 | | | — | | | 3,181 | | | — | |
| Repurchase agreements | Repurchase agreements | 775 | | | 0 | | | 775 | | | 0 | | Repurchase agreements | 1,115 | | | — | | | 1,115 | | | — | |
| | 8,029 | | | 2,827 | | | 5,202 | | | 0 | | | 14,227 | | | 929 | | | 13,298 | | | — | |
Restricted cash and short-term investments (1), (4)(3) | Restricted cash and short-term investments (1), (4)(3) | 508 | | | 385 | | | 123 | | | 0 | | Restricted cash and short-term investments (1), (4)(3) | 923 | | | 688 | | | 235 | | | — | |
Long-term investments (3)(4) | Long-term investments (3)(4) | 146 | | | 146 | | | 0 | | | 0 | | Long-term investments (3)(4) | 153 | | | 153 | | | — | | | — | |
| Total | Total | $ | 8,683 | | | $ | 3,358 | | | $ | 5,325 | | | $ | 0 | | Total | $ | 15,303 | | | $ | 1,770 | | | $ | 13,533 | | | $ | — | |
(1)All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period. There were no credit losses.
(2)American’s short-term investments mature in one year or less except for $286 millionless.
(3)Restricted cash and short-term investments primarily include collateral associated with the payment of bank notes/certificatescertain fees and interest in respect to the AAdvantage Financing and money market funds to be used to finance a substantial portion of deposit/time depositsthe cost of the renovation and $70 millionexpansion of corporatethe Terminal at JFK as well as collateral held to support workers' compensation obligations.
(3)(4)Long-term investments primarily include American's equity investment in China Southern Airlines, in which American presently owns a 1.8% equity interest, and are classified in other assets on the condensed consolidated balance sheet.
(4)Restricted cash and short-term investments primarily includes money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK and collateral held to support workers' compensation obligations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Fair Value of Debt
The fair value of American’s long-term debt was estimated using quoted market prices or discounted cash flow analyses based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If American’s long-term debt was measured at fair value, it would have been classified as Level 2 except for $550 million as of December 31, 2020, which would have been classified as Level 3 in the fair value hierarchy.
The carrying value and estimated fair value of American’s long-term debt, including current maturities, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Long-term debt, including current maturities | $ | 31,911 | | | $ | 33,778 | | | $ | 28,410 | | | $ | 27,193 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | | | December 31, 2019 | | |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Long-term debt, including current maturities | $ | 28,607 | | | $ | 24,585 | | | $ | 22,372 | | | $ | 23,196 | |
(Unaudited)
7. Employee Benefit Plans
The following table provides the components of net periodic benefit cost (income) (in millions):
| | | | | Pension Benefits | | | Retiree Medical and Other
Postretirement Benefits | | | | Pension Benefits | | Retiree Medical and Other
Postretirement Benefits |
| Three Months Ended September 30, | Three Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 | Three Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| Service cost | Service cost | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 1 | | Service cost | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Interest cost | Interest cost | | 153 | | | 174 | | | 8 | | | 9 | | Interest cost | | 132 | | | 153 | | | 8 | | | 8 | |
| Expected return on assets | Expected return on assets | | (252) | | | (203) | | | (3) | | | (4) | | Expected return on assets | | (269) | | | (252) | | | (3) | | | (3) | |
| Special termination benefits | Special termination benefits | | 0 | | | 0 | | | 410 | | | 0 | | Special termination benefits | | — | | | — | | | — | | | 410 | |
| Settlements | | 0 | | | 0 | | | 0 | | | 0 | | |
| | Amortization of: | Amortization of: | | Amortization of: | |
| Prior service cost (benefit) | Prior service cost (benefit) | | 7 | | | 7 | | | (33) | | | (59) | | Prior service cost (benefit) | | 7 | | | 7 | | | (3) | | | (33) | |
| Unrecognized net loss (gain) | Unrecognized net loss (gain) | | 41 | | | 37 | | | (5) | | | (8) | | Unrecognized net loss (gain) | | 54 | | | 41 | | | (6) | | | (5) | |
| Net periodic benefit cost (income) | Net periodic benefit cost (income) | | $ | (50) | | | $ | 16 | | | $ | 379 | | | $ | (61) | | Net periodic benefit cost (income) | | $ | (75) | | | $ | (50) | | | $ | (2) | | | $ | 379 | |
| | | | | Pension Benefits | | | Retiree Medical and Other
Postretirement Benefits | | | | Pension Benefits | | Retiree Medical and Other
Postretirement Benefits |
| Nine Months Ended September 30, | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 | Nine Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| Service cost | Service cost | | $ | 2 | | | $ | 2 | | | $ | 5 | | | $ | 3 | | Service cost | | $ | 3 | | | $ | 2 | | | $ | 7 | | | $ | 5 | |
| Interest cost | Interest cost | | 459 | | | 524 | | | 22 | | | 26 | | Interest cost | | 392 | | | 459 | | | 23 | | | 22 | |
| Expected return on assets | Expected return on assets | | (754) | | | (609) | | | (9) | | | (12) | | Expected return on assets | | (809) | | | (754) | | | (9) | | | (9) | |
| Special termination benefits | Special termination benefits | | 0 | | | 0 | | | 410 | | | 0 | | Special termination benefits | | — | | | — | | | 139 | | | 410 | |
| Settlements | Settlements | | 4 | | | 0 | | | 0 | | | 0 | | Settlements | | — | | | 4 | | | — | | | — | |
| Amortization of: | Amortization of: | | Amortization of: | |
| Prior service cost (benefit) | Prior service cost (benefit) | | 21 | | | 21 | | | (139) | | | (177) | | Prior service cost (benefit) | | 21 | | | 21 | | | (10) | | | (139) | |
| Unrecognized net loss (gain) | Unrecognized net loss (gain) | | 123 | | | 113 | | | (17) | | | (24) | | Unrecognized net loss (gain) | | 158 | | | 123 | | | (17) | | | (17) | |
| Net periodic benefit cost (income) | Net periodic benefit cost (income) | | $ | (145) | | | $ | 51 | | | $ | 272 | | | $ | (184) | | Net periodic benefit cost (income) | | $ | (235) | | | $ | (145) | | | $ | 133 | | | $ | 272 | |
Effective November 1, 2012, substantially all of American’s defined benefit pension plans were frozen.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income (expense), net in the condensed consolidated statements of operations.
During the first quarter of 2021 and the third quarter of 2020, American remeasured its retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted in tointo voluntary early retirement programs offered as a result of reductions to its operation due to COVID-19.the COVID-19 pandemic. For the nine months ended September 30, 2021, American recognized a $139 million special charge for these enhanced healthcare benefits and increased its postretirement benefits obligation by $139 million. For the three and nine months ended September 30, 2020, American recognized a $410 million special charge for these enhanced healthcare benefits and increased its postretirement benefits obligation by $410 million.
In January 2021, American made $241 million as of September 30, 2020.
Pursuant to the CARES Act, minimum required pensionin contributions to be made inits pension plans, including a contribution of $130 million for the 2020 calendar year 2020 canthat was permitted to be deferred to January 1,4, 2021 with interest accruing fromas provided under the original due dateCARES Act. On March 11, 2021, the ARP was enacted, which included funding relief provisions benefiting single employer qualified retirement benefit pension plans such as those sponsored by American. Based on American's current understanding of the ARP provisions applicable to the new payment date.its pension plans, American expects to defer its $130 million 2020 minimum required contributions to January 1, 2021, which American intends to pay or otherwise satisfy on or prior to December 31, 2020.will have no additional funding requirements for 2021.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
8. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss (AOCI) are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension, Retiree
Medical and
Other
Postretirement
Benefits | | Unrealized Loss on Investments | | Income Tax Benefit (Provision) (1) | | Total |
| Balance at December 31, 2019 | $ | (5,218) | | | $ | (2) | | | $ | (1,203) | | | $ | (6,423) | |
Other comprehensive income (loss) before
reclassifications | (180) | | | 0 | | | 41 | | | (139) | |
| Amounts reclassified from AOCI | (8) | | | 0 | | | 1 | | (2) | (7) | |
Net current-period other comprehensive income
(loss) | (188) | | | 0 | | | 42 | | | (146) | |
| Balance at September 30, 2020 | $ | (5,406) | | | $ | (2) | | | $ | (1,161) | | | $ | (6,569) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension,
Retiree
Medical and
Other
Postretirement
Benefits | | Unrealized Gain (Loss) on Investments | | Income Tax
Benefit
(Provision) (1) | | Total |
| Balance at December 31, 2020 | $ | (6,215) | | | $ | (2) | | | $ | (977) | | | $ | (7,194) | |
| Other comprehensive income (loss) before reclassifications | 35 | | | — | | | (8) | | | 27 | |
| Amounts reclassified from AOCI | 152 | | | — | | | (34) | | (2) | 118 | |
| Net current-period other comprehensive income (loss) | 187 | | | — | | | (42) | | | 145 | |
| Balance at September 30, 2021 | $ | (6,028) | | | $ | (2) | | | $ | (1,019) | | | $ | (7,049) | |
(1)Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income (loss)loss until the obligations are fully extinguished.
(2)Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision (benefit)benefit on the condensed consolidated statement of operations.
Reclassifications out of AOCI are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amounts reclassified from AOCI | | | | | | | | Affected line items on the condensed consolidated statements of operations |
| AOCI Components | | Three Months Ended September 30, | | | | Nine Months Ended
September 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
Amortization of pension, retiree medical
and other postretirement benefits: | | | | | | | | | | |
| Prior service benefit | | $ | (20) | | | $ | (40) | | | $ | (91) | | | $ | (121) | | | Nonoperating other income (expense), net |
| Actuarial loss | | 27 | | | 22 | | | 84 | | | 69 | | | Nonoperating other income (expense), net |
Total reclassifications for the period,
net of tax | | $ | 7 | | | $ | (18) | | | $ | (7) | | | $ | (52) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amounts reclassified from AOCI | | Affected line items on the condensed consolidated statements of operations |
| AOCI Components | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| 2021 | | 2020 | | 2021 | | 2020 | |
Amortization of pension, retiree medical
and other postretirement benefits: | | | | | | | | | | |
| Prior service cost (benefit) | | $ | 3 | | | $ | (20) | | | $ | 9 | | | $ | (91) | | | Nonoperating other income (expense), net |
| Actuarial loss | | 37 | | | 27 | | | 109 | | | 84 | | | Nonoperating other income (expense), net |
Total reclassifications for the period,
net of tax | | $ | 40 | | | $ | 7 | | | $ | 118 | | | $ | (7) | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
9. Regional Expenses
American's regional carriers provide scheduled air transportation under the brand name “American Eagle.” The American Eagle carriers include AAG's wholly-owned regional carriers as well as third-party regional carriers. Substantially all of American's regional carrier arrangements are in the form of capacity purchase agreements. Expenses associated with American Eagle operations are classified as regional expenses on the condensed consolidated statements of operations.
Beginning in the first quarter of 2021, aircraft fuel and related taxes as well as certain salaries, wages and benefits, other rent and landing fees, selling and other expenses are no longer allocated to regional expenses on American's condensed consolidated statements of operations. The three and nine months ended September 30, 2020 condensed consolidated statements of operations have been recast to conform to the 2021 presentation. This statement of operations presentation change has no impact on total operating expenses or net loss.
Regional expenses consistfor the three months ended September 30, 2021 and 2020 include $65 million and $66 million of depreciation and amortization, respectively, and $1 million and $3 million of aircraft rent, respectively. Regional expenses for the following (in millions):nine months ended September 30, 2021 and 2020 include $197 million and $207 million of depreciation and amortization, respectively, and $5 million and $11 million of aircraft rent, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Aircraft fuel and related taxes | $ | 158 | | | $ | 485 | | | $ | 638 | | | $ | 1,395 | |
| Salaries, wages and benefits | 59 | | | 76 | | | 214 | | | 241 | |
Capacity purchases from third-party regional carriers (1) | 622 | | | 900 | | | 2,105 | | | 2,665 | |
| Maintenance, materials and repairs | (4) | | | 14 | | | 2 | | | 23 | |
| Other rent and landing fees | 106 | | | 159 | | | 347 | | | 472 | |
| Aircraft rent | 3 | | | 8 | | | 11 | | | 23 | |
| Selling expenses | 27 | | | 102 | | | 121 | | | 299 | |
| Depreciation and amortization | 66 | | | 72 | | | 207 | | | 210 | |
| Special items, net | (228) | | | 0 | | | (338) | | | 0 | |
| Other | 43 | | | 97 | | | 193 | | | 288 | |
| Total regional expenses | $ | 852 | | | $ | 1,913 | | | $ | 3,500 | | | $ | 5,616 | |
(1)During the three months ended September 30, 20202021 and 2019,2020, American recognized $102$125 million and $150$102 million, respectively, of expense under its capacity purchase agreement with Republic Airways Inc. (Republic). During the nine months ended September 30, 20202021 and 2019,2020, American recognized $313$343 million and $442$313 million, respectively, of expense under its capacity purchase agreement with Republic. American holds a 25% equity interest in Republic Airways Holdings Inc., the parent company of Republic.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
10. Transactions with Related Parties
The following represents the net receivables (payables) to related parties (in millions):
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
AAG (1) | AAG (1) | $ | 11,212 | | | $ | 14,597 | | AAG (1) | $ | 7,574 | | | $ | 9,940 | |
AAG’s wholly-owned subsidiaries (2) | AAG’s wholly-owned subsidiaries (2) | (2,029) | | | (2,146) | | AAG’s wholly-owned subsidiaries (2) | (2,087) | | | (2,063) | |
| Total | Total | $ | 9,183 | | | $ | 12,451 | | Total | $ | 5,487 | | | $ | 7,877 | |
(1)The decrease in American’s net related party receivable from AAG is primarily due to cash received from the proceeds of AAG financing transactions including the PSPPSP2 Promissory Note, the 6.50% convertible senior notesPSP3 Promissory Note and the issuance of 85.2 million shares of AAG common stock pursuant to a public stockan at-the-market offering.
(2)The net payable to AAG’s wholly-owned subsidiaries consists primarily of amounts due under regional capacity purchase agreements with AAG’s wholly-owned regional airlines operating under the brand name of American Eagle.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
11. Legal Proceedings
Chapter 11 Cases. On November 29, 2011, AMR Corporation (AMR), American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the acquisition of US Airways Group, Inc. by AMR (the Merger).
Pursuant to rulings of the Bankruptcy Court, theThe Plan established a disputed claims reserve (the Disputed Claims Reserve)(DCR) to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. The shares of AAG common stock issued to the Disputed Claims ReserveDCR were originally issued on December 13, 2013 and have at all times since been included in the number of shares issued and outstanding as reported by AAG from time to time in its quarterly and annual reports, including for calculating earnings per common share. As disputed claims are resolved, the claimants receive distributions of shares from the Disputed Claims Reserve.DCR. American is not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims ReserveDCR are not sufficient to fully pay any additional allowed unsecured claims. If any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to AAG but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders under the Plan. In February 2020, 2.2 million shares of AAG common stock were distributed from the Disputed Claims Reserve. After giving effect to this distribution, asAs of September 30, 2020,2021, the Disputed Claims ReserveDCR held approximately 4.8 million shares of AAG common stock.
American has filed a motion to close the bankruptcy case, which is set for a hearing on November 4, 2021. If granted, the order will allow American to settle various bankruptcy-related claims from the DCR, distribute all remaining shares (and accumulated dividends) thereunder and facilitate an end to the bankruptcy case.
Private Party Antitrust Action Related to Passenger Capacity. American, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court). On June 15, 2018, American reached a settlement agreement with the plaintiffs in the amount of $45 million to resolve all class claims in the U.S. lawsuits. That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia. American believes these appeals are without merit and intends to vigorously defend against them.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the Bankruptcy Court. The complaint named as defendants US Airways Group, Inc., US Airways, Inc., AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019. The2019 and the parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019, and they are awaiting2019. On January 29, 2021, the Bankruptcy Court's decision.Court published its decision finding in American’s favor. The plaintiffs have appealed this ruling to the U.S. District Court, which remains pending. American believes this lawsuit is without merit and intends to continue to vigorously defend against it, including against plaintiffs' appeal of the allegations.Bankruptcy Court's January 29, 2021 ruling.
Government Antitrust Action Related to the Northeast Alliance. On September 21, 2021, the United States Department of Justice (DOJ), joined by Attorneys General from six states and the District of Columbia, filed an antitrust complaint against American and JetBlue Airways Corporation (JetBlue) alleging that American and JetBlue violated U.S. antitrust laws in connection with the previously disclosed Northeast Alliance (NEA) arrangement. American believes this complaint is without merit and intends to defend against it vigorously.
Also on September 21, 2021, the United States Department of Transportation (DOT) published a Clarification Notice relating to the agreement that had been reached between the DOT, American, and JetBlue in January 2021, at the conclusion of the DOT’s review of the NEA (DOT Agreement). The DOT Clarification Notice stated, among other things, that the DOT Agreement remains in force during the pendency of the DOJ action against the NEA and, while the DOT retains independent statutory authority to prohibit unfair methods of competition in air transportation, the DOT intends to defer to DOJ to resolve the antitrust concerns that DOJ has identified with respect to the NEA. The DOT simultaneously published a Notice Staying Proceeding in relation to a complaint by Spirit Airlines, Inc. regarding the NEA, pending resolution of the DOJ action described above.
General. In addition to the specifically identified legal proceedings, American and its subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within American’s control. Therefore, although American will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on American are uncertain but could be material.
12. Impairment
Long-lived Assets
Accounting Standards Codification (ASC) 360 - Property, Plant, and Equipment (ASC 360) requires long-lived assets to be assessed for impairment when events and circumstances indicate that the assets may be impaired. Long-lived assets consist of owned flight and ground equipment, ROU assets and definite-lived intangible assets such as certain domestic airport slots and gate leasehold rights, customer relationships and marketing agreements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
As previously discussed, in the first nine months of 2020, American's operations, liquidity and stock price were significantly impacted by decreased passenger demand and government travel restrictions due to COVID-19. Additionally, American decided to retire certain mainline aircraft earlier than planned including Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. As a result of these events and circumstances, in each of the first three quarters of 2020, American performed impairment tests on its long-lived assets in connection with the preparation of American's financial statements.
In accordance with ASC 360, an impairment of a long-lived asset or group of long-lived assets exists only when the sum of the estimated undiscounted future cash flows expected to be generated directly by the assets are less than the carrying value of the assets. American groups assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for which identifiable cash flows exist. Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including American's current fleet plan.
As a result of the impairment tests performed on American's long-lived assets, American determined the sum of the estimated undiscounted future cash flows exceeded the $41.5 billion carrying value for its long-lived assets except for the aircraft being retired earlier than planned as discussed above. For those aircraft and certain related spare parts, American recorded impairment charges reflecting the difference between the carrying values of these assets and their fair values of $714 million and $1.5 billion for the three and nine months ended September 30, 2020, respectively. Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable. Due to the inherent uncertainties of the current operating environment, American will continue to evaluate its current fleet (including aircraft in temporary storage) and may decide to permanently retire additional aircraft.
Goodwill and Indefinite-lived Intangible Assets
ASC 350 - Intangibles - Goodwill and Other (ASC 350) requires goodwill and indefinite-lived intangible assets to be assessed for impairment annually or more frequently if events or circumstances indicate that the fair values of goodwill and indefinite-lived intangible assets may be lower than their carrying values. Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the merger of AAG with US Airways Group, Inc. American has 1 reporting unit. Indefinite-lived intangible assets consist of certain domestic airport slots and international slots and route authorities.
In each of the first three quarters of 2020, American performed interim impairment tests on its goodwill and indefinite-lived intangible assets as a result of the events and circumstances previously discussed due to the impact of COVID-19 on its business. In accordance with ASC 350, for goodwill, American performed a quantitative analysis by using a market approach. Under the market approach, the fair value of the reporting unit was determined based on quoted market prices for equity and the fair value of debt as described in Note 6. The fair value exceeded the carrying value of the reporting unit, and American's $4.1 billion of goodwill was not impaired.
Additionally, American performed interim qualitative impairment tests on its $1.8 billion of indefinite-lived intangible assets and determined there was no material impairment.
As discussed above, due to the inherent uncertainties of the current operating environment, American will continue to evaluate its goodwill and indefinite-lived intangible assets for events or circumstances that indicate that their fair values may be lower than their carrying values.
13. Subsequent Events
On October 21, 2020, American and AAG entered into a Restatement Agreement (the Treasury Loan Restatement Agreement) to the Treasury Loan Agreement. The Treasury Loan Restatement Agreement increased the commitment under the Treasury Term Loan Facility to $7.5 billion, representing an increase of approximately $2.0 billion beyond the approximately $5.5 billion of commitment under the Treasury Term Loan Facility as of the date of execution of the Treasury Loan Agreement. No additional borrowing was made by American on October 21, 2020 in connection with the entry into the Treasury Loan Restatement Agreement. Due to the increase in the commitment under the Treasury Term Loan Facility to $7.5 billion, AAG may now issue up to an aggregate of approximately 60.0 million Treasury Loan Warrant Shares, assuming the Treasury Term Loan Facility, as amended by the Restatement Agreement, is fully drawn.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of AAG’s and American’s Annual Report on Form 10-K for the year ended December 31, 20192020 (the 20192020 Form 10-K). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of AAG and American, but rather updates disclosures made in the 20192020 Form 10-K.
Financial Overview
Impact of Coronavirus (COVID-19)
COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, “shelter in place”“stay at home” orders and business closures. As a result, we have experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in our revenues. While our business performed largely as expected in Januaryglobal vaccination efforts are underway and February of 2020, a severe reduction indemand for air travel starting in March 2020 resulted inhas begun to return, our total operating revenues decreasing approximately 20% incontinued to improve during the first quarter of 2020, 86% in the second quarter of 2020 and 73% in the third quarter of 2020 as compared to the first, second and third quarters of 2019, respectively. While2021, although recovery was weaker than previous expectations, primarily due to the lengthrise in COVID-19 cases associated with the delta variant and severitythe continuation or reimposition of restrictions on global travel. The continued impact of the reductionCOVID-19 pandemic, including any increases in demand dueinfection rates, new variants and renewed governmental action to slow the spread of COVID-19 is uncertain, we expect our results of operations for the remainder of 2020 tocannot be severely impacted.estimated.
We have taken aggressive actions to mitigate the effecteffects of the COVID-19 pandemic on our business, including deep capacity reductions, structural changes to our fleet, cost reductions, and steps to preserve cash and improve our overall liquidity position. We remain extremely focused on taking all self-help measures available to manage our business during this unprecedented time,position, consistent with the terms of the financial assistance we have received from the U.S. Government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.Act (CARES Act), Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) and Section 7301 of the American Rescue Plan Act of 2021 (the ARP).
Capacity Reductions
We have significantly reduced ourOur capacity (as measured by available seat miles), continues to be significantly reduced compared to pre-COVID-19 pandemic levels, with flying during the third quarter of 2020 flying decreased by 59% year-over-year and2021 down 19.4% as compared to the third quarter of 2019. Domestic capacity in the third quarter of 2021 was down 4.7% while international capacity was down 45.9% versus the third quarter of 2019.
We currently expect our fourth quarter of 2020 flying expected2021 system capacity to decrease by more than 50% year-over-year, with long-haulbe down 11% to 13% as compared to the fourth quarter of 2019. While demand for domestic and short-haul international capacity down approximately 75% year-over-year. The demand environmentmarkets has largely recovered to 2019 levels, uncertainty continues to be uncertain as COVID-19 cases have continued to fluctuate in jurisdictions to which we fly and travel restrictions have generally remained in place. Due to this uncertainty, weexist. We will continue to adjustmatch our futureforward capacity to match developingwith observed booking trends in bookings for future travel and make further adjustments to our capacity as needed.
We also announced changes to our international schedule for winter 2020 through summer 2021. We expect our summer 2021 long-haul international capacity to be down 25% compared to 2019, and also plan to exit 19 international routes from six hubs. These changes will allow us to reset our international network for future growth as demand returns.
Fleet
To better align our network with lower passenger demand, we accelerated the retirement of Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. These retirements remove complexity from our operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types. See Note 13 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the accounting for our fleet retirements. Due to the inherent uncertainties of the current operating environment, we will continue to evaluate our current fleet and may decide to permanently retire additional aircraft. In addition, we have placed a number of Boeing 737-800 and certain regional aircraft into temporary storage.
Cost Reductions
We are moving quickly to better align our costs with our reduced schedule. In aggregate, we estimate that we have reduced our 20202021 operating and capital expenditures by more than $1.3 billion, which are permanent non-volume cost reductions and other efficiency measures. These reductions include approximately $17.0 billion. These savings have been achieved primarily through capacity$600 million in labor productivity enhancements, $500 million in management salaries and benefits and $200 million in other permanent cost reductions. In addition, we have implementedAlso, during the first quarter of 2021, an additional 1,600 represented team members opted into a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing all non-critical facility
investments and information technology projects. We have also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs, decreased our management and support staff team, including officers, by approximately 5,100 positions, or 30%, and, as necessary, undertaken furloughs, to reduce our labor costs consistent with our obligations under the CARES Act. In total, more than 20,000 team members have opted for an early retirement or long-term paid leave and approximately 19,000 team members were furloughed starting October 1, 2020. Additionally, we have made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.program.
Liquidity
AtAs of September 30, 2020,2021, we had $13.6$17.9 billion in total available liquidity, consisting of $8.3$14.5 billion in unrestricted cash and short-term investments, $4.9$2.8 billion in an undrawn term loan facilitycapacity under the CARES Actrevolving credit facilities and $400a total of $570 million in an undrawn short-term revolving facility.and other facilities.
During the first nine months of 2020,2021, we completed the following financing transactions (see Note 65 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information):
•refinanced the $1.2issued $3.5 billion 2014 Term Loan Facility at a lower interest rate and extended the maturity from 2021 to 2027;
•raised $1.0 billion from a senior secured delayed draw term loan credit facility;
•issued $500 million in aggregate principal amount of 3.75% unsecured senior notes5.50% Senior Secured Notes due 20252026 and repaid $500 million$3.0 billion in aggregate principal amount of 4.625% unsecured senior notes that matured in March 2020;5.75% Senior Secured Notes due 2029 and entered into the $3.5 billion AAdvantage Term Loan Facility of which the full amount of term loans was drawn at closing;
•borrowedrepaid in full $750 million under the 2013 Revolving Facility, $1.6 billion under the 2014 Revolving Facility and $450 million under the April 2016 Revolving Facility;Facility, all of which was borrowed in the second quarter of 2020 in response to the COVID-19 pandemic;
•issued $1.0 billion in aggregate principal amount of 6.50% convertible senior notes due 2025;
•issued 85.2 million shares of AAG common stock at a price of $13.50 per share pursuant to a public offering of common stock for net proceeds of $1.1 billion;
•issued $2.5 billion in aggregate principal amount of 11.75% senior secured notes due 2025 and repaid the $1.0 billion senior secured delayed draw term loan credit facility that we borrowed in March 2020;
•issued approximately $360$550 million in special facility revenue bonds, of which $47 million was used to fundoutstanding loans under, and terminated, the redemption of certain outstanding bonds;
•entered into a $5.5$7.5 billion secured term loan facility with the U.S. Department of the Treasury (Treasury) (the Treasury Loan Agreement), of which we borrowed $550 million;;
•issued $1.2 billion in aggregate principal amount24.2 million shares of two seriesAAG common stock at an average price of 10.75% senior secured notes due 2026 secured by various collateral;$19.26 per share pursuant to an at-the-market offering for net proceeds of $460 million (approximately $650 million of at-the-market authorization remains available at September 30, 2021);
•raised $392issued approximately $150 million from aircraft sale-leaseback transactions;in special facility revenue bonds related to John F. Kennedy International Airport (JFK), of which $62 million was used to fund the redemption of other bonds related to JFK;
•repaid in full $950 million of the outstanding balance under, and terminated, the April 2016 Spare Parts Term Loan Facility; and
•raised $323$168 million principally from enhanced equipment trust certificates (EETCs) and other aircraft and flight equipment financings, of which $17 million was used to repay existing indebtedness.sale-leaseback transactions.
In addition to the foregoing financings, during the first quarter of 2021, we were initially approved to receivereceived an aggregate of $5.8approximately $3.1 billion in financial assistance to be paid in installments through the payroll support program (Payroll Support Program)(PSP2) established under the CARES Act, all of which was received by the end of July 2020. On September 30, 2020,PSP Extension Law. In April 2021, we received an additional installment of $168$463 million for a totalan aggregate of $6.0$3.5 billion of such financial assistance and, asunder PSP2. In connection with our receipt of this financial assistance, AAG issued a result, the promissory note (the PSPPSP2 Promissory Note) previously issued to Treasury for $1.7 billion was revised upwards to $1.8$1.0 billion in aggregate principal amount and warrants to purchase up to an aggregate of approximately 13.76.6 million shares (the PSP2 Warrant Shares) of AAG common stock were revised upwardsstock.
In the second quarter of 2021, we received an aggregate of approximately $3.3 billion in financial assistance through the payroll support program (PSP3) established under the ARP. In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP3 Promissory Note) to 14.1Treasury for $946 million in aggregate principal amount and warrants to purchase up to an aggregate of approximately 4.4 million shares (the PSPPSP3 Warrant Shares) of AAG common stock. See Note 1 to AAG'sAAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further discussion on the Payroll Support Program.PSP2 and PSP3.
Also, we are permitted to, and will, defer payment of the employerA significant portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022). This deferral is expected to provide approximately $300 million in additional liquidity during 2020. Additionally, we have
suspended our capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act are applicable.
We continue to evaluate future financing opportunities and work with third-party appraisers on valuations of our remaining unencumbered assets.
Certain of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value, andcollateral coverage and/or debt service coverage ratio covenants.
Given the above actions and our current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings and funds from government assistance obtained pursuant to the CARES Act)financings), and projected cash flows from operationsoperations.
AAG’s Third Quarter 20202021 Results
The selected financial data presented below is derived from AAG’s unaudited condensed consolidated financial statements included in Part I, Item 1A of this report and should be read in conjunction with those financial statements and the related notes thereto.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | |
Decrease | | Percent Decrease |
| | 2020 | | 2019 | | | | |
| | (In millions, except percentage changes) | | | | | | |
| Passenger revenue | $ | 2,540 | | | $ | 10,995 | | | $ | (8,455) | | | (76.9) | |
| Cargo revenue | 207 | | | 208 | | | (1) | | | (0.4) | |
| Other operating revenue | 426 | | | 708 | | | (282) | | | (39.9) | |
| Total operating revenues | 3,173 | | | 11,911 | | | (8,738) | | | (73.4) | |
| Mainline and regional aircraft fuel and related taxes | 611 | | | 2,474 | | | (1,863) | | | (75.3) | |
| Salaries, wages and benefits | 2,705 | | | 3,219 | | | (514) | | | (16.0) | |
| Total operating expenses | 6,044 | | | 11,103 | | | (5,059) | | | (45.6) | |
| Operating income (loss) | (2,871) | | | 808 | | | (3,679) | | | nm (2) |
| Pre-tax income (loss) | (3,095) | | | 557 | | | (3,652) | | | nm |
| Income tax provision (benefit) | (696) | | | 132 | | | (828) | | | nm |
| Net income (loss) | (2,399) | | | 425 | | | (2,824) | | | nm |
| | | | | | | |
| Pre-tax income (loss) – GAAP | $ | (3,095) | | | $ | 557 | | | $ | (3,652) | | | nm |
Adjusted for: Pre-tax net special items (1) | (540) | | | 278 | | | (818) | | | nm |
| Pre-tax income (loss) excluding net special items | $ | (3,635) | | | $ | 835 | | | $ | (4,470) | | | nm |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase
(Decrease) | | Percent Increase (Decrease) |
| | 2021 | | 2020 | |
| | (In millions, except percentage changes) |
| Passenger revenue | $ | 7,957 | | | $ | 2,540 | | | $ | 5,417 | | | nm (2) |
| Cargo revenue | 332 | | | 207 | | | 125 | | | 59.9 |
| Other operating revenue | 680 | | | 426 | | | 254 | | | 59.8 |
| Total operating revenues | 8,969 | | | 3,173 | | | 5,796 | | | nm |
| Aircraft fuel and related taxes | 1,952 | | | 611 | | | 1,341 | | | nm |
| Salaries, wages and benefits | 3,018 | | | 2,763 | | | 255 | | | 9.3 |
| Total operating expenses | 8,374 | | | 6,044 | | | 2,330 | | | 38.5 |
| Operating income (loss) | 595 | | | (2,871) | | | (3,466) | | | nm |
| Pre-tax income (loss) | 206 | | | (3,095) | | | (3,301) | | | nm |
| Income tax provision (benefit) | 37 | | | (696) | | | (733) | | | nm |
| Net income (loss) | 169 | | | (2,399) | | | (2,568) | | | nm |
| | | | | | | |
| Pre-tax income (loss) – GAAP | $ | 206 | | | $ | (3,095) | | | $ | (3,301) | | | nm |
Adjusted for: pre-tax net special items (1) | (1,039) | | | (540) | | | 499 | | | 92.5 |
| Pre-tax loss excluding net special items | $ | (833) | | | $ | (3,635) | | | $ | (2,802) | | | (77.1) |
(1)See below “Reconciliation of GAAP to Non-GAAP Financial Measures” and Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for details on the components of net special items.
(2)Not meaningful or greater than 100% change. In addition, due to the volatility caused by the COVID-19 pandemic, many line item fluctuations may be expressed as not meaningful.
Pre-Tax Income (Loss) and Net Income (Loss)
Pre-tax lossincome and net lossincome were $3.1 billion$206 million and $2.4 billion,$169 million, respectively, in the third quarter of 2020.2021. This compares to third quarter 20192020 pre-tax incomeloss and net incomeloss of $557 million$3.1 billion and $425 million,$2.4 billion, respectively. The quarter-over-quarter decrease in our pre-tax income was principally driven by lower revenues as a result of a decline in passenger demand and government travel restrictions related to the outbreak and spread of COVID-19. This decline in revenues was offset in part by a decrease in expenses due to our reduced schedule and cost reduction actions described above. Additionally, we recognized $540 million of net special credits during the third quarter of 2020 driven principally by the Payroll Support Program financial assistance (the PSP Financial Assistance), offset in part by severance expenses and fleet impairment charges. See Notes 1 and 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the PSP Financial Assistance and net special items, respectively.
Excluding the effects of pre-tax net special items, pre-tax loss was $833 million and $3.6 billion in the third quarter of 2021 and 2020, and pre-tax income was $835 million in the third quarter of 2019.respectively. The quarter-over-quarter decreaseimprovement in our pre-tax income (loss), on both a GAAP basis and excluding pre-tax net special items, was principallyprimarily due to higher revenues driven by lower revenuesdomestic and decreasedshort-haul international leisure demand, offset in part by an increase in our operating expenses due to doubling our reduced schedule and cost reduction actionscapacity as described above.compared to the third quarter of 2020 as demand returned from the trough of the COVID-19 pandemic.
Revenue
In the third quarter of 2020,2021, we reported total operating revenues of $3.2$9.0 billion, an increase of $5.8 billion as compared to the third quarter of 2020. Passenger revenue was $8.0 billion in the third quarter of 2021, an increase of $5.4 billion as compared to the third quarter of 2020. The increase in passenger revenue in the third quarter of 2021 was due to increased revenue passenger miles (RPMs) driven by domestic and short-haul international leisure demand, resulting in a decrease78.7% load factor in the third quarter of $8.7 billion,2021.
In the third quarter of 2021, cargo revenue was $332 million, an increase of $125 million, or 73.4%59.9%, as compared to the third quarter of 2019. Passenger2020. The increase in cargo revenue was $2.5 billionprimarily due to a 51.5% increase in the third quartercargo ton miles reflecting increases in freight volumes, principally as a result of 2020, a decrease of $8.5 billion,adding international widebody capacity and cargo-only flights to our schedule.
Other operating revenue increased $254 million, or 76.9%59.8%, as compared to the third quarter of 2019. The decrease in passenger revenue in the third quarter of 2020, was due to a decline in passenger demand and government travel restrictions related to COVID-19, resulting in a 72.1% quarter-over-quarter decrease in revenue passenger miles (RPMs) and a 26.7 point decrease in passenger load factor.
Cargo revenue decreased $1 million, or 0.4%, as compared to the third quarter of 2019, primarily due to an 83.6% increase in yield as a result of rate increases which was offset by a 45.8% decrease in cargo ton miles reflecting declines in freight volumes, principally as a result of international schedule reductions.
Other operating revenue decreased $282 million, or 39.9%, as compared to the third quarter of 2019, driven primarily by lowerhigher revenue associated with our loyalty program and airport clubs.program.
Our total revenue per available seat mile (TRASM) was 14.68 cents in the third quarter of 2021, a 42.3% increase as compared to 10.31 cents in the third quarter of 2020, a 34.4% decrease as compared to 15.71 cents2020.
Fuel
Aircraft fuel expense was $2.0 billion in the third quarter of 2019.
Fuel
Our mainline and regional fuel expense totaled $611 million in the third quarter of 2020,2021, which was $1.9$1.3 billion or 75.3%, lowerhigher as compared to the third quarter of 2019.2020. This decreaseincrease was primarily driven by a 58.7% decreasean 88.5% increase in gallons of fuel consumedconsumption as a result of lowerincreased capacity and a 40.1% decrease69.3% increase in the average price per gallon of aircraft fuel including related taxes to $2.07 in the third quarter of 2021 from $1.23 in the third quarter of 2020 from $2.05 in the third quarter of 2019.2020.
As of September 30, 2020,2021, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors. Although spot prices for oil and jet fuel are presently very low by historical standards, weWe do not currently view the market opportunities to hedge fuel prices as attractive because, among other things, the forward curve for the purchase of such products, or hedges relatedour future fuel needs remain unclear due to such products, is very steep,uncertainties regarding air travel demand and any hedging would potentially require significant capital or collateral to be placed at risk, and our future fuel needs remain unclear due to uncertainties regarding air travel demand.risk. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices.
Other Costs
We remain committed to actively managing our cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: general economic conditions and the price of fuel. In particular, the onset of the COVID-19 pandemic has resulted in a very rapid deterioration in general economic conditions.
Our 20202021 third quarter total operating cost per available seat mile (CASM) was 19.6413.70 cents, an increasea decrease of 34.2%30.2%, from 14.6419.64 cents in the third quarter of 2019. Lower than planned2020. This decrease in CASM was primarily driven by higher capacity in the third quarter of 2020 due to decreasedincreased passenger demand and government travel restrictions related to COVID-19 drove the increase in our CASM,cost reduction and efficiency initiatives as discussed above, offset in part by the PSP Financial Assistance recognizedan increase in thefuel price.
Our 2021 third quarter of 2020.
Our 2020 third quartertotal operating CASM excluding net special items and fuel was 19.3412.24 cents, as compared to 11.07a decrease of 36.7%, from 19.34 cents in the third quarter of 2019. The increase2020. This decrease in CASM excluding net special items and fuel was primarily driven by lowerhigher capacity in the third quarter of 2020and cost reduction and efficiency initiatives as described above.previously discussed.
For a reconciliation of total operating CASM to total operating CASM excluding net special items and fuel, see below “Reconciliation of GAAP to Non-GAAP Financial Measures.”
Reconciliation of GAAP to Non-GAAP Financial Measures
We sometimes use financial measures that are derived from the condensed consolidated financial statements but that are not presented in accordance with GAAP to understand and evaluate our current operating performance and to allow for period-to-period comparisons. We believe these non-GAAP financial measures may also provide useful information to investors and others. These non-GAAP measures may not be comparable to similarly titled non-GAAP measures of other companies, and should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with GAAP. We are providing a reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis.
The following table presents the reconciliation of pre-tax income (loss) (GAAP measure) to pre-tax income (loss)loss excluding net special items (non-GAAP measure). Management uses this non-GAAP financial measure to evaluate our current operating performance and to allow for period-to-period comparisons. As net special items may vary from period-to-period in nature and amount, the adjustment to exclude net special items allows management an additional tool to understand our core operating performance.
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (In millions) | | | (In millions) |
| Reconciliation of Pre-Tax Income (Loss) Excluding Net Special Items: | | |
| Pre-tax income (loss) - GAAP | $ | (3,095) | | | $ | 557 | | | $ | (8,644) | | | $ | 1,685 | | |
| Reconciliation of Pre-Tax Loss Excluding Net Special Items: | | Reconciliation of Pre-Tax Loss Excluding Net Special Items: | |
| Pre-tax income (loss) – GAAP | | Pre-tax income (loss) – GAAP | $ | 206 | | | $ | (3,095) | | | $ | (1,357) | | | $ | (8,644) | |
Pre-tax net special items (1): | Pre-tax net special items (1): | | Pre-tax net special items (1): | |
| Operating special items, net | Operating special items, net | (519) | | | 234 | | | (966) | | | 493 | | Operating special items, net | (1,057) | | | (519) | | | (4,435) | | | (966) | |
| Nonoperating special items, net | Nonoperating special items, net | (21) | | | 44 | | | 207 | | | 43 | | Nonoperating special items, net | 18 | | | (21) | | | 31 | | | 207 | |
| Total pre-tax net special items | Total pre-tax net special items | (540) | | | 278 | | | (759) | | | 536 | | Total pre-tax net special items | (1,039) | | | (540) | | | (4,404) | | | (759) | |
| Pre-tax income (loss) excluding net special items | $ | (3,635) | | | $ | 835 | | | $ | (9,403) | | | $ | 2,221 | | |
| Pre-tax loss excluding net special items | | Pre-tax loss excluding net special items | $ | (833) | | | $ | (3,635) | | | $ | (5,761) | | | $ | (9,403) | |
(1)See Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on net special items.
Additionally, the table below presents the reconciliation of total operating expenses (GAAP measure) to total operating costs excluding net special items and fuel (non-GAAP measure). and CASM to CASM excluding net special items and fuel. Management uses total operating costs and CASM excluding net special items and aircraft fuel to evaluate our current operating performance and for period-to-period comparisons. The price of fuel, over which we have no control, impacts the comparability of period-to-period financial performance. The adjustment to exclude aircraft fuel and net special items allows management an additional tool to understand and analyze our non-fuel costs and core operating performance. Amounts may not recalculate due to rounding.
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Reconciliation of Total Operating Costs per Available Seat Mile (CASM) Excluding Net Special Items and Fuel: | | | | | | | | |
| Reconciliation of CASM Excluding Net Special Items and Fuel: | | Reconciliation of CASM Excluding Net Special Items and Fuel: | | | | | | | |
| (In millions) | (In millions) | | (In millions) | |
| Total operating expenses - GAAP | $ | 6,044 | | | $ | 11,103 | | | $ | 21,215 | | | $ | 32,119 | | |
| Total operating expenses – GAAP | | Total operating expenses – GAAP | $ | 8,374 | | | $ | 6,044 | | | $ | 20,734 | | | $ | 21,215 | |
Operating net special items (1): | Operating net special items (1): | | Operating net special items (1): | |
| Mainline operating special items, net | Mainline operating special items, net | 295 | | | (228) | | | 657 | | | (487) | | Mainline operating special items, net | 990 | | | 295 | | | 3,986 | | | 657 | |
| Regional operating special items, net | Regional operating special items, net | 224 | | | (6) | | | 309 | | | (6) | | Regional operating special items, net | 67 | | | 224 | | | 449 | | | 309 | |
| Fuel: | | |
| Aircraft fuel and related taxes - mainline | (453) | | | (1,989) | | | (2,065) | | | (5,710) | | |
| Aircraft fuel and related taxes - regional | (158) | | | (485) | | | (638) | | | (1,395) | | |
| Aircraft fuel and related taxes | | Aircraft fuel and related taxes | (1,952) | | | (611) | | | (4,596) | | | (2,703) | |
| Total operating expenses, excluding net special items and fuel | Total operating expenses, excluding net special items and fuel | $ | 5,952 | | | $ | 8,395 | | | $ | 19,478 | | | $ | 24,521 | | Total operating expenses, excluding net special items and fuel | $ | 7,479 | | | $ | 5,952 | | | $ | 20,573 | | | $ | 19,478 | |
| | Total Available Seat Miles (ASM) | Total Available Seat Miles (ASM) | 30,768 | | | 75,820 | | | 109,948 | | | 214,816 | | Total Available Seat Miles (ASM) | 61,111 | | | 30,768 | | | 153,431 | | | 109,948 | |
| (In cents) | (In cents) | | (In cents) | |
| Total operating CASM | 19.64 | | | 14.64 | | | 19.30 | | | 14.95 | | |
| CASM | | CASM | 13.70 | | | 19.64 | | | 13.51 | | | 19.30 | |
Operating net special items per ASM (1): | Operating net special items per ASM (1): | | Operating net special items per ASM (1): | |
| Mainline operating special items, net | Mainline operating special items, net | 0.96 | | | (0.30) | | | 0.60 | | | (0.23) | | Mainline operating special items, net | 1.62 | | | 0.96 | | | 2.60 | | | 0.60 | |
| Regional operating special items, net | Regional operating special items, net | 0.73 | | | (0.01) | | | 0.28 | | | — | | Regional operating special items, net | 0.11 | | | 0.73 | | | 0.29 | | | 0.28 | |
| Fuel per ASM: | | |
| Aircraft fuel and related taxes - mainline | (1.47) | | | (2.62) | | | (1.88) | | | (2.66) | | |
| Aircraft fuel and related taxes - regional | (0.51) | | | (0.64) | | | (0.58) | | | (0.65) | | |
| Total operating CASM, excluding net special items and fuel | 19.34 | | | 11.07 | | | 17.72 | | | 11.41 | | |
| Aircraft fuel and related taxes per ASM | | Aircraft fuel and related taxes per ASM | (3.19) | | | (1.98) | | | (3.00) | | | (2.46) | |
| CASM, excluding net special items and fuel | | CASM, excluding net special items and fuel | 12.24 | | | 19.34 | | | 13.41 | | | 17.72 | |
(1)See Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on net special items.
AAG’s Results of Operations
Operating Statistics
The table below sets forth selected operating data for the three and nine months ended September 30, 20202021 and 2019.2020. Amounts may not recalculate due to rounding.
| | | | Three Months Ended
September 30, | | | Increase (Decrease) | | Nine Months Ended
September 30, | | | Increase (Decrease) | | Three Months Ended
September 30, | | Increase
(Decrease) | | Nine Months Ended
September 30, | | Increase (Decrease) |
| | | 2020 | | 2019 | | | 2020 | | 2019 | | | Increase (Decrease) | 2021 | | 2020 | | Increase
(Decrease) | | 2020 | | Increase (Decrease) |
Revenue passenger miles (millions) (a) | Revenue passenger miles (millions) (a) | 18,121 | | | 64,874 | | | (72.1) | % | | 70,523 | | | 182,334 | | | (61.3) | % | Revenue passenger miles (millions) (a) | 48,069 | | | 18,121 | | | nm% | | 112,555 | | 70,523 | | | 59.6% |
Available seat miles (millions) (b) | Available seat miles (millions) (b) | 30,768 | | | 75,820 | | | (59.4) | % | | 109,948 | | | 214,816 | | | (48.8) | % | Available seat miles (millions) (b) | 61,111 | | | 30,768 | | | 98.6% | | 153,431 | | | 109,948 | | | 39.5% |
Passenger load factor (percent) (c) | Passenger load factor (percent) (c) | 58.9 | | | 85.6 | | | (26.7) | pts | | 64.1 | | | 84.9 | | | (20.8) | pts | Passenger load factor (percent) (c) | 78.7 | | | 58.9 | | | 19.8pts | | 73.4 | | | 64.1 | | | 9.3pts |
Yield (cents) (d) | Yield (cents) (d) | 14.01 | | | 16.95 | | | (17.3) | % | | 16.06 | | | 17.37 | | | (7.5) | % | Yield (cents) (d) | 16.55 | | | 14.01 | | | 18.1% | | 15.71 | | | 16.06 | | | (2.2)% |
Passenger revenue per available seat mile (cents) (e) | Passenger revenue per available seat mile (cents) (e) | 8.25 | | | 14.50 | | | (43.1) | % | | 10.30 | | | 14.74 | | | (30.1) | % | Passenger revenue per available seat mile (cents) (e) | 13.02 | | | 8.25 | | | 57.8% | | 11.52 | | | 10.30 | | | 11.9% |
Total revenue per available seat mile (cents) (f) | Total revenue per available seat mile (cents) (f) | 10.31 | | | 15.71 | | | (34.4) | % | | 12.11 | | | 16.04 | | | (24.5) | % | Total revenue per available seat mile (cents) (f) | 14.68 | | | 10.31 | | | 42.3% | | 13.33 | | | 12.11 | | | 10.1% |
Aircraft at end of period (g) | 1,381 | | | 1,552 | | | (11.0) | % | | 1,381 | | | 1,552 | | | (11.0) | % | |
| Fuel consumption (gallons in millions) | Fuel consumption (gallons in millions) | 499 | | | 1,209 | | | (58.7) | % | | 1,745 | | | 3,420 | | | (49.0) | % | Fuel consumption (gallons in millions) | 941 | | | 499 | | | 88.5% | | 2,393 | | | 1,745 | | | 37.1% |
| Average aircraft fuel price including related taxes (dollars per gallon) | Average aircraft fuel price including related taxes (dollars per gallon) | 1.23 | | | 2.05 | | | (40.1) | % | | 1.55 | | | 2.08 | | | (25.4) | % | Average aircraft fuel price including related taxes (dollars per gallon) | 2.07 | | | 1.23 | | | 69.3% | | 1.92 | | | 1.55 | | | 24.0% |
Total operating cost per available seat mile (cents) (g) | | Total operating cost per available seat mile (cents) (g) | 13.70 | | | 19.64 | | | (30.2)% | | 13.51 | | | 19.30 | | | (30.0)% |
Aircraft at end of period (h) | | Aircraft at end of period (h) | 1,414 | | | 1,381 | | | 2.4% | | 1,414 | | | 1,381 | | | 2.4% |
| Full-time equivalent employees at end of period | Full-time equivalent employees at end of period | 110,500 | | | 131,900 | | | (16.2) | % | | 110,500 | | | 131,900 | | | (16.2) | % | Full-time equivalent employees at end of period | 119,800 | | | 110,500 | | | 8.4% | | 119,800 | | | 110,500 | | | 8.4% |
Operating cost per available seat mile (cents) (h) | 19.64 | | | 14.64 | | | 34.2 | % | | 19.30 | | | 14.95 | | | 29.1 | % | |
(a)Revenue passenger mile (RPM) – A basic measure of sales volume. One RPM represents one passenger flown one mile.
(b)Available seat mile (ASM) – A basic measure of production. One ASM represents one seat flown one mile.
(c)Passenger load factor – The percentage of available seats that are filled with revenue passengers.
(d)Yield – A measure of airline revenue derived by dividing passenger revenue by RPMs.
(e)Passenger revenue per available seat mile (PRASM) – Passenger revenue divided by ASMs.
(f)Total revenue per available seat mile (TRASM) – Total revenues divided by ASMs.
(g)Total operating cost per available seat mile (CASM) – Total operating expenses divided by ASMs.
(h)Includes aircraft owned and leased by American as well as aircraft operated by third-party regional carriers under capacity purchase agreements. Excludes 1237 mainline aircraft and 29nine regional aircraft that are in temporary storage at September 30, 2021 as follows: 13 Embraer 175, 1237 Boeing 737-800, seven Embraer 140, sixeight Embraer 145 and three Bombardier CRJ900 aircraft.
(h)Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs.one Embraer 170.
Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 2019
As discussed above, our results of operations for the three months ended September 30, 2020 were significantly impacted by COVID-19. As a result, the comparison of these results to the three months ended September 30, 2019 are largely not meaningful. Refer to the "Financial Overview" above for discussion of our third quarter of 2020 financial results and the impact of COVID-19 on our business.
Operating Revenues
| | | | Three Months Ended
September 30, | | | Decrease | | Percent Decrease | | Three Months Ended
September 30, | | Increase | | Percent Increase |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent Increase |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Passenger | Passenger | $ | 2,540 | | | $ | 10,995 | | | $ | (8,455) | | | (76.9) | | Passenger | $ | 7,957 | | | $ | 2,540 | | | $ | 5,417 | | | nm |
| Cargo | Cargo | 207 | | | 208 | | | (1) | | | (0.4) | | Cargo | 332 | | | 207 | | | 125 | | | 59.9 |
| Other | Other | 426 | | | 708 | | | (282) | | | (39.9) | | Other | 680 | | | 426 | | | 254 | | | 59.8 |
| Total operating revenues | Total operating revenues | $ | 3,173 | | | $ | 11,911 | | | $ | (8,738) | | | (73.4) | | Total operating revenues | $ | 8,969 | | | $ | 3,173 | | | $ | 5,796 | | | nm |
This table presents our passenger revenue and the quarter-over-quarter change in certain operating statistics:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Decrease
vs. Three Months Ended September 30, 2019 | | | | | | | | |
| | Three Months Ended
September 30, 2020 | | RPMs | | ASMs | | Load Factor | | Passenger Yield | | PRASM |
| | (In millions) | | | | | | | | | | |
| Passenger revenue | $ | 2,540 | | | (72.1)% | | (59.4) | % | | (26.7) | pts | | (17.3) | % | | (43.1) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase vs. Three Months Ended September 30, 2020 |
| | Three Months Ended
September 30, 2021 | | RPMs | | ASMs | | Load Factor | | Passenger Yield | | PRASM |
| | (In millions) | | | | | | | | | | |
| Passenger revenue | $ | 7,957 | | | nm% | | 98.6% | | 19.8pts | | 18.1% | | 57.8% |
Passenger revenue increased $5.4 billion in the third quarter of 2021 from the third quarter of 2020 primarily due to increased RPMs driven by domestic and short-haul international leisure demand, resulting in a 78.7% load factor in the third quarter of 2021.
Cargo revenue increased $125 million, or 59.9%, in the third quarter of 2021 from the third quarter of 2020 primarily due to a 51.5% increase in cargo ton miles reflecting increases in freight volumes, principally as a result of adding international widebody capacity and cargo-only flights to our schedule.
Other operating revenue increased $254 million, or 59.8%, as compared to the third quarter of 2020, driven primarily by higher revenue associated with our loyalty program.
Total operating revenues in the third quarter of 2020 decreased $8.72021 increased $5.8 billion or 73.4%, from the third quarter of 2019, primarily due to a decline2020 driven principally by the increase in passenger demand and government travel restrictions relatedrevenue as described above. Our TRASM was 14.68 cents in the third quarter of 2021, a 42.3% increase as compared to COVID-19.10.31 cents in the third quarter of 2020.
Operating Expenses
| | | | Three Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Three Months Ended
September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent Increase (Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Aircraft fuel and related taxes | Aircraft fuel and related taxes | $ | 453 | | | $ | 1,989 | | | $ | (1,536) | | | (77.2) | | Aircraft fuel and related taxes | $ | 1,952 | | | $ | 611 | | | $ | 1,341 | | | nm |
| Salaries, wages and benefits | Salaries, wages and benefits | 2,705 | | | 3,219 | | | (514) | | | (16.0) | | Salaries, wages and benefits | 3,018 | | | 2,763 | | | 255 | | | 9.3 |
| Regional expenses | | Regional expenses | 887 | | | 529 | | | 358 | | | 67.8 |
| Maintenance, materials and repairs | Maintenance, materials and repairs | 337 | | | 610 | | | (273) | | | (44.7) | | Maintenance, materials and repairs | 548 | | | 337 | | | 211 | | | 62.3 |
| Other rent and landing fees | Other rent and landing fees | 367 | | | 530 | | | (163) | | | (30.8) | | Other rent and landing fees | 694 | | | 472 | | | 222 | | | 47.1 |
| Aircraft rent | Aircraft rent | 336 | | | 335 | | | 1 | | | 0.2 | | Aircraft rent | 358 | | | 336 | | | 22 | | | 6.6 |
| Selling expenses | Selling expenses | 70 | | | 424 | | | (354) | | | (83.5) | | Selling expenses | 318 | | | 97 | | | 221 | | | nm |
| Depreciation and amortization | Depreciation and amortization | 498 | | | 499 | | | (1) | | | (0.3) | | Depreciation and amortization | 480 | | | 498 | | | (18) | | | (3.5) |
| Mainline operating special items, net | Mainline operating special items, net | (295) | | | 228 | | | (523) | | | nm | Mainline operating special items, net | (990) | | | (295) | | | (695) | | | nm |
| Other | Other | 659 | | | 1,336 | | | (677) | | | (50.7) | | Other | 1,109 | | | 696 | | | 413 | | | 59.2 |
| Regional expenses: | | |
| Aircraft fuel and related taxes | 158 | | | 485 | | | (327) | | | (67.4) | | |
| Other | 756 | | | 1,448 | | | (692) | | | (47.8) | | |
| Total operating expenses | Total operating expenses | $ | 6,044 | | | $ | 11,103 | | | $ | (5,059) | | | (45.6) | | Total operating expenses | $ | 8,374 | | | $ | 6,044 | | | $ | 2,330 | | | 38.5 |
Total operating expenses decreased $5.1increased $2.3 billion, or 45.6%38.5%, in the third quarter of 20202021 from the third quarter of 20192020 primarily due to increases in aircraft fuel and related taxes and our reduced schedule and cost reduction actions as described in the "Financial Overview" above.increased capacity.
Aircraft fuel and related taxes increased $1.3 billion in the third quarter of 2021 from the third quarter of 2020 primarily due to an 88.5% increase in fuel consumption as a result of increased capacity and a 69.3% increase in the average price per gallon of aircraft fuel including related taxes to $2.07 in the third quarter of 2021 from $1.23 in the third quarter of 2020.
Aircraft rent increased $22 million, or 6.6%, in the third quarter of 2021 from the third quarter of 2020 primarily due to the delivery of 31 new leased mainline aircraft subsequent to the third quarter of 2020.
Selling expenses increased $221 million in the third quarter of 2021 from the third quarter of 2020 due to higher commission expense and credit card fees driven by the overall increase in revenues.
Operating Special Items, Net
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| | | (In millions) | | | (In millions) |
PSP Financial Assistance (1) | PSP Financial Assistance (1) | $ | (1,908) | | | $ | — | | PSP Financial Assistance (1) | $ | (992) | | | $ | (1,908) | |
| Mark-to-market adjustments on bankruptcy obligations, net | | Mark-to-market adjustments on bankruptcy obligations, net | (1) | | | — | |
Severance expenses (2) | Severance expenses (2) | 871 | | | — | | Severance expenses (2) | — | | | 871 | |
Fleet impairment (3) | Fleet impairment (3) | 742 | | | 201 | | Fleet impairment (3) | — | | | 742 | |
Fleet restructuring expenses (4) | — | | | 72 | | |
| Litigation reserve adjustments | — | | | (53) | | |
| Merger integration expenses | — | | | 29 | | |
Mark-to-market adjustments on bankruptcy obligations, net (5) | — | | | (22) | | |
| | Other operating special items, net | Other operating special items, net | — | | | 1 | | Other operating special items, net | 3 | | | — | |
| Mainline operating special items, net | Mainline operating special items, net | (295) | | | 228 | | Mainline operating special items, net | (990) | | | (295) | |
| PSP Financial Assistance (1) | PSP Financial Assistance (1) | (228) | | | — | | PSP Financial Assistance (1) | (128) | | | (228) | |
| Regional pilot retention program (4) | | Regional pilot retention program (4) | 61 | | | — | |
Severance expenses (2) | Severance expenses (2) | 4 | | | — | | Severance expenses (2) | — | | | 4 | |
| Other operating special items, net | — | | | 6 | | |
| Regional operating special items, net | Regional operating special items, net | (224) | | | 6 | | Regional operating special items, net | (67) | | | (224) | |
| Operating special items, net | Operating special items, net | $ | (519) | | | $ | 234 | | Operating special items, net | $ | (1,057) | | | $ | (519) | |
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the Payroll Support Program Agreement (PSP Agreement).PSP2 and PSP3 Agreements. See Note 11(b) to AAG's Condensed Consolidated Financial Statements in Part I, Item 1A for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2)Severance expenses principally include salary and medical costs primarily associated with certain team members who opted in tointo voluntary early retirement programs offered as a result of reductions to our operation due to COVID-19. These expenses in the three months ended September 30, 2020 also include salary and medical costs associated with team members who were notified in the third quarter of 2020 they were being involuntarily furloughed starting October 1, 2020, subsequent to the expiration of the Payroll Support Program requirement against involuntary furloughs.COVID-19 pandemic. Cash payments primarily related to these chargesour voluntary early retirement programs for the three months ended September 30, 2021 and 2020 were approximately $190 million and $120 million.million, respectively.
(3)Fleet impairment charges resulted from our decision to retirethe retirement of certain aircraft earlier than planned driven primarily by the severe decline in air travel due to COVID-19. See Note 13 to AAG’s Condensed Consolidated Financial Statementsthe COVID-19 pandemic. In the third quarter of 2020, we retired our Airbus A330-200 fleet which resulted in Part I, Item 1A for further information related to these charges.
The three months ended September 30, 2020 included a $709 million non-cash write-down of Airbus A330-200 aircraft and associated spare parts and $33 million in cash charges primarily for lease return and other costs.
(4)Fleet restructuring expenses principally included accelerated depreciation and rent expenseOur regional pilot retention program provides for, aircraft and related equipment expectedamong other things, a cash retention bonus to be retired earlier than planned.
(5)Bankruptcy obligations that will be settledpaid in sharesthe fourth quarter of 2021 to eligible captains at our common stock are marked-to-market basedwholly-owned regional airlines included on our stock price.the pilot seniority list as of September 1, 2021.
Nonoperating Results
| | | | Three Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Three Months Ended
September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent Increase (Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Interest income | Interest income | $ | 5 | | | $ | 34 | | | $ | (29) | | | (84.9) | | Interest income | $ | 5 | | | $ | 5 | | | $ | — | | | (4.1) |
| Interest expense, net | Interest expense, net | (340) | | | (284) | | | (56) | | | 19.6 | | Interest expense, net | (476) | | | (340) | | | (136) | | | 40.0 |
| Other income (expense), net | 111 | | | (1) | | | 112 | | | nm | |
| Other income, net | | Other income, net | 82 | | | 111 | | | (29) | | | (26.0) |
| Total nonoperating expense, net | Total nonoperating expense, net | $ | (224) | | | $ | (251) | | | $ | 27 | | | (10.8) | | Total nonoperating expense, net | $ | (389) | | | $ | (224) | | | $ | (165) | | | 73.8 |
Interest income decreased in the third quarter of 2020 compared to the third quarter of 2019 primarily as a result of lower returns on our short-term investments. Interest expense, net increased in the third quarter of 20202021 compared to the third quarter of 20192020 primarily due to the issuance of debt.debt subsequent to the third quarter of 2020, including $10.0 billion associated with the AAdvantage Financing, to improve our liquidity position in response to the COVID-19 pandemic. See Note 5 to AAG's Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the AAdvantage Financing.
In the third quarter of 2021, other nonoperating income, net included $80 million of non-service related pension and other postretirement benefit plan income.
In the third quarter of 2020, other nonoperating income, net included $84 million of non-service related pension and other postretirement benefit plan income and $21 million of net special credits principally for mark-to-market unrealized gains associated with our equity investment in China Southern Airlines Company Limited (China Southern Airlines).
In the third quarter of 2019, other nonoperating expense, net included $44 million of net special charges principally for mark-to-market unrealized losses associated with our equity investment in China Southern Airlines and certain treasury rate lock derivative instruments, offset in part by $47 million of non-service related pension and other postretirement benefit plan income.
The increase in non-service related pension and other postretirement benefit plan income in the third quarter of 2020 as compared to the third quarter of 2019 is principally due to an increase in the expected return on pension plan assets.
Income Taxes
In the third quarter of 2020,2021, we recorded an income tax benefitprovision of $696$37 million. Substantially all of our income or loss before income taxes is attributable to the United States.
See Note 76 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on income taxes.
Nine Months Ended September 30, 20202021 Compared to Nine Months Ended September 30, 2019
As discussed above, our results of operations for the nine months ended September 30, 2020 were significantly impacted by COVID-19. As a result, the comparison of these results to the nine months ended September 30, 2019 are largely not meaningful. Refer to the "Financial Overview" above for discussion of our first nine months of 2020 financial results and the impact of COVID-19 on our business.
Operating Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | |
Decrease | | Percent Decrease |
| | 2020 | | 2019 | | | | |
| | (In millions, except percentage changes) | | | | | | |
| Passenger | $ | 11,328 | | | $ | 31,663 | | | $ | (20,335) | | | (64.2) |
| Cargo | 484 | | | 647 | | | (163) | | | (25.1) |
| Other | 1,497 | | | 2,145 | | | (648) | | | (30.2) |
| Total operating revenues | $ | 13,309 | | | $ | 34,455 | | | $ | (21,146) | | | (61.4) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | |
Increase | | Percent
Increase |
| | 2021 | | 2020 | |
| | (In millions, except percentage changes) |
| Passenger | $ | 17,682 | | | $ | 11,328 | | | $ | 6,354 | | | 56.1 |
| Cargo | 973 | | | 484 | | | 489 | | | nm |
| Other | 1,800 | | | 1,497 | | | 303 | | | 20.2 |
| Total operating revenues | $ | 20,455 | | | $ | 13,309 | | | $ | 7,146 | | | 53.7 |
This table presents our passenger revenue and the period-over-period change in certain operating statistics:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Decrease
vs. Nine Months Ended September 30, 2019 | | | | | | | | |
| | Nine Months Ended
September 30, 2020 | | RPMs | | ASMs | | Load Factor | | Passenger Yield | | PRASM |
| | (In millions) | | | | | | | | | | |
| Passenger revenue | $ | 11,328 | | | (61.3)% | | (48.8)% | | (20.8) | pts | | (7.5)% | | (30.1) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase (Decrease) vs. Nine Months Ended September 30, 2020 |
| | Nine Months Ended
September 30, 2021 | | RPMs | | ASMs | | Load Factor | | Passenger Yield | | PRASM |
| | (In millions) | | | | | | | | | | |
| Passenger revenue | $ | 17,682 | | | 59.6% | | 39.5% | | 9.3pts | | (2.2)% | | 11.9% |
Passenger revenue increased $6.4 billion, or 56.1%, in the first nine months of 2021 from the first nine months of 2020 primarily due to a 59.6% increase in RPMs. This increase in RPMs was principally due to increased flying domestically and in Latin America driven by leisure demand, offset in part by reduced Atlantic and Pacific flying as a result of low passenger demand and government-imposed travel restrictions related to the COVID-19 pandemic. A 2.2% decrease in passenger yield offset in part the capacity driven increase to passenger revenue.
Cargo revenue increased $489 million in the first nine months of 2021 from the first nine months of 2020 primarily due to a 68.3% increase in cargo ton miles reflecting higher freight volumes and the addition of cargo-only flights to our schedule as well as a 19.4% increase in cargo yield as a result of higher rates.
Total operating revenues in the first nine months of 2020 decreased $21.12021 increased $7.1 billion, or 61.4%53.7%, from the first nine months of 2019, primarily due to a decline2020 driven principally by the increase in passenger demand and government travel restrictions relatedcargo revenue as described above. Our TRASM increased 10.1% to COVID-19.13.33 cents in the first nine months of 2021 from 12.11 cents in the first nine months of 2020.
Operating Expenses
| | | | Nine Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Nine Months Ended
September 30, | | Increase
(Decrease) | | Percent
Increase
(Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent
Increase
(Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Aircraft fuel and related taxes | Aircraft fuel and related taxes | $ | 2,065 | | | $ | 5,710 | | | $ | (3,645) | | | (63.8) | Aircraft fuel and related taxes | $ | 4,596 | | | $ | 2,703 | | | $ | 1,893 | | | 70.0 |
| Salaries, wages and benefits | Salaries, wages and benefits | 8,384 | | | 9,509 | | | (1,125) | | (11.8) | Salaries, wages and benefits | 8,611 | | | 8,592 | | | 19 | | | 0.2 |
| Regional expenses | | Regional expenses | 2,148 | | | 2,161 | | | (13) | | | (0.6) |
| Maintenance, materials and repairs | Maintenance, materials and repairs | 1,253 | | | 1,745 | | | (492) | | (28.2) | Maintenance, materials and repairs | 1,383 | | | 1,253 | | | 130 | | | 10.4 |
| Other rent and landing fees | Other rent and landing fees | 1,149 | | | 1,568 | | | (419) | | (26.7) | Other rent and landing fees | 1,950 | | | 1,495 | | | 455 | | | 30.4 |
| Aircraft rent | Aircraft rent | 1,004 | | | 996 | | | 8 | | 0.8 | Aircraft rent | 1,064 | | | 1,004 | | | 60 | | | 6.0 |
| Selling expenses | Selling expenses | 418 | | | 1,194 | | | (776) | | (65.0) | Selling expenses | 745 | | | 540 | | | 205 | | | 38.1 |
| Depreciation and amortization | Depreciation and amortization | 1,557 | | | 1,469 | | | 88 | | 6.0 | Depreciation and amortization | 1,439 | | | 1,557 | | | (118) | | | (7.5) |
| Mainline operating special items, net | Mainline operating special items, net | (657) | | | 487 | | | (1,144) | | nm | Mainline operating special items, net | (3,986) | | | (657) | | | (3,329) | | | nm |
| Other | Other | 2,404 | | | 3,859 | | | (1,455) | | (37.7) | | Other | 2,784 | | | 2,567 | | | 217 | | | 8.4 |
| Regional expenses: | | |
| Aircraft fuel and related taxes | 638 | | | 1,395 | | | (757) | | (54.2) | |
| Other | 3,000 | | | 4,187 | | | (1,187) | | (28.3) | |
| Total operating expenses | Total operating expenses | $ | 21,215 | | | $ | 32,119 | | | $ | (10,904) | | | (33.9) | Total operating expenses | $ | 20,734 | | | $ | 21,215 | | | $ | (481) | | | (2.3) |
Total operating expenses decreased $10.9 billion,$481 million, or 33.9%2.3%, in the first nine months of 20202021 from the first nine months of 20192020 primarily due to a $3.5 billion increase in net operating special credits, offset in part by an increase in aircraft fuel and related taxes and other costs due to our reduced scheduleincreased capacity. See further discussion of operating special items, net below.
Aircraft fuel and cost reduction actions as describedrelated taxes increased $1.9 billion, or 70.0%, in the "Financial Overview" above.first nine months of 2021 from the first nine months of 2020 primarily due to a 37.1% increase in fuel consumption as a result of increased capacity and a 24.0% increase in the average price per gallon of aircraft fuel including related taxes to $1.92 in the first nine months of 2021 from $1.55 in the first nine months of 2020.
DepreciationOther rent and amortizationlanding fees increased $88$455 million, or 30.4%, in the first nine months of 2021 from the first nine months of 2020 primarily due to an increase in variable rent and landing fees due to our increased capacity.
Aircraft rent increased $60 million, or 6.0%, in the first nine months of 20202021 from the first nine months of 20192020 primarily due in part to accelerated depreciation for certain aircraft and related equipment expected to be retired earlier than planned. Depreciation associated with facility improvements also contributed to the increase.delivery of 31 new leased mainline aircraft subsequent to the first nine months of 2020.
Selling expenses increased $205 million, or 38.1%, in the first nine months of 2021 from the first nine months of 2020 due to higher commission expense and credit card fees driven by the overall increase in revenues.
Depreciation and amortization decreased $118 million, or 7.5%, in the first nine months of 2021 from the first nine months of 2020 primarily due to the early retirement of aircraft as a result of the COVID-19 pandemic.
Operating Special Items, Net
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2020 | | 2019 |
| | (In millions) | | |
PSP Financial Assistance (1) | $ | (3,710) | | | $ | — | |
Fleet impairment (2) | 1,484 | | | 201 | |
Severance expenses (3) | 1,408 | | | — | |
Labor contract expenses (4) | 228 | | | — | |
Mark-to-market adjustments on bankruptcy obligations, net (5) | (49) | | | (18) | |
Fleet restructuring expenses (6) | — | | | 232 | |
| Litigation reserve adjustments | — | | | (53) | |
| Merger integration expenses | — | | | 106 | |
| Other operating special items, net | (18) | | | 19 | |
| Mainline operating special items, net | (657) | | | 487 | |
| | | |
PSP Financial Assistance (1) | (444) | | | — | |
Fleet impairment (2) | 117 | | | — | |
Severance expenses (3) | 18 | | | — | |
| Other operating special items, net | — | | | 6 | |
| Regional operating special items, net | (309) | | | 6 | |
| Operating special items, net | $ | (966) | | | $ | 493 | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| | (In millions) |
PSP Financial Assistance (1) | $ | (4,162) | | | $ | (3,710) | |
Severance expenses (2) | 168 | | | 1,408 | |
Mark-to-market adjustments on bankruptcy obligations, net (3) | 5 | | | (49) | |
Fleet impairment (4) | — | | | 1,484 | |
Labor contract expenses (5) | — | | | 228 | |
| Other operating special items, net | 3 | | | (18) | |
| Mainline operating special items, net | (3,986) | | | (657) | |
| | | |
PSP Financial Assistance (1) | (539) | | | (444) | |
Regional pilot retention program (6) | 61 | | | — | |
Fleet impairment (4) | 27 | | | 117 | |
Severance expenses (2) | 2 | | | 18 | |
| | | |
| Regional operating special items, net | (449) | | | (309) | |
| Operating special items, net | $ | (4,435) | | | $ | (966) | |
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP Agreement.PSP2 and PSP3 Agreements. See Note 11(b) to AAG's Condensed Consolidated Financial Statements in Part I, Item 1A for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2)Severance expenses include salary and medical costs primarily associated with certain team members who opted into voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic. Cash payments primarily related to our voluntary early retirement programs for the nine months ended September 30, 2021 and 2020 were approximately $480 million and $170 million, respectively.
(3)Bankruptcy obligations that will be settled in shares of our common stock are marked-to-market based on our stock price.
(4)Fleet impairment charges resulted from our decision to retirethe retirement of certain aircraft earlier than planned driven primarily by the severe decline in air travel due to COVID-19. Aircraftthe COVID-19 pandemic. In the first nine months of 2021, we retired includeour remaining Embraer 140 fleet resulting in a non-cash write down of these regional aircraft. In the first nine months of 2020, we retired our entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft. See Note 13 to AAG’s Condensed Consolidated Financial Statementsaircraft resulting in Part I, Item 1A for further information related to these charges.
The nine months ended September 30, 2020 included a $1.5 billion non-cash write-down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of right-of-use (ROU) assets and lease return costs.
(3)Severance expenses principally include salary and medical costs associated with certain team members who opted in to voluntary early retirement programs offered as a result of reductions to our operation due to COVID-19. These expenses also include salary and medical costs associated with team members who were notified in the third quarter of 2020 they were being involuntarily furloughed starting October 1, 2020, subsequent to the expiration of the Payroll Support Program requirement against involuntary furloughs. Cash payments related to these charges for the nine months ended September 30, 2020 were approximately $170 million.
(4)(5)Labor contract expenses primarily relaterelated to one-time charges resulting fromdue to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM Association) for our maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(5)Bankruptcy obligations that will be settled in shares of our common stock are marked-to-market based on our stock price.(6)
(6)Fleet restructuring expenses principally included accelerated depreciation and rent expenseOur regional pilot retention program provides for, aircraft and related equipment expectedamong other things, a cash retention bonus to be retired earlier than planned.paid in the fourth quarter of 2021 to eligible captains at our wholly-owned regional airlines included on the pilot seniority list as of September 1, 2021.
Nonoperating Results
| | | | Nine Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Nine Months Ended
September 30, | | Increase
(Decrease) | | Percent
Increase
(Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent
Increase
(Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Interest income | Interest income | $ | 36 | | | $ | 103 | | | $ | (67) | | | (64.9) | Interest income | $ | 13 | | | $ | 36 | | | $ | (23) | | | (63.2) |
| Interest expense, net | Interest expense, net | (851) | | | (830) | | | (21) | | | 2.6 | Interest expense, net | (1,332) | | | (851) | | | (481) | | | 56.4 |
| Other income, net | Other income, net | 77 | | | 76 | | | 1 | | | 1.2 | Other income, net | 241 | | | 77 | | | 164 | | | nm |
| Total nonoperating expense, net | Total nonoperating expense, net | $ | (738) | | | $ | (651) | | | $ | (87) | | | 13.4 | Total nonoperating expense, net | $ | (1,078) | | | $ | (738) | | | $ | (340) | | | 46.2 |
Interest income decreased in the first nine months of 20202021 compared to the first nine months of 20192020 primarily as a result of lower returns on our short-term investments. Interest expense, net increased in the first nine months of 20202021 compared to the first nine months of 20192020 primarily due to the issuance of debt, including $10.0 billion associated with the AAdvantage Financing, to improve our liquidity position in response to the COVID-19 pandemic. See Note 5 to AAG's Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the AAdvantage Financing.
In the first nine months of 2021, other nonoperating income, net included $252 million of non-service related pension and lower capitalized interestother postretirement benefit plan income, offset in part by lower interest expense on our variable-rate debt.$31 million of net special charges principally for non-cash charges associated with debt refinancings and extinguishments.
In the first nine months of 2020, other nonoperating income, net included $290 million of non-service related pension and other postretirement benefit plan income. This income was offset in part by $207 million of net special charges principally for mark-to-market unrealized losses associated with our equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and $20 million of net foreign currency losses, primarily associated with losses from Latin American currencies.
In the first nine months of 2019, other nonoperating income, net principally included $137 million of non-service related pension and other postretirement benefit plan income. This income was offset in part by $43 million of net special charges principally for mark-to-market unrealized losses associated with our equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and $24 million of net foreign currency losses, primarily associated with losses from Latin American currencies.
The increase in non-service related pension and other postretirement benefit plan income in the first nine months of 2020 as compared to the first nine months of 2019 is principally due to an increase in the expected return on pension plan assets.
Income Taxes
In the first nine months of 2020,2021, we recorded an income tax benefit of $1.9 billion.$296 million. Substantially all of our income or loss before income taxes is attributable to the United States.
See Note 76 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on income taxes.
American’s Results of Operations
Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 2019
As discussed above, American's results of operations for the three months ended September 30, 2020 were significantly impacted by COVID-19. As a result, the comparison of these results to the three months ended September 30, 2019 are largely not meaningful. Refer to the "Financial Overview" above for discussion of American's third quarter of 2020 financial results and the impact of COVID-19 on American's business.
Operating Revenues
| | | | Three Months Ended
September 30, | | |
Decrease | | Percent Decrease | | Three Months Ended
September 30, | | Increase | | Percent Increase |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent Increase |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Passenger | Passenger | $ | 2,540 | | | $ | 10,995 | | | $ | (8,455) | | | (76.9) | | Passenger | $ | 7,957 | | | $ | 2,540 | | | $ | 5,417 | | | nm |
| Cargo | Cargo | 207 | | | 208 | | | (1) | | | (0.4) | | Cargo | 332 | | | 207 | | | 125 | | | 59.9 |
| Other | Other | 425 | | | 707 | | | (282) | | | (39.8) | | Other | 679 | | | 425 | | | 254 | | | 59.7 |
| Total operating revenues | Total operating revenues | $ | 3,172 | | | $ | 11,910 | | | $ | (8,738) | | | (73.4) | | Total operating revenues | $ | 8,968 | | | $ | 3,172 | | | $ | 5,796 | | | nm |
Passenger revenue increased $5.4 billion in the third quarter of 2021 from the third quarter of 2020 primarily due to increased RPMs driven by domestic and short-haul international leisure demand, resulting in an increased load factor in the third quarter of 2021.
Cargo revenue increased $125 million, or 59.9%, in the third quarter of 2021 from the third quarter of 2020 primarily due to an increase in cargo ton miles reflecting increases in freight volumes, principally as a result of adding international widebody capacity and cargo-only flights to American's schedule.
75
Other operating revenue increased $254 million, or 59.7%, as compared to the third quarter of 2020, driven primarily by higher revenue associated with American's loyalty program.Total operating revenues in the third quarter of 2020 decreased $8.72021 increased $5.8 billion or 73.4%, from the third quarter of 2019, primarily due to a decline2020 driven principally by the increase in passenger demand and government travel restrictions related to COVID-19.revenue as described above.
Operating Expenses
| | | | Three Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Three Months Ended
September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent Increase (Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Aircraft fuel and related taxes | Aircraft fuel and related taxes | $ | 453 | | | $ | 1,989 | | | $ | (1,536) | | | (77.2) | | Aircraft fuel and related taxes | $ | 1,952 | | | $ | 611 | | | $ | 1,341 | | | nm |
| Salaries, wages and benefits | Salaries, wages and benefits | 2,704 | | | 3,217 | | | (513) | | | (16.0) | | Salaries, wages and benefits | 3,017 | | | 2,762 | | | 255 | | | 9.2 |
| Regional expenses | | Regional expenses | 789 | | | 467 | | | 322 | | | 69.2 |
| Maintenance, materials and repairs | Maintenance, materials and repairs | 337 | | | 610 | | | (273) | | | (44.7) | | Maintenance, materials and repairs | 548 | | | 337 | | | 211 | | | 62.3 |
| Other rent and landing fees | Other rent and landing fees | 367 | | | 530 | | | (163) | | | (30.8) | | Other rent and landing fees | 694 | | | 472 | | | 222 | | | 47.1 |
| Aircraft rent | Aircraft rent | 336 | | | 335 | | | 1 | | | 0.2 | | Aircraft rent | 358 | | | 336 | | | 22 | | | 6.6 |
| Selling expenses | Selling expenses | 70 | | | 424 | | | (354) | | | (83.5) | | Selling expenses | 318 | | | 97 | | | 221 | | | nm |
| Depreciation and amortization | Depreciation and amortization | 498 | | | 499 | | | (1) | | | (0.3) | | Depreciation and amortization | 480 | | | 498 | | | (18) | | | (3.5) |
| Mainline operating special items, net | Mainline operating special items, net | (295) | | | 228 | | | (523) | | | nm | Mainline operating special items, net | (990) | | | (295) | | | (695) | | | nm |
| Other | Other | 659 | | | 1,337 | | | (678) | | | (50.7) | | Other | 1,109 | | | 696 | | | 413 | | | 59.1 |
| Regional expenses: | | |
| Aircraft fuel and related taxes | 158 | | | 485 | | | (327) | | | (67.4) | | |
| Other | 694 | | | 1,428 | | | (734) | | | (51.4) | | |
| Total operating expenses | Total operating expenses | $ | 5,981 | | | $ | 11,082 | | | $ | (5,101) | | | (46.0) | | Total operating expenses | $ | 8,275 | | | $ | 5,981 | | | $ | 2,294 | | | 38.3 |
Total operating expenses decreased $5.1increased $2.3 billion, or 46.0%38.3%, in the third quarter of 20202021 from the third quarter of 20192020 primarily due to increases in aircraft fuel and related taxes and American's reduced scheduleincreased capacity.
Aircraft fuel and cost reduction actions as describedrelated taxes increased $1.3 billion in the "Financial Overview" above.third quarter of 2021 from the third quarter of 2020 primarily due to an 88.5% increase in fuel consumption as a result of increased capacity and a 69.3% increase in the average price per gallon of aircraft fuel including related taxes to $2.07 in the third quarter of 2021 from $1.23 in the third quarter of 2020.
Aircraft rent increased $22 million, or 6.6%, in the third quarter of 2021 from the third quarter of 2020 primarily due to the delivery of 31 new leased mainline aircraft subsequent to the third quarter of 2020.
Selling expenses increased $221 million in the third quarter of 2021 from the third quarter of 2020 due to higher commission expense and credit card fees driven by the overall increase in revenues.
Operating Special Items, Net
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| | | (In millions) | | | (In millions) |
PSP Financial Assistance (1) | PSP Financial Assistance (1) | $ | (1,908) | | | $ | — | | PSP Financial Assistance (1) | $ | (992) | | | $ | (1,908) | |
| Mark-to-market adjustments on bankruptcy obligations, net | | Mark-to-market adjustments on bankruptcy obligations, net | (1) | | | — | |
Severance expenses (2) | Severance expenses (2) | 871 | | | — | | Severance expenses (2) | — | | | 871 | |
Fleet impairment (3) | Fleet impairment (3) | 742 | | | 201 | | Fleet impairment (3) | — | | | 742 | |
Fleet restructuring expenses (4) | — | | | 72 | | |
| Litigation reserve adjustments | — | | | (53) | | |
| Merger integration expenses | — | | | 29 | | |
Mark-to-market adjustments on bankruptcy obligations, net (5) | — | | | (22) | | |
| | Other operating special items, net | Other operating special items, net | — | | | 1 | | Other operating special items, net | 3 | | | — | |
| Mainline operating special items, net | Mainline operating special items, net | (295) | | | 228 | | Mainline operating special items, net | (990) | | | (295) | |
| PSP Financial Assistance (1) | PSP Financial Assistance (1) | (228) | | | — | | PSP Financial Assistance (1) | (128) | | | (228) | |
| | Regional operating special items, net | Regional operating special items, net | (228) | | | — | | Regional operating special items, net | (128) | | | (228) | |
| Operating special items, net | Operating special items, net | $ | (523) | | | $ | 228 | | Operating special items, net | $ | (1,118) | | | $ | (523) | |
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP Agreement.PSP2 and PSP3 Agreements. See Note 11(b) to American's Condensed Consolidated Financial Statements in Part I, Item 1B for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2)Severance expenses principally include salary and medical costs primarily associated with certain team members who opted in tointo voluntary early retirement programs offered as a result of reductions to American's operation due to COVID-19. These expenses in the three months ended September 30, 2020 also include salary and medical costs associated
with team members who were notified in the third quarter of 2020 they were being involuntarily furloughed starting October 1, 2020, subsequent to the expiration of the Payroll Support Program requirement against involuntary furloughs.COVID-19 pandemic. Cash payments primarily related to these chargesAmerican's voluntary early retirement programs for the three months ended September 30, 2021 and 2020 were approximately $190 million and $120 million.million, respectively.
(3)Fleet impairment charges resulted from American's decision to retirethe retirement of certain aircraft earlier than planned driven primarily by the severe decline in air travel due to COVID-19. See Note 12 to American’s Condensed Consolidated Financial Statementsthe COVID-19 pandemic. In the third quarter of 2020, American retired its Airbus A330-200 fleet which resulted in Part I, Item 1B for further information related to these charges.
The three months ended September 30, 2020 included a $709 million non-cash write-down of Airbus A330-200 aircraft and associated spare parts and $33 million in cash charges primarily for lease return and other costs.
(4)Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.
(5)Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG's stock price.
Nonoperating Results
| | | | Three Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Three Months Ended
September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent Increase (Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Interest income | Interest income | $ | 72 | | | $ | 131 | | | $ | (59) | | | (44.9) | | Interest income | $ | 8 | | | $ | 72 | | | $ | (64) | | | (89.2) |
| Interest expense, net | Interest expense, net | (310) | | | (281) | | | (29) | | | 10.2 | | Interest expense, net | (435) | | | (310) | | | (125) | | | 40.2 |
| Other income (expense), net | 111 | | | (10) | | | 121 | | | nm | |
| Other income, net | | Other income, net | 82 | | | 111 | | | (29) | | | (26.4) |
| Total nonoperating expense, net | Total nonoperating expense, net | $ | (127) | | | $ | (160) | | | $ | 33 | | | (20.7) | | Total nonoperating expense, net | $ | (345) | | | $ | (127) | | | $ | (218) | | | nm |
Interest income decreased in the third quarter of 20202021 compared to the third quarter of 20192020 primarily as a result of lower returns on American's short-term investments and lower interest-bearing related party receivables from American's parent company, AAG. Interest expense, net increased in the third quarter of 20202021 compared to the third quarter of 20192020 primarily due to the issuance of debt.debt subsequent to the third quarter of 2020, including $10.0 billion associated with the AAdvantage Financing, to improve American's liquidity position in response to the COVID-19 pandemic. See Note 4 to American's Condensed Consolidated Financial Statements in Part I, Item 1B for further information on the AAdvantage Financing.
In the third quarter of 2021, other nonoperating income, net included $80 million of non-service related pension and other postretirement benefit plan income.
In the third quarter of 2020, other nonoperating income, net included $84 million of non-service related pension and other postretirement benefit plan income and $21 million of net special credits principally for mark-to-market unrealized gains associated with American's equity investment in China Southern Airlines.
In the third quarter of 2019, other nonoperating expense, net included $52 million of net special charges principally for mark-to-market unrealized losses associated with American's equity investment in China Southern Airlines and certain treasury rate lock derivative instruments, offset in part by $47 million of non-service related pension and other postretirement benefit plan income.
The increase in non-service related pension and other postretirement benefit plan income in the third quarter of 2020 as compared to the third quarter of 2019 is principally due to an increase in the expected return on pension plan assets.
Income Taxes
American is parta member of the AAGAAG's consolidated federal and certain state income tax return.returns.
In the third quarter of 2020,2021, American recorded an income tax benefitprovision of $660$68 million. Substantially all of American’s income or loss before income taxes is attributable to the United States.
See Note 5 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B for additional information on income taxes.
Nine Months Ended September 30, 20202021 Compared to Nine Months Ended September 30, 2019
As discussed above, American's results of operations for the nine months ended September 30, 2020 were significantly impacted by COVID-19. As a result, the comparison of these results to the nine months ended September 30, 2019 are largely not meaningful. Refer to the "Financial Overview" above for discussion of American's first nine months of 2020 financial results and the impact of COVID-19 on American's business.
Operating Revenues
| | | | Nine Months Ended
September 30, | | |
Decrease | | Percent Decrease | | Nine Months Ended
September 30, | |
Increase | | Percent
Increase |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent
Increase |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Passenger | Passenger | $ | 11,328 | | | $ | 31,663 | | | $ | (20,335) | | | (64.2) | | Passenger | $ | 17,682 | | | $ | 11,328 | | | $ | 6,354 | | | 56.1 |
| Cargo | Cargo | 484 | | | 647 | | | (163) | | | (25.1) | | Cargo | 973 | | | 484 | | | 489 | | | nm |
| Other | Other | 1,496 | | | 2,139 | | | (643) | | | (30.0) | | Other | 1,799 | | | 1,496 | | | 303 | | | 20.3 |
| Total operating revenues | Total operating revenues | $ | 13,308 | | | $ | 34,449 | | | $ | (21,141) | | | (61.4) | | Total operating revenues | $ | 20,454 | | | $ | 13,308 | | | $ | 7,146 | | | 53.7 |
Passenger revenue increased $6.4 billion, or 56.1%, in the first nine months of 2021 from the first nine months of 2020 primarily due to an increase in RPMs. This increase in RPMs was principally due to increased flying domestically and in Latin America driven by leisure demand, offset in part by reduced Atlantic and Pacific flying as a result of low passenger demand and government-imposed travel restrictions related to the COVID-19 pandemic. A decrease in passenger yield offset in part the capacity driven increase to passenger revenue.
Cargo revenue increased $489 million in the first nine months of 2021 from the first nine months of 2020 primarily due to an increase in cargo ton miles reflecting higher freight volumes and the addition of cargo-only flights to American's schedule as well as an increase in cargo yield as a result of higher rates.
Total operating revenues in the first nine months of 2020 decreased $21.12021 increased $7.1 billion, or 61.4%53.7%, from the first nine months of 2019, primarily due to a decline2020 driven principally by the increase in passenger demand and government travel restrictions related to COVID-19.cargo revenue as described above.
Operating Expenses
| | | | Nine Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Nine Months Ended
September 30, | | Increase
(Decrease) | | Percent
Increase
(Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent
Increase
(Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Aircraft fuel and related taxes | Aircraft fuel and related taxes | $ | 2,065 | | | $ | 5,710 | | | $ | (3,645) | | | (63.8) | | Aircraft fuel and related taxes | $ | 4,596 | | | $ | 2,703 | | | $ | 1,893 | | | 70.0 |
| Salaries, wages and benefits | Salaries, wages and benefits | 8,380 | | | 9,503 | | | (1,123) | | | (11.8) | | Salaries, wages and benefits | 8,607 | | | 8,589 | | | 18 | | | 0.2 |
| Regional expenses | | Regional expenses | 2,053 | | | 2,022 | | | 31 | | | 1.6 |
| Maintenance, materials and repairs | Maintenance, materials and repairs | 1,253 | | | 1,745 | | | (492) | | | (28.2) | | Maintenance, materials and repairs | 1,383 | | | 1,253 | | | 130 | | | 10.4 |
| Other rent and landing fees | Other rent and landing fees | 1,149 | | | 1,568 | | | (419) | | | (26.7) | | Other rent and landing fees | 1,950 | | | 1,495 | | | 455 | | | 30.4 |
| Aircraft rent | Aircraft rent | 1,004 | | | 996 | | | 8 | | | 0.8 | | Aircraft rent | 1,064 | | | 1,004 | | | 60 | | | 6.0 |
| Selling expenses | Selling expenses | 418 | | | 1,194 | | | (776) | | | (65.0) | | Selling expenses | 745 | | | 540 | | | 205 | | | 38.1 |
| Depreciation and amortization | Depreciation and amortization | 1,557 | | | 1,469 | | | 88 | | | 6.0 | | Depreciation and amortization | 1,439 | | | 1,557 | | | (118) | | | (7.5) |
| Mainline operating special items, net | Mainline operating special items, net | (657) | | | 487 | | | (1,144) | | | nm | Mainline operating special items, net | (3,986) | | | (657) | | | (3,329) | | | nm |
| Other | Other | 2,425 | | | 3,860 | | | (1,435) | | | (37.2) | | Other | 2,785 | | | 2,588 | | | 197 | | | 7.6 |
| Regional expenses: | | |
| Aircraft fuel and related taxes | 638 | | | 1,395 | | | (757) | | | (54.2) | | |
| Other | 2,862 | | | 4,221 | | | (1,359) | | | (32.2) | | |
| Total operating expenses | Total operating expenses | $ | 21,094 | | | $ | 32,148 | | | $ | (11,054) | | | (34.4) | | Total operating expenses | $ | 20,636 | | | $ | 21,094 | | | $ | (458) | | | (2.2) |
Total operating expenses decreased $11.1 billion,$458 million, or 34.4%2.2%, in the first nine months of 20202021 from the first nine months of 20192020 primarily due to a $3.5 billion increase in net operating special credits, offset in part by an increase in aircraft fuel and related taxes and other costs due to American's reduced scheduleincreased capacity. See further discussion of operating special items, net below.
Aircraft fuel and cost reduction actions as describedrelated taxes increased $1.9 billion, or 70.0%, in the "Financial Overview" above.first nine months of 2021 from the first nine months of 2020 primarily due to a 37.1% increase in fuel consumption as a result of increased capacity and a 24.0% increase in the average price per gallon of aircraft fuel including related taxes to $1.92 in the first nine months of 2021 from $1.55 in the first nine months of 2020.
DepreciationOther rent and amortizationlanding fees increased $88$455 million, or 30.4%, in the first nine months of 2021 from the first nine months of 2020 primarily due to an increase in variable rent and landing fees due to American's increased capacity.
Aircraft rent increased $60 million, or 6.0%, in the first nine months of 20202021 from the first nine months of 20192020 primarily due in part to accelerated depreciation for certain aircraft and related equipment expected to be retired earlier than planned. Depreciation associated with facility improvements also contributed to the increase.delivery of 31 new leased mainline aircraft subsequent to the first nine months of 2020.
Selling expenses increased $205 million, or 38.1%, in the first nine months of 2021 from the first nine months of 2020 due to higher commission expense and credit card fees driven by the overall increase in revenues.Depreciation and amortization decreased $118 million, or 7.5%, in the first nine months of 2021 from the first nine months of 2020 primarily due to the early retirement of aircraft as a result of the COVID-19 pandemic.
Operating Special Items, Net
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2020 | | 2019 |
| | (In millions) | | |
PSP Financial Assistance (1) | $ | (3,710) | | | $ | — | |
Fleet impairment (2) | 1,484 | | | 201 | |
Severance expenses (3) | 1,408 | | | — | |
Labor contract expenses (4) | 228 | | | — | |
Mark-to-market adjustments on bankruptcy obligations, net (5) | (49) | | | (18) | |
Fleet restructuring expenses (6) | — | | | 232 | |
| Litigation reserve adjustments | — | | | (53) | |
| Merger integration expenses | — | | | 106 | |
| Other operating special items, net | (18) | | | 19 | |
| Mainline operating special items, net | (657) | | | 487 | |
| | | |
PSP Financial Assistance (1) | (444) | | | — | |
Fleet impairment (2) | 106 | | | — | |
| Regional operating special items, net | (338) | | | — | |
| Operating special items, net | $ | (995) | | | $ | 487 | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| | (In millions) |
PSP Financial Assistance (1) | $ | (4,162) | | | $ | (3,710) | |
Severance expenses (2) | 168 | | | 1,408 | |
Mark-to-market adjustments on bankruptcy obligations, net (3) | 5 | | | (49) | |
Fleet impairment (4) | — | | | 1,484 | |
Labor contract expenses (5) | — | | | 228 | |
| Other operating special items, net | 3 | | | (18) | |
| Mainline operating special items, net | (3,986) | | | (657) | |
| | | |
PSP Financial Assistance (1) | (539) | | | (444) | |
Fleet impairment (4) | 27 | | | 106 | |
| Regional operating special items, net | (512) | | | (338) | |
| Operating special items, net | $ | (4,498) | | | $ | (995) | |
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP Agreement.PSP2 and PSP3 Agreements. See Note 11(b) to American's Condensed Consolidated Financial Statements in Part I, Item 1B for further information. The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.
(2)Severance expenses include salary and medical costs primarily associated with certain team members who opted into voluntary early retirement programs offered as a result of reductions to American's operation due to the COVID-19 pandemic. Cash payments primarily related to American's voluntary early retirement programs for the nine months ended September 30, 2021 and 2020 were approximately $480 million and $170 million, respectively.
(3)Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG's stock price.
(4)Fleet impairment charges resulted from American's decision to retirethe retirement of certain aircraft earlier than planned driven primarily by the severe decline in air travel due to COVID-19. Aircraftthe COVID-19 pandemic. In the first nine months of 2021, American retired includeits remaining Embraer 140 fleet resulting in a non-cash write down of these regional aircraft. In the first nine months of 2020, American retired its entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft. See Note 12 to American’s Condensed Consolidated Financial Statementsaircraft resulting in Part I, Item 1B for further information related to these charges.
The nine months ended September 30, 2020 included a $1.5 billion non-cash write-down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.
(3)Severance expenses principally include salary and medical costs associated with certain team members who opted in to voluntary early retirement programs offered as a result of reductions to American's operation due to COVID-19. These expenses also include salary and medical costs associated with team members who were notified in the third quarter of 2020 they were being involuntarily furloughed starting October 1, 2020, subsequent to the expiration of the Payroll Support Program requirement against involuntary furloughs. Cash payments related to these charges for the nine months ended September 30, 2020 were approximately $170 million.
(4)(5)Labor contract expenses primarily relaterelated to one-time charges resulting fromdue to the ratification of a new contract with the TWU-IAMTransport Workers Union and International Association of Machinists & Aerospace Workers for American's maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(5)Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG's stock price.
(6)Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.
Nonoperating Results
| | | | Nine Months Ended
September 30, | | | Increase (Decrease) | | Percent Increase (Decrease) | | Nine Months Ended
September 30, | | Increase
(Decrease) | | Percent
Increase
(Decrease) |
| | | 2020 | | 2019 | | | | 2021 | | 2020 | Percent
Increase
(Decrease) |
| | | (In millions, except percentage changes) | | | (In millions, except percentage changes) |
| Interest income | Interest income | $ | 268 | | | $ | 389 | | | $ | (121) | | | (31.1) | | Interest income | $ | 26 | | | $ | 268 | | | $ | (242) | | | (90.4) |
| Interest expense, net | Interest expense, net | (825) | | | (835) | | | 10 | | | (1.2) | | Interest expense, net | (1,214) | | | (825) | | | (389) | | | 47.2 |
| Other income, net | Other income, net | 78 | | | 69 | | | 9 | | | 13.2 | | Other income, net | 239 | | | 78 | | | 161 | | | nm |
| Total nonoperating expense, net | Total nonoperating expense, net | $ | (479) | | | $ | (377) | | | $ | (102) | | | 26.9 | | Total nonoperating expense, net | $ | (949) | | | $ | (479) | | | $ | (470) | | | 98.2 |
Interest income decreased in the first nine months of 20202021 compared to the first nine months of 20192020 primarily as a result of lower returns on American's short-term investments and lower interest-bearing related party receivables from American's parent company, AAG. Interest expense, net decreasedincreased in the first nine months of 20202021 compared to the first nine months of 20192020 primarily due to the issuance of debt, including $10.0 billion associated with the AAdvantage Financing, to improve American's liquidity position in response to the COVID-19 pandemic. See Note 4 to American's Condensed Consolidated Financial Statements in Part I, Item 1B for further information on the AAdvantage Financing.
In the first nine months of 2021, other nonoperating income, net included $251 million of non-service related pension and lower capitalized interestother postretirement benefit plan income, offset in part by lower interest expense on American's variable-rate debt.$31 million of net special charges principally for non-cash charges associated with debt refinancings and extinguishments.
In the first nine months of 2020, other nonoperating income, net included $290 million of non-service related pension and other postretirement benefit plan income. This income was offset in part by $207 million of net special charges principally for mark-to-market unrealized losses associated with American's equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and $20 million of net foreign currency losses, primarily associated with losses from Latin American currencies.
In the first nine months of 2019, other nonoperating income, net principally included $138 million of non-service related pension and other postretirement benefit plan income. This income was offset in part by $51 million of net special charges principally for mark-to-market unrealized losses associated with American's equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and $24 million of net foreign currency losses, primarily associated with losses from Latin American currencies.
The increase in non-service related pension and other postretirement benefit plan income in the first nine months of 2020 as compared to the first nine months of 2019 is principally due to an increase in the expected return on pension plan assets.
Income Taxes
American is parta member of the AAGAAG's consolidated federal and certain state income tax return.returns.
In the first nine months of 2020,2021, American recorded an income tax benefit of $1.9 billion.$247 million. Substantially all of American’s income or loss before income taxes is attributable to the United States.
See Note 5 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B for additional information on income taxes.
Liquidity and Capital Resources
Liquidity
As of September 30, 2020,2021, AAG had approximately $13.6$17.9 billion in total available liquidity and $508$923 million in restricted cash and short-term investments. Additional detail regarding our available liquidity is provided in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | AAG | | | | American | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| Cash | $ | 253 | | | $ | 280 | | | $ | 243 | | | $ | 267 | |
| Short-term investments | 8,031 | | | 3,546 | | | 8,029 | | | 3,543 | |
| Undrawn credit facilities | 5,327 | | | 3,243 | | | 5,327 | | | 3,243 | |
| Total available liquidity | $ | 13,611 | | | $ | 7,069 | | | $ | 13,599 | | | $ | 7,053 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | AAG | | American |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2021 | | December 31, 2020 |
| Cash | $ | 293 | | | $ | 245 | | | $ | 282 | | | $ | 231 | |
| Short-term investments | 14,243 | | | 6,619 | | | 14,227 | | | 6,617 | |
| Undrawn facilities | 3,413 | | | 7,396 | | | 3,413 | | | 7,396 | |
| Total available liquidity | $ | 17,949 | | | $ | 14,260 | | | $ | 17,922 | | | $ | 14,244 | |
Given the actions we have taken in response to the COVID-19 pandemic and our assumptions about its future impact on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings and funds from government assistance obtained pursuant to the CARES Act)financings) and projected cash flows from operations.
Share Repurchase Programs and Cash Dividends
During the nine months ended September 30, 2020, we repurchased 6.4 million shares of AAG common stock for $145 million at a weighted average cost per share of $22.77, all of which were purchased in the first quarter of 2020.
In January 2020, our Board of Directors declared a cash dividend of $0.10 per share for stockholders of record as of February 5, 2020 and paid on February 19, 2020, totaling $43 million.
We have suspended our capital return program, including share repurchases and the payment of future dividends. In connection with our receipt of financial assistance under the Payroll Support Program, we agreed not to repurchase shares of or make dividend payments in respect of AAG common stock through September 30, 2021. As of September 30, 2020, we also entered into the Treasury Loan Agreement, and, as a result, we will be prohibited from repurchasing shares of AAG common stock and paying dividends on AAG common stock through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.
Certain Covenants
Certain of our debt financing agreements (including our secured notes, term loans, revolving credit facilities and spare engine EETCs)enhanced equipment trust certificates (EETCs)) contain loan to value (LTV) or collateral coverage ratio covenants and require us to appraise the related collateral annually or semiannually. Pursuant to such agreements, if the loan to valueLTV or collateral coverage ratio exceeds a specified threshold or if the value of the appraised collateral fails to meet a specified threshold, as the case may be, we are required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash or investment securities), or pay down such financing, in whole or in part.part, or the interest rate for the financing under such agreements will be increased. As of the most recent applicable measurement dates, we were in compliance with each of the foregoing collateral coverage tests. Additionally, certaina significant portion of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities, and our Treasury Term Loan FacilityAAdvantage Financing contains a debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in mandatory prepaymentearly repayment of the Treasury Term Loan Facility.AAdvantage Financing. For further information regarding our debt covenants, see Note 5 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A and Note 4 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B.
Sources and Uses of Cash
AAG
Operating Activities
Our net cash provided by operating activities was $1.9 billion for the first nine months of 2021 as compared to net cash used in operating activities wasof $3.7 billion for the first nine months of 2020, as compared to net cash provided by operating activities of $3.2a $5.6 billion forperiod-over-period increase. In the first nine months of 2019. The $6.9 billion period-over-period decrease in operating cash flows was primarily due to a net loss in the first nine months of 2020. The net loss was primarily driven by lower revenues as a result of a decline in passenger demand2021 and government travel restrictions related to the outbreak and spread of COVID-19, offset in part by a decrease in expenses due to our reduced schedule and cost reduction actions. Additionally,2020, we received cash proceeds of approximately $4.7 billion and $4.2 billion inassociated with the PSP Financial Assistance, respectively. Excluding the PSP Financial Assistance, our operating cash flows increased $5.1 billion compared to the first nine months of 2020 associated with the PSP Financial Assistance.driven by a decrease in our pre-tax loss as well as working capital increases principally in our air traffic liability as demand for travel returns. In addition, during the first nine months of 2020,2021, we also recorded a $1.4 billion special charge for salarymade $241 million in contributions to our pension plans and medical costsapproximately $480 million in cash payments associated with certain team members who opted in toour voluntary early retirement programs as well as team members who were involuntarily furloughed starting October 1, 2020. Approximately $170 million of this charge has been paid to team members in the first nine months of 2020.programs. We expect cash payments under these programs of approximately $200$80 million in the fourth quarterremainder of 2020 and2021, approximately $600$230 million in 2021 with the remaining payments in 2022 and approximately $540 million in 2023 and beyond.
Investing Activities
Our net cash used in investing activities was $6.0$7.7 billion and $2.9$6.0 billion for the first nine months of 20202021 and 2019,2020, respectively.
Our principal investing activities in the first nine months of 2021 included $7.6 billion in net purchases of short-term investments as well as a $330 million increase in restricted short-term investments primarily related to collateral for the AAdvantage Financing. These cash outflows were offset in part by $181 million of proceeds from the sale of property and equipment principally related to our retired fleet and $168 million of proceeds primarily from aircraft sale-leaseback transactions. Additionally, aircraft purchase deposit returns of $874 million offset our capital expenditures for the first nine months of 2021, which expenditures were principally related to the harmonization of interior configurations across our mainline fleet and the purchase of two Airbus A321neo aircraft.Our principal investing activities in the first nine months of 2020 included $4.5 billion in net purchases of short-term investments, capital expenditures of $1.8 billion for property and equipment, including 10 Airbus 321neoA321neo aircraft, three Embraer 175 aircraft and three Bombardier CRJ900 aircraft as well as a $317 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds.bonds related to JFK. These cash outflows were offset in part by $433 million of proceeds primarily from aircraft sale-leaseback transactions and $251 million of proceeds from the sale of property and equipment.
Our principal investing activities in the first nine months of 2019 included expenditures of $3.1 billion for property and equipment, including 15 Embraer 175 aircraft, eight Bombardier CRJ900 aircraft, six Airbus 321neo aircraft, four Boeing 737 MAX aircraft and two Boeing 787 Family aircraft, and $354 million in net purchases of short-term investments. These cash outflows were offset in part by $629 million of proceeds primarily from aircraft sale-leaseback transactions.
Financing Activities
Our net cash provided by financing activities was $5.8 billion and $9.7 billion for the first nine months of 2021 and 2020, as compared to net cash used inrespectively.
Our principal financing activities of $296 million forin the first nine months of 2019.2021 included $12.1 billion in proceeds from the issuance of debt, including approximately $10.0 billion associated with the AAdvantage Financing, $1.0 billion in aggregate principal amount under the PSP2 Promissory Note, $946 million in aggregate principal amount under the PSP3 Promissory Note and the $150 million issuance of special facility revenue bonds related to JFK. We also received $460 million in net proceeds from the issuance of equity pursuant to an at-the-market offering. These cash inflows were offset in part by $6.6 billion in debt repayments, including prepayments totaling $2.8 billion for our revolving credit facilities, $950 million for the April 2016 Spare Parts Term Loan Facility, $550 million of outstanding loans under the Treasury Loan Agreement and $2.3 billion in scheduled debt repayments. In addition, we had $176 million of deferred financing cost cash outflows.
Our principal financing activities in the first nine months of 2020 included $11.6 billion in proceeds from the issuance of debt and $1.5 billion in proceeds from the issuance of equity. These proceeds principally include $2.8 billion borrowed under the 2014 Revolving Facility, the 2013 Revolving Facility and the April 2016 Revolving Facility, $2.5 billion in aggregate principal amount of 11.75% senior secured notes, $1.8 billion in aggregate principal amount under the PSPPSP1 Promissory Note, $1.2 billion in aggregate principal amount of two series of 10.75% senior secured notes due 2026, $1.0 billion in aggregate principal amount of AAG’s 6.50% convertible senior notes, $1.0 billion under the Delayed Draw Term Loan Credit Facility, $550 million under the Treasury Term Loan Facility, $500 million in aggregate principal amount of 3.75% unsecured senior notes due 2025 and the $360 million issuance of special facility revenue bonds related to JFK as well as $1.1 billion of net proceeds from a public offering of common stock. These cash inflows were offset in part by $3.0 billion in debt repayments, consisting of approximately $2.0 billion in scheduled debt repayments, including repayment of $500 million of 4.625% senior notes, and the prepayment of the $1.0 billion Delayed Draw Term Loan Credit Facility, as well as $173 million in share repurchases (which occurred in the first quarter of 2020), $132 million of deferred financing costs and $43 million in dividend payments (which occurred in the first quarter of 2020).
Our principal financing activities in the first nine months
American
Operating Activities
American’s net cash provided by operating activities was $4.4 billion for the first nine months of 2021 as compared to net cash used in operating activities wasof $90 million for the first nine months of 2020, as compared to net cash provided by operating activities of $2.9a $4.5 billion forperiod-over-period increase. In the first nine months of 2019. The $3.02021 and 2020, American received cash proceeds of approximately $4.2 billion period-over-periodand $3.7 billion associated with the PSP Financial Assistance, respectively. American also had an $879 million net decrease in intercompany cash receipts principally from AAG's financing transactions. Excluding the PSP Financial Assistance and decrease in AAG's financing transactions, American's operating cash flows was primarily dueincreased $4.9 billion compared to a net loss in the first nine months of 2020 offset in part by intercompany cash receipts from AAG's financing transactions. The net loss was primarily driven by lower revenues as a result of a decline in passenger demand and government travel restrictions related to the outbreak and spread of COVID-19, offset in part by a decrease in expenses due toits pre-tax loss as well as working capital increases principally in American's reduced schedule and cost reduction actions. Additionally, American received cash proceeds of $3.7 billion inair traffic liability as demand for travel returns. In addition, during the first nine months of 20202021, American made $241 million in contributions to its pension plans and approximately $480 million in cash payments associated with the PSP Financial Assistance. In the first nine months of 2020, American also recorded a $1.4 billion special charge for salary and medical costs associated with certain team members who opted in toAmerican's voluntary early retirement programs as well as team members who were involuntarily furloughed starting October 1, 2020. Approximately $170 million of this charge has been paid to team members in the first nine months of 2020.programs. American expects cash payments under these programs of approximately $200$80 million in the fourth quarterremainder of 20202021, approximately $230 million in 2022 and approximately $600$540 million in 2021 with the remaining payments in 20222023 and beyond.
Investing Activities
American’s net cash used in investing activities was $6.0$7.7 billion and $2.8$6.0 billion for the first nine months of 20202021 and 2019,2020, respectively.
American’s principal investing activities in the first nine months of 2021 included $7.6 billion in net purchases of short-term investments as well as a $330 million increase in restricted short-term investments primarily related to collateral for the AAdvantage Financing. These cash outflows were offset in part by $181 million of proceeds from the sale of property and equipment principally related to American's retired fleet and $168 million of proceeds primarily from aircraft sale-leaseback transactions. Additionally, aircraft purchase deposit returns of $874 million offset American's capital expenditures for the first nine months of 2021, which expenditures were principally related to the harmonization of interior configurations across its mainline fleet and the purchase of two Airbus A321neo aircraft.American’s principal investing activities in the first nine months of 2020 included $4.5 billion in net purchases of short-term investments, capital expenditures of $1.8 billion for property and equipment, including 10 Airbus 321neoA321neo aircraft, three Embraer 175 aircraft and three Bombardier CRJ900 aircraft as well as a $317 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds.bonds related to JFK. These cash outflows were offset in part by $433 million of proceeds primarily from aircraft sale-leaseback transactions and $251 million of proceeds from the sale of property and equipment.
American’s principal investing activities in the first nine months of 2019 included expenditures of $3.0 billion for property and equipment, including 15 Embraer 175 aircraft, eight Bombardier CRJ900 aircraft, six Airbus 321neo aircraft, four Boeing 737 MAX aircraft and two Boeing 787 Family aircraft, and $354 million in net purchases of short-term investments. These cash outflows were offset in part by $629 million of proceeds primarily from aircraft sale-leaseback transactions.
Financing Activities
American’s net cash provided by financing activities was $3.3 billion and $6.1 billion for the first nine months of 2021 and 2020, as compared to net cash used inrespectively.
American’s principal financing activities of $76 million forin the first nine months of 2019.2021 included $10.1 billion in proceeds from the issuance of debt, including approximately $10.0 billion associated with the AAdvantage Financing and the $150 million issuance of special facility revenue bonds related to JFK. These cash inflows were offset in part by $6.6 billion in debt repayments, including prepayments totaling $2.8 billion for American's revolving credit facilities, $950 million for the April 2016 Spare Parts Term Loan Facility, $550 million of outstanding loans under the Treasury Loan Agreement and $2.3 billion in scheduled debt repayments. In addition, American had $174 million of deferred financing cost cash outflows.
American’s principal financing activities in the first nine months of 2020 included $8.7 billion in proceeds from the issuance of debt, including $2.8 billion borrowed under the 2014 Revolving Facility, the 2013 Revolving Facility and the April 2016 Revolving Facility, $2.5 billion in aggregate principal amount of 11.75% senior secured notes, $1.2 billion in aggregate principal amount of two series of 10.75% senior secured notes due 2026, $1.0 billion under the Delayed Draw Term Loan Credit Facility, $550 million under the Treasury Term Loan Facility and the $360 million issuance of special facility revenue bonds.bonds related to JFK. These cash inflows were offset in part by $2.5 billion in debt repayments, consisting of approximately $1.5 billion in scheduled debt repayments and the prepayment of the $1.0 billion Delayed Draw Term Loan Credit Facility, as well as $122 million of deferred financing costs.
American’s principal financing activities in the first nine months
Commitments
Significant Indebtedness
As of September 30, 2020,2021, AAG had $33.0$38.3 billion in long-term debt, including current maturities of $2.6$2.4 billion. As of September 30, 2020,2021, American had $28.9$32.3 billion in long-term debt, including current maturities of $2.6$1.7 billion. All material changes in our significant indebtedness since our 20192020 Form 10-K are discussed in Note 65 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A and Note 4 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B.
Aircraft and Engine Purchase Commitments
As of September 30, 2020,2021, we had definitive purchase agreements with Airbus, Boeing and Embraer for the acquisition of the following mainline and regional aircraft (1):
| | | Remainder
of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and Thereafter | | Total | | Remainder
of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and Thereafter | | Total |
| Airbus | Airbus | | | | | | | | | | | | | | Airbus | | | | | | | | | | | | | |
A320 Family (2) | 6 | | | 16 | | | 26 | | | 8 | | | 22 | | | 20 | | | 98 | | |
| A320neo Family | | A320neo Family | 6 | | | 26 | | | 5 | | | 18 | | | 22 | | | 5 | | | 82 | |
| Boeing | Boeing | | Boeing | |
737 MAX Family (3) | 737 MAX Family (3) | 8 | | | 18 | | | 10 | | | — | | | — | | | 40 | | | 76 | | 737 MAX Family (3) | 1 | | | — | | | 12 | | | 6 | | | 20 | | | 20 | | | 59 | |
| 787 Family | 787 Family | 7 | | | 13 | | | — | | | 6 | | | 6 | | | 13 | | | 45 | | 787 Family | 3 | | | 10 | | | 11 | | | 6 | | | 8 | | | 5 | | | 43 | |
| Embraer | | |
| E175 | 6 | | | 5 | | | — | | | — | | | — | | | — | | | 11 | | |
| Total | Total | 27 | | | 52 | | | 36 | | | 14 | | | 28 | | | 73 | | | 230 | | Total | 10 | | | 36 | | | 28 | | | 30 | | | 50 | | | 30 | | | 184 | |
(1)Delivery schedule represents our best estimate as of the date of this report. Actual delivery dates are subject to change based on manyvarious potential factors including production delays by the manufacturer.
(2)In October 2019, the Office of the U.S. Trade Representative announced a 10% tariff on new Airbus aircraft imported from Europe. Effective March 18, 2020, this tariff rate increased to 15%. We continue to take every effort to mitigate the effect of these tariffs on our Airbus deliveries. See Part II, Item 1A. Risk Factors - “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control.”
(3)On March 13, 2019, a directive from the Federal Aviation Administration(FAA) grounded all U.S.-registered Boeing 737 MAX aircraft. Our fleet currently includes 24 Boeing 737 MAX aircraft with an additional 76 on order. We have removed all Boeing 737 MAX aircraft flying from our flight schedule through December 29, 2020 and continue to assess this timeline. In addition, we have not taken delivery of any Boeing 737 MAX Family aircraft since the grounding. The extent of the delay to the scheduled deliveries of the Boeing 737 MAX aircraft included in the table above is expected to be impacted by the length of time the FAA order remains in place, Boeing's production rate and the pace at which Boeing can deliver aircraft following the lifting of the FAA order, among other factors. The above table reflects our estimate of future Boeing 737 MAX aircraft deliveries based on information currently available to us; however, the actual delivery schedule may differ from the table above, potentially materially.
We also have agreements for 3025 spare engines to be delivered in 20202021 and beyond.
We currently have financing commitments in place for all 10 aircraft on order and scheduled to be delivered through 2020. Additionally, wein the remainder of 2021: six Airbus A320neo Family aircraft, three Boeing 787 Family aircraft and one Boeing 737 MAX Family aircraft. We also have financing commitments in place for 44 aircraft scheduled to be delivered in 2021: 16 Airbus A320 Family aircraft, 1310 Boeing 787 Family aircraft 10 Boeing 737 MAX Family aircraftin 2022 and five Embraer 175 aircraft.Boeing 787 Family Aircraft in 2023. Our ability to draw on the financing commitments we have in place is subject to (1) the satisfaction of various terms and conditions, including in some cases, on our acquisition of the aircraft by a certain date and the lifting of the grounding directive from the FAA of the Boeing 737 MAX aircraft by a certain date and (2) the performance by the counterparty providing such financing commitments of its obligations thereunder. We do not have financing commitments in place for the remaining eight Boeing 737 MAX Family aircraft scheduled to be delivered in 2021, however, we do have rights to defer these eight Boeing 737 MAX Family aircraft from 2021 to 2023. In addition, we also have rights to defer to 2023-2024 the 10 Boeing 737 MAX Family aircraft currently scheduled to be delivered in 2022. See Part II, Item 1A. Risk Factors – “We will need to obtain sufficient financing or other capital to operate successfully” for additional discussion.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.
There have been no material changes in our off-balance sheet arrangements as discussed in our 20192020 Form 10-K.
Labor Contracts
On March 26, 2020, a new five-year joint collective bargaining agreement was ratified between us and the TWU-IAM Association. The new agreement will significantly increase the cost of providing compensation and benefits to our mainline maintenance and fleet service team members.
Contractual Obligations
The following table provides details of our future cash contractual obligations as of September 30, 20202021 (in millions). Except to the extent set forth in the applicable accompanying footnotes, the table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time.
| | | | Payments Due by Period | | | Payments Due by Period |
| | | Remainder
of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and Thereafter | | Total | | Remainder
of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and Thereafter | | Total |
| American | American | | | | | | | | | | | | | | American | | | | | | | | | | | | | |
| Long-term debt: | Long-term debt: | | Long-term debt: | |
Principal amount (a), (c) | Principal amount (a), (c) | $ | 614 | | | $ | 2,609 | | | $ | 1,653 | | | $ | 4,142 | | | $ | 4,381 | | | $ | 15,545 | | | $ | 28,944 | | Principal amount (a), (c) | $ | 557 | | | $ | 1,645 | | | $ | 4,169 | | | $ | 3,470 | | | $ | 7,752 | | | $ | 14,754 | | | $ | 32,347 | |
Interest obligations (b), (c) | Interest obligations (b), (c) | 191 | | | 1,156 | | | 1,057 | | | 985 | | | 885 | | | 1,513 | | | 5,787 | | Interest obligations (b), (c) | 291 | | | 1,527 | | | 1,480 | | | 1,323 | | | 1,152 | | | 1,358 | | | 7,131 | |
| Finance lease obligations | Finance lease obligations | 36 | | | 128 | | | 132 | | | 110 | | | 116 | | | 171 | | | 693 | | Finance lease obligations | 55 | | | 197 | | | 165 | | | 164 | | | 109 | | | 149 | | | 839 | |
Aircraft and engine purchase commitments (d) | Aircraft and engine purchase commitments (d) | 441 | | | 866 | | | 1,669 | | | 1,518 | | | 2,531 | | | 4,768 | | | 11,793 | | Aircraft and engine purchase commitments (d) | 329 | | | 1,678 | | | 1,632 | | | 2,504 | | | 3,390 | | | 1,775 | | | 11,308 | |
| Operating lease commitments | Operating lease commitments | 539 | | | 1,974 | | | 1,828 | | | 1,651 | | | 1,270 | | | 4,710 | | | 11,972 | | Operating lease commitments | 468 | | | 1,961 | | | 1,866 | | | 1,508 | | | 1,140 | | | 5,121 | | | 12,064 | |
Regional capacity purchase agreements (e) | Regional capacity purchase agreements (e) | 228 | | | 1,192 | | | 1,555 | | | 1,570 | | | 1,582 | | | 4,743 | | | 10,870 | | Regional capacity purchase agreements (e) | 344 | | | 1,505 | | | 1,844 | | | 1,886 | | | 1,740 | | | 3,477 | | | 10,796 | |
Minimum pension obligations (f) | Minimum pension obligations (f) | 130 | | | 564 | | | 607 | | | 618 | | | 654 | | | 413 | | | 2,986 | | Minimum pension obligations (f) | — | | | — | | | 46 | | | 136 | | | 111 | | | 224 | | | 517 | |
| Retiree medical and other postretirement benefits | Retiree medical and other postretirement benefits | 6 | | | 18 | | | 18 | | | 17 | | | 29 | | | 265 | | | 353 | | Retiree medical and other postretirement benefits | 23 | | | 90 | | | 85 | | | 82 | | | 77 | | | 358 | | | 715 | |
Other purchase obligations (g) | Other purchase obligations (g) | 674 | | | 2,134 | | | 1,223 | | | 895 | | | 260 | | | 1,104 | | | 6,290 | | Other purchase obligations (g) | 948 | | | 3,863 | | | 1,735 | | | 979 | | | 153 | | | 1,172 | | | 8,850 | |
| Total American Contractual Obligations | Total American Contractual Obligations | 2,859 | | | 10,641 | | | 9,742 | | | 11,506 | | | 11,708 | | | 33,232 | | | 79,688 | | Total American Contractual Obligations | 3,015 | | | 12,466 | | | 13,022 | | | 12,052 | | | 15,624 | | | 28,388 | | | 84,567 | |
| | AAG Parent and Other AAG Subsidiaries | AAG Parent and Other AAG Subsidiaries | | AAG Parent and Other AAG Subsidiaries | |
| Long-term debt: | Long-term debt: | | Long-term debt: | |
Principal amount (a) | Principal amount (a) | — | | | 2 | | | 752 | | | 2 | | | 2 | | | 3,281 | | | 4,039 | | Principal amount (a) | — | | | 750 | | | — | | | — | | | 1,500 | | | 3,746 | | | 5,996 | |
Interest obligations (b) | Interest obligations (b) | 20 | | | 142 | | | 122 | | | 103 | | | 102 | | | 366 | | | 855 | | Interest obligations (b) | 18 | | | 140 | | | 122 | | | 121 | | | 133 | | | 761 | | | 1,295 | |
| Operating lease commitments | Operating lease commitments | 3 | | | 14 | | | 13 | | | 10 | | | 7 | | | 20 | | | 67 | | Operating lease commitments | 3 | | | 17 | | | 15 | | | 12 | | | 7 | | | 22 | | | 76 | |
Minimum pension obligations (f) | Minimum pension obligations (f) | 3 | | | 4 | | | 4 | | | 4 | | | 5 | | | 13 | | | 33 | | Minimum pension obligations (f) | — | | | — | | | — | | | — | | | 1 | | | 4 | | | 5 | |
| Total AAG Contractual Obligations | Total AAG Contractual Obligations | $ | 2,885 | | | $ | 10,803 | | | $ | 10,633 | | | $ | 11,625 | | | $ | 11,824 | | | $ | 36,912 | | | $ | 84,682 | | Total AAG Contractual Obligations | $ | 3,036 | | | $ | 13,373 | | | $ | 13,159 | | | $ | 12,185 | | | $ | 17,265 | | | $ | 32,921 | | | $ | 91,939 | |
(a)Amounts represent contractual amounts due. Excludes $337$436 million and $443$32 million of unamortized debt discount, premium and issuance costs as of September 30, 20202021 for American and AAG Parent, respectively. For additional information, see Note 65 and Note 4 to AAG’s and American’s Condensed Consolidated Financial Statements in Part I, Items 1A and 1B, respectively.
(b)For variable-rate debt, future interest obligations are estimated using the current forward rates at September 30, 2020.2021.
(c)Includes $11.1$9.7 billion of future principal payments and $2.0$1.6 billion of future interest payments as of September 30, 2020,2021, related to EETCs associated with mortgage financings of certain aircraft and spare engines.
(d)See "Aircraft and Engine Purchase Commitments" in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information about the firm commitment aircraft delivery schedule, in particular the footnotes to the table thereunder as to potential changes to such delivery schedule. Due to uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent our current best estimate, including with respect to the delivery of Airbus A320 Family and Boeing 737 MAX aircraft;estimate; however, the actual delivery schedule may differ from the table above, potentially materially. Additionally, the amounts in the table exclude 20three and 10 Boeing 787-8 aircraft to be delivered in 20202021 and 20212022, respectively, as well as five Boeing 787-9 aircraft to be delivered in 2023, in each case, for which we have obtained committed lease financing. This financing is reflected in the operating lease commitments line above.
(e)Represents minimum payments under capacity purchase agreements with third-party regional carriers. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and our actual payments could differ materially. Rental payments under operating leases for certain aircraft flown under these capacity purchase agreements are reflected in the operating lease commitments line above.
(f)IncludesOn March 11, 2021, the ARP was enacted, which included funding relief provisions benefiting single employer qualified retirement benefit pension plans such as those sponsored by American. The amounts in the table represent minimum pension contributions based on actuarially determined estimates asand reflect our current understanding of December 31, 2019the ARP provisions applicable to our pension plans and iscould change based on estimated payments through 2029. Pursuant to the CARES Act passed in March 2020, minimum required pension contributions to be made in the calendar year 2020 can be deferred to January 1, 2021, with interest accruingany associated regulations or interpretive guidance from the original due date to the new payment date. We expect to defer our $133 million 2020 minimum required contributions to January 1, 2021, which we intend to paycertain government agencies or otherwise satisfy on or prior to December 31, 2020.any other factors.
(g)Includes purchase commitments for aircraft fuel, construction projects, flight equipment maintenance, construction projects and information technology support.
Capital Raising Activity and Other Possible Actions
In light of the cash needs imposed by the current operating losses due to reduced demand in response to the COVID-19 pandemic as well as our significant financial commitments related to, among other things, new flight equipment, the servicing and amortization of existing debt and equipment leasing arrangements, new flight equipment and pension funding obligations, we and our subsidiaries will regularly consider, and enter into negotiations related to, capital raising and liability management activity, which may include the entry into leasing transactions and future issuances of, and transactions designed to manage the timing and amount of, secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise. The cash available from operations (if any) and these sources, however, may not be sufficient to cover our cash obligations because economic factors may reduce the amount of cash generated by operations or increase costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks (in particular the ongoing global outbreak of COVID-19), natural disasters or other causes could reduce the demand for air travel, which would reduce the amount of cash generated by operations. See Part II, Item 1A. Risk Factors – "The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted our business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition and liquidity" for additional discussion. An increase in costs, either due to an increase in borrowing costs caused by a reduction in credit ratings or a general increase in interest rates, or due to an increase in the cost of fuel, maintenance, aircraft, aircraft engines or parts, could decrease the amount of cash available to cover cash contractual obligations. Moreover, certain of our financing arrangements contain significant minimum cash balance or similar liquidity requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements. See Note 65 and Note 4 to AAG's and American's Condensed Consolidated Financial Statements in Part I, Items 1A and 1B, respectively.
In the past, we have from time to time refinanced, redeemed or repurchased our debt and taken other steps to reduce or otherwise manage the aggregate amount and cost of our debt, lease and other obligations or otherwise improve our balance sheet. Going forward, depending on market conditions, our cash position and other considerations, we may continue to take such actions.
Critical Accounting Policies and Estimates
For information regarding our critical accounting policies and estimates, see disclosures in the Consolidated Financial Statements and accompanying notes contained in our 20192020 Form 10-K and Note 13 and Note 12 to AAG’s and American’s Condensed Consolidated Financial Statements in Part I, Items 1A and 1B, respectively.10-K.
Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2016-13: Measurement of Credit Losses on Financial Instruments
This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. We adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on our condensed consolidated financial statements.
ASU 2020-06: Accounting for Convertible Instruments and Contracts In An Entity's Own Equity (the New Convertible Debt Standard)
This ASUThe New Convertible Debt Standard simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature orand for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, this ASUthe New Convertible Debt Standard amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt this ASUthe New Convertible Debt Standard using either a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning after December 15, 2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020. This ASUThe New Convertible Debt Standard is applicable to our 6.50% convertible senior notes due 2025 (the Convertible Notes). We early adopted the New Convertible Debt Standard as of January 1, 2021 using the modified retrospective method to recognize the Convertible Notes as a single liability instrument. As of January 1, 2021, we recorded a $415 million ($320 million net of tax) reduction to additional paid-in capital to remove the equity component of the Convertible Notes from our balance sheet and wea $19 million cumulative effect adjustment credit, net of tax, to retained deficit related to non-cash debt discount amortization recognized in periods prior to adoption resulting in a corresponding reduction of $389 million to the debt discount associated with the Convertible Notes.
ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740)
This standard simplifies the accounting and disclosure requirements for income taxes by clarifying the existing guidance to improve consistency in the application of Accounting Standards Codification 740. This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly-owned subsidiaries that are assessing thenot subject to income tax. We adopted this standard effective January 1, 2021, and it did not have a material impact the adoption of this ASU will have on our condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AAG's and American’s Market Risk Sensitive Instruments and Positions
Our primary market risk exposures include the price of aircraft fuel, foreign currency exchange rates and interest rate risk. Our exposure to these market risks has not changed materially from our exposure discussed in our 20192020 Form 10-K except as updated below.
Aircraft Fuel
As of September 30, 2020,2021, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. We do not currently view the market opportunities to hedge fuel prices as attractive because, among other things, our future fuel needs remain unclear due to uncertainties regarding air travel demand and any hedging would potentially require significant capital or collateral to be placed at risk. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors. Although spot prices for oil and jet fuel are presently very low by historical standards, we do not currently view the market opportunities to hedge fuel prices as attractive because, among other things, the forward curve for the purchase of such products, or hedges related to such products, is very steep, any hedging would potentially require significant capital or collateral to be placed at risk, and our future fuel needs remain unclear due to uncertainties regarding air travel demand. Based on our 20202021 forecasted fuel consumption, we estimate that a one cent per gallon increase in the price of aircraft fuel would increase our 20202021 annual fuel expense by $23$34 million.
Foreign Currency
We are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated transactions. Our largest exposure comes from the British pound sterling, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real. We do not currently have a foreign currency hedge program.
Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.
Interest
Our earnings and cash flow are affected by changes in interest rates due to the impact those changes have on our interest expense from variable-rate debt instruments and our interest income from short-term, interest-bearing
investments. If annual interest rates increase 100 basis points, based on our September 30, 20202021 variable-rate debt and short-term investments balances, annual interest expense on variable rate debt would increase by approximately $130$111 million and annual interest income on short-term investments would increase by approximately $80$145 million.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021.2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacinghas chosen SOFR as the recommended risk-free reference rate for the U.S. dollar LIBOR with a newly created index, calculated(calculated based on repurchase agreements backed by Treasury securities,treasury securities), we cannot currently predict whetherthe extent to which this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.
We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As of September 30, 2020,2021, we had $12.8$11.1 billion of borrowings based on LIBOR. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure 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, as amended (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 SEC's rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of AAG’s and American’s disclosure controls and procedures as of September 30, 20202021 was performed under the supervision and with the participation of AAG’s and American’s management, including AAG’s and American’s CEO and CFO. Based on that evaluation, AAG’s and American’s management, including AAG’s and American’s CEO and CFO, concluded that AAG’s and American’s disclosure controls and procedures were effective as of September 30, 20202021 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
For the quarter ended September 30, 2020,2021, there have been no changes in AAG’s or American’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, AAG’s and American’s internal control over financial reporting.
Limitation on the Effectiveness of Controls
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and, as noted above, the CEO and CFO of AAG and American believe that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020.2021.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ChapterSee Note 11 Cases. On November 29, 2011, AMR Corporation (AMR), American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the acquisition of US Airways Group, Inc. (US Airways Group) by AMR (the Merger).
Pursuant to rulings of the Bankruptcy Court, the Plan established a disputed claims reserve (the Disputed Claims Reserve) to hold shareseach of AAG common stock reservedand American's Condensed Consolidated Financial Statements in Part I, Item 1A and Part I, Item 1B, respectively, for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. The shares of AAG common stock issued to the Disputed Claims Reserve were originally issuedinformation on December 13, 2013 and have at all times since been included in the number of shares issued and outstanding as reported from time to time in our quarterly and annual reports, including for calculating earnings per common share. As disputed claims are resolved, the claimants receive distributions of shares from the Disputed Claims Reserve. We are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims Reserve are not sufficient to fully pay any additional allowed unsecured claims. If any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders under the Plan. In February 2020, 2.2 million shares of AAG common stock were distributed from the Disputed Claims Reserve. After giving effect to this distribution, as of September 30, 2020, the Disputed Claims Reserve held 4.8 million shares of AAG common stock.
Private Party Antitrust Action Related to Passenger Capacity. We, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court). On June 15, 2018, we reached a settlement agreement with the plaintiffs in the amount of $45 million to resolve all class claims in the U.S. lawsuits. That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia. We believe these appeals are without merit and intend to vigorously defend against them.
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the Bankruptcy Court. The complaint named as defendants US Airways Group, US Airways, Inc. (US Airways), AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019. The parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019, and we are awaiting the Bankruptcy Court's decision. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.
ITEM 1A. RISK FACTORS
Below are certain risk factors that may affect our business, results of operations and financial condition, or the trading price of our common stock or other securities. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business.
Risks Related to our Business
The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted our business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition and liquidity.
The COVID-19 outbreak, along with the measures governments and private organizations worldwide have implemented in an attempt to contain the spread of this pandemic, has resulted in a severe decline in demand for air travel, which has adversely affected our business, operations and financial condition to an unprecedented extent. Measures ranging fromsuch as travel restrictions, “shelter in place”including testing regimes, “stay at home” and quarantine orders, limitations on public gatherings, to cancellation of public events and many others have resulted in a precipitous decline in demand for both domestic and international business and leisure travel. In response to this material deterioration in demand, we have taken a number of aggressive actions to ameliorate our business, operations and financial condition. We have focused on reducing our capacity, making structural changes to our fleet, implementing cost reductions, preserving cash and improving our overall liquidity position. We have reduced our system-wide capacity and will continue to monitor conditions and to proactively evaluate and adjust our schedule to match demand. Additionally, we have determined to retireretired certain mainline aircraft earlier than planned, including all of our Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as certain regional aircraft, including certainour Embraer 140 fleet and Bombardier CRJ200 aircraft, which we expect will allow us to be more efficient by reducing the number of sub-fleets we operate, and we have also placed a number of Boeing 737-800 aircraft into temporary storage. We have moved quickly to attempt to better align our costs with our reduced schedule and made other cost-saving initiatives (including reductions in maintenance expense, marketing expense, event and training expenses,expense, airport facilities expense, salaries and benefits expense, and other volume-related expense reductions, including fuel). Nonetheless, we incurred significant negative operating cash flownet losses, excluding net special items, in 2020 and the first nine months of 2020, we continue to do so,2021, and we expect to continue to do so until there is a significant global recovery in demand for air travel. The duration and severity of the COVID-19 pandemic remain uncertain, and there can be no assurance that theseany of the mitigating actions we have taken will suffice to sustain our business and operations through this pandemic. We expect our results of operations for fiscal 2020 to be materially impacted.
We have taken and will take additional actions to improve our financial position, including measures to improve liquidity, such as obtaining financial assistance under the CARES Act. WeAct, the PSP Extension Law and the ARP. In 2020, we received approximately $6.0 billion in financial assistance from Treasury through the Payroll Support ProgramPSP1 established under the CARES Act, asand in the first nine months of September 30, 2020.2021, we received approximately $3.5 billion in financial assistance from Treasury through PSP2 established under the PSP Extension Law and $3.3 billion in financial assistance from Treasury through PSP3 established under the ARP. In connection with the financial assistance we have received under the Payroll Support Program,through PSP1, PSP2 and PSP3, we are required to comply with certainthe relevant provisions of the CARES Act, the PSP Extension Law and the ARP, including the requirement that funds provided pursuant to the Payroll Support ProgramPSP1, PSP2 and PSP3 be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits; the requirementprohibition against involuntary furloughs and reductions in employee pay rates and benefits through at least September 30, 2021; the requirement to recall employees involuntarily terminated or furloughed after September 30, 2020; the requirement that certain levels of commercial air service be maintained; provisions prohibiting the repurchase of AAG’sAAG common stock and the payment of common stock dividends through September 30, 2021;2022; and restrictions on the payment of certain executive compensation until March 24, 2022.April 1, 2023. Additionally, under the Payroll Support Program,PSP1, PSP2 and PSP3, we and certain of our subsidiaries are, and will continue to be, subject to substantial and continuing reporting obligations. In addition, we received a secured loan from Treasury under the loan program pursuant to the CARES Act that is due in June 2025 and, as a result, the stock repurchase, dividend and executive compensation restrictions will remain in place through the date that is one year after such secured loan is fully repaid. The substance and duration of these restrictions may materially affect our operations, and we may not be successful in managing these impacts.
We intend tomay pursue additional financing through, among other things, the issuance of additional unsecured and secured debt securities, equity securities and equity-linked securities and/or the entry into additional bilateral and syndicated secured and/or unsecured credit facilities. There can be no assurance as to the timing of any such financing transactions, which may be in the near term, or that we will be able to obtain such additional financing on favorable terms, or at all. Any such actions could be conducted in the near term, may be material in nature, could result in the incurrence and issuance of significant additional indebtedness or equity and could impose significant covenants and restrictions to which we are not currently subject.
The measures we have taken to reduce our expenditures and to improve our liquidity, and any other strategic actions that we may take in the future in response to the COVID-19 pandemic may not be effective in offsetting decreased demand, and we may not be permitted to take certain strategic actions that we believe are beneficial if such strategic actions are in contravention of the requirements under the CARES Act, the PSP Extension Law or the ARP, which could result in a material adverse effect on our business, operating results and financial condition.
The full extent of the ongoing impact of the COVID-19 pandemic on our longer-term operational and financial performance will depend on future developments, many of which are outside our control, including the effectiveness of the mitigation strategies discussed above,above; the duration and spread of COVID-19, including any recurrence of the pandemic or the emergence of novel variants, and related travel advisories, restrictions and restrictions,testing regimes; the supply of effective vaccines and success of efforts to deploy the vaccines; the impact of the COVID-19 pandemic on overall long-term demand for air travel,travel; the impact on demand and capacity which could result from government mandates on air service including,(including, for instance, requirements for passengers to wear face coverings while traveling or have their temperature checked or have administered COVID-19 tests and other checks prior to or after entering an airport or boarding an airplane, or which would limit the number of seats that can be occupied on an aircraft to allow for social distancing ifor prohibit flights to certain locations); the impact of COVID-19 on our employees are unableemployees’ ability to work because they are quarantined or sickened as a result of exposure to COVID-19 or if they are subject to additional governmental COVID-19 curfews or "shelter in place""stay at home" health orders or similar restrictions,restrictions; the impact of federal vaccine mandates, including the willingness of our employees to comply with such mandates and potential conflict with actions by certain states that are in conflict with the federal mandate; the impact of the COVID-19 pandemic on the financial health and operations of our business partners and future governmental actions, all of which are highly uncertain and cannot be predicted. At this time, we are also not able to predict whether the COVID-19 pandemic will result in permanent changes to our customers' behavior, with such changes including but not limited to a permanent reduction in business travel as a result of increased usage of "virtual" and "teleconferencing" products and more broadly a general reluctance to travel by consumers, each of which could have a material impact on our business.
We are also dependent upon effective COVID-19 vaccines, including an efficient distribution and sufficient supply, and significant uptake by the general public in order to normalize economic conditions and the airline industry and to realize our financial and growth plans and business strategy. The failure of a vaccine, including to the extent it is not effective against any COVID-19 variants, significant unplanned adverse reactions to the vaccine, politicization of the vaccine or general public distrust of the vaccine could have an adverse effect on our business, financial condition and results of operations. Additionally, in September 2021, the U.S. federal government issued guidance on previously announced COVID-19 vaccination requirements for federal contractors. Due to a number of our agreements, American is classified as a government contractor. Consistent with this guidance, we announced in October 2021 that the federal vaccine mandate would require all of American’s U.S.-based team members and certain international crew members to be vaccinated, without the provision of a regular testing alternative. We cannot predict the impact of this federal vaccination requirement on our business.
In addition, an outbreak of another disease or similar public health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could adversely impact our business, financial condition and operating results. Outbreaks of other diseases could also result in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely affect our operations.
Downturns in economic conditions could adversely affect our business.
Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a strong negative effect on our business. In particular, the ongoing COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels are expected to have a
severe and prolonged effect on the global economy generally and, in turn, is expected tomay depress demand for air travel into the foreseeable future. Due to the uncertainty surrounding the duration and severity of this pandemic, we can provide no assurance as to when and at what pace demand for air travel will return to pre-pandemicpre-COVID-19 pandemic levels, if at all. Accordingly, we cannot predict the ultimate impact of the COVID-19 pandemic on our business, financial condition and results of operations. See also “The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted our business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition and liquidity” and “The airline industry is intensely competitive and dynamic.”
We will need to obtain sufficient financing or other capital to operate successfully.
Our business plan contemplates continued significant investments related to modernizing our fleet, improving the experience of our customers and updating our facilities. Significant capital resources will be required to execute this plan. We estimate that, based on our commitments as of September 30, 2020,2021, our planned aggregate expenditures for aircraft purchase commitments and certain engines on a consolidated basis for calendar years 2020-20242021-2025 would be approximately $8.0$9.5 billion. We may also require financing to refinance maturing obligations and to provide liquidity to fund other corporate requirements, in particular given the severe decline in revenuerequirements. Accordingly, we have experienced as a result of
COVID-19.will need substantial liquidity, financing or other capital resources to finance such aircraft and engines and meet such other liquidity needs. If needed, to meet our liquidity needs, it may be difficult for us to raise additional capital on acceptable terms, or at all, due to, among other factors: our substantial level of existing indebtedness, particularly following the additional liquidity transactions completed and contemplated in response to the impact of COVID-19;the COVID-19 pandemic; our non-investment grade credit rating; unfavorable market conditions; the availability of assets to use as collateral for loans or other indebtedness, which has been reduced significantly as a result of certain financing transactions we have undertaken since the beginning of 2020 and may be further reduced as we continue to seek significant additional liquidity;reduced; and the effect the COVID-19 pandemic has had on the global economy generally and the air transportation industry in particular. Accordingly, we will need substantial financing or other capital resources to finance such aircraft and engines and meet such other liquidity needs. If we are unable to arrange any such required financing at customary advance rates and on terms and conditions acceptable to us, we may need to use cash from operations or cash on hand to purchase such aircraft and engines or fund such other corporate requirements or may seek to negotiate deferrals for such aircraft and engines with the applicable aircraft and engine manufacturers or otherwise defer corporate obligations. Depending on numerous factors applicable at the time we seek capital, many of which are out of our control, such as the state of the domestic and global economies, the capital and credit markets’ view of our prospects and the airline industry in general, and the general availability of debt and equity capital, the financing or other capital resources that we will need may not be available to us, or may be available only on onerous terms and conditions. There can be no assurance that we will be successful in obtaining financing or other needed sources of capital to operate successfully.successfully or to fund our committed expenditures. An inability to obtain necessary financing on acceptable terms would have a material adverse impact on our business, results of operations and financial condition.
Our high level of debt and other obligations may limit our ability to fund general corporate requirements and obtain additional financing, may limit our flexibility in responding to competitive developments and cause our business to be vulnerable to adverse economic and industry conditions.
We have significant amounts of indebtedness and other obligations, including pension obligations, obligations to make future payments on flight equipment and property leases related to airport and other facilities, and substantial non-cancelable obligations under aircraft and related spare engine purchase agreements. Moreover, currently a very significant portion of our assets are pledged to secure our indebtedness. Our substantial indebtedness and other obligations, which are generally greater than the indebtedness and other obligations of our competitors, could have important consequences. For example, they may:
•make it more difficult for us to satisfy our obligations under our indebtedness;
•limit our ability to obtain additional funding for working capital, capital expenditures, acquisitions, investments, integration costs and general corporate purposes, and adversely affect the terms on which such funding can be obtained;
•require us to dedicate a substantial portion of our liquidity or cash flow from operations to payments on our indebtedness and other obligations, thereby reducing the funds available for other purposes;
•make us more vulnerable to economic downturns, industry conditions and catastrophic external events, particularly relative to competitors with lower relative levels of financial leverage;
•significantly constrain our ability to respond, or respond quickly, to unexpected disruptions in our own operations, the U.S. or global economies, or the businesses in which we operate, or to take advantage of opportunities that would improve our business, operations, or competitive position versus other airlines;
•limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions;
•contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities; and
•contain restrictive covenants that could, among other things:
◦limit our ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends; and
◦if breached, result in an event of default under our indebtedness.
In addition, in response to the travel restrictions, decreased demand and other effects the COVID-19 pandemic has had and is expected to have on our business, we have obtained and currently anticipate that it willmay be necessary to continue to
obtain a significant amount of additional financing in the near term from a variety of sources. Such financing may include the issuance of additional unsecured or secured debt securities, equity securities and equity-linked securities as well as additional bilateral and syndicated secured and/or unsecured credit facilities, among other items. There can be no assurance as to the timing of any such financing transactions, which may be in the near term, or that we will be able to obtain such additional financing on favorable terms, or at all. Any such actions could be conducted in the near term, may be material in nature, could result in the incurrence and issuance of significant additional indebtedness or equity and could impose significant covenants and restrictions to which we are not currently subject. In particular, in connection with the financial assistance we have received through the Payroll Support Program,PSP1, PSP2 and PSP3, we are required to comply with the relevant provisions of the CARES Act, the PSP Extension Law and the ARP, including the requirement that funds provided pursuant to the Payroll Support ProgramPSP1, PSP2 and PSP3 be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits; the requirementprohibition against involuntary furloughs and reductions in employee pay rates and benefits which expired effective October 1, 2020; the requirement that certain levels of commercial air service be maintained;through at least September 30, 2021; provisions prohibiting the repurchase of AAG common stock and the payment of common stock dividends through September 30, 2021;2022; and restrictions on the payment of certain executive compensation until March 24, 2022. In addition, we have entered into the Treasury Loan Agreement and, as a result, the stock repurchase, dividend and executive compensation restrictions will remain in place through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.April 1, 2023. Additionally, under the Payroll Support ProgramPSP1, PSP2 and PSP3, we and certain of our subsidiaries are subject to substantial and continuing reporting obligations. Moreover, as a result of the recent financing activities we have undertaken in response to the COVID-19 pandemic, the number of financings with respect to which such covenants and provisions apply has increased, thereby subjecting us to more substantial risk of cross-default and cross-acceleration in the event of breach, and additional covenants and provisions could become binding on us as we continue to seek additional liquidity.
The obligations discussed above, including those imposed as a result of the CARES Act, the PSP Extension Law, the ARP and any additional financings we may be required to undertake as a result of the impact of the COVID-19 pandemic, could also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business, and could materially adversely affect our liquidity, results of operations and financial condition.
Further, a substantial portion of our long-term indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate (LIBOR) for deposits of U.S. dollars. LIBOR tends to fluctuate based on general short-term interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. We have not hedged our interest rate exposure with respect to our floating rate debt. Accordingly, our interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates. To the extent the interest rates applicable to our floating rate debt increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021.2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates
Committee, is considering replacinghas chosen SOFR as the recommended risk-free reference rate for the U.S. dollar LIBOR with a newly created index, calculated(calculated based on repurchase agreements backed by treasury securities,securities), we cannot currently predict whetherthe extent to which this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere. See also the discussion of interest rate risk in Part I, Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk – “Interest.”
We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach an agreement with our lenders on any such amendments. As of September 30, 2020,2021, we had $12.8$11.1 billion of borrowings based on LIBOR. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.
We have significant pension and other postretirement benefit funding obligations, which may adversely affect our liquidity, results of operations and financial condition.
Our pension funding obligations are significant. The amount of these obligations will depend on the performance of investments held in trust by the pension plans, interest rates for determining liabilities and actuarial experience. The minimum funding obligation applicable to our pension plans was subject to favorable temporary funding rules that expired at the end of 2017 and, as a result, our minimum pension funding obligations increased materially beginning in 2019. In January 2021, we made $241 million in contributions to our pension plans, including a contribution of $130 million for the 2020 calendar year that was permitted to be deferred to January 4, 2021 as provided under the CARES Act. On March 11, 2021, the ARP was enacted, which included funding relief provisions benefiting single employer qualified retirement benefit pension plans such as those sponsored by American. Based on our current understanding of the ARP provisions applicable to our pension plans, we will have no additional funding requirements for 2021. In addition, we have significant obligations for retiree medical and other postretirement benefits. Additionally, we participate in the IAM National Pension Fund (the IAM Pension Fund). The funding status of the IAM Pension Fund is subject to the risk that other employers may not meet their obligations, which under certain circumstances could cause our obligations to increase. Furthermore, if we were to withdraw from the IAM Pension Fund, if the IAM Pension fund were to terminate, or if the IAM Pension Fund were to undergo a mass withdrawal, we could be subject to liability as imposed by law.
If our financial condition worsens, provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these credit card processing companies, under certain conditions (including, with respect to certain agreements, our failure to maintain certain levels of liquidity), to hold an amount of our cash (referred to as a holdback) equal to some or all of the advance ticket sales that have been processed by that credit card processor, but for which we have not yet provided the air transportation. Additionally, such credit card processing companies may require cash or other collateral reserves to be established. These credit card processing companies are not currently entitled to maintain any holdbacks pursuant to these requirements. These holdback requirements can be modified at the discretion of the credit card processing companies upon the occurrence of specific events, including material adverse changes in our financial condition or the triggering of a liquidity covenant. In light of the effect the COVID-19 pandemic is having on demand for air travel and, in turn, capacity, we have seen an increase in demand from consumers for refunds on their tickets, and we anticipate this will continue to be the case for the near future. Requests for refunds and the ongoing impact of the COVID-19 pandemic on our longer-term financial performance may reduce our liquidity and cause us to be forced to post cash or other collateral with the credit card processing companies in respect of advance ticket sales. The imposition of holdback requirements, up to and including 100% of relevant advanced ticket sales, would materially reduce our liquidity. Likewise, other of our commercial agreements contain provisions that allow other entities to impose less-favorable terms, including the acceleration of amounts due, in the event of material adverse changes in our financial condition. For example, we maintain certain letters of credit, insurance- and surety-related agreements under which counterparties may require collateral, including cash collateral.
The loss of key personnel upon whom we depend to operate our business or the inability to attract and develop additional qualified personnel could adversely affect our business.
We believe that our future success will depend in large part on our ability to attract, develop and retain or attract highly qualified management, technical and other personnel. We may not be successful in attracting, developing or retaining key personnel or in attracting other highly qualified personnel. Among other things, the CARES Act, imposesthe PSP Extension Law and the ARP impose significant restrictions on executive compensation, which will remain in place through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.until April 1, 2023. Such restrictions, over time, will likely result in lower executive compensation in the airline industry than is prevailing in other industries, which may presentcreating increasing retention challenges in the case of executives presented with alternative, non-airline opportunities or with opportunities from airlines that are not subject to such restrictions because they never entered into such Treasury loans oropportunities. In addition, we currently have repaid their Treasury loansa significantly smaller workforce than we did prior to us.the onset of the COVID-19 pandemic, while the demand for leisure travel, in particular domestically, accelerated during 2021. Competition for skilled personnel has intensified and may continue to intensify if overall industry capacity continues to increase and/or we were to incur attrition at levels higher than we have historically. Any inability to attract, develop and retain or attract significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition.
The airline industry is intensely competitive and dynamic.
Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, as well as joint ventures formed by some of these airlines, many of which have more financial or other resources and/or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles. In many of our markets, we compete with at least one low-cost carrier (including so-called ultra-low-cost carriers). Our revenues are sensitive to the actions of other carriers in many areas, including pricing, scheduling, capacity, fees (including cancellation, change and baggage fees), amenities, loyalty benefits and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues. These factors may become even more significant in periods when the industry experiences large losses (such as the current one caused by the COVID-19 pandemic), as airlines under financial stress, or in bankruptcy, may institute pricing or fee structures intended to attract more customers to achieve near term survival at the expense of long-term viability.
Low-cost carriers (including so-called ultra-low-cost carriers) have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more established airlines, and represent significant competitors, particularly for customers who fly infrequently, are price sensitive and therefore tend not to be loyal to any one particular carrier. A number of these low-cost carriers have announced growth strategies including commitments to acquire significant numbers of new aircraft for delivery in the next few years. These low-cost carriers are attempting to continue to increase their market share through growth and, potentially, consolidation, and are expected to continue to have an impact on our revenues and overall performance. We and several other large network carriers have implemented “Basic Economy” fares designed to more effectively compete against low-cost carriers, but we cannot predict whether these initiatives will be successful. While historically these carriers have provided competition in domestic markets, we have recently experienced new competition from low-cost carriers on international routes, including low-cost airlines executing international long-haul expansion strategies. The actions of existing or future low-cost carriers, including those described above, could have a material adverse effect on our operations and financial performance.
We provide air travel internationally, directly as well as through joint business, alliance, codeshare and similar arrangements to which we are a party. While our network is comprehensive, compared to some of our key global competitors, we generally have somewhat greater relative exposure to certain regions (for example, Latin America) and somewhat lower relative exposure to others (for example, China). Our financial performance relative to our key competitors will therefore be influenced significantly by macro-economic conditions in particular regions around the world and the relative exposure of our network to the markets in those regions, including the duration of declines in demand for travel to specific regions as a result of the continuing outbreak of COVID-19 and the speed with which demand for travel to these regions returns.
In providing international air transportation, we compete to provide scheduled passenger and cargo service between the U.S. and various overseas locations with U.S. airlines, foreign investor-owned airlines and foreign state-owned or state-affiliated airlines. Competition is increasing from foreign state-owned and state-affiliated airlines in the Gulf region. These carriers have large numbers of international widebody aircraft in service and on order and are increasing service to the U.S. from locations both in and outside the Middle East. Service to and from locations outside of the Middle East is provided by some of these carriers under so-called “fifth freedom” rights permitted under international treaties which allow service to and from stopover points between an airline’s home country and the ultimate destination. Such flights, such as a stopover in Europe on flights to the United States, allow the carrier to sell tickets for travel between the stopover point and the United States in competition with service provided by us. We believe these state-owned and state-affiliated
carriers in the Gulf region, including their affiliated carriers, benefit from significant government subsidies, which have allowed them to grow quickly, reinvest in their product and expand their global presence.
Our international service exposes us to foreign economies and the potential for reduced demand when any foreign country we serve suffers adverse local economic conditions or if governments restrict commercial air service to or from any of these markets. For example, the COVID-19 pandemic has resulted in a precipitous decline in demand for air travel, in particular international travel, in part as a result of the imposition by the U.S. and foreign governments of restrictions on travel from certain regions. In addition, open skies agreements, which are now in place with a substantial number of countries around the world, provide international airlines with open access to U.S. markets, potentially subjecting us to increased competition on our international routes. See also “Our business is subject to extensive government regulation, which may 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.”
Certain airline alliances, joint ventures and joint businesses have been, or may in the future be, 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. Our ability to attract and retain customers is dependent upon, among other things, our ability to offer our customers convenient access to desired markets. Our business could be adversely affected if we are unable to maintain or obtain alliance and marketing relationships with other air carriers in desired markets.
American has established a transatlantic joint business agreement (JBA) with British Airways, Iberia and Finnair, a transpacific JBA with Japan Airlines and a JBA relating to Australia and New Zealand with Qantas Airways, each of which has been granted antitrust immunity. The transatlantic JBA relationship benefits from a grant of antitrust immunity from the Department of Transportation (DOT) and was reviewed by the European Commission (EC) in July 2010. In connection with this review, we provided certain commitments to the EC regarding, among other things, the availability of take-off and landing slots at London Heathrow (LHR) or London Gatwick (LGW) airports. The commitments accepted by the EC were binding for 10 years. In October 2018, in anticipation of the exit of the United Kingdom from the European Union (EU), commonly referred to as Brexit, and the expiry of the EC commitments in July 2020, the United Kingdom Competition and Markets Authority (CMA) opened an investigation into the transatlantic JBA. We continue to fully cooperate with the CMA and, in September 2020, the CMA adopted interim measures that effectively extend the EC commitments for an additional three years until March 2024 as a result of the uncertainty created by the COVID-19 pandemic. The CMA plans to complete its investigation before the interim measures expire. An application for antitrust immunity is also pending with the DOT to add Aer Lingus, which is owned by the parent company of British Airways and Iberia, to the transatlantic JBA. The foregoing arrangements are important aspects of our international network and we are dependent on the performance and continued cooperation of the other airlines party to those agreements.
Additionally, on July 16, 2020, we announced our intention to enter into a strategic relationship with JetBlue Airways Corp. This arrangement, once finalized, includes an alliance agreement with reciprocal codesharing on domestic and international routes from New York (JFK, LGA and EWR) and Boston, and will provide for reciprocal loyalty program benefits. The arrangement does not include JetBlue's future transatlantic flying. The implementation of the alliance agreement is subject to governmental review. No assurances can be given as to any benefits that we may derive from any of the foregoing arrangements or any other arrangements that may ultimately be implemented, or whether or not regulators will, or if granted continue to, approve or impose material conditions on our business activities.
Additional mergers and other forms of industry consolidation, including antitrust immunity grants, may take place and may not involve us as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with any such combinations, our competitive position relative to the post-combination carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our network, which in turn could decrease our overall market share and revenues. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.
Additionally, our AAdvantage loyalty program, which is an important element of our sales and marketing programs, faces significant and increasing competition from the loyalty programs offered by other travel companies, as well as from similar loyalty benefits offered by banks and other financial services companies. Competition among loyalty programs is intense regarding the rewards, fees, required usage, and other terms and conditions of these programs. In addition, we have used certain assets from our AAdvantage loyalty program as collateral for the secured loan under the Treasury Loan Agreement, which contains covenants that impose restrictions on certain amendments or changes to our AAdvantage
loyalty program. These competitive factors and covenants (to the extent applicable) may affect our ability to attract and retain customers, increase usage of our loyalty program and maximize the revenue generated by our loyalty program.
Our business has been and will continue to be affected by many changing economic and other conditions beyond our control, including global events that affect travel behavior, and our results of operations could be volatile and fluctuate due to seasonality.
Our business, results of operations and financial condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:
•the effects of the ongoing COVID-19 pandemic;
•actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks and political instability;
•changes in consumer preferences, perceptions, spending patterns and demographic trends;
•changes in the competitive environment due to industry consolidation, changes in airline alliance affiliations, and other factors;
•actual or potential disruptions to the United StatesU.S. National Airspace System (the ATC system);
•increases in costs of safety, security, and environmental measures;
•outbreaks of diseases that affect travel behavior; and
•weather and natural disasters, including increases in frequency, severity or duration of such disasters, and related costs caused by more severe weather due to climate change.
In particular,addition to the effects of the ongoing COVID-19 pandemic, an outbreak of aanother contagious disease disease—such as has occurred in the past with the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus COVID-19 or any other similar illness, illness—if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior. See also "The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted our business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition and liquidity.” As a result of these or other conditions beyond our control, our results of operations could be volatile and subject to rapid and unexpected change. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year.
Our business is very dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on consumer demand, our operating results and liquidity.
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business and thus is a significant factor in the price of airline tickets. Market prices for aircraft fuel have fluctuated substantially over the past several years and prices continue to be highly volatile.
Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our operating results and liquidity. Due to the competitive nature of the airline industry and unpredictability of the market for air travel, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues or decrease other operating costs sufficiently to offset fuel price increases. Similarly, we cannot predict actions that may be taken by our competitors in response to changes in fuel prices.
Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters (including hurricanes or similar events in the U.S. Southeast and on the Gulf Coast where a significant portion of domestic refining capacity is located), political disruptions or wars involving oil-producing countries, economic sanctions imposed against oil-producing countries or specific industry participants, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, changes in the cost to transport or store petroleum products, changes in access to petroleum product pipelines and terminals, speculation in
the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, distribution challenges, additional fuel price volatility and cost increases in the future. For instance, effective January 1, 2020, rules adopted by the International Maritime Organization restrict the sulfur content allowable in marine fuels from 3.5% to 0.5%, which is expected to cause increased demand by maritime shipping companies for low-sulfur fuel and potentially lead to increased costs of aircraft fuel. Any of these factors or events could cause a disruption in or increased demands on oil production, refinery operations, pipeline capacity or terminal access and possibly result in significant increases in the price of aircraft fuel and diminished availability of aircraft fuel supply.
Our aviation fuel purchase contracts generally do not provide meaningful price protection against increases in fuel costs. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review this policy from time to time based on market conditions and other factors. Although spot prices for oil and jet fuel are presently very low by historical standards, we do not currently view the market opportunities to hedge fuel prices as attractive because, among other things, the forward curve for the purchase of such products, or hedges related to such products, is very steep, any hedging would potentially require significant capital or collateral to be placed at risk, and our future fuel needs remain unclear due to uncertainties regarding air travel demand. Accordingly, as of September 30, 2020, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices and, while the price of fuel has been at historically low levels during the COVID-19 pandemic, there is no assurance that it will remain so and any increase in fuel prices, coupled with the severe reduction in demand we are experiencing, during the COVID-19 pandemic will materially affect our business in an adverse manner. See also the discussion in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk – “Aircraft Fuel.”
Union disputes, employee strikes and other labor-related disruptions, or our inability to otherwise maintain labor costs at competitive levels may adversely affect our operations and financial performance.
Relations between air carriers and labor unions in the U.S. are governed by the Railway Labor Act (RLA). Under the RLA, collective bargaining agreements (CBAs) generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (NMB). For the dates that the CBAs with our major work groups become amendable under the RLA, see Part I, Item 1. Business – “Employees and Our People—Labor Relations” in our 20192020 Form 10-K.
In the case of a CBA that is amendable under the RLA, if no agreement is reached during direct negotiations between the parties, either party may request that the NMB appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (PEB) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of this “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, which could materially adversely affect our business, results of operations and financial condition.
None of the unions representing our employees presently may lawfully engage in concerted slowdowns or refusals to work, such as strikes, sick-outs or other similar activity, against us. Nonetheless, there is a risk that employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance. Additionally, some of our unions have brought and may continue to bring grievances to binding arbitration, including those related to wages. If successful, there is a risk these arbitral avenues could result in material additional costs that we did not anticipate. See also Part I, Item 1. Business – “Employees and Labor Relations” in our 20192020 Form 10-K.
As of December 31, 2019,2020, approximately 85%84% of our employees were represented for collective bargaining purposes by labor unions. Currently, we believe our labor costs are generally competitive relative to the other large network carriers. However, we cannot provide assurance that labor costs going forward will remain competitive because we are in negotiations for several important new labor agreements now and other agreements are scheduled to become amendable, competitors may significantly reduce their labor costs or we may agree to higher-cost provisions unilaterally or in connection with our current or future labor negotiations.
If we encounter problems with any of our third-party regional operators or third-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.We haveA significant pensionportion of our regional operations are conducted by third-party operators on our behalf, substantially all of which are provided for under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risk of disruptions to their operations, which has in the past and may in the future result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, the inability of third parties to hire or retain skilled personnel, including pilots and mechanics, and other postretirement benefit fundingrisk factors, such as an out-of-court or bankruptcy restructuring of any of our regional operators. Several of these third-party regional operators provide significant regional capacity that we would be unable to replace in a short period of time should that operator fail to perform its obligations to us. Disruptions to capital markets, shortages of skilled personnel and adverse economic conditions in general have subjected certain of these third-party regional operators to significant financial pressures, which have in the past and may in the future lead to bankruptcies among these operators. In particular, the severe decline in demand for air travel resulting from the COVID-19 pandemic and related governmental restrictions on travel have materially impacted demand for services provided by our regional carriers and, as a result, we temporarily significantly reduced our regional capacity. We expect the disruption to services resulting from the COVID-19 pandemic to continue to adversely affect our liquidity,regional operators, some of whom may experience significant financial stress, declare bankruptcy or otherwise cease to operate. We may also experience disruption to our regional operations or incur financial damages if we terminate the capacity purchase agreement with one or more of our current operators or transition the services to another provider. Any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial condition.
Our pension funding obligations
In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including distribution and sale of airline seat inventory, reservations, provision of information technology and services, regional operations, aircraft maintenance, ground services and facilities and baggage handling. Similar agreements may be entered into in any new markets we decide to serve. These agreements are significant. The amountgenerally subject to termination after notice by the third-party service provider. We are also at risk should one of these obligations will depend on the performance of investments held in trust by the pension plans, interest rates for determining liabilitiesservice providers cease operations, and actuarial experience. The minimum funding obligation applicable to our pension plans was subject to favorable temporary funding rulesthere is no guarantee that expired at the end of 2017 and, as a result, our minimum pension funding obligations increased materially beginning in 2019. In addition, we have significant obligations for retiree medical and other postretirement benefits. Additionally, we participate in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund (the IAM Pension Fund). The funding status of the IAM Pension Fund is subject to the risk that other employers may not meet their obligations, which under certain circumstances could cause our obligations to increase. Furthermore, if we were to withdraw from the IAM Pension Fund, if the IAM Pension fund were to terminate, or if the IAM Pension Fund were to undergo a mass withdrawal, we could be subject to liability as imposed by law.replace these providers on a timely basis with comparably priced providers, or at all. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
Any damage to our reputation or brand image could adversely affect our business or financial results.
Maintaining a good reputation globally is critical to our business. Our reputation or brand image could be adversely impacted by, among other things, any failure to maintain high ethical, social and environmental sustainability practices for all of our operations and activities, our impact on the environment, public pressure from investors or policy groups to change our policies, such as movements to institute a “living wage,” customer perceptions of our advertising campaigns, sponsorship arrangements or marketing programs, customer perceptions of our use of social media, or customer perceptions of statements made by us, our employees and executives, agents or other third parties. In addition, we operate in a highly visible industry that has significant exposure to social media. Negative publicity, including as a result of misconduct by our customers, vendors or employees, can spread rapidly through social media. Should we not respond in a timely and appropriate manner to address negative publicity, our brand and reputation may be significantly harmed. Damage to our reputation or brand image or loss of customer confidence in our services could adversely affect our business and financial results, as well as require additional resources to rebuild our reputation.
Moreover, the outbreak and spread of COVID-19 have adversely impacted consumer perceptions of the health and safety of travel, and in particular airline travel, and these negative perceptions could continue even after the pandemic subsides. Actual or perceived risk of infection on our flights has had, and may continue to have, a material adverse effect on the public's perception of us, which has harmed, and may continue to harm, our reputation and business. We have taken various measures to reassure our team members and the traveling public of the safety of air travel, including requirements that passengers wear face coverings, the provision of protective equipment for team members and enhanced cleaning procedures onboard aircraft and in airports. We expect that we will continue to incur COVID-19 related costs as we sanitize aircraft, implement additional hygiene-related protocols and take other actions to limit the threat of infection among our employees and passengers. However, we cannot assure that these or any other actions we might take in response to the COVID-19 pandemic will be sufficient to restore the confidence of consumers in the safety of air travel.
We are at risk of losses and adverse publicity stemming from any public incident involving our company, our people or our brand, including any accident or other public incident involving our personnel or aircraft, or the personnel or aircraft of our regional, codeshare or joint business operators.
In a modern world where news can be captured and travel rapidly, we are at risk of adverse publicity stemming from any public incident involving our company, our people or our brand. Such an incident could involve the actual or alleged behavior of any of our employees. Further, if our personnel, one of our aircraft, a type of aircraft in our fleet, or personnel of, or an aircraft that is operated under our brand by, one of our regional operators or an airline with which we have a marketing alliance, joint business or codeshare relationship, were to be involved in a public incident, accident, catastrophe or regulatory enforcement action, we could be exposed to significant reputational harm and potential legal liability. The insurance we carry may be inapplicable or inadequate to cover any such incident, accident, catastrophe or action. In the event that our insurance is inapplicable or inadequate, we may be forced to bear substantial losses from an incident or accident. In addition, any such incident, accident, catastrophe or action involving our personnel, one of our aircraft (or personnel and aircraft of our regional operators and our codeshare partners), or a type of aircraft in our fleet could create an adverse public perception, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft or those of our regional operators or codeshare partners, and adversely impact our business, results of operations and financial condition.
We face challenges in integrating our computer, communications and other technology systems.
While we have to date successfully integrated many of our computer, communication and other technology systems in connection with the merger of US Airways and American, including our customer reservations system and our pilot, flight attendant and fleet scheduling system, we still have to complete several additional important system integration or replacement projects. In a number of prior airline mergers, the integration of these systems or deployment of replacement systems has taken longer, been more disruptive and cost more than originally forecasted. The implementation process to integrate or replace these various systems will involve a number of risks that could adversely impact our business, results of operations and financial condition. New systems will replace multiple legacy systems and the related implementations will be a complex and time-consuming project involving substantial expenditures for implementation consultants, system hardware, software and implementation activities, as well as the transformation of business and financial processes.
We cannot assure that our security measures, change control procedures or disaster recovery plans will be adequate to prevent disruptions or delays in connection with systems integration or replacement. Disruptions in or changes to these systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition.
Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.
We have in the past instituted, and intend to institute in the future, changes to our business model designed to increase revenues and offset costs. These measures include further segmentation of the classes of services we offer, such as Premium Economy service and Basic Economy service, enhancements to our AAdvantage loyalty program, charging separately for services that had previously been included within the price of a ticket, changing (whether it be increasing, decreasing or eliminating) other pre-existing fees, reconfiguration of our aircraft cabins, and efforts to optimize our network including by focusing growth on a limited number of large hubs and entering into agreements with other airlines. For example, in 2020, we eliminated change fees for most domestic and international tickets, which has reduced our change fee revenue, a trend which is expected to continue as demand for air travel recovers, assuming this change remains in place. We may introduce additional initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure that these measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of these initiatives may create logistical challenges that could harm the operational performance of our airline or result in decreased demand. Also, our implementation of any new or increased fees might result in adverse brand perceptions or reputational harm, and could reduce the demand for air travel on our airline or across the industry in general, particularly if weakened economic conditions make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar charges.
Our intellectual property rights, particularly our branding rights, are valuable, and any inability to protect them may adversely affect our business and financial results.
We consider our intellectual property rights, particularly our branding rights such as our trademarks applicable to our airline and AAdvantage loyalty program, to be a significant and valuable aspect of our business. We protect our intellectual property rights through a combination of trademark, copyright and other forms of legal protection, contractual agreements and policing of third-party misuses of our intellectual property. Our failure to obtain or adequately protect our intellectual property or any change in law that lessens or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely affect our business and financial results. Any litigation or disputes regarding intellectual property may be costly and time-consuming and may divert the attention of our management and key personnel from our business operations, either of which may adversely affect our business and financial results.
In addition, we have used certain of our branding and AAdvantage loyalty program intellectual property as collateral for various financings (including the AAdvantage Financing), which contain covenants that impose restrictions on the use of such intellectual property and, in the case of the AAdvantage Financing, on certain amendments or changes to our AAdvantage loyalty program. These covenants may have an adverse effect on our ability to use such intellectual property.
We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity.
From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. We are currently involved in various legal proceedings and claims that have not yet been fully resolved, and additional claims may arise in the future. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Litigation is subject to significant uncertainty and may be expensive, time-consuming, and disruptive to our operations. Although we will vigorously defend ourselves in such legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain. For these and other reasons, we may choose to settle legal proceedings and claims, regardless of their actual merit. If a legal proceeding is resolved against us, it could result in significant compensatory damages, and in certain circumstances punitive or trebled damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief imposed on us. If our existing insurance does not cover the amount or types of damages awarded, or if other resolution or actions taken as a result of the legal proceeding were to restrain our ability to operate or market our services, our consolidated financial position, results of operations or cash flows could be materially adversely affected. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to our reputation, which could adversely impact our business. Additional information regarding certain legal matters in which we are involved can be found in Note 11 to each of AAG and American's Condensed Consolidated Financial Statements in Part I, Item 1A and Part I, Item 1B, respectively.
Our ability to utilize our NOL Carryforwards may be limited.
Under the Internal Revenue Code of 1986, as amended (the Code), a corporation is generally allowed a deduction for net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards). As of December 31, 2020, we had approximately $16.5 billion of federal NOLs available to reduce future federal taxable income, of which $8.5 billion will expire beginning in 2023 if unused and $8.0 billion can be carried forward indefinitely. We also had approximately $5.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2020, which will expire in taxable years 2020 through 2040 if unused. Our NOL Carryforwards are subject to adjustment on audit by the Internal Revenue Service and the respective state taxing authorities. Additionally, due to the COVID-19 pandemic and other economic factors, the NOL Carryforwards may expire before we can generate sufficient taxable income to use them.
Our ability to use our NOL Carryforwards will depend on the amount of taxable income generated in future periods. We presently have a $34 million valuation allowance on certain net deferred tax assets related to state NOL Carryforwards. If our financial results continue to be adversely impacted by the COVID-19 pandemic, there can be no assurance that an additional valuation allowance on our net deferred tax assets will not be required. Such valuation allowance could be material.
A corporation’s ability to deduct its federal NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code (Section 382) if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material stockholders exceed 50% during a rolling three-year period). In 2013, we experienced an ownership change in connection with our emergence from bankruptcy and US Airways Group experienced an ownership change in connection with the Merger. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $7.0 billion of unlimited NOLs still remaining at December 31, 2020) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. If the special rules are determined not to apply, our ability to utilize such federal NOL Carryforwards may be subject to limitation. In addition, under the loan program of the CARES Act, the warrants (and common stock issuable upon exercise thereof) we issued to Treasury did not and will not result in an ownership change for purposes of Section 382. This exception does not apply for companies issuing warrants, stock options, common or preferred stock or other equity pursuant to PSP1, PSP2 and PSP3 and accordingly will not apply to the warrants issued by us under PSP1, PSP2 and PSP3. Substantially all of our remaining federal NOL Carryforwards attributable to US Airways Group and its subsidiaries are subject to limitation under Section 382 as a result of the Merger; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes.
Notwithstanding the foregoing, an ownership change subsequent to our emergence from bankruptcy may severely limit or effectively eliminate our ability to utilize our NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on our ability to utilize our NOL Carryforwards, our Certificate of Incorporation contains transfer restrictions applicable to certain substantial stockholders, which are scheduled to expire on December 31, 2021. These restrictions may adversely affect the ability of certain holders of AAG common stock to dispose of or acquire shares of AAG common stock. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, no assurance can be given that an ownership change will not occur even with these restrictions in place. See also “Certain provisions of AAG’s Certificate of Incorporation and Bylaws make it difficult for stockholders to change the composition of our Board of Directors and may discourage takeover attempts that some of our stockholders might consider beneficial.”
New U.S. tax legislation may adversely affect our financial condition, results of operations and cash flows.
The U.S. government may enact significant changes to the taxation of business entities including, among others, an increase in the corporate income tax rate, the imposition of minimum taxes or surtaxes on certain types of income, significant changes to the taxation of income derived from international operations, and an addition of further limitations on the deductibility of business interest. While certain draft legislation has been publicly released and is under development in Congress at this time, the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur. If such changes are enacted or implemented, we are currently unable to predict the ultimate impact on our business and therefore there can be no assurance our business will not be adversely affected.
We have a significant amount of goodwill, which is assessed for impairment at least annually. In addition, we may never realize the full value of our intangible assets or long-lived assets, causing us to record material impairment charges.
Goodwill and indefinite-lived intangible assets are not amortized, but are assessed for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred. In accordance with applicable accounting standards, we first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. In addition, we are required to assess certain of our other long-lived assets for impairment if conditions indicate that an impairment may have occurred.
Future impairment of goodwill or other long-lived assets could be recorded in results of operations as a result of changes in assumptions, estimates, or circumstances, some of which are beyond our control. There can be no assurance that a material impairment charge of goodwill or tangible or intangible assets will be avoided. The value of our aircraft could be impacted in future periods by changes in supply and demand for these aircraft. Such changes in supply and demand for certain aircraft types could result from grounding of aircraft by us or other airlines, including as a result of significant or prolonged declines in demand for air travel and corresponding reductions to capacity. In 2020, we recorded a $1.5 billion impairment charge associated with our decision to retire certain mainline aircraft, principally Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft, earlier than previously planned as a result of the severe decline in demand for air travel due to the COVID-19 pandemic. We can provide no assurance that a material impairment loss of tangible or intangible assets will not occur in a future period, and the risk of future material impairments has been significantly heightened as a result of the effects of the COVID-19 pandemic on our flight schedules and business. Such impairment charges could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to the Airline Industry
The airline industry is intensely competitive and dynamic.
Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, as well as joint ventures formed by some of these airlines, many of which have more financial or other resources and/or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles. In many of our markets, we compete with at least one low-cost carrier (including so-called ultra-low-cost carriers). Our revenues are sensitive to the actions of other carriers in many areas, including pricing, scheduling, capacity, fees (including cancellation, change and baggage fees), amenities, loyalty benefits and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues. These factors may become even more significant in periods when the industry experiences large losses (such as the current one caused by the COVID-19 pandemic), as airlines under financial stress, or in bankruptcy, may institute pricing or fee structures intended to attract more customers to achieve near term survival at the expense of long-term viability.
Low-cost carriers (including so-called ultra-low-cost carriers) have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more established airlines, and represent significant competitors, particularly for customers who fly infrequently, are price sensitive and therefore tend not to be loyal to any one particular carrier. A number of these low-cost carriers have recently commenced operations, and several new entrants have announced their intention to start up new ultra-low-cost carriers. Many of these new and existing carriers have announced growth strategies including commitments to acquire significant numbers of new aircraft for delivery in the next few years. These low-cost carriers are attempting to continue to increase their market share through growth and, potentially, consolidation, and are expected to continue to have an impact on our revenues and overall performance. We and several other large network carriers have implemented “Basic Economy” fares designed to more effectively compete against low-cost carriers, but we cannot predict whether these initiatives will be successful. While historically these carriers have provided competition in domestic markets, we have recently experienced new competition from low-cost carriers on international routes, including low-cost airlines executing international long-haul expansion strategies, a trend likely to continue with the delivery of planned, long-range narrowbody aircraft. The actions of existing or future low-cost carriers, including those described above, could have a material adverse effect on our operations and financial performance.
We provide air travel internationally, directly as well as through joint businesses, alliances, codeshare and similar arrangements to which we are a party. While our network is comprehensive, compared to some of our key global competitors, we generally have somewhat greater relative exposure to certain regions (for example, Latin America) and somewhat lower relative exposure to others (for example, China). Our financial performance relative to our key competitors will therefore be influenced significantly by macro-economic conditions in particular regions around the world and the relative exposure of our network to the markets in those regions, including the duration of declines in demand for travel to specific regions as a result of the continuing outbreak of COVID-19 and the speed with which demand for travel to these regions returns.
Our international service exposes us to foreign economies and the potential for reduced demand when any foreign country we serve suffers adverse local economic conditions or if governments restrict commercial air service to or from any of these markets. For example, the COVID-19 pandemic has resulted in a precipitous decline in demand for air travel, in particular international travel, in part as a result of the imposition by the U.S. and foreign governments of restrictions on travel from certain regions. In addition, open skies agreements, which are now in place with a substantial number of countries around the world, provide international airlines with open access to U.S. markets, potentially subjecting us to increased competition on our international routes. See also “Our business is subject to extensive government regulation, which may 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.”
Certain airline alliances, joint ventures and joint businesses have been, or may in the future be, 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. Our ability to attract and retain customers is dependent upon, among other things, our ability to offer our customers convenient access to desired markets. Our business could be adversely affected if we are unable to maintain or obtain alliance and marketing relationships with other air carriers in desired markets.
American has established a transatlantic joint business with British Airways, Aer Lingus, Iberia and Finnair, a transpacific joint business with Japan Airlines and a joint business relating to Australia and New Zealand with Qantas, each of which has been granted antitrust immunity. The transatlantic joint business benefits from a grant of antitrust immunity from the United States Department of Transportation (DOT) and was reviewed by the European Commission (EC) in July 2010. In connection with this review, we provided certain commitments to the EC regarding, among other things, the availability of take-off and landing slots at London Heathrow (LHR) or London Gatwick (LGW) airports. The commitments accepted by the EC were binding for 10 years. In October 2018, in anticipation of the exit of the United Kingdom from the European Union (EU), commonly referred to as Brexit, and the expiry of the EC commitments in July 2020, the United Kingdom Competition and Markets Authority (CMA) opened an investigation into the transatlantic joint business. We continue to fully cooperate with the CMA and, in September 2020, the CMA adopted interim measures that effectively extend the EC commitments for an additional three years until March 2024 in light of the uncertainty created by the COVID-19 pandemic. The CMA plans to complete its investigation before the interim measures expire. The foregoing arrangements are important aspects of our international network and we are dependent on the performance and continued cooperation of the other airlines party to those arrangements.
In 2020, we entered into an expanded marketing relationship with Alaska Airlines. This arrangement expands our existing codeshare relationship, including codeshare on certain of our international routes from Seattle-Tacoma International Airport and Los Angeles International Airport (LAX), and provides for reciprocal loyalty program benefits and shared lounge access. Pursuant to federal law, American and Alaska Airlines submitted this proposed arrangement to the DOT for review. After the DOT allowed the review period to expire with no further actions, American and Alaska Airlines commenced implementation of this arrangement.
Also, in 2020, we announced our intention to enter into a marketing relationship with JetBlue Airways Corporation (JetBlue). This arrangement includes an alliance agreement with reciprocal codesharing on domestic and certain international routes from New York (JFK, LaGuardia Airport (LGA), and Newark Liberty International Airport) and Boston Logan International Airport, and provides for reciprocal loyalty program benefits. The arrangement does not include JetBlue’s future transatlantic flying. Pursuant to federal law, American and JetBlue submitted this proposed alliance arrangement to the DOT for review. After American, JetBlue and the DOT agreed to a series of commitments, the DOT terminated its review of the proposed alliance. The commitments include growth commitments to ensure capacity expansion, slot divestitures at JFK and at Ronald Reagan Washington National Airport (DCA) near Washington, D.C. and antitrust compliance measures. Beyond this agreement with the DOT (the DOT Agreement), American and JetBlue will also be refraining from certain kinds of coordination on certain city pair markets. On September 21, 2021, the United States Department of Justice (DOJ), joined by Attorneys General from six states and the District of Columbia, filed an antitrust complaint against American and JetBlue Airways Corporation (JetBlue) alleging that American and JetBlue violated U.S. antitrust laws in connection with the Northeast Alliance arrangement (the NEA).We believe the complaint is without merit and intend to defend against it vigorously.
Notwithstanding the DOT’s termination of its reviews of the Alaska Airlines and JetBlue alliances, the DOT maintains authority to conduct investigations under the scope of its existing statutes and regulations, including conduct related to these alliances. On September 21, 2021, the DOT published a Clarification Notice relating to the DOT Agreement. The DOT Clarification Notice stated, among other things, that the DOT Agreement remains in force during the pendency of the DOJ action against the NEA and, while the DOT retains independent statutory authority to prohibit unfair methods of competition in air transportation, the DOT intends to defer to DOJ to resolve the antitrust concerns that DOJ has identified with respect to the NEA. The DOT simultaneously published a Notice Staying Proceeding in relation to a complaint by Spirit Airlines, Inc. regarding the NEA, pending resolution of the DOJ action described above.
No assurances can be given as to any benefits that we may derive from any of the foregoing arrangements or any other arrangements that may ultimately be implemented, or whether or not regulators will, or if granted continue to, approve or impose material conditions on our business activities.
Additional mergers and other forms of industry consolidation, including antitrust immunity grants, may take place and may not involve us as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with any such combinations, our competitive position relative to the post-combination carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our network, which in turn could decrease our overall market share and revenues. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.
Additionally, our AAdvantage loyalty program, which is an important element of our sales and marketing programs, faces significant and increasing competition from the loyalty programs offered by other travel companies, as well as from similar loyalty benefits offered by banks and other financial services companies. Competition among loyalty programs is intense regarding the rewards, fees, required usage, and other terms and conditions of these programs. In addition, we have used certain assets from our AAdvantage loyalty program as collateral for the AAdvantage Financing, which contains covenants that impose restrictions on certain amendments or changes to certain of our AAdvantage Agreements and other aspects of the AAdvantage loyalty program. These competitive factors and covenants (to the extent applicable) may affect our ability to attract and retain customers, increase usage of our loyalty program and maximize the revenue generated by our loyalty program.
The commercial relationships that we have with other airlines, including any related equity investments, may not produce the returns or results we expect.
An important part of our strategy to expand our network has been to expand our commercial relationships with other airlines, such as by entering into global alliance, joint business and codeshare relationships, and, in certain instances, including China Southern Airlines and our previously announced proposed investments in GOL Linhas Aéreas Inteligentes S.A. and JetSmart Airlines SpA, by making a significant equity investment in another airline in connection with initiating or expanding such a commercial relationship. We may explore additional investments in, and joint ventures and strategic alliances with, other carriers as part of our global business strategy. We face competition in forming and maintaining these commercial relationships since there are a limited number of potential arrangements and other airlines are looking to enter into similar relationships, and our inability to form or maintain these relationships or inability to form as many of these relationships as our competitors may have an adverse effect on our business. Any such existing or future investment could involve significant challenges and risks, including that we may not realize a satisfactory return on our investment or that they may not generate the expected revenue synergies. In addition, as a result of the global spread of COVID-19, the industry has experienced a precipitous decline in demand for air travel both internationally and domestically, which is expected to continue into the foreseeable future and could materially disrupt our partners' abilities to provide air service, the timely execution of our strategic operating plans, including the finalization, approval and implementation of new strategic relationships or the maintenance or expansion of existing relationships. These events could have a material adverse effect on our business, results of operations and financial condition.
Our business is very dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on consumer demand, our operating results and liquidity.
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business and thus is a significant factor in the price of airline tickets. Market prices for aircraft fuel have fluctuated substantially over the past several years and prices continue to be highly volatile.
Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our operating results and liquidity. Due to the competitive nature of the airline industry and unpredictability of the market for air travel, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues or decrease other operating costs sufficiently to offset fuel price increases. Similarly, we cannot predict actions that may be taken by our competitors in response to changes in fuel prices.
Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters (including hurricanes or similar events in the U.S. Southeast and on the Gulf Coast where a significant portion of domestic refining capacity is located), political disruptions or wars involving oil-producing countries, economic sanctions imposed against oil-producing countries or specific industry participants, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, changes in the cost to transport or store petroleum products, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, distribution challenges, additional fuel price volatility and cost increases in the future. For instance, effective January 1, 2020, rules adopted by the International Maritime Organization restrict the sulfur content allowable in marine fuels from 3.5% to 0.5%, which is expected to cause increased demand by maritime shipping companies for low-sulfur fuel and potentially lead to increased costs of aircraft fuel. Any of these factors or events could cause a disruption in or increased demands on oil production, refinery operations, pipeline capacity or terminal access and possibly result in significant increases in the price of aircraft fuel and diminished availability of aircraft fuel supply.
Our aviation fuel purchase contracts generally do not provide meaningful price protection against increases in fuel costs. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review this policy from time to time based on market conditions and other factors. We do not currently view the market opportunities to hedge fuel prices as attractive because, among other things, our future fuel needs remain unclear due to uncertainties regarding air travel demand and any hedging would potentially require significant capital or collateral to be placed at risk. Accordingly, as of September 30, 2021, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices. See also the discussion in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk – “Aircraft Fuel.”
Our business is subject to extensive government regulation, which may 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. In the last several years, Congress hasand state and local governments have passed laws and regulatory initiatives, and the DOT, the FAA,Federal Aviation Administration (FAA), the Transportation Security Administration, the Department of Homeland Security and several of their respective international counterparts have issued regulations and a number of other directives, that affect the airline industry. These requirements impose substantial costs on us and restrict the ways we may conduct our business.
For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions. These requirements can be issued with little or no notice, or can otherwise impact our ability to efficiently or fully utilize our aircraft, and in some instances have resulted in the temporary and prolonged grounding of aircraft types altogether (including, for example, the March 2019 grounding of all Boeing 737 MAX Family aircraft, including the 24 aircraft in our fleet, which remainsremained in place as offor over a year and was not lifted in the date of this report)United States until November 2020), or otherwise caused substantial disruption and resulted in material costs to us and lost revenues. The FAA also exercises comprehensive regulatory authority over nearly all technical aspects of our operations. Our failure to comply with such requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators. In the future, any new regulatory requirements, particularly requirements that limit our ability to operate or price our products, could have a material adverse effect on us and the industry. In 2021, the FAA is expected to issue a number of rules that will impact us, including regulations mandating certain rest requirements for flight attendants.
DOT consumer rules, and rules promulgated by certain analogous agencies in other countries we serve, dictate procedures for customer handling during long onboard delays, further regulate airline interactions with passengers, including passengers with disabilities, through the ticketing process, at the airport, and onboard the aircraft, and require disclosures concerning airline fares and ancillary fees such as baggage fees. Other DOT rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international airlines. In 2020,2021, the DOT is expected to propose or implement a number of new regulations that will impact us, including disability rules for accessible lavatories and wheelchair assistance, refunds for checked bag fees in the event of certain delays in delivery.delivery, refunds for cancellations and in the event of government restrictions related to pandemics, and display of ancillary fees.
The Aviation and Transportation Security Act mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per-ticket tax on passengers and a tax on airlines. Present and potential future security requirements can have the effect of imposing costs and inconvenience on travelers, potentially reducing the demand for air travel.
Similarly, there are a number of legislative and regulatory initiatives and reforms at the state and local levels. These initiatives include increasingly stringent laws to protect the environment, wage/hour requirements, mandatory paid sick or family leave, and healthcare mandates. These laws could affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs. In recent years, the airline industry has experienced an increase in litigation over the application of state and local employment laws, particularly in California. Application of these laws may result in operational disruption, increased litigation risk and impact our negotiated labor agreements. Additionally, in September 2021, the U.S. federal government issued guidance on previously announced COVID-19 vaccination requirements for federal contractors. Due to a number of our agreements, American is classified as a government contractor. Consistent with this guidance, we announced in October 2021 that the federal vaccine mandate would require all of American’s U.S.-based team members and certain international crew members to be vaccinated, without the provision of a regular testing alternative. We cannot predict the impact of this federal vaccination requirement on our business.
The results of our operations, demand for air travel, and the manner in which we conduct business each may be affected by changes in law and future actions taken by governmental agencies, including:
•changes in law that affect the services that can be offered by airlines in particular markets and at particular airports, or the types of fares offered or fees that can be charged to passengers;
•the granting and timing of certain governmental approvals (including antitrust or foreign government approvals) needed for codesharing alliances, joint businesses and other arrangements with other airlines;airlines, and the imposition of regulatory investigations related to any of the foregoing (including our arrangements with JetBlue);
•restrictions on competitive practices (for example, court orders, or agency regulations or orders, that would curtail an airline’s ability to respond to a competitor);
•the adoption of new passenger security standards or regulations that impact customer service standards;
•restrictions on airport operations, such as restrictions on the use of slots at airports or the auction or reallocation of slot rights currently held by us;
•the adoption of more restrictive locally-imposed noise restrictions; and
•restrictions on travel or special guidelines regarding aircraft occupancy or hygiene related to COVID-19.COVID-19, including the imposition of preflight testing regimes or vaccination confirmation requirements which have to date and may in the future have the effect of reducing demand for air travel in the markets where such requirements are imposed.
Each additional regulation or other form of regulatory oversight increases costs and adds greater complexity to airline operations and, in some cases, may reduce the demand for air travel. There can be no assurance that the increased costs or greater complexity associated with our compliance with new rules, anticipated rules or other forms of regulatory oversight will not have a material adverse effect on us.
Any significant reduction in air traffic capacity at and in the airspace serving key airports in the U.S. or overseas could have a material adverse effect on our business, results of operations and financial condition. In addition, the ATC system is not successfully modernizing to meet the growing demand for U.S. air travel. Air traffic controllers rely on outdated procedures and technologies that routinely compel airlines, including ourselves, to fly inefficient routes or take significant delays on the ground. The ATC system’s inability to manage existing travel demand has led government agencies to implement short-term capacity constraints during peak travel periods or adverse weather conditions in certain markets, resulting in delays and disruptions of air traffic. The outdated technologies also cause the ATC system to be less resilient in the event of a failure. For example, an automation failure and an evacuation, in 2015 and 2017, respectively, at the Washington Air Route Control Center resulted in cancellations and delays of hundreds of flights traversing the greater Washington, D.C. airspace.
In the early 2000s, the FAA embarked on a path to modernize the national airspace system, including migration from the current radar-based ATC system to a GPS-based system. This modernization of the ATC system, generally referred to as “NextGen,” has been plagued by delays and cost overruns, and it remains uncertain when the full array of benefits expected from this modernization will be available to the public and the airlines, including ourselves. Failure to update the ATC system in a timely manner and the substantial costs that may be imposed on airlines, including ourselves, in order to fund a modernized ATC system may have a material adverse effect on our business.
Further, our business has been adversely impacted when government agencies have ceased to operate as expected including due to partial shut-downs, sequestrations or similar events and the COVID-19 pandemic. These events have resulted in, among other things, reduced demand for air travel, an actual or perceived reduction in ATCair traffic control and security screening resources and related travel delays, as well as disruption in the ability of the FAA to grant required regulatory approvals, such as those that are involved when a new aircraft is first placed into service.
Our operating authority in international markets is subject to aviation agreements between the U.S. and the respective countries or governmental authorities, such as the EU, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments. Moreover, alliances with international carriers may be subject to the jurisdiction and regulations of various foreign agencies. The U.S. government has negotiated “open skies” agreements with many countries,130 trading partners, which agreements allow unrestricted route authority access between the U.S. and the foreign markets. While the U.S. has worked to increase the number of countries with which open skies agreements are in effect, a number of markets important to us, including China, do not have open skies agreements. For example, the open skies air services agreement between the U.S. and the EU, which took effect in March 2008, provides airlines from the U.S. and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly from the U.S. to any airport in the EU. As a result of the agreement and a subsequent open skies agreement involving the U.S. and the United Kingdom, which was agreed in anticipation of Brexit, we face increased competition in these markets, including LHR. Bilateral and multilateral agreements among the U.S. and various foreign governments of countries we serve but which are not covered by an open skies treaty are subject to periodic renegotiation. We currently operate a number of international routes under government arrangements that limit the number of airlines permitted to operate on the route, the capacity of the airlines providing services on the route, or the number of airlines allowed access to particular airports. If an open skies policy were to be adopted for any of these markets, it could have a material adverse impact on us and could
result in the impairment of material amounts of our related tangible and intangible assets. In addition, competition from foreign airlines, revenue-sharing joint ventures, JBAs,joint business agreements, and other alliance arrangements by and among other airlines could impair the value of our business and assets on the open skies routes.
Brexit occurred on January 31, 2020 under the terms of the agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the EU and the European Atomic Energy Community (the Withdrawal Agreement). There will now beThe Withdrawal Agreement provided for a transition period during which the United Kingdom and the EU will seek to negotiate an agreement governing their future relationship, including in relation to air services. Under the Withdrawal Agreement, this transition period is scheduled to endthat ended on December 31, 2020, with a potential extension of up2020. Prior to two years, although the United Kingdom government previously passed legislation preventing any such extensionend of the transition period, on December 24, 2020, EU and the deadlineUnited Kingdom negotiators agreed to request such an extension has passed.a new trade and cooperation agreement, which was signed on December 30, 2020 (the EU-UK Trade and Cooperation Agreement). The EU-UK Trade and Cooperation Agreement was provisionally applied as of January 1, 2021 and entered into force on May 1, 2021. We face risks associated with Brexit, notably given the extent of our passenger and cargo traffic and that of our joint business partners that flows through LHR in the United Kingdom. During the transition period, our current air services may continue as we currently conduct them. However, Brexit will mandate further modification in the current regulatory regime, includingThe EU-UK Trade and Cooperation Agreement includes provisions in relation to commercial air service. The preciseservice that we expect to be sufficient to sustain our current services under the transatlantic joint business. However, the scope of traffic rights betweenunder the EUEU-UK Trade and the United Kingdom remains uncertainCooperation Agreement is less extensive than before Brexit and therefore the full impact of the EU-UK Trade and Cooperation Agreement is uncertain. As a result, the continuation of our current services, and those of our partners is not assured and could be subject to disruption. During the transition period, the United Kingdom and the EU will seek to implement a new air services agreement. We cannot predict the terms of any such successor air services agreement or whether changes in the relationship between the United Kingdom and the EU,
including whether or not an agreement governing their future relationship is reached before the end of the transition period,disrupted. This could materially adversely affect our business, results of operations and financial condition. More generally, changes in U.S. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of route authorities, slots or other assets located abroad, or otherwise adversely affect our international operations.
We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control.
We operate a global business with significant operations outside of the U.S. Our current international activities and prospects have been, and in the future could be, adversely affected by government policies, reversals or delays in the opening of foreign markets, increased competition in international markets, the performance of our alliance, joint business and codeshare partners in a given market, exchange controls or other restrictions on repatriation of funds, currency and political risks (including changes in exchange rates and currency devaluations), environmental regulation, increases in taxes and fees and changes in international government regulation of our operations, including the inability to obtain or retain needed route authorities and/or slots. In particular, the outbreak and global spread of COVID-19 have severely impacted the demand for international travel and have resulted in the imposition of significant governmental restrictions on commercial air service to or from certain regions. We have responded by temporarily suspending a significant portion of our long-haul international flights through the summer of 2021 and delaying the introduction of certain new long-haul international routes. We can provide no assurance as to when such restrictions will be eased or lifted, when demand for international travel will return to pre-pandemicpre-COVID-19 pandemic levels, if at all, or whether certain international destinations we previously served will be economical in the future. Fluctuations in foreign currencies, including devaluations, exchange controls and other restrictions on the repatriation of funds, have significantly affected and may continue to significantly affect our operating performance, liquidity and the value of any cash held outside the U.S. in local currency.
Such fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition.
More generally, our industry may be affected by any deterioration in global trade relations, including shifts in the trade policies of individual nations. For example, much of the demand for international air travel is the result of business travel in support of global trade. Should protectionist governmental policies, such as increased tariff or other trade barriers, travel limitations and other regulatory actions, have the effect of reducing global commercial activity, the result could be a material decrease in the demand for international air travel. Additionally, certain of the products and services that we purchase, including certain of our aircraft and related parts, are sourced from suppliers located in foreign countries, and the imposition of new tariffs, or any increase in existing tariffs, by the U.S. government in respect of the importation of such products could materially increase the amounts we pay for them. In particular, on October 2, 2019, the Office of the U.S. Trade Representative (USTR), as part of an ongoing dispute with the EU before the World Trade Organization (WTO) concerning, among other things, aircraft subsidies, was authorized by an arbitration tribunal of the WTO to impose up to $7.5 billion per year in import tariffs on certain goods originating from the EU. In October 2019, the USTR imposed tariffs on certain imports from the EU, including on certain Airbus aircraft that we previously contracted to purchase, whichpurchase; these aircraft were initially subject to an ad valorem duty of 10%. On February 14, 2020, that was subsequently increased to 15% in March 2020. In January 2021, the USTR increased such duty to 15% effective March 18, 2020. Whileexpanded the scope of the 15% tariff to apply to certain imported aircraft parts in addition to imported aircraft. In June 2021, the United States, the EU and ratethe UK announced agreements to suspend the imposition of these tariffs, are subject to change,contingent upon each party remaining satisfied that subsidies do not arise. However, if and to the extent any of these tariffs are imposedreimposed on us without any available means for us to mitigate or pass on the burden of these tariffs to Airbus, the effective cost of new Airbus aircraft required to implement our fleet plan would increase.
Brexit occurred on January 31, 2020 under the terms of the Withdrawal Agreement. There will now beThe Withdrawal Agreement provided for a transition period during which the United Kingdom and the EU will seek to negotiate an agreement governing their future relationship, including in relation to air services. Under the Withdrawal Agreement, this transition period is scheduled to endthat ended on December 31, 2020, with a potential extension of up2020. Prior to two years, although the United Kingdom government previously passed legislation preventing any such extensionend of the transition period, on December
24, 2020, EU and United Kingdom negotiators agreed to the deadline to request such an extension has passed.EU-UK Trade and Cooperation Agreement, which was signed on December 30, 2020. The EU-UK Trade and Cooperation Agreement was provisionally applied as of January 1, 2021 and entered into force on May 1, 2021. We face risks associated with Brexit, notably given the extent of our passenger and cargo traffic and that of our joint business partners that flows through LHR in the United Kingdom. During the transition period,The EU-UK Trade and Cooperation Agreement includes provisions in relation to commercial air service that we expect to be sufficient to sustain our current air services may continue as we currently conduct them. The preciseunder the transatlantic joint business. However, the scope of traffic rights betweenunder the EUEU-UK Trade and the United Kingdom remains uncertainCooperation Agreement is less extensive than before Brexit and therefore the full impact of the EU-UK Trade and Cooperation Agreement is uncertain. As a result, the continuation of our current services, and those of our partners is not assured and could be subject to disruption. During the transition period, the United Kingdom and the EU will seek to implement a new air services agreement. We cannot predict the terms of any such successor air services agreement or
whether changes in the relationship between the United Kingdom and the EU, including whether or not an agreement governing their future relationship is reached before the end of the transition period,disrupted. This could materially adversely affect our business, results of operations and financial condition.
Moreover, Brexit could adversely affect European or worldwide economic or market conditions and could contribute to further instability in global financial markets. In addition, Brexit has created uncertainty as to the future trade relationship between the EU and the United Kingdom, including air traffic services. LHR is presently a very important element of our international network, however it may become less desirable as a destination or as a hub location after Brexit when compared to other airports in Europe. Brexit could also lead to legal and regulatory uncertainty such as the identity of the relevant regulators, new regulatory action and/or potentially divergent treaties, laws and regulations as the United Kingdom determines which EU treaties, laws and regulations to replace or replicate, including those governing aviation, labor, environmental, data protection/privacy, competition and other matters applicable to the provision of air transportation services by us or our alliance, joint business or codeshare partners. For example, in October 2018, in anticipation of Brexit and the expiry of the EC commitments in July 2020, the CMA opened an investigation into the transatlantic JBA.joint business. We continue to fully cooperate with the CMA and, in September 2020, the CMA adopted interim measures that effectively extend the EC commitments for an additional three years until March 2024 as a resultin light of the uncertainty created by the COVID-19 pandemic. The CMA plans to complete its investigation before the interim measures expire. The impact on our business of any treaties, laws and regulations that replace the existing EU counterparts, or other governmental or regulatory actions taken by the United Kingdom or the EU in connection with or subsequent to Brexit, cannot be predicted, including whether or not regulators will continue to approve or impose material conditions on our business activities. Any of these effects, and others we cannot anticipate, could materially adversely affect our business, results of operations and financial condition.
Additionally, fluctuations in foreign currencies, including devaluations, exchange controls and other restrictions on the repatriation of funds, have significantly affected and may continue to significantly affect our operating performance, liquidity and the value of any cash held outside the U.S. in local currency. Such fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition.
We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns.
Acts of terrorism or fear of such attacks, including elevated national threat warnings, wars or other military conflicts, may depress air travel, particularly on international routes, and cause declines in revenues and increases in costs. The attacks of September 11, 2001 and continuing terrorist threats, attacks and attempted attacks materially impacted and continue to impact air travel. Increased security procedures introduced at airports since the attacks of September 11, 2001 and any other such measures that may be introduced in the future generate higher operating costs for airlines. The Aviation and Transportation Security Act mandated improved flight deck security, deployment of federal air marshals on board flights, improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, additional provision of passenger data to the U.S. Customs and Border Protection Agency and enhanced background checks. A concurrent increase in airport security charges and procedures, such as restrictions on carry-on baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of our flying and revenue. Implementation of and compliance with increasingly-complexincreasingly complex security and customs requirements will continue to result in increased costs for us and our passengers, and have caused and likely will continue to cause periodic service disruptions and delays. We have at times found it necessary or desirable to make significant expenditures to comply with security-related requirements while seeking to reduce their impact on our customers, such as expenditures for automated security screening lines at airports. As a result of competitive pressure, and the need to improve security screening throughput to support the pace of our operations, it is unlikely that we will be able to capture all security-related costs through increased fares. In addition, we cannot forecast what new security requirements may be imposed in the future, or their impact on our business.
We are subject to risks associated with climate change, including increased regulation of our CO2 emissions, changing consumer preferences and the potential increased impacts of severe weather events on our operations and infrastructure.
Efforts to transition to a low-carbon future have increased the focus by global, regional and national regulators on climate change and greenhouse gas (GHG) emissions, including carbon dioxide (CO2). emissions. In particular, the International Civil Aviation Organization is in the process of adopting(ICAO) has adopted rules, including those pertaining to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), thatwhich will require American to limitaddress the growth in CO2 emissions of a significant majority of our international flights. For more information on CORSIA, see
under Part I, Item 1. Business – Domestic and Global Regulatory Landscape – Environmental Matters in our 2020 Form 10-K.At this time, the costs of complying with our future obligations under CORSIA are uncertain, primarily because it is difficult to estimate the return of demand for international air travel during and cannot be fully predicted. For example, we will not directly control our CORSIA compliance costs duringin the CORSIA Pilot and First Phases because such phases include a sharing mechanism forrecovery from the growth in emissions for the global aviation sector. In addition, thereCOVID-19 pandemic. There is also significant uncertainty with respect to the future supply demand and price of carbon offset credits and sustainable or lower carbon aircraft fuel, carbon offset credits and technologiesfuels that could allow us to reduce our emissions of CO2.In addition, we will not directly control our CORSIA compliance costs through 2029 because those obligations are based on the growth in emissions of the global aviation sector and begin to incorporate a factor for individual airline operator emissions growth beginning in 2030. Due to the competitive nature of the airline industry and unpredictability of the market for air travel, we can offer no assurance that we may be able to increase our fares, impose surcharges or otherwise increase revenues or decrease other operating costs sufficiently to offset our costs of meeting obligations under CORSIA.
In the event that CORSIA does not come into force as expected, American and other airlines could become subject to an unpredictable and inconsistent array of national or regional emissions restrictions, creating a patchwork of complex regulatory requirements that could affect global competitors differently without offering meaningful aviation environmental improvements. Concerns over climate change are likely to result in continued attempts by municipal, state, regional, and federal agencies to adopt requirements or change business environments related to aviation that, if successful, may result in increased costs to the airline industry and us. In addition, several countries and U.S. states have adopted or are considering adopting programs, including new taxes, to regulate domestic GHG emissions. Finally, certain airports have adopted, and others could in the future adopt, GHG emission or climate-related goals that could impact our operations or require us to make changes or investments in our infrastructure.
In January 2021, the U.S. Environmental Protection Agency (EPA) adopted GHG emission standards for new aircraft engines designed to implement the ICAO standard, which are aligned with the 2017 ICAO airplane engine GHG emission standards. Like the ICAO standards, the final EPA standards would not apply to engines on in-service aircraft. The final standards have been challenged by several states and environmental groups, and the Biden administration has issued an executive order requiring a review of these final standards along with others issued by the prior administration. On February 17, 2021, the United States Court of Appeals for the District of Columbia Circuit ordered to hold the challenge by the states and environmental groups in abeyance pending EPA's review. The outcome of the legal challenge and administrative review cannot be predicted at this time. On September 9, 2021, the Biden Administration launched the Sustainable Aviation Fuel Grand Challenge to scale up the production of sustainable aviation fuel, aiming to reduce GHG emissions from aviation by 20% by 2030 and to replace all traditional aviation fuel with sustainable aviation fuel by 2050. Whether these goals will be achieved and the potential effects on our business cannot be predicted at this time.
All such climate change-related regulatory activity and developments may adversely affect our business and financial results by requiring us to reduce our emissions, make capital investments to purchase specific types of equipment or technologies, purchase carbon offset credits, or otherwise incur additional costs related to our emissions. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs.
Growing recognition among consumers of the dangers of climate change may mean some customers choose to fly less frequently or fly on an airline they perceive as operating in a manner that is more sustainable to the climate. Business customers may choose to use alternatives to travel, such as virtual meetings and workspaces. Greater development of high-speed rail in markets now served by short-haul flights could provide passengers with lower-carbon alternatives to flying with us. Our collateral to secure loans, in the form of aircraft, spare parts and airport slots, could lose value as customer demand shifts and economies move to low-carbon alternatives, which may increase our financing cost.
Finally, the potential acute and chronic physical effects of climate change, such as increased frequency and severity of storms, floods, fires, sea-level rise, excessive heat, longer-term changes in weather patterns and other climate-related events, could affect our operations, infrastructure and financial results. Operational impacts, such as the canceling of flights, could result in loss of revenue. We could incur significant costs to improve the climate resiliency of our
infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not able to predict accurately the materiality of any potential losses or costs associated with the physical effects of climate change.
We are subject to many forms of environmental and noise regulation and may incur substantial costs as a result.
We are subject to a number of increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of human health and the environment and noise reduction, including those relating to emissions to the air, discharges to land and surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. This universe of substances is evolving to encompass many substances not previously regulated. Compliance with environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties.penalties, as well as civil liability.
We are also subject to other environmental laws and regulations, including those that require us to investigate and remediate soil or groundwater to meet certain remediation standards. Under federal law, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be retroactive, strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of when it occurred, fault or the amount of waste directly attributable to us. We have liability for investigation and remediation costs at various sites, although such costs currently are not expected to have a material adverse effect on our business.
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to indemnify the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even in certain cases where we are not the party responsible for the initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, and such indemnities are generally joint and several among the participating airlines.
Governmental authorities in several U.S. and foreign cities are also considering, or have already implemented, aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
The FAA is also currently evaluating possible changes to how aircraft noise is measured, and the resulting standards that are based on them. Ultimately, these changes could have an impact on, or limit, our operations, or make it more difficult for the FAA to modernize and increase the efficiency of airspace and airports we utilize.We depend on a limited number of suppliers for aircraft, aircraft engines and parts.
We depend on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts. For example, under our current fleet plan, byas of the end of 2020 all of our mainline aircraft will have beenwere manufactured by either Airbus or Boeing and all of our regional aircraft will have beenwere manufactured by either Bombardier or Embraer. Further, our supplier base continues to consolidate as evidenced by the recent acquisition of Rockwell Collins by United Technologies and the recent transactions involving Airbus and Bombardier and Bombardier and Mitsubishi. Due to the limited number of these suppliers, we are vulnerable to any problems associated with the performance of their obligation to supply key aircraft, parts and engines, including design defects, mechanical problems, contractual performance by suppliers, adverse perception by the public that would result in customer avoidance of any of our aircraft or any action by the FAA or any other regulatory authority resulting in an inability to operate our aircraft, even temporarily. In particular,For instance, in March 2019, the FAA ordered the grounding of all Boeing 737 MAX Family aircraft, which remainsremained in place asfor over a year and was not lifted in the United States until November 2020, and more recently in April 2021, we removed from operations, pending ongoing inspection and investigation, a subset of our Boeing 737 MAX Family aircraft after receipt of notice from Boeing of a potential electrical power system issue relating to those aircraft. More recently, Boeing has been unable to deliver 787 aircraft that we have on order due to regulatory concerns raised by the dateFAA. The limited number of this report.these suppliers may also result in reduced competition and potentially higher prices than if the supplier base was less concentrated.
Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity, and failure of new aircraft to perform as expected, may adversely impact our business, results of operations and financial condition.
The success of our business depends on, among other things, effectively managing the number and types of aircraft we operate. If, for any reason, we are unable to accept or secure deliveries of new aircraft on contractually scheduled delivery dates, this could have negative impacts on our business, results of operations and financial condition. Our failure
to integrate newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some leased aircraft or otherwise delay the exit of certain aircraft from our fleet. Such unanticipated extensions or delays may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs, or reductions to our schedule, thereby reducing revenues. If new aircraft orders are not filled on a timely basis, we could face higher financing and operating costs than planned. In addition, if the aircraft we receive do not meet expected performance or quality standards, including with respect to fuel efficiency, safety and reliability, we could face higher financing and operating costs than planned and our business, results of operations and financial condition could be adversely impacted. For instance, in March 2019, the FAA grounded all Boeing 737 MAX Family aircraft, including the 24 aircraft in our fleet. Forfleet at the durationtime of the Boeing 737 MAX grounding, we have beenand which caused us to be unable to take delivery of the Boeing 737 MAX Family aircraft we had on order from Boeing. More recently, Boeing has been unable to deliver 787 aircraft that we have on order from Boeing and have in some instances been requireddue to extend the service lives of older, less efficient aircraft and delay service that we planned to offer. Further, deliveries of Boeing 737 MAX aircraft have remained suspended following the grounding, and Boeing is not currently manufacturing new 737 MAX aircraft. Depending on the ultimate duration of the grounding, various Boeing 737 MAX aircraft financings and financing commitments we previously obtained may be terminated and, as a result, we may be required to prepay such financings and obtain alternate financing and financing commitments for these aircraft. Such a need to obtain substitute financing could be material and any such substitute financing may not be available at all or may require that we agree to terms and conditions less favorable than the previously obtained financings and financing commitments. Further, once the grounding has been lifted, we will be subject to additional training requirements, and such additional training would further delay the aircraft’s return to service and impose restrictions on our ability to optimize our fleet. This and other operational requirements and uncertainties regarding the timing of the delivery of Boeing 737 MAX aircraft we have on order and how rapidly we will be able to take delivery of and integrate such Boeing 737 MAX aircraft into our fleet could potentially result in further significant constraints on our operating efficiency, capacity and growth plans. In addition, the timing of the 737 MAX’s recertification and return to service, and the resumption of deliveries, could be significantly impactedregulatory concerns raised by the COVID-19 pandemic.
We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could harm our business, results of operations and financial condition.
We are highly dependent on existing and emerging technology and automated systems to operate our business. These technologies and systems include our computerized airline reservation system, flight operations systems, financial planning, management and accounting systems, telecommunications systems, website, maintenance systems and check-in kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information, as well as issue electronic tickets and process critical financial information in a timely manner. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to be able to issue, track and accept these electronic tickets. If our technologies or automated systems are not functioning or if our third-party service providers were to fail to adequately provide technical support, system maintenance or timely software upgrades for any one of our key existing systems, we could experience service disruptions or delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems vendors goes into bankruptcy, ceases operations or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at all, and any transition time to a new system may be significant.
Our technologies and automated systems cannot be completely protected against events that are beyond our control, including natural disasters, power failures, terrorist attacks, cyber-attacks, data theft, equipment and software failures, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We cannot assure that our security measures, change control procedures or disaster recovery plans are adequate to prevent disruptions or delays. Disruption in or changes to these technologies or systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition.
We face challenges in integrating our computer, communications and other technology systems.
While we have to date successfully integrated many of our computer, communication and other technology systems in connection with the merger of US Airways and American, including our customer reservations system and our pilot, flight attendant and fleet scheduling system, we still have to complete several additional important system integration or replacement projects. In a number of prior airline mergers, the integration of these systems or deployment of replacement systems has taken longer, been more disruptive and cost more than originally forecasted. The implementation process to integrate or replace these various systems will involve a number of risks that could adversely impact our business, results of operations and financial condition. New systems will replace multiple legacy systems and the related implementation will be a complex and time-consuming project involving substantial expenditures for implementation consultants, system hardware, software and implementation activities, as well as the transformation of business and financial processes.
We cannot assure that our security measures, change control procedures or disaster recovery plans will be adequate to prevent disruptions or delays in connection with systems integration or replacement. Disruptions in or changes to these systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition.
Evolving data security and privacy requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition.
Our business requires the secure processing and storage of sensitive information relating to our customers, employees, business partners and others. However, like any global enterprise operating in today’s digital business environment, we are subject to threats to the security of our networks and data, including threats potentially involving criminal hackers, hacktivists, state-sponsored actors, corporate espionage, employee malfeasance, and human or technological error. These threats continue to increase as the frequency, intensity and sophistication of attempted attacks and intrusions increase around the world. We and our business partners have been the target of cybersecurity attacks and data breaches in the past and expect that we will continue to be in the future.
Furthermore, in response to these threats there has been heightened legislative and regulatory focus on data privacy and cybersecurity in the U.S., the EU and elsewhere, particularly with respect to critical infrastructure providers, including those in the transportation sector. As a result, we must comply with a proliferating and fast-evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements for notifying regulators and affected individuals in the event of a data security incident. This regulatory environment is increasingly challenging and may present material obligations and risks to our business, including significantly expanded compliance burdens, costs and enforcement risks. For example, in May 2018, the EU’s new General Data Protection Regulation, commonly referred to as GDPR, came into effect, which imposes a host of new data privacy and security requirements, imposing significant costs on us and carrying substantial penalties for non-compliance.
In addition, many of our commercial partners, including credit card companies, have imposed data security standards that we must meet. In particular, we are required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply with their highest level of data security standards. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs.
A significant cybersecurity incident couldinvolving us or one of our AAdvantage partners or other business partners have in the past and may in the future result in a range of potentially material negative consequences for us, including unauthorized access to, disclosure, modification, misuse, loss or destruction of company systems or data; theft of sensitive, regulated or confidential data, such as personal identifying information or our intellectual property; the loss of functionality of critical systems through ransomware, denial of service or other attacks; a deterioration in our relationships with business partners and other third parties; and business delays, service or system disruptions, damage to equipment and injury to persons or property. For example, in March 2021, a sub-set of AAdvantage members as well as members of several other major airline loyalty programs received a notification about a security incident involving a limited amount of loyalty data held by a service provider. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. The constantly changing nature of the threats means that we may not be able to prevent all data security breaches or misuse of data. Similarly, we depend on the ability of our key commercial partners, including AAdvantage partners, other business partners, our regional carriers, distribution partners and technology vendors, to conduct their businesses in a manner that complies with applicable security standards and assures their ability to perform on a timely basis. A security failure, including a failure to meet relevant payment security standards, breach or other significant cybersecurity incident affecting one of our partners could result in potentially material negative consequences for us.
In addition, the costs and operational consequences of defending against, preparing for, responding to and remediating an incident of cybersecurity breach may be substantial. As cybersecurity threats become more frequent, intense and sophisticated, costs of proactive defense measures are increasing. Further, we could be exposed to litigation, regulatory enforcement or other legal action as a result of an incident, carrying the potential for damages, fines, sanctions or other penalties, as well as injunctive relief and enforcement actions requiring costly compliance measures. A significant number of recent privacy and data security incidents, including those involving other large airlines, have resulted in very substantial adverse financial consequences to those companies. A cybersecurity incident could also impact our brand, including that of the AAdvantage program, harm our reputation and adversely impact our relationship with our customers, employees and stockholders. Accordingly, failure to appropriately address these issues could result in material financial and other liabilities and cause significant reputational harm to our company.
If we encounter problems with any of our third-party regional operators or third-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.
A significant portion of our regional operations are conducted by third-party operators on our behalf, substantially all of which are provided for under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risk of disruptions to their operations, which has in the past and may in the future result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, the inability of third parties to hire or retain skilled personnel, including pilots and mechanics, and other risk factors, such as an out-of-court or bankruptcy restructuring of any of our regional operators. Several of these third-party regional operators provide significant regional capacity that we would be unable to replace in a short period of time should that operator fail to perform its obligations to us. Disruptions to capital markets, shortages of skilled personnel and adverse economic conditions in general have subjected certain of these third-party regional operators to significant financial pressures, which have in the past and may in the future lead to bankruptcies among these operators. In particular, the significant decline in demand for air travel resulting from the COVID-19 pandemic and related governmental restrictions on travel have materially impacted demand for services provided by our regional carriers and, as a result, we have significantly reduced our regional capacity and expect to maintain these reduced levels of capacity for the foreseeable future. We expect the disruption to services resulting from the COVID-19 pandemic to adversely affect our regional operators, some of whom
may experience significant financial stress, declare bankruptcy or otherwise cease to operate. We may also experience disruption to our regional operations or incur financial damages if we terminate the capacity purchase agreement with one or more of our current operators or transition the services to another provider. Any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial condition.
In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including distribution and sale of airline seat inventory, reservations, provision of information technology and services, regional operations, aircraft maintenance, ground services and facilities and baggage handling. Similar agreements may be entered into in any new markets we decide to serve. These agreements are generally subject to termination after notice by the third-party service provider. We are also at risk should one of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers, or at all. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
We rely on third-party distribution channels and must manage effectively the costs, rights and functionality of these channels.
We rely on third-party distribution channels, including those provided by or through global distribution systems (GDSs) (e.g., Amadeus, Sabre and Travelport), conventional travel agents, travel management companies and online travel agents (OTAs) (e.g., Expedia, including its booking sites Orbitz and Travelocity, and Booking Holdings, including its booking sites Kayak and Priceline), to distribute a significant portion of our airline tickets, and we expect in the future to continue to rely on these channels. We are also dependent upon the ability and willingness of these distribution channels to expand their ability to distribute and collect revenues for ancillary products (e.g., fees for selective seating). These distribution channels are more expensive and at present have less functionality in respect of ancillary product offerings than those we operate ourselves, such as our website at www.aa.com. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of our distribution channels, while maintaining an industry-competitive cost structure. Further, as distribution technology changes we will need to continue to update our technology by acquiring new technology from third parties, building the functionality ourselves, or a combination, which in any event will likely entail significant technological and commercial risk and involve potentially material investments. These imperatives may affect our relationships with conventional travel agents, travel management companies, GDSs and OTAs, including if consolidation of conventional travel agents, travel management companies, GDSs or OTAs continues, or should any of these parties seek to acquire other technology providers thereby potentially limiting our technology alternatives. Any inability to manage our third-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our business, results of operations and financial condition.
If we are unable to obtain and maintain adequate facilities and infrastructure throughout our system and, at some airports, adequate slots, we may be unable to operate our existing flight schedule and to expand or change our route network in the future, which may have a material adverse impact on our operations.
In order to operate our existing and proposed flight schedule and, where desirable, add service along new or existing routes, we must be able to maintain and/or obtain adequate gates, check-in counters, operations areas, operations control facilities and administrative support space. As airports around the world become more congested, it may not be possible for us to ensure that our plans for new service can be implemented in a commercially viable manner, given operating constraints at airports throughout our network, including those imposed by inadequate facilities at desirable airports.
In light of constraints on existing facilities, there is presently a significant amount of capital spending underway at major airports in the United States, including large projects underway at a number of airports where we have significant operations, such as Chicago O'Hare International Airport (ORD), Los Angeles International Airport (LAX), LaGuardia Airport (LGA)LAX, LGA and Ronald Reagan Washington National Airport (DCA).DCA. This spending is expected to result in increased costs to airlines and the traveling public that use those facilities as the airports seek to recover their investments through increased rental, landing and other facility costs. In some circumstances, such costs could be imposed by the relevant airport authority without our approval. Accordingly, our operating costs are expected to increase significantly at many airports at which we operate, including a number of our hubs and gateways, as a result of capital spending projects currently underway and additional projects that we expect to commence over the next several years.
In addition, operations at three major domestic airports, certain smaller domestic airports and many foreign airports we serve are regulated by governmental entities through allocations of slots or similar regulatory mechanisms that limit the rights of carriers to conduct operations at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well. In the U.S., the DOT and the FAA currently regulate the allocation of slots or slot exemptions at DCA and two New York City airports: John F. Kennedy International AirportJFK and LGA. Our operations at these airports generally require the allocation of slots or similar regulatory authority. In addition to slot restrictions, operations at DCA and LGA are also limited based on a so-called “perimeter rule” which generally limits the stage length of the flights that can be operated from those airports to 1,250 and 1,500 miles, respectively. Similarly, our operations at LHR, international airports in Beijing, Frankfurt, Paris, Tokyo and other airports outside the U.S. are regulated by local slot authorities pursuant to the International Airline Trade Association Worldwide Scheduling Guidelines and/or applicable local law. Termination of slot controls at some or all of the foregoing airports could affect our operational performance and competitive position. We currently have sufficient slots or analogous authorizations to operate our existing flights and we have generally, but not always, been able to obtain the rights to expand our operations and to change our schedules. However, there is no assurance that we will be able to obtain sufficient slots or analogous authorizations in the future or as to the cost of acquiring such rights because, among other reasons, such allocations are often sought after by other airlines and are subject to changes in governmental policies. Due to the dramatic reduction in air travel resulting from the COVID-19 pandemic, we are in many instances relying on exemptions granted by applicable authorities from the requirement that we continuously use certain slots, gates and routes or risk having such operating rights revoked, and wedepending on the applicable authority these exemptions can vary in the way they are structured and applied. We cannot predict whether such exemptions will continue to be granted, whether they will be granted on the same or similar terms, or whether we ultimately could be at risk of losing valuable operating rights. We cannot provide any assurance that regulatory changes regardingresulting in changes in the application of slot controls or the allocation of or any reallocation of existing slots, the continued enforcement or termination of a perimeter rule or similar regulatory authorityregime will not have a material adverse impact on our operations.
Our ability to provide service can also be impaired at airports, such as LAX and ORD where the airport gategates and other facilities are currently inadequate to accommodate all of the service that we would like to provide, or airports such as Dallas Love Field Airport where we have no access to gates at all.
Any limitation on our ability to acquire or maintain adequate gates, ticketing facilities, operations areas, operations control facilities, slots (where applicable), or office space could have a material adverse effect on our business, results of operations and financial condition.
Interruptions or disruptions in service at one of our key facilities could have a material adverse impact on our operations.
We operate principally through our hubs and gateways in Charlotte, Chicago, Dallas/Fort Worth, London Heathrow, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. and partner gateways including in London Heathrow (among others). Substantially all of our flights either originate at or fly into one of these locations. A significant interruption or disruption in service at one of our hubs, gateways or other airports where we have a significant presence, resulting from air traffic control delays, weather conditions, natural disasters, growth constraints, performance by third-party service providers (such
(such as electric utility or telecommunications providers), failure of computer systems, disruptions at airport facilities or other key facilities used by us to manage our operations (such as occurred in the United Kingdom at LGW on December 20, 2018 and LHR on January 8, 2019 due to unauthorized drone activity), labor relations, power supplies, fuel supplies, terrorist activities, or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, results of operations and financial condition. We have limited control, particularly in the short term, over the operation, quality or maintenance of many of the services on which our operations depend and over whether vendors of such services will improve or continue to provide services that are essential to our business.
Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.
We have recently instituted, and intend to institute in the future, changes to our business model designed to increase revenues and offset costs. These measures include further segmentation of the classes of services we offer, such as Premium Economy service and Basic Economy service, enhancements to our AAdvantage loyalty program, charging separately for services that had previously been included within the price of a ticket, increasing other pre-existing fees, reconfiguration of our aircraft cabins, and efforts to optimize our network including by focusing growth on a limited number of large hubs. We may introduce additional initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure that these measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of these initiatives may create logistical challenges that could harm the operational performance of our airline or result in decreased demand. Also, our
implementation of any new or increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly if weakened economic conditions make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar charges.
Our intellectual property rights, particularly our branding rights, are valuable, and any inability to protect them may adversely affect our business and financial results.
We consider our intellectual property rights, particularly our branding rights such as our trademarks applicable to our airline and AAdvantage loyalty program, to be a significant and valuable aspect of our business. We protect our intellectual property rights through a combination of trademark, copyright and other forms of legal protection, contractual agreements and policing of third-party misuses of our intellectual property. Our failure to obtain or adequately protect our intellectual property or any change in law that lessens or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely affect our business and financial results. Any litigation or disputes regarding intellectual property may be costly and time-consuming and may divert the attention of our management and key personnel from our business operations, either of which may adversely affect our business and financial results.
In addition, we have used certain of our branding and AAdvantage loyalty program intellectual property as collateral for various financings (including the Treasury Loan Agreement), which contain covenants that impose restrictions on the use of such intellectual property and, in the case of the Treasury Loan Agreement, on certain amendments or changes to our AAdvantage loyalty program. These covenants may have an adverse effect on our ability to use such intellectual property.
We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity.
From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. We are currently involved in various legal proceedings and claims that have not yet been fully resolved, and additional claims may arise in the future. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Litigation is subject to significant uncertainty and may be expensive, time-consuming, and disruptive to our operations. Although we will vigorously defend ourselves in such legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain. For these and other reasons, we may choose to settle legal proceedings and claims, regardless of their actual merit. If a legal proceeding is resolved against us, it could result in significant compensatory damages, and in certain circumstances punitive or trebled damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief imposed on us. If our existing insurance does not cover the amount or types of damages awarded, or if other resolution or actions taken as a result of the legal proceeding were to restrain our ability to operate or market our services, our consolidated financial position, results of operations or cash flows could be materially adversely affected. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to our reputation, which could adversely impact our business. Additional information regarding certain legal matters in which we are involved can be found in Part II, Item 1. Legal Proceedings.
A higher than normal number of pilot retirements, more stringent duty time regulations, increased flight hour requirement for commercial airline pilots, reductions in the number of military pilots entering the commercial workforce, increased training requirements and other factors have caused a shortage of pilots that could materially adversely affect our business.
We currently have a higher than normal number of pilots eligible for retirement. Large numbers of pilots in the industry are approaching the FAA’s mandatory retirement age of 65. Our pilots and other employees are subject to rigorous certification standards, and our pilots and other crew members must adhere to flight time and rest requirements. Commencing in 2013, the minimum flight hour requirement to achieve a commercial pilot’s license in the United States increased from 250 to 1,500 hours, thereby significantly increasing the time and cost commitment required to become licensed to fly commercial aircraft. Additionally, the number of military pilots being trained by the U.S. armed forces and available as commercial pilots upon their retirement from military service has been decreasing. These and other factors have contributed to a shortage of qualified, entry-level pilots and increased compensation costs, particularly for our regional subsidiaries and our other regional partners who are being required by market conditions to pay significantly increased wages and large signing bonuses to their pilots in an attempt to achieve desired staffing levels. The foregoing factors have also led to increased competition from large, mainline carriers attempting to meet their hiring needs. We believe that this industry-wide pilot shortage is becoming an increasing problem for airlines in the United States. Our regional airline subsidiaries and other regional partners have recently been unable to hire adequate numbers of pilots to meet their needs, resulting in a
reduction in the number of flights offered, disruptions, increased compensation expense and costs of operations, financial difficulties and other adverse effects, and these circumstances may become more severe in the future and thereby cause a material adverse effect on our business.
Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results.
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly, and our ability to continue to obtain insurance even at current prices remains uncertain. If we are unable to maintain adequate insurance coverage, our business could be materially and adversely affected. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the claims paying ability of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass along additional insurance costs to passengers is limited. As a result, further increases in insurance costs or reductions in available insurance coverage could have an adverse impact on our financial results.
The airline industry is heavily taxed.
The airline industry is subject to extensive government fees and taxation that negatively impact our revenue and profitability. The U.S. airline industry is one of the most heavily taxed of all industries. These fees and taxes have grown significantly in the past decade for domestic flights, and various U.S. fees and taxes also are assessed on international flights. For example, as permitted by federal legislation, most major U.S. airports impose a per-passenger facility charge on us. In addition, the governments of foreign countries in which we operate impose on U.S. airlines, including us, various fees and taxes, and these assessments have been increasing in number and amount in recent years. Moreover, we are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. We collect the excise tax, along with certain other U.S. and foreign taxes and user fees on air transportation (such as passenger security fees), and pass along the collected amounts to the appropriate governmental agencies. Although these taxes and fees are not our operating expenses, they represent an additional cost to our customers. There are continuing efforts in Congress and in other countries to raise different portions of the various taxes, fees, and charges imposed on airlines and their passengers, including the passenger facility charge, and we may not be
able to recover all of these charges from our customers. Increases in such taxes, fees and charges could negatively impact our business, results of operations and financial condition.
Under DOT regulations, all governmental taxes and fees must be included in the prices we quote or advertise to our customers. Due to the competitive revenue environment, many increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the customer. Further increases in fees and taxes may reduce demand for air travel, and thus our revenues.
Our abilityRisks Related to utilize our NOL Carryforwards may be limited.
Under the Internal Revenue Code of 1986, as amended (the Code), a corporation is generally allowed a deduction for net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards). As of December 31, 2019, we had available NOL Carryforwards of approximately $9.1 billion for regular federal income tax purposes that will expire, if unused, beginning in 2023, and approximately $3.0 billion for state income tax purposes that will expire, if unused, between 2020 and 2039. Our NOL Carryforwards are subject to adjustment on audit by the Internal Revenue Service and the respective state taxing authorities.
Our ability to use our NOL Carryforwards also will depend on the amount of taxable income generated in future periods. We presently do not have a valuation allowance on our net deferred tax assets. If our financial results continue to be adversely impacted by COVID-19, there can be no assurance that a valuation allowance on our net deferred tax assets will not be required in the future. Such valuation allowance could be material. Additionally, due to COVID-19 and other economic factors, the NOL Carryforwards may expire before we can generate sufficient taxable income to use them.
A corporation’s ability to deduct its federal NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code (Section 382) if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material stockholders exceed 50 percent during a rolling three-year period). In 2013, we experienced an ownership change in connection with our emergence from bankruptcy and US Airways Group experienced an ownership change in connection with the Merger. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change
occurs upon emergence from bankruptcy. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $7.3 billion of unlimited NOL still remaining at December 31, 2019) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. If the special rules are determined not to apply, our ability to utilize such federal NOL Carryforwards may be subject to limitation. In addition, under the loan program of the CARES Act, a government acquisition of warrants, stock options, common or preferred stock or other equity acquired in relation to the program does not result in an ownership change for purposes of section 382. This exception does not apply for companies issuing warrants, stock options, common or preferred stock or other equity pursuant to the Payroll Support Program and accordingly will not apply to the warrants issued by us under that program. Substantially all of our remaining federal NOL Carryforwards attributable to US Airways Group and its subsidiaries are subject to limitation under Section 382 as a result of the Merger; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes.
Notwithstanding the foregoing, an ownership change subsequent to our emergence from bankruptcy may severely limit or effectively eliminate our ability to utilize our NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on our ability to utilize our NOL Carryforwards, our Certificate of Incorporation contains transfer restrictions applicable to certain substantial stockholders. These restrictions may adversely affect the ability of certain holdersOwnership of AAG common stock to dispose of or acquire shares of AAG common stock. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, no assurance can be given that an ownership change will not occur even with these restrictions in place. See also “Certain provisions of AAG’s Certificate of IncorporationCommon Stock and Bylaws make it difficult for stockholders to change the composition of our Board of Directors and may discourage takeover attempts that some of our stockholders might consider beneficial.”
The commercial relationships that we have with other airlines, including any related equity investment, may not produce the returns or results we expect.
An important part of our strategy to expand our network has been to expand our commercial relationships with other airlines, such as by entering into global alliance, joint business and codeshare relationships, and, in one instance involving China Southern Airlines, by making a significant equity investment in another airline in connection with initiating such a commercial relationship. We may explore similar non-controlling investments in, and joint ventures and strategic alliances with, other carriers as part of our global business strategy. We face competition in forming and maintaining these commercial relationships since there are a limited number of potential arrangements and other airlines are looking to enter into similar relationships, and our inability to form or maintain these relationships or inability to form as many of these relationships as our competitors may have an adverse effect on our business. Any such existing or future investment could involve significant challenges and risks, including that we may not realize a satisfactory return on our investment or that they may not generate the expected revenue synergies. In addition, as a result of the global spread of COVID-19, the industry has experienced a precipitous decline in demand for air travel both internationally and domestically, which is expected to continue into the foreseeable future and could materially disrupt the timely execution of our strategic operating plans, including the finalization, approval and implementation of new strategic relationships or the expansion of existing relationships. These events could have a material adverse effect on our business, results of operations and financial condition.
If our financial condition worsens, provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these credit card processing companies, under certain conditions (including, with respect to certain agreements, our failure to maintain certain levels of liquidity), to hold an amount of our cash (a holdback) equal to some or all of the advance ticket sales that have been processed by that credit card processor, but for which we have not yet provided the air transportation. Additionally, such credit card processing companies may require cash or other collateral reserves to be established. These credit card processing companies are not currently entitled to maintain any holdbacks pursuant to these requirements. These holdback requirements can be modified at the discretion of the credit card processing companies upon the occurrence of specific events, including material adverse changes in our financial condition or the triggering of a liquidity covenant. In light of the effect COVID-19 is having on demand for air travel and, in turn, capacity, we have seen an increase in demand from consumers for refunds on their tickets, and we anticipate this will continue to be the case for the near future. Requests for refunds and the ongoing impact of COVID-19 on our longer-term financial performance may reduce our liquidity and cause us to be forced to post cash or other collateral with the credit card processing companies in respect of advance ticket sales. The imposition of holdback requirements, up to and including 100% of relevant advanced ticket sales, would materially reduce our liquidity. Likewise,
other of our commercial agreements contain provisions that allow other entities to impose less-favorable terms, including the acceleration of amounts due, in the event of material adverse changes in our financial condition. For example, we maintain certain letters of credit, insurance- and surety-related agreements under which counterparties may require collateral, including cash collateral.
We have a significant amount of goodwill, which is assessed for impairment at least annually. In addition, we may never realize the full value of our intangible assets or long-lived assets, causing us to record material impairment charges.
Goodwill and indefinite-lived intangible assets are not amortized, but are assessed for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred. In accordance with applicable accounting standards, we first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. In addition, we are required to assess certain of our other long-lived assets for impairment if conditions indicate that an impairment may have occurred.
Future impairment of goodwill or other long-lived assets could be recorded in results of operations as a result of changes in assumptions, estimates, or circumstances, some of which are beyond our control. There can be no assurance that a material impairment charge of goodwill or tangible or intangible assets will be avoided. The value of our aircraft could be impacted in future periods by changes in supply and demand for these aircraft. Such changes in supply and demand for certain aircraft types could result from grounding of aircraft by us or other airlines, including as a result of significant or prolonged declines in demand for air travel and corresponding reductions to capacity. In the first nine months of 2020, we recorded an $1.5 billion impairment charge associated with our decision to retire certain mainline aircraft, principally Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft, earlier than previously planned as a result of the decline in demand for air travel due to COVID-19. We can provide no assurance that a material impairment loss of tangible or intangible assets will not occur in a future period, and the risk of future material impairments has been significantly heightened as result of the effects of the COVID-19 pandemic on our flight schedules and business. Such impairment charges could have a material adverse effect on our business, results of operations and financial condition.Convertible Notes
The price of AAG common stock has been and may in the future be volatile.
The market price of AAG common stock has fluctuated substantially in the past, and may fluctuate substantially in the future, due to a variety of factors, many of which are beyond our control, including:
•the effects of the COVID-19 pandemic on our business or the U.S. and global economies;
•macro-economic conditions, including the price of fuel;
•changes in market values of airline companies as well as general market conditions;
•our operating and financial results failing to meet the expectations of securities analysts or investors;
•changes in financial estimates or recommendations by securities analysts;
•changes in our level of outstanding indebtedness and other obligations;
•changes in our credit ratings;
•material announcements by us or our competitors;
•expectations regarding our capital deployment program, including any existing or potential future share repurchase programs and any future dividend payments that may be declared by our Board of Directors, or any determination to cease repurchasing stock or paying dividends (which we have suspended for an indefinite period in accordance with the applicable requirements under the CARES Act)Act, the PSP Extension Law and the ARP);
•new regulatory pronouncements and changes in regulatory guidelines;
•general and industry-specific economic conditions;
•changes in our key personnel;
•public or private sales of a substantial number of shares of AAG common stock or issuances of AAG common stock upon the exercise or conversion of restricted stock unit awards, stock appreciation rights, or other securities that may be issued from time to time, including warrants we have or will issue in connection with our receipt of funds under the CARES Act;Act, the PSP Extension Law and the ARP;
•increases or decreases in reported holdings by insiders or other significant stockholders; and
•fluctuations in trading volume.volume; and
•technical factors in the public trading market for our stock that may produce price movements that may or may not comport with macro, industry or company-specific fundamentals, including, without limitation, the sentiment of retail investors (including as may be expressed on financial trading and other social media sites), the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives on our common stock and any related hedging and other technical trading factors.
The closing price of our common stock on Nasdaq varied from $9.04 to $30.47 during 2020 and $15.00 to $25.82 during 2021 year-to-date through October 15, 2021. At times during this period, fluctuations in our stock price have been rapid, imposing risks on investors due to the possibility of significant, short-term price volatility. While we believe that this wide range of trading prices is broadly indicative of the changing prospects for a large airline facing the challenges imposed by the COVID-19 pandemic, we also believe, based in part on the commentary of market analysts, that the trading price of our common stock has at times been influenced by the technical trading factors discussed in the last bullet above. On some occasions, market analysts have explained fluctuations in our stock price by reference to purported “short squeeze” activity. A “short squeeze” is a technical market condition that occurs when the price of a stock increases substantially, forcing market participants who had taken a position that its price would fall (i.e., who had sold the stock “short”), to buy it, which in turn may create significant, short-term demand for the stock not for fundamental reasons, but rather due to the need for such market participants to acquire the stock in order to forestall the risk of even greater losses. A “short squeeze” condition in the market for a stock can lead to short-term conditions involving very high volatility and trading that may or may not track fundamental valuation models.
We have ceased making repurchases of our common stock and paying dividends on our common stock as required by the CARES Act.Act, the PSP Extension Law and the ARP. Following the end of those restrictions, if we do decide to make repurchases of or pay dividends on our common stock, we cannot guarantee that we will continue to do so or that our capital deployment program will enhance long-term stockholder value. Our capital deployment program could increase the volatility of the price of our common stock and diminish our cash reserves.
Since July 2014, as part of our capital deployment program, our Board of Directors had approved seven share repurchase programs aggregating $13.0 billion of authority. As of September 30, 2020, there was $420 million of remaining authority to repurchase shares under our current $2.0 billion share repurchase program. In connection with our receipt of payroll supportthe financial assistance provided under the CARES Act,PSP1, PSP2 and PSP3, we agreed not to repurchase shares of AAG common stock through September 30, 2021. In addition, we have entered into the Treasury Loan Agreement and, as a result, we are prohibited from repurchasing shares of AAG common stock through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.2022. If we determine to make any share repurchases in the future, such repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. These share repurchase programs do not obligate us to acquire any specific number of shares or to repurchase any specific number of shares for any fixed period, and may be suspended again at any time at our discretion and without prior notice. The timing and amount of repurchases, if any, will be subject to market and economic conditions, applicable legal requirements, such as the requirements of the CARES Act, the PSP Extension Law, the ARP and other relevant factors. Our repurchase of AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice.
Our Board of Directors commenced declaring quarterly cash dividends in July 2014 as part of our capital deployment program. In connection with our receipt of payroll supportthe financial assistance provided under the CARES Act,PSP1, PSP2 and PSP3, we agreed not to pay dividends on AAG common stock through September 30, 2021. In addition, we have entered into the Treasury Loan Agreement, and as a result, we are prohibited from paying dividends on AAG common stock through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.2022. If we determine to make any dividends in the future, such dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended or discontinued again at any time at our discretion and without prior notice. We will continue to retain future earnings to develop our business, as opportunities arise, and evaluate on a quarterly basis the amount and timing of future dividends based on our operating results, financial condition, capital requirements and general business conditions. The amount and timing of any future dividends may vary, and the payment of any dividend does not assure that we will pay dividends in the future.
In addition, any future repurchases of AAG common stock or payment of dividends, or any determination to cease repurchasing stock or paying dividends, could affect our stock price and increase its volatility. The existence of a share repurchase program and any future dividends could cause our stock price to be higher than it would otherwise be and could potentially reduce the market liquidity for our stock. Additionally, any future repurchases of AAG common stock or payment of dividends will diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Further, our repurchase of AAG common stock may fluctuate such that our cash flow may be insufficient to fully cover our share repurchases. Although our share repurchase programs are intended to enhance long-term stockholder value, there is no assurance that they will do so.
AAG’s Certificate of Incorporation and Bylaws include provisions that limit voting and acquisition and disposition of our equity interests.
Our Certificate of Incorporation and Bylaws include significant provisions that limit voting and ownership and disposition of our equity interests as described in Part II, Item 5. Market for American Airlines Group's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities - "Ownership Restrictions" and AAG’s Description of the Registrants’ Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, which is filed as Exhibit 4.1 in our 20192020 10-K. These restrictions may adversely affect the ability of certain holders of AAG common stock and our other equity interests to vote such interests and adversely affect the ability of persons to acquire shares of AAG common stock and our other equity interests.
Certain provisions of AAG’s Certificate of Incorporation and Bylaws make it difficult for stockholders to change the composition of our Board of Directors and may discourage takeover attempts that some of our stockholders might consider beneficial.
Certain provisions of our Certificate of Incorporation and Bylaws, as currently in effect, may have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in our best interest and the best interest of our stockholders. These provisions include, among other things, the following:
•advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
•the ability of our Board of Directors to fill vacancies on the board;
•a prohibition against stockholders taking action by written consent;
•stockholders are restricted from calling a special meeting unless they hold at least 20% of our outstanding shares and follow the procedures provided for in the amended Bylaws;
•a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve any amendment of our Bylaws submitted to stockholders for approval; and
•super-majority voting requirements to modify or amend specified provisions of our Certificate of Incorporation.
These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of the interests of our stockholders. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our Board of Directors, they could enable our Board of Directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interest and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders whose acquisition of our securities is approved by the Board of Directors prior to the investment under Section 203.
The issuance or sale of shares of our common stock, rights to acquire shares of our common stock, or warrants issued to Treasury under the Payroll Support ProgramCARES Act, the PSP Extension Law, the ARP, PSP1, PSP2 and in connection with the loan under the CARES Act,PSP3, could depress the trading price of our common stock and the Convertible Notes.
We may conduct future offerings of material amounts of our common stock, preferred stock or other securities that are convertible into or exercisable for our common stock to finance our operations, to fund acquisitions, or for any other purposes at any time and from time to time (including as compensation to the U.S. Government for the proceeds received pursuant to the Payroll Support Program and the loan under the CARES Act)PSP1, PSP2 or PSP3). If these additional shares or securities are issued or sold, or if it is perceived that they will be sold, into the public market or otherwise, the price of our common stock and Convertible Notes could decline substantially. If we issue additional shares of our common stock or rights to acquire shares of our common stock, if any of our existing stockholders sells a substantial amount of our common stock, or if the market perceives that such issuances or sales may occur, then the trading price of our common stock and Convertible Notes could decline substantially.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 30, 2020, as partial compensation to the U.S. Government for an additional installment of $168 million of financial assistance under the Payroll Support Program, we issued a PSP Warrant to purchase up to 0.4 million PSP
Warrant Shares. The exercise price of the PSP Warrant Shares is $12.51 per share, subject to certain anti-dilution provisions provided for in the PSP Warrant.
The PSP Warrant does not have any voting rights and is freely transferrable, with registration rights. The PSP Warrant expires on September 30, 2025. The PSP Warrant will be exercisable either through net share settlement or cash, at our option.
The PSP Warrant was issued pursuant to an exemption from registration provided for under Section 4(a)(2) of the Securities Act as a transaction not involving a public offering. Any issuance of the PSP Warrant Shares upon exercise of the PSP Warrant will be exempt as an exchange by the Company exclusively with its security holders eligible for exemption under Section 3(a)(9) of the Securities Act.
The PSP Warrant was issued solely as compensation to the U.S. Government related to our receipt of financial assistance under the Payroll Support Program. No separate proceeds were received upon issuance of the PSP Warrant or will be received upon exercise thereof.
ITEM 5. OTHER INFORMATION
(a) On July 15, 2020, we filed a Form 8-K (the July Form 8-K) disclosing that American had started an involuntary furlough process by issuing Worker Adjustment and Retraining Notification Act notices to certain of its team members. On August 25, 2020, we filed a Form 8-K (the August Form 8-K) disclosing additional details regarding the planned workforce reduction. At the respective times of the filings of the July Form 8-K and August Form 8-K, we were unable to make a good faith determination of an estimate or range of estimates required by paragraphs (b), (c) and (d) of Item 2.05 of Form 8-K with respect to such workforce reduction actions.
In connection with the preparation of the financial statements for the third quarter of 2020 as contained in this Form 10-Q, American recorded a charge of approximately $115 million consisting principally of severance and medical costs for these furloughed team members. We are providing this disclosure in lieu of amendments to the July Form 8-K and August Form 8-K solely to provide the information required by paragraphs (b), (c) and (d) of Item 2.05 of Form 8-K. Except as set forth herein, the disclosures in the July Form 8-K and August Form 8-K remain unchanged.
ITEM 6. EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K: Where the amount of securities authorized to be issued under any of our long-term debt agreements does not exceed 10 percent10% of our assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S-K, in lieu of filing such as an exhibit, we hereby agree to furnish to the Commission upon request a copy of any agreement with respect to such long-term debt.
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Exhibit Number | Description |
| |
4.110.1 | |
4.2 | |
4.3 | Indenture (LGA/DCA Notes),the Letter Agreement No. AAL-LA-2100511, dated as of September 25, 2020,March 9, 2021, to Purchase Agreement No. 3219 by and among American Airlines, Inc., American Airlines Group Inc. and Wilmington Trust, National Association, as trustee and as collateral trustee.# |
4.4 | |
4.5 | |
4.6 | |
10.1 | |
| 10.2 | Amendment No. 13,15, dated as of July 13, 2020,June 30, 2021, to the A320 Family Aircraft Purchase Agreement between Airbus S.A.S., as seller, and American Airlines, Inc. as buyer, dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise.* |
10.3 | |
| 31.1 | |
| 31.2 | |
| 31.3 | |
| 31.4 | |
| 32.1 | |
| 32.2 | |
| 101.1 | Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL (eXtensible Business Reporting Language). |
| 104.1 | Cover page interactive data file (formatted in Inline XBRL and contained in Exhibit 101.1). |
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* Certain confidential information contained inPortions of this agreement hasexhibit have been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.
# Pursuant toin accordance with Item 601(a)(5)601(b)(10) of Regulation S-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted. Such exhibits and schedules are described in the referenced agreement. AAG and American hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules.S-K.
SIGNATURES
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.
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| | | |
| | | American Airlines Group Inc. |
| | | |
Date: October 22, 202021, 2021 | By: | | /s/ Derek J. Kerr |
| | | Derek J. Kerr |
| | | Executive Vice President and Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |
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.
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| | | American Airlines, Inc. |
| | | |
Date: October 22, 202021, 2021 | By: | | /s/ Derek J. Kerr |
| | | Derek J. Kerr |
| | | Executive Vice President and Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |