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, 20162019 (the 20162019 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 20162019 Form 10-K.
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.
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| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Mainline and regional passenger revenues | | $ | 9,377 |
| | $ | 9,150 |
| | $ | 227 |
| | 2.5 |
|
Other operating revenues | | 1,301 |
| | 1,273 |
| | 28 |
| | 2.2 |
|
Total operating revenues | | 10,878 |
| | 10,594 |
| | 284 |
| | 2.7 |
|
Mainline and regional aircraft fuel and related taxes | | 1,922 |
| | 1,696 |
| | 226 |
| | 13.3 |
|
Salaries, wages and benefits | | 2,995 |
| | 2,772 |
| | 223 |
| | 8.0 |
|
Total operating expenses | | 9,646 |
| | 9,163 |
| | 483 |
| | 5.3 |
|
Operating income | | 1,232 |
| | 1,431 |
| | (199 | ) | | (13.9 | ) |
Pre-tax income | | 1,004 |
| | 1,189 |
| | (185 | ) | | (15.6 | ) |
Income tax provision | | 380 |
| | 452 |
| | (72 | ) | | (16.0 | ) |
Net income | | 624 |
| | 737 |
| | (113 | ) | | (15.4 | ) |
| | | | | | | | |
Pre-tax income | | $ | 1,004 |
| | $ | 1,189 |
| | $ | (185 | ) | | (15.6 | ) |
Adjusted for: Total pre-tax special items (1) | | 110 |
| | 294 |
| | (184 | ) | | (62.6 | ) |
Pre-tax income excluding special items | | $ | 1,114 |
| | $ | 1,483 |
| | $ | (369 | ) | | (24.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
(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.
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(1)(2)Not meaningful or greater than 100% change.
| 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 special items.
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Pre-Tax Income (Loss) and Net Income (Loss)
We realizedPre-tax loss and net income of $624 millionloss were $3.1 billion and $2.4 billion, respectively, in the third quarter of 2017 as compared2020. This compares to third quarter 2019 pre-tax income and net income of $737$557 million and $425 million, 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 2016. Pre-tax income was $1.0 billion2020 driven principally by the Payroll Support Program financial assistance (the PSP Financial Assistance), offset in part by severance expenses and $1.2 billionfleet impairment charges. See Notes 1 and 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the third quarters of 2017PSP Financial Assistance and 2016,net special items, respectively.
Excluding the effects of pre-tax net special items, we recognized pre-tax income of $1.1loss was $3.6 billion in the third quarter of 2017 as compared to $1.5 billion2020 and pre-tax income was $835 million in the third quarter of 2016.2019. The quarter-over-quarter declinesdecrease in our pre-tax income on both a GAAP basis and excluding pre-tax net special items werewas principally driven by higher wage rateslower revenues and fuel costs. Wage rates were higherdecreased expenses due to mid-contract pay increases for pilotsour reduced schedule and flight attendants effective in the second quarter of 2017,cost reduction actions as well as increases for maintenance and fleet service work groups, which became effective mid-third quarter of 2016. Additionally, fuel costs increased due to a 13.3% increase in the average price per gallon of fuel as discussed below. These increases were offset in part by higher revenues.described above.
Revenue
In the third quarter of 2017,2020, we reported total operating revenues of $10.9$3.2 billion, an increasea decrease of $284 million,$8.7 billion, or 2.7%73.4%, as compared to the 2016 period. Mainline and regional passenger revenues were $9.4third quarter of 2019. Passenger revenue was $2.5 billion an increasein the third quarter of $227 million,2020, a decrease of $8.5 billion, or 2.5%76.9%, as compared to the 2016 period. The increase in mainline and regional passenger revenues was driven by a 1.6% period-over-period increase in consolidated yields and continued strong demand. Domestic consolidated yields increased 1.2% and international yields rose 3.4%, due principally to improved performance in Latin America. The third quarter of 2017 marks our fourth consecutive2019. The decrease in passenger revenue in the third quarter of period-over-period increasing unit revenue. Our mainline2020 was due to a decline in passenger demand and regionalgovernment 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 lower revenue associated with our loyalty program and airport clubs.
Our total revenue per available seat mile (TRASM) was 14.8910.31 cents in the third quarter of 2017,2020, a 1.1% increase34.4% decrease as compared to 14.7315.71 cents in the third quarter of 2016.2019.
Fuel
Our mainline and regional fuel expense totaled $1.9 billion$611 million in the third quarter of 2017,2020, which was $226 million,$1.9 billion, or 13.3%75.3%, higherlower as compared to the 2016 period.third quarter of 2019. This increasedecrease was primarily driven by a 13.3% increase58.7% decrease in gallons of fuel consumed as a result of lower capacity and a 40.1% decrease in the average price per gallon of aircraft fuel including related taxes to $1.67$1.23 in the third quarter of 20172020 from $1.48$2.05 in the 2016 period.
third quarter of 2019.
As of September 30, 2017,2020, 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. 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. 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: the health of the economygeneral economic conditions and the price of fuel. In particular, the COVID-19 pandemic has resulted in a very rapid deterioration in general economic conditions.
Our 20172020 third quarter mainlinetotal cost per available seat mile (CASM) was 12.3719.64 cents, an increase of 3.5%34.2%, from 11.9614.64 cents in 2016.the third quarter of 2019. Lower than planned capacity in the third quarter of 2020 due to decreased passenger demand and government travel restrictions related to COVID-19 drove the increase in our CASM, offset in part by the PSP Financial Assistance recognized in the third quarter of 2020.
Our 2020 third quarter CASM excluding net special items and fuel was 19.34 cents, as compared to 11.07 cents in the third quarter of 2019. The increase was primarily driven by higher wage rates due tolower capacity in the mid-contract pay increases described above and higher fuel costs.
Our 2017 third quarter mainline CASM excluding special items and fuel was 9.77 cents, an increase of 4.8%, as compared to the 2016 period, which was also driven by higher wage rates2020 as described above.
For a reconciliation of mainlineCASM to total CASM excluding net special items and fuel, see below “Reconciliation of GAAP to Non-GAAP Financial Measures.”
Liquidity and Stockholder Returns
As of September 30, 2017, we had approximately $8.3 billion in total available liquidity, consisting of $5.8 billion in unrestricted cash and investments and $2.5 billion in undrawn revolving credit facilities. We also had restricted cash of $393 million.
During the third quarter of 2017, we returned $411 million to our stockholders, including quarterly dividend payments of $49 million and the repurchase of $362 million of common stock, or 7.7 million shares. Since our capital return program commenced in mid-2014, we have returned more than $11.1 billion to stockholders, including $797 million in quarterly dividend payments and $10.3 billion in share repurchases, or 257.7 million shares. In October 2017, our Board of Directors declared a $0.10 per share dividend for stockholders of record on November 13, 2017, and payable on November 27, 2017.
We continue to take advantage of historically low interest rates to finance new aircraft deliveries under our fleet renewal program. During the third quarter of 2017, we issued an aggregate principal amount of $253 million in Enhanced Equipment Trust Certificate (EETC) equipment notes at an average fixed interest rate of 3.43%, as well as $282 million in other equipment notes, which primarily bear interest at variable rates based on LIBOR plus a margin, averaging 2.85% at September 30, 2017. We also raised $500 million in net proceeds from aircraft sale-leaseback transactions. See Note 5 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on our debt obligations.
As a result of the foregoing factors, we currently have a higher debt level and fewer unencumbered assets than our network airline peers. Accordingly, we believe it is important to retain liquidity levels higher than our peers given our overall leverage as well as to protect against an adverse economic shock. Our current plan is to maintain minimum total available liquidity of $7.0 billion. We were well above that minimum level at September 30, 2017.
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 below presents the reconciliation of pre-tax income (loss) (GAAP measure) to pre-tax income (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 better understand our core operating performance.
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In millions) | | | | | | |
Reconciliation of Pre-Tax Income (Loss) Excluding Net Special Items: | | | | | | | |
Pre-tax income (loss) - GAAP | $ | (3,095) | | | $ | 557 | | | $ | (8,644) | | | $ | 1,685 | |
Pre-tax net special items (1): | | | | | | | |
Operating special items, net | (519) | | | 234 | | | (966) | | | 493 | |
Nonoperating special items, net | (21) | | | 44 | | | 207 | | | 43 | |
Total pre-tax net special items | (540) | | | 278 | | | (759) | | | 536 | |
Pre-tax income (loss) excluding net special items | $ | (3,635) | | | $ | 835 | | | $ | (9,403) | | | $ | 2,221 | |
(1)See Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on net special items.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Reconciliation of Pre-Tax Income Excluding Special Items: | | | | | | | | |
Pre-tax income | | $ | 1,004 |
| | $ | 1,189 |
| | $ | 2,659 |
| | $ | 3,799 |
|
Pre-tax special items (1): | | | | | | | | |
Operating special items, net | | 107 |
| | 294 |
| | 431 |
| | 463 |
|
Nonoperating special items, net | | 3 |
| | — |
| | 12 |
| | 36 |
|
Total pre-tax special items | | 110 |
| | 294 |
| | 443 |
| | 499 |
|
Pre-tax income excluding special items | | $ | 1,114 |
| | $ | 1,483 |
| | $ | 3,102 |
| | $ | 4,298 |
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Additionally, the table below presents the reconciliation of mainlinetotal operating costsexpenses (GAAP measure) to mainlinetotal operating costs excluding net special items and fuel (non-GAAP measure). Management uses mainlinetotal operating costs 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 better understand and analyze our non-fuel costs and core operating performance. Amounts may not recalculate due to rounding.
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Reconciliation of Mainline CASM Excluding Special Items and Fuel: | | | | | | | | |
(In millions) | | | | | | | | |
Total operating expenses | | $ | 9,646 |
| | $ | 9,163 |
| | $ | 28,238 |
| | $ | 25,874 |
|
Less regional expenses: | | | | | | | | |
Fuel and related taxes | | (352 | ) | | (303 | ) | | (999 | ) | | (801 | ) |
Other | | (1,302 | ) | | (1,235 | ) | | (3,849 | ) | | (3,687 | ) |
Total mainline operating expenses | | 7,992 |
| | 7,625 |
| | 23,390 |
| | 21,386 |
|
Adjusted for: Special items, net (1) | | (112 | ) | | (289 | ) | | (432 | ) | | (450 | ) |
Adjusted for: Aircraft fuel and related taxes | | (1,570 | ) | | (1,393 | ) | | (4,481 | ) | | (3,736 | ) |
Mainline operating expenses excluding special items and fuel | | $ | 6,310 |
| | $ | 5,943 |
| | $ | 18,477 |
| | $ | 17,200 |
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(In millions) | | | | | | | | |
Available Seat Miles (ASM) | | 64,582 |
| | 63,751 |
| | 184,665 |
| | 183,985 |
|
(In cents) | | | | | | | | |
Mainline CASM | | 12.37 |
| | 11.96 |
| | 12.67 |
| | 11.62 |
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Adjusted for: Special items, net per ASM | | (0.17 | ) | | (0.45 | ) | | (0.23 | ) | | (0.24 | ) |
Adjusted for: Aircraft fuel and related taxes per ASM | | (2.43 | ) | | (2.18 | ) | | (2.43 | ) | | (2.03 | ) |
Mainline CASM excluding special items and fuel | | 9.77 |
| | 9.32 |
| | 10.01 |
| | 9.35 |
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Reconciliation of Total Operating Costs per Available Seat Mile (CASM) Excluding Net Special Items and Fuel: | | | | | | | |
(In millions) | | | | | | | |
Total operating expenses - GAAP | $ | 6,044 | | | $ | 11,103 | | | $ | 21,215 | | | $ | 32,119 | |
Operating net special items (1): | | | | | | | |
Mainline operating special items, net | 295 | | | (228) | | | 657 | | | (487) | |
Regional operating special items, net | 224 | | | (6) | | | 309 | | | (6) | |
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) | |
Total operating expenses, excluding net special items and fuel | $ | 5,952 | | | $ | 8,395 | | | $ | 19,478 | | | $ | 24,521 | |
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Total Available Seat Miles (ASM) | 30,768 | | | 75,820 | | | 109,948 | | | 214,816 | |
(In cents) | | | | | | | |
Total operating CASM | 19.64 | | | 14.64 | | | 19.30 | | | 14.95 | |
Operating net special items per ASM (1): | | | | | | | |
Mainline operating special items, net | 0.96 | | | (0.30) | | | 0.60 | | | (0.23) | |
Regional operating special items, net | 0.73 | | | (0.01) | | | 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 | |
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(1)
| (1)See Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on special items. |
AAG’s Results of Operations
Operating Statistics
The table below sets forth selected mainline and regional operating data for the three and nine months ended September 30, 2017 and 2016.
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| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Mainline | | | | | | | | | | | | |
Revenue passenger miles (millions) (a) | | 54,012 |
| | 53,472 |
| | 1.0 | % | | 152,400 |
| | 151,619 |
| | 0.5 | % |
Available seat miles (millions) (b) | | 64,582 |
| | 63,751 |
| | 1.3 | % | | 184,665 |
| | 183,985 |
| | 0.4 | % |
Passenger load factor (percent) (c) | | 83.6 |
| | 83.9 |
| | (0.3 | )pts | | 82.5 |
| | 82.4 |
| | 0.1 | pts |
Yield (cents) (d) | | 14.12 |
| | 13.87 |
| | 1.8 | % | | 14.42 |
| | 13.98 |
| | 3.2 | % |
Passenger revenue per available seat mile (cents) (e) | | 11.81 |
| | 11.64 |
| | 1.5 | % | | 11.90 |
| | 11.52 |
| | 3.3 | % |
Operating cost per available seat mile (cents) (f) | | 12.37 |
| | 11.96 |
| | 3.5 | % | | 12.67 |
| | 11.62 |
| | 9.0 | % |
Aircraft at end of period | | 947 |
| | 922 |
| | 2.7 | % | | 947 |
| | 922 |
| | 2.7 | % |
Fuel consumption (gallons in millions) | | 947 |
| | 953 |
| | (0.6 | )% | | 2,713 |
| | 2,739 |
| | (0.9 | )% |
Average aircraft fuel price including related taxes (dollars per gallon) | | 1.66 |
| | 1.46 |
| | 13.4 | % | | 1.65 |
| | 1.36 |
| | 21.1 | % |
Full-time equivalent employees at end of period | | 105,000 |
| | 101,200 |
| | 3.8 | % | | 105,000 |
| | 101,200 |
| | 3.8 | % |
Total Mainline and Regional | | | | | | | | | | | | |
Revenue passenger miles (millions) (a) | | 60,471 |
| | 59,919 |
| | 0.9 | % | | 171,019 |
| | 170,025 |
| | 0.6 | % |
Available seat miles (millions) (b) | | 73,053 |
| | 71,911 |
| | 1.6 | % | | 209,136 |
| | 207,726 |
| | 0.7 | % |
Passenger load factor (percent) (c) | | 82.8 |
| | 83.3 |
| | (0.5 | )pts | | 81.8 |
| | 81.9 |
| | (0.1 | )pts |
Yield (cents) (d) | | 15.51 |
| | 15.27 |
| | 1.6 | % | | 15.85 |
| | 15.43 |
| | 2.8 | % |
Passenger revenue per available seat mile (cents) (e) | | 12.84 |
| | 12.72 |
| | 0.9 | % | | 12.96 |
| | 12.63 |
| | 2.7 | % |
Total revenue per available seat mile (cents) (g) | | 14.89 |
| | 14.73 |
| | 1.1 | % | | 15.11 |
| | 14.63 |
| | 3.3 | % |
Aircraft at end of period | | 1,558 |
| | 1,521 |
| | 2.4 | % | | 1,558 |
| | 1,521 |
| | 2.4 | % |
Fuel consumption (gallons in millions) | | 1,148 |
| | 1,149 |
| | — | % | | 3,291 |
| | 3,304 |
| | (0.4 | )% |
Average aircraft fuel price including related taxes (dollars per gallon) | | 1.67 |
| | 1.48 |
| | 13.3 | % | | 1.67 |
| | 1.37 |
| | 21.2 | % |
Full-time equivalent employees at end of period (h) | | 127,600 |
| | 121,800 |
| | 4.8 | % | | 127,600 |
| | 121,800 |
| | 4.8 | % |
| |
(a)
| Revenue passenger mile (RPM) – A basic measure of sales volume. One RPM represents one passenger flown one mile. |
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(b)
| Available seat mile (ASM) – A basic measure of production. One ASM represents one seat flown one mile. |
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(c)
| Passenger load factor – The percentage of available seats that are filled with revenue passengers. |
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(d)
| Yield – A measure of airline revenue derived by dividing passenger revenue by RPMs. |
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(e)
| Passenger revenue per available seat mile (PRASM) – Passenger revenues divided by ASMs. |
| |
(f)
| Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs. |
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(g)
| Total revenue per available seat mile (TRASM) – Total revenues divided by total mainline and regional ASMs. |
| |
(h)
| Regional full-time equivalent employees only include our wholly-owned regional airline subsidiaries, Envoy, Piedmont and PSA. |
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
We realized pre-tax income of $1.0 billion and $1.2 billion in the third quarters of 2017 and 2016, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $1.1 billion and $1.5 billion in the third quarters of 2017 and 2016, respectively.
Our third quarter 2017 pre-tax results on both a GAAP basis and excluding pre-tax net special items were principally driven by higher wage rates and fuel costs, which were offset in part by higher revenues.
Operating Revenues
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| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Mainline passenger | | $ | 7,628 |
| | $ | 7,419 |
| | $ | 209 |
| | 2.8 |
Regional passenger | | 1,749 |
| | 1,731 |
| | 18 |
| | 1.1 |
Cargo | | 200 |
| | 171 |
| | 29 |
| | 17.0 |
Other | | 1,301 |
| | 1,273 |
| | 28 |
| | 2.2 |
Total operating revenues | | $ | 10,878 |
| | $ | 10,594 |
| | $ | 284 |
| | 2.7 |
This table presents our total passenger revenues and the period-over-period change in certain operating statistics:
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| | | | Increase (Decrease) vs. Three Months Ended September 30, 2016 |
| | Three Months Ended September 30, 2017 | | Passenger Revenue | | RPMs | | ASMs | | Load Factor | | Passenger Yield | | PRASM |
| | (In millions) | | | | | | | | | | | | |
Mainline passenger | | $ | 7,628 |
| | 2.8% | | 1.0% | | 1.3% | | (0.3 | )pts | | 1.8 | % | | 1.5 | % |
Regional passenger | | 1,749 |
| | 1.1% | | 0.2% | | 3.8% | | (2.7 | )pts | | 0.9 | % | | (2.7 | )% |
Total passenger revenues | | $ | 9,377 |
| | 2.5% | | 0.9% | | 1.6% | | (0.5 | )pts | | 1.6 | % | | 0.9 | % |
Total passenger revenues increased $227 million, or 2.5%, in the third quarter of 2017 from the 2016 period primarily driven by a 1.6% period-over-period increase in consolidated passenger yields and continued strong demand. Domestic consolidated yields increased 1.2% and international yields rose 3.4%, due principally to improved performance in Latin America.
Cargo revenue increased $29 million, or 17.0%, in the third quarter of 2017 from the 2016 period primarily driven by an increase in freight volume.
Other revenue primarily includes revenue associated with our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. In the third quarters of 2017 and 2016, other revenue associated with our loyalty program was $577 million and $569 million, respectively, of which $549 million and $540 million, respectively, related to the marketing component of mileage sales and other marketing related payments.
Total operating revenues in the third quarter of 2017 increased $284 million, or 2.7%, from the 2016 period driven principally by a 2.5% increase in total passenger revenues as described above. Our mainline and regional TRASM was 14.89 cents in the third quarter of 2017, a 1.1% increase as compared to 14.73 cents in the 2016 period.
Mainline Operating Expenses
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 1,570 |
| | $ | 1,393 |
| | $ | 177 |
| | 12.7 |
|
Salaries, wages and benefits | | 2,995 |
| | 2,772 |
| | 223 |
| | 8.0 |
|
Maintenance, materials and repairs | | 487 |
| | 481 |
| | 6 |
| | 1.4 |
|
Other rent and landing fees | | 471 |
| | 463 |
| | 8 |
| | 1.7 |
|
Aircraft rent | | 304 |
| | 299 |
| | 5 |
| | 1.5 |
|
Selling expenses | | 400 |
| | 347 |
| | 53 |
| | 15.1 |
|
Depreciation and amortization | | 433 |
| | 399 |
| | 34 |
| | 8.6 |
|
Special items, net | | 112 |
| | 289 |
| | (177 | ) | | (61.2 | ) |
Other | | 1,220 |
| | 1,182 |
| | 38 |
| | 3.3 |
|
Total mainline operating expenses | | $ | 7,992 |
| | $ | 7,625 |
| | $ | 367 |
| | 4.8 |
|
Mainline operating expenses increased $367 million, or 4.8%, in the third quarter of 2017 from the 2016 period. The increase in operating expenses was primarily driven by higher wage rates and fuel costs. See detailed explanations below relating to changes in mainline CASM.
Mainline CASM
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 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 table below presents the reconciliation of mainline operating expenses (GAAP measure) to mainline operating costs excluding special items and fuel (non-GAAP measure). Management uses mainline operating costs excluding special items and 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 special items allows management an additional tool to better understand and analyze our non-fuel costs and core operating performance.
The major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the three months ended September 30, 2017 and 2016 are as follows (amounts may not recalculate due to rounding):
|
| | | | | | | | | |
| | Three Months Ended September 30, | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In cents, except percentage changes) |
Mainline CASM: | | | | | | |
Aircraft fuel and related taxes | | 2.43 |
| | 2.18 |
| | 11.3 |
|
Salaries, wages and benefits | | 4.64 |
| | 4.35 |
| | 6.6 |
|
Maintenance, materials and repairs | | 0.75 |
| | 0.75 |
| | 0.1 |
|
Other rent and landing fees | | 0.73 |
| | 0.73 |
| | 0.4 |
|
Aircraft rent | | 0.47 |
| | 0.47 |
| | 0.2 |
|
Selling expenses | | 0.62 |
| | 0.54 |
| | 13.6 |
|
Depreciation and amortization | | 0.67 |
| | 0.63 |
| | 7.2 |
|
Special items, net | | 0.17 |
| | 0.45 |
| | (61.7 | ) |
Other | | 1.89 |
| | 1.85 |
| | 1.9 |
|
Total mainline CASM | | 12.37 |
| | 11.96 |
| | 3.5 |
|
Special items, net | | (0.17 | ) | | (0.45 | ) | | (61.7 | ) |
Aircraft fuel and related taxes | | (2.43 | ) | | (2.18 | ) | | 11.3 |
|
Mainline CASM, excluding special items and fuel | | 9.77 |
| | 9.32 |
| | 4.8 |
|
Significant changes in the components of mainline CASM are as follows:
Aircraft fuel and related taxes per ASM increased 11.3% primarily due to a 13.4% increase in the average price per gallon of fuel to $1.66 in the third quarter of 2017 from $1.46 in the 2016 period.
Salaries, wages and benefits per ASM increased 6.6% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective mid-third quarter of 2016.
Selling expenses per ASM increased 13.6% primarily due to higher revenues in the third quarter of 2017 as compared to the 2016 period, resulting in higher commissions.
Depreciation and amortization per ASM increased 7.2% primarily due to aircraft purchased in connection with our fleet renewal program.
Operating Special Items, Net
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | (In millions) |
Merger integration expenses (1) | | $ | 62 |
| | $ | 194 |
|
Fleet restructuring expenses (2) | | 62 |
| | 31 |
|
Mark-to-market adjustments for bankruptcy obligations and other | | (12 | ) | | 39 |
|
Other operating charges, net | | — |
| | 25 |
|
Total mainline operating special items, net | | 112 |
| | 289 |
|
Regional operating special items, net (3) | | (5 | ) | | 5 |
|
Total operating special items, net | | $ | 107 |
| | $ | 294 |
|
| |
(1)
| Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance. |
| |
(2)
| Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned. |
| |
(3)
| Regional operating special items, net principally related to a gain on the sale of certain aircraft in the 2017 period and Merger integration expenses in the 2016 period. |
Regional Operating Expenses
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 352 |
| | $ | 303 |
| | $ | 49 |
| | 16.1 |
Other | | 1,302 |
| | 1,235 |
| | 67 |
| | 5.4 |
Total regional operating expenses | | $ | 1,654 |
| | $ | 1,538 |
| | $ | 116 |
| | 7.5 |
Regional operating expenses increased $116 million, or 7.5%, in the third quarter of 2017 from the 2016 period. The period-over-period increase was primarily due to a $49 million, or 16.1%, increase in fuel costs and a $67 million, or 5.4%, increase in other regional operating expenses. The average price per gallon of fuel increased 13.1% to $1.75 in the third quarter of 2017 from $1.55 in the 2016 period, on a 2.6% increase in consumption. The increase in other regional operating expenses was primarily driven by a 3.8% increase in capacity, principally from our wholly-owned regional carriers. See Note 10 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, 2020 and 2019.Amounts may not recalculate due to rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Increase (Decrease) | | Nine Months Ended September 30, | | | | Increase (Decrease) |
| 2020 | | 2019 | | | | 2020 | | 2019 | | |
Revenue passenger miles (millions) (a) | 18,121 | | | 64,874 | | | (72.1) | % | | 70,523 | | | 182,334 | | | (61.3) | % |
Available seat miles (millions) (b) | 30,768 | | | 75,820 | | | (59.4) | % | | 109,948 | | | 214,816 | | | (48.8) | % |
Passenger load factor (percent) (c) | 58.9 | | | 85.6 | | | (26.7) | pts | | 64.1 | | | 84.9 | | | (20.8) | pts |
Yield (cents) (d) | 14.01 | | | 16.95 | | | (17.3) | % | | 16.06 | | | 17.37 | | | (7.5) | % |
Passenger revenue per available seat mile (cents) (e) | 8.25 | | | 14.50 | | | (43.1) | % | | 10.30 | | | 14.74 | | | (30.1) | % |
Total revenue per available seat mile (cents) (f) | 10.31 | | | 15.71 | | | (34.4) | % | | 12.11 | | | 16.04 | | | (24.5) | % |
Aircraft at end of period (g) | 1,381 | | | 1,552 | | | (11.0) | % | | 1,381 | | | 1,552 | | | (11.0) | % |
Fuel consumption (gallons in millions) | 499 | | | 1,209 | | | (58.7) | % | | 1,745 | | | 3,420 | | | (49.0) | % |
Average aircraft fuel price including related taxes (dollars per gallon) | 1.23 | | | 2.05 | | | (40.1) | % | | 1.55 | | | 2.08 | | | (25.4) | % |
Full-time equivalent employees at end of period | 110,500 | | | 131,900 | | | (16.2) | % | | 110,500 | | | 131,900 | | | (16.2) | % |
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)Includes aircraft owned and leased by American as well as aircraft operated by third-party regional expenses.carriers under capacity purchase agreements. Excludes 12 mainline and 29 regional aircraft that are in temporary storage as follows: 13 Embraer 175, 12 Boeing 737-800, seven Embraer 140, six Embraer 145 and three Bombardier CRJ900 aircraft.
(h)Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs.
Three Months Ended September 30, 2020 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 |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Passenger | $ | 2,540 | | | $ | 10,995 | | | $ | (8,455) | | | (76.9) | |
Cargo | 207 | | | 208 | | | (1) | | | (0.4) | |
Other | 426 | | | 708 | | | (282) | | | (39.9) | |
Total operating revenues | $ | 3,173 | | | $ | 11,911 | | | $ | (8,738) | | | (73.4) | |
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) | % |
Total operating revenues in the third quarter of 2020 decreased $8.7 billion, or 73.4%, from the third quarter of 2019, primarily due to a decline in passenger demand and government travel restrictions related to COVID-19.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Increase (Decrease) | | Percent Increase (Decrease) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Aircraft fuel and related taxes | $ | 453 | | | $ | 1,989 | | | $ | (1,536) | | | (77.2) | |
Salaries, wages and benefits | 2,705 | | | 3,219 | | | (514) | | | (16.0) | |
Maintenance, materials and repairs | 337 | | | 610 | | | (273) | | | (44.7) | |
Other rent and landing fees | 367 | | | 530 | | | (163) | | | (30.8) | |
Aircraft rent | 336 | | | 335 | | | 1 | | | 0.2 | |
Selling expenses | 70 | | | 424 | | | (354) | | | (83.5) | |
Depreciation and amortization | 498 | | | 499 | | | (1) | | | (0.3) | |
Mainline operating special items, net | (295) | | | 228 | | | (523) | | | nm |
Other | 659 | | | 1,336 | | | (677) | | | (50.7) | |
Regional expenses: | | | | | | | |
Aircraft fuel and related taxes | 158 | | | 485 | | | (327) | | | (67.4) | |
Other | 756 | | | 1,448 | | | (692) | | | (47.8) | |
Total operating expenses | $ | 6,044 | | | $ | 11,103 | | | $ | (5,059) | | | (45.6) | |
Total operating expenses decreased $5.1 billion, or 45.6%, in the third quarter of 2020 from the third quarter of 2019 due to our reduced schedule and cost reduction actions as described in the "Financial Overview" above.
Operating Special Items, Net
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2020 | | 2019 |
| (In millions) | | |
PSP Financial Assistance (1) | $ | (1,908) | | | $ | — | |
Severance expenses (2) | 871 | | | — | |
Fleet impairment (3) | 742 | | | 201 | |
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 | — | | | 1 | |
Mainline operating special items, net | (295) | | | 228 | |
| | | |
PSP Financial Assistance (1) | (228) | | | — | |
Severance expenses (2) | 4 | | | — | |
Other operating special items, net | — | | | 6 | |
Regional operating special items, net | (224) | | | 6 | |
Operating special items, net | $ | (519) | | | $ | 234 | |
(1)PSP Financial Assistance represents recognition of a portion of financial assistance received from Treasury pursuant to the Payroll Support Program Agreement (PSP Agreement). See Note 1 to AAG's Condensed Consolidated Financial Statements in Part I, Item 1A for further information.
(2)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 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. Cash payments related to these charges for the three months ended September 30, 2020 were approximately $120 million.
(3)Fleet impairment resulted from our decision to retire certain aircraft earlier than planned driven by the decline in air travel due to COVID-19. See Note 13 to AAG’s Condensed Consolidated Financial Statements 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 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 our common stock are marked-to-market based on our stock price.
Nonoperating Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Increase (Decrease) | | Percent Increase (Decrease) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Interest income | $ | 5 | | | $ | 34 | | | $ | (29) | | | (84.9) | |
Interest expense, net | (340) | | | (284) | | | (56) | | | 19.6 | |
Other income (expense), net | 111 | | | (1) | | | 112 | | | nm |
Total nonoperating expense, net | $ | (224) | | | $ | (251) | | | $ | 27 | | | (10.8) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Interest income | | $ | 25 |
| | $ | 16 |
| | $ | 9 |
| | 51.4 |
|
Interest expense, net | | (266 | ) | | (250 | ) | | (16 | ) | | 6.6 |
|
Other, net | | 13 |
| | (8 | ) | | 21 |
| | nm |
|
Total nonoperating expense, net | | $ | (228 | ) | | $ | (242 | ) | | $ | 14 |
| | (5.4 | ) |
Our short-term investments in each period consisted of highly liquid investments that provided relatively nominal returns. 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 $9in the third quarter of 2020 compared to the third quarter of 2019 primarily due to the issuance of debt.
In the third quarter of 2020, other nonoperating income, net included $84 million or 51.4%,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 interest rates, which drove more than a 50 basis point increase in average yields in the third quarter of 2017 as compared to the 2016 period.
Interest expense, net increased $16 million in the third quarter of 2017 as compared to the 2016 period primarily due to higher outstanding debt as a result of aircraft financings associated with our fleet renewal program.expected return on pension plan assets.
Income Taxes
In the third quarter 2017,of 2020, we recorded an income tax provisionbenefit of $380 million, which was substantially non-cash due to utilization of our net operating losses (NOLs).$696 million. Substantially all of our income or loss before income taxes is attributable to the United States. At December 31, 2016, we had approximately $10.5 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.
See Note 67 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on income taxes.
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019
We realized pre-tax incomeAs discussed above, our results of $2.7 billion and $3.8 billion inoperations 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 20172020 financial results and 2016, respectively. Excluding the effectsimpact of pre-tax net special items, pre-tax income was $3.1 billion and $4.3 billion in the first nine months of 2017 and 2016, respectively.
Our pre-tax resultsCOVID-19 on both a GAAP basis and excluding pre-tax net special items for the first nine months of 2017 were principally driven by higher wage rates and fuel costs, which were offset in part by higher revenues.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 (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Mainline passenger | | $ | 21,981 |
| | $ | 21,192 |
| | $ | 789 |
| | 3.7 |
Regional passenger | | 5,133 |
| | 5,040 |
| | 93 |
| | 1.8 |
Cargo | | 568 |
| | 506 |
| | 62 |
| | 12.2 |
Other | | 3,924 |
| | 3,653 |
| | 271 |
| | 7.4 |
Total operating revenues | | $ | 31,606 |
| | $ | 30,391 |
| | $ | 1,215 |
| | 4.0 |
This table presents our total passenger revenuesrevenue and the period-over-period change in certain operating statistics:
|
| | | | | | | | | | | | | | | | | | |
| | | | Increase (Decrease) vs. Nine Months Ended September 30, 2016 |
| | Nine Months Ended September 30, 2017 | | Passenger Revenue | | RPMs | | ASMs | | Load Factor | | Passenger Yield | | PRASM |
| | (In millions) | | | | | | | | | | | | |
Mainline passenger | | $ | 21,981 |
| | 3.7% | | 0.5% | | 0.4% | | 0.1 | pts | | 3.2% | | 3.3 | % |
Regional passenger | | 5,133 |
| | 1.8% | | 1.2% | | 3.1% | | (1.4 | )pts | | 0.7% | | (1.2 | )% |
Total passenger revenues | | $ | 27,114 |
| | 3.4% | | 0.6% | | 0.7% | | (0.1 | )pts | | 2.8% | | 2.7 | % |
Total passenger revenues increased $882 million, or 3.4%, in the first nine months of 2017 from the 2016 period primarily driven by a 2.8% period-over-period increase in consolidated passenger yields and continued strong demand. Domestic consolidated yields increased 3.6% and international yields rose 1.8%, due principally to improved performance in Latin America.
Cargo revenue increased $62 million, or 12.2%, in the first nine months of 2017 from the 2016 period primarily driven by an increase in freight volume.
Other revenue primarily includes revenue associated with our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $271 million, or 7.4%, in the first nine months of 2017 from the 2016 period primarily driven by an increase in loyalty program revenue. In the first nine months of 2017 and 2016, other revenue associated with our loyalty program was $1.8 billion and $1.5 billion, respectively, of which $1.6 billion and $1.4 billion, respectively, related to the marketing component of mileage sales and other marketing related payments. This period-over-period increase was primarily due to revenues associated with our new co-branded credit card agreements that became effective in the third quarter of 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) | % |
Total operating revenues in the first nine months of 2017 increased $1.22020 decreased $21.1 billion, or 4.0%61.4%, from the 2016 period driven principally by a 3.4% increase in total passenger revenues as described above. Our mainline and regional TRASM was 15.11 cents in the first nine months of 2017,2019, primarily due to a 3.3% increase as compareddecline in passenger demand and government travel restrictions related to 14.63 cents in the 2016 period.COVID-19.
Mainline Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | Increase (Decrease) | | Percent Increase (Decrease) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Aircraft fuel and related taxes | $ | 2,065 | | | $ | 5,710 | | | $ | (3,645) | | | (63.8) |
Salaries, wages and benefits | 8,384 | | | 9,509 | | | (1,125) | | (11.8) |
Maintenance, materials and repairs | 1,253 | | | 1,745 | | | (492) | | (28.2) |
Other rent and landing fees | 1,149 | | | 1,568 | | | (419) | | (26.7) |
Aircraft rent | 1,004 | | | 996 | | | 8 | | 0.8 |
Selling expenses | 418 | | | 1,194 | | | (776) | | (65.0) |
Depreciation and amortization | 1,557 | | | 1,469 | | | 88 | | 6.0 |
Mainline operating special items, net | (657) | | | 487 | | | (1,144) | | nm |
Other | 2,404 | | | 3,859 | | | (1,455) | | (37.7) | |
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 | $ | 21,215 | | | $ | 32,119 | | | $ | (10,904) | | | (33.9) |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 4,481 |
| | $ | 3,736 |
| | $ | 745 |
| | 19.9 |
|
Salaries, wages and benefits | | 8,824 |
| | 8,094 |
| | 730 |
| | 9.0 |
|
Maintenance, materials and repairs | | 1,474 |
| | 1,352 |
| | 122 |
| | 9.1 |
|
Other rent and landing fees | | 1,363 |
| | 1,342 |
| | 21 |
| | 1.6 |
|
Aircraft rent | | 892 |
| | 908 |
| | (16 | ) | | (1.7 | ) |
Selling expenses | | 1,094 |
| | 990 |
| | 104 |
| | 10.5 |
|
Depreciation and amortization | | 1,255 |
| | 1,128 |
| | 127 |
| | 11.3 |
|
Special items, net | | 432 |
| | 450 |
| | (18 | ) | | (3.8 | ) |
Other | | 3,575 |
| | 3,386 |
| | 189 |
| | 5.6 |
|
Total mainline operating expenses | | $ | 23,390 |
| | $ | 21,386 |
| | $ | 2,004 |
| | 9.4 |
|
MainlineTotal operating expenses increased $2.0decreased $10.9 billion, or 9.4%33.9%, in the first nine months of 20172020 from the 2016 period. The increase in operating expenses was primarily driven by higher wage rates and fuel costs. See detailed explanations below relating to changes in mainline CASM.
Mainline CASM
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 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 table below presents the reconciliation of mainline operating expenses (GAAP measure) to mainline operating costs excluding special items and fuel (non-GAAP measure). Management uses mainline operating costs excluding special items and 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 special items allows management an additional tool to better understand and analyze our non-fuel costs and core operating performance.
The major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the nine months ended September 30, 2017 and 2016 are as follows (amounts may not recalculate due to rounding):
|
| | | | | | | | | |
| | Nine Months Ended September 30, | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In cents, except percentage changes) |
Mainline CASM: | | | | | | |
Aircraft fuel and related taxes | | 2.43 |
| | 2.03 |
| | 19.5 |
|
Salaries, wages and benefits | | 4.78 |
| | 4.40 |
| | 8.6 |
|
Maintenance, materials and repairs | | 0.80 |
| | 0.73 |
| | 8.7 |
|
Other rent and landing fees | | 0.74 |
| | 0.73 |
| | 1.2 |
|
Aircraft rent | | 0.48 |
| | 0.49 |
| | (2.1 | ) |
Selling expenses | | 0.59 |
| | 0.54 |
| | 10.1 |
|
Depreciation and amortization | | 0.68 |
| | 0.61 |
| | 10.9 |
|
Special items, net | | 0.23 |
| | 0.24 |
| | (4.2 | ) |
Other | | 1.94 |
| | 1.84 |
| | 5.2 |
|
Total mainline CASM | | 12.67 |
| | 11.62 |
| | 9.0 |
|
Special items, net | | (0.23 | ) | | (0.24 | ) | | (4.2 | ) |
Aircraft fuel and related taxes | | (2.43 | ) | | (2.03 | ) | | 19.5 |
|
Mainline CASM, excluding special items and fuel | | 10.01 |
| | 9.35 |
| | 7.0 |
|
Significant changes in the components of mainline CASM are as follows:
Aircraft fuel and related taxes per ASM increased 19.5% primarily due to a 21.1% increase in the average price per gallon of fuel to $1.65 in the first nine months of 2017 from $1.362019 due to our reduced schedule and cost reduction actions as described in the 2016 period, offset in part by a 0.9% decrease in gallons of fuel consumed.
Salaries, wages and benefits per ASM increased 8.6% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective mid-third quarter of 2016.
Maintenance, materials and repairs per ASM increased 8.7% as compared to the 2016 period primarily due to a contract change impacting the timing of maintenance expenses incurred. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown. Previously this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed.
Selling expenses per ASM increased 10.1% primarily due to higher revenues in the first nine months of 2017 as compared to the 2016 period, resulting in higher commissions."Financial Overview" above.
Depreciation and amortization per ASM increased 10.9% primarily due to aircraft purchased in connection with our fleet renewal program.
Other operating expenses per ASM increased 5.2% primarily due to expenses associated with improving our product offerings, customer experience and operational reliability.
Operating Special Items, Net
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | (In millions) |
Merger integration expenses (1) | | $ | 192 |
| | $ | 395 |
|
Fleet restructuring expenses (2) | | 174 |
| | 72 |
|
Mark-to-market adjustments for bankruptcy obligations and other | | 7 |
| | (22 | ) |
Labor contract expenses (3) | | 45 |
| | — |
|
Other operating charges, net | | 14 |
| | 5 |
|
Total mainline operating special items, net | | 432 |
| | 450 |
|
Regional operating special items, net (4) | | (1 | ) | | 13 |
|
Total operating special items, net | | $ | 431 |
| | $ | 463 |
|
| |
(1)
| Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance. |
| |
(2)
| Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned. |
| |
(3)
| Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017. |
| |
(4)
| Regional operating special items, net principally related to a gain on the sale of certain aircraft in the 2017 period and Merger integration expenses in the 2016 period. |
Regional Operating Expenses
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 999 |
| | $ | 801 |
| | $ | 198 |
| | 24.7 |
Other | | 3,849 |
| | 3,687 |
| | 162 |
| | 4.4 |
Total regional operating expenses | | $ | 4,848 |
| | $ | 4,488 |
| | $ | 360 |
| | 8.0 |
Regional operating expenses increased $360$88 million, or 8.0%6.0%, in the first nine months of 20172020 from the 2016 period. The period-over-period increase was primarily due to a $198 million, or 24.7%, increase in fuel costs and a $162 million, or 4.4%, increase in other regional operating expenses. The average price per gallon of fuel increased 21.8% to $1.73 in the first nine months of 20172019 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.
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 | |
(1)PSP Financial Assistance represents recognition of a portion of financial assistance received from $1.42Treasury pursuant to the PSP Agreement. See Note 1 to AAG's Condensed Consolidated Financial Statements in the 2016 period, on a 2.4% increase in consumption. The increase in other regional operating expenses was primarilyPart I, Item 1A for further information.
(2)Fleet impairment resulted from our decision to retire certain aircraft earlier than planned driven by a 3.1% increasethe decline in capacity, principally from our wholly-owned regional carriers.air travel due to COVID-19. Aircraft retired include Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300, Embraer 190, certain Embraer 140 and Bombardier CRJ200 aircraft. See Note 1013 to AAG’s Condensed Consolidated Financial Statements 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 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)Labor contract expenses primarily relate to one-time charges resulting from 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 regional expenses.our 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) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Interest income | $ | 36 | | | $ | 103 | | | $ | (67) | | | (64.9) |
Interest expense, net | (851) | | | (830) | | | (21) | | | 2.6 |
Other income, net | 77 | | | 76 | | | 1 | | | 1.2 |
Total nonoperating expense, net | $ | (738) | | | $ | (651) | | | $ | (87) | | | 13.4 |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Interest income | | $ | 70 |
| | $ | 45 |
| | $ | 25 |
| | 55.4 |
|
Interest expense, net | | (787 | ) | | (738 | ) | | (49 | ) | | 6.6 |
|
Other, net | | 8 |
| | (25 | ) | | 33 |
| | nm |
|
Total nonoperating expense, net | | $ | (709 | ) | | $ | (718 | ) | | $ | 9 |
| | (1.3 | ) |
Our short-term investments in each period consisted of highly liquid investments that provided relatively nominal returns. Interest income decreased in the first nine months of 2020 compared to the first nine months of 2019 primarily as a result of lower returns on our short-term investments. Interest expense, net increased $25in the first nine months of 2020 compared to the first nine months of 2019 primarily due to the issuance of debt and lower capitalized interest offset in part by lower interest expense on our variable-rate debt.
In the first nine months of 2020, other nonoperating income, net included $290 million or 55.4%,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 interest rates, which drove more than a 50 basis point increase in average yields in the first nine months of 2017 as compared to the 2016 period.
Interest expense, net increased $49 million in the first nine months of 2017 as compared to the 2016 period primarily due to higher outstanding debt as a result of aircraft financings associated with our fleet renewal program.
Other nonoperating expense, net in the 2016 period primarily included $36 million of net special charges consisting of debt issuance and extinguishment costs associated with a bond refinancing, offset in part by $19 million of foreign currency gains.expected return on pension plan assets.
Income Taxes
In the first nine months of 2017,2020, we recorded an income tax provisionbenefit of $998 million, which was substantially non-cash due to utilization of our NOLs.$1.9 billion. Substantially all of our income or loss before income taxes is attributable to the United States. At December 31, 2016, we had approximately $10.5 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.
See Note 67 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, 20172020 Compared to Three Months Ended September 30, 20162019
American realized pre-tax incomeAs discussed above, American's results of $1.0 billion and $1.2 billion inoperations for the third quartersthree months ended September 30, 2020 were significantly impacted by COVID-19. As a result, the comparison of 2017 and 2016, respectively.
American’s third quarter 2017 pre-taxthese results were principally driven by higher wage rates and fuel costs, which were offset in part by higher revenues.
Operating Revenues
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Mainline passenger | | $ | 7,628 |
| | $ | 7,419 |
| | $ | 209 |
| | 2.8 |
|
Regional passenger | | 1,749 |
| | 1,731 |
| | 18 |
| | 1.1 |
|
Cargo | | 200 |
| | 171 |
| | 29 |
| | 17.0 |
|
Other | | 1,298 |
| | 1,270 |
| | 28 |
| | 2.2 |
|
Total operating revenues | | $ | 10,875 |
| | $ | 10,591 |
| | $ | 284 |
| | 2.7 |
|
Total passenger revenues increased $227 million, or 2.5%, into 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 2017 from2020 financial results and the 2016 period primarily driven by a period-over-period increase in consolidated passenger yields and continued strong demand.impact of COVID-19 on American's business.
Cargo revenue increased $29 million, or 17.0%, in the third quarter of 2017 from the 2016 period primarily driven by an increase in freight volume.Operating Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | |
Decrease | | Percent Decrease |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Passenger | $ | 2,540 | | | $ | 10,995 | | | $ | (8,455) | | | (76.9) | |
Cargo | 207 | | | 208 | | | (1) | | | (0.4) | |
Other | 425 | | | 707 | | | (282) | | | (39.8) | |
Total operating revenues | $ | 3,172 | | | $ | 11,910 | | | $ | (8,738) | | | (73.4) | |
Other revenue primarily includes revenue associated with American’s loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. In the third quarters of 2017 and 2016, other revenue associated with American’s loyalty program was $577 million and $569 million, respectively, of which $549 million and $540 million, respectively, related to the marketing component of mileage sales and other marketing related payments.
Total operating revenues in the third quarter of 2017 increased $284 million,2020 decreased $8.7 billion, or 2.7%73.4%, from the 2016 period driven principally bythird quarter of 2019, primarily due to a 2.5% increasedecline in total passenger revenues as described above.demand and government travel restrictions related to COVID-19.
Mainline Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Increase (Decrease) | | Percent Increase (Decrease) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Aircraft fuel and related taxes | $ | 453 | | | $ | 1,989 | | | $ | (1,536) | | | (77.2) | |
Salaries, wages and benefits | 2,704 | | | 3,217 | | | (513) | | | (16.0) | |
Maintenance, materials and repairs | 337 | | | 610 | | | (273) | | | (44.7) | |
Other rent and landing fees | 367 | | | 530 | | | (163) | | | (30.8) | |
Aircraft rent | 336 | | | 335 | | | 1 | | | 0.2 | |
Selling expenses | 70 | | | 424 | | | (354) | | | (83.5) | |
Depreciation and amortization | 498 | | | 499 | | | (1) | | | (0.3) | |
Mainline operating special items, net | (295) | | | 228 | | | (523) | | | nm |
Other | 659 | | | 1,337 | | | (678) | | | (50.7) | |
Regional expenses: | | | | | | | |
Aircraft fuel and related taxes | 158 | | | 485 | | | (327) | | | (67.4) | |
Other | 694 | | | 1,428 | | | (734) | | | (51.4) | |
Total operating expenses | $ | 5,981 | | | $ | 11,082 | | | $ | (5,101) | | | (46.0) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 1,570 |
| | $ | 1,393 |
| | $ | 177 |
| | 12.7 |
|
Salaries, wages and benefits | | 2,991 |
| | 2,770 |
| | 221 |
| | 8.0 |
|
Maintenance, materials and repairs | | 487 |
| | 481 |
| | 6 |
| | 1.4 |
|
Other rent and landing fees | | 471 |
| | 463 |
| | 8 |
| | 1.7 |
|
Aircraft rent | | 304 |
| | 299 |
| | 5 |
| | 1.5 |
|
Selling expenses | | 400 |
| | 347 |
| | 53 |
| | 15.1 |
|
Depreciation and amortization | | 433 |
| | 399 |
| | 34 |
| | 8.6 |
|
Special items, net | | 112 |
| | 289 |
| | (177 | ) | | (61.2 | ) |
Other | | 1,220 |
| | 1,184 |
| | 36 |
| | 3.1 |
|
Total mainline operating expenses | | $ | 7,988 |
| | $ | 7,625 |
| | $ | 363 |
| | 4.8 |
|
MainlineTotal operating expenses increased $363 million,decreased $5.1 billion, or 4.8%46.0%, in the third quarter of 20172020 from the 2016 period. The increasethird quarter of 2019 due to American's reduced schedule and cost reduction actions as described in operating expenses was primarily driven by higher wage rates and fuel costs. Detailed explanations relatedthe "Financial Overview" above.
Operating Special Items, Net
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2020 | | 2019 |
| (In millions) | | |
PSP Financial Assistance (1) | $ | (1,908) | | | $ | — | |
Severance expenses (2) | 871 | | | — | |
Fleet impairment (3) | 742 | | | 201 | |
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 | — | | | 1 | |
Mainline operating special items, net | (295) | | | 228 | |
| | | |
PSP Financial Assistance (1) | (228) | | | — | |
Regional operating special items, net | (228) | | | — | |
Operating special items, net | $ | (523) | | | $ | 228 | |
(1)PSP Financial Assistance represents recognition of a portion of financial assistance received from Treasury pursuant to the changesPSP Agreement. See Note 1 to American's Condensed Consolidated Financial Statements in American’s mainline operatingPart I, Item 1B for further information.
(2)Severance expenses areprincipally include salary and medical costs associated with certain team members who opted in to voluntary early retirement programs offered as follows:
Aircraft fuel and related taxes increased 12.7% primarilya result of reductions to American's operation due to a 13.4% increaseCOVID-19. These expenses in the average price per gallon of fuel to $1.66three months ended September 30, 2020 also include salary and medical costs associated
with team members who were notified in the third quarter of 20172020 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 three months ended September 30, 2020 were approximately $120 million.
(3)Fleet impairment resulted from $1.46American's decision to retire certain aircraft earlier than planned driven by the decline in the 2016 period.
Salaries, wages and benefits increased 8.0% primarilyair travel due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective mid-third quarter of 2016.
Selling expenses increased 15.1% primarily due to higher revenues in the third quarter of 2017 as compared to the 2016 period, resulting in higher commissions.
Depreciation and amortization increased 8.6% primarily due to aircraft purchased in connection with American’s fleet renewal program.
Operating Special Items, Net
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | (In millions) |
Merger integration expenses (1) | | $ | 62 |
| | $ | 194 |
|
Fleet restructuring expenses (2) | | 62 |
| | 31 |
|
Mark-to-market adjustments for bankruptcy obligations and other | | (12 | ) | | 39 |
|
Other operating charges, net | | — |
| | 25 |
|
Total mainline operating special items, net | | 112 |
| | 289 |
|
Regional operating special items, net (3) | | (1 | ) | | 3 |
|
Total operating special items, net | | $ | 111 |
| | $ | 292 |
|
| |
(1)
| Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance. |
| |
(2)
| Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned. |
| |
(3)
| Regional operating special items, net principally related to Merger integration expenses. |
Regional Operating Expenses
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 352 |
| | $ | 303 |
| | $ | 49 |
| | 16.1 |
|
Other | | 1,310 |
| | 1,231 |
| | 79 |
| | 6.4 |
|
Total regional operating expenses | | $ | 1,662 |
| | $ | 1,534 |
| | $ | 128 |
| | 8.3 |
|
Regional operating expenses increased $128 million, or 8.3%, in the third quarter of 2017 from the 2016 period. The period-over-period increase was primarily due to a $49 million, or 16.1%, increase in fuel costs and a $79 million, or 6.4%, increase in other regional operating expenses. The average price per gallon of fuel increased 13.1% to $1.75 in the third quarter of 2017 from $1.55 in the 2016 period, on a 2.6% increase in consumption. The increase in other regional operating expenses was primarily driven by increased capacity.COVID-19. See Note 812 to American’s Condensed Consolidated Financial Statements 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 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 regional expenses.AAG's stock price.
Nonoperating Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Increase (Decrease) | | Percent Increase (Decrease) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Interest income | $ | 72 | | | $ | 131 | | | $ | (59) | | | (44.9) | |
Interest expense, net | (310) | | | (281) | | | (29) | | | 10.2 | |
Other income (expense), net | 111 | | | (10) | | | 121 | | | nm |
Total nonoperating expense, net | $ | (127) | | | $ | (160) | | | $ | 33 | | | (20.7) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Interest income | | $ | 56 |
| | $ | 28 |
| | $ | 28 |
| | nm |
|
Interest expense, net | | (250 | ) | | (229 | ) | | (21 | ) | | 9.4 |
|
Other, net | | 13 |
| | (8 | ) | | 21 |
| | nm |
|
Total nonoperating expense, net | | $ | (181 | ) | | $ | (209 | ) | | $ | 28 |
| | (13.5 | ) |
American’sInterest income decreased in the third quarter of 2020 compared to the third quarter of 2019 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 each period consistedthe third quarter of highly liquid investments that provided relatively nominal returns. Interest2020 compared to the third quarter of 2019 primarily due to the issuance of debt.
In the third quarter of 2020, other nonoperating income, increased $28net 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 interest rates, which drove more than a 50 basis point increase in average yields in the third quarter of 2017 as compared to the 2016 period.
Interest expense, net increased $21 million in the third quarter of 2017 as compared to the 2016 period primarily due to higher outstanding debt as a result of aircraft financings associated with American’s fleet renewal program.expected return on pension plan assets.
Income Taxes
American is part of the AAG consolidated income tax return.
In the third quarter 2017,of 2020, American recorded an income tax provisionbenefit of $395 million, which was substantially non-cash due to utilization of its NOLs.$660 million. Substantially all of American’s income or loss before income taxes is attributable to the United States. At December 31, 2016, American had approximately $11.3 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.
See Note 45 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B for additional information on income taxes.
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019
American realized pre-tax incomeAs discussed above, American's results of $2.8 billion and $3.9 billion inoperations 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 20172020 financial results and 2016, respectively.the impact of COVID-19 on American's business.
American’s pre-tax results for the first nine months of 2017 were principally driven by higher wage rates and fuel costs, which were offset in part by higher revenues.
Operating Revenues
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Mainline passenger | | $ | 21,981 |
| | $ | 21,192 |
| | $ | 789 |
| | 3.7 |
Regional passenger | | 5,133 |
| | 5,040 |
| | 93 |
| | 1.8 |
Cargo | | 568 |
| | 506 |
| | 62 |
| | 12.2 |
Other | | 3,916 |
| | 3,639 |
| | 277 |
| | 7.6 |
Total operating revenues | | $ | 31,598 |
| | $ | 30,377 |
| | $ | 1,221 |
| | 4.0 |
Total passenger revenues increased $882 million, or 3.4%, in the first nine months of 2017 from the 2016 period primarily driven by a period-over-period increase in consolidated passenger yields and continued strong demand.
Cargo revenue increased $62 million, or 12.2%, in the first nine months of 2017 from the 2016 period primarily driven by an increase in freight volume.
Other revenue primarily includes revenue associated with American’s loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $277 million, or 7.6%, in the first nine months of 2017 from the 2016 period primarily driven by an increase in loyalty program revenue. In the first nine months of 2017 and 2016, other revenue associated with American’s loyalty program was $1.8 billion and $1.5 billion, respectively, of which $1.6 billion and $1.4 billion, respectively, related to the marketing component of mileage sales and other marketing related payments. This period-over-period increase was primarily due to revenues associated with our new co-branded credit card agreements that became effective in the third quarter of 2016. | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 1,496 | | | 2,139 | | | (643) | | | (30.0) | |
Total operating revenues | $ | 13,308 | | | $ | 34,449 | | | $ | (21,141) | | | (61.4) | |
Total operating revenues in the first nine months of 2017 increased $1.22020 decreased $21.1 billion, or 4.0%61.4%, from the 2016 period driven principally byfirst nine months of 2019, primarily due to a 3.4% increasedecline in total passenger revenues as described above.demand and government travel restrictions related to COVID-19.
Mainline Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | Increase (Decrease) | | Percent Increase (Decrease) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Aircraft fuel and related taxes | $ | 2,065 | | | $ | 5,710 | | | $ | (3,645) | | | (63.8) | |
Salaries, wages and benefits | 8,380 | | | 9,503 | | | (1,123) | | | (11.8) | |
Maintenance, materials and repairs | 1,253 | | | 1,745 | | | (492) | | | (28.2) | |
Other rent and landing fees | 1,149 | | | 1,568 | | | (419) | | | (26.7) | |
Aircraft rent | 1,004 | | | 996 | | | 8 | | | 0.8 | |
Selling expenses | 418 | | | 1,194 | | | (776) | | | (65.0) | |
Depreciation and amortization | 1,557 | | | 1,469 | | | 88 | | | 6.0 | |
Mainline operating special items, net | (657) | | | 487 | | | (1,144) | | | nm |
Other | 2,425 | | | 3,860 | | | (1,435) | | | (37.2) | |
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 | $ | 21,094 | | | $ | 32,148 | | | $ | (11,054) | | | (34.4) | |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 4,481 |
| | $ | 3,736 |
| | $ | 745 |
| | 19.9 |
|
Salaries, wages and benefits | | 8,816 |
| | 8,087 |
| | 729 |
| | 9.0 |
|
Maintenance, materials and repairs | | 1,474 |
| | 1,352 |
| | 122 |
| | 9.1 |
|
Other rent and landing fees | | 1,363 |
| | 1,342 |
| | 21 |
| | 1.6 |
|
Aircraft rent | | 892 |
| | 908 |
| | (16 | ) | | (1.7 | ) |
Selling expenses | | 1,094 |
| | 990 |
| | 104 |
| | 10.5 |
|
Depreciation and amortization | | 1,255 |
| | 1,128 |
| | 127 |
| | 11.3 |
|
Special items, net | | 432 |
| | 450 |
| | (18 | ) | | (3.8 | ) |
Other | | 3,575 |
| | 3,391 |
| | 184 |
| | 5.4 |
|
Total mainline operating expenses | | $ | 23,382 |
| | $ | 21,384 |
| | $ | 1,998 |
| | 9.3 |
|
MainlineTotal operating expenses increased $2.0decreased $11.1 billion, or 9.3%34.4%, in the first nine months of 20172020 from the 2016 period. The increase in operating expenses was primarily driven by higher wage rates and fuel costs. Detailed explanations related to the changes in American’s mainline operating expenses are as follows:
Aircraft fuel and related taxes increased 19.9% primarily due to a 21.1% increase in the average price per gallon of fuel to $1.65 in the first nine months of 2017 from $1.362019 due to American's reduced schedule and cost reduction actions as described in the 2016 period, offset in part by a 0.9% decrease in gallons of fuel consumed.
Salaries, wages and benefits increased 9.0% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective mid-third quarter of 2016.
Maintenance, materials and repairs increased 9.1% as compared to the 2016 period primarily due to a contract change impacting the timing of maintenance expenses incurred. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown. Previously this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed.
Selling expenses increased 10.5% primarily due to higher revenues in the first nine months of 2017 as compared to the 2016 period, resulting in higher commissions."Financial Overview" above.
Depreciation and amortization increased 11.3% primarily due to aircraft purchased in connection with American’s fleet renewal program.
Other operating expenses increased 5.4% primarily due to expenses associated with improving our product offerings, customer experience and operational reliability.
Operating Special Items, Net
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | (In millions) |
Merger integration expenses (1) | | $ | 192 |
| | $ | 395 |
|
Fleet restructuring expenses (2) | | 174 |
| | 72 |
|
Mark-to-market adjustments for bankruptcy obligations and other | | 7 |
| | (22 | ) |
Labor contract expenses (3) | | 45 |
| | — |
|
Other operating charges, net | | 14 |
| | 5 |
|
Total mainline operating special items, net | | 432 |
| | 450 |
|
Regional operating special items, net (4) | | 3 |
| | 11 |
|
Total operating special items, net | | $ | 435 |
| | $ | 461 |
|
| |
(1)
| Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance. |
| |
(2)
| Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned. |
| |
(3)
| Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017. |
| |
(4)
| Regional operating special items, net principally related to Merger integration expenses. |
Regional Operating Expenses
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Aircraft fuel and related taxes | | $ | 999 |
| | $ | 801 |
| | $ | 198 |
| | 24.7 |
|
Other | | 3,861 |
| | 3,679 |
| | 182 |
| | 5.0 |
|
Total regional operating expenses | | $ | 4,860 |
| | $ | 4,480 |
| | $ | 380 |
| | 8.5 |
|
Regional operating expenses increased $380$88 million, or 8.5%6.0%, in the first nine months of 20172020 from the 2016 period. The period-over-period increase was primarily due to a $198 million, or 24.7%, increase in fuel costs and a $182 million, or 5.0%, increase in other regional operating expenses. The average price per gallon of fuel increased 21.8% to $1.73 in the first nine months of 20172019 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.
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 | |
(1)PSP Financial Assistance represents recognition of a portion of financial assistance received from $1.42Treasury pursuant to the PSP Agreement. See Note 1 to American's Condensed Consolidated Financial Statements in the 2016 period, on a 2.4% increase in consumption. The increase in other regional operating expenses was primarilyPart I, Item 1B for further information.
(2)Fleet impairment resulted from American's decision to retire certain aircraft earlier than planned driven by increased capacity.the decline in air travel due to COVID-19. Aircraft retired include Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300, Embraer 190, certain Embraer 140 and Bombardier CRJ200 aircraft. See Note 812 to American’s Condensed Consolidated Financial Statements 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 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)Labor contract expenses primarily relate to one-time charges resulting from the ratification of a new contract with the TWU-IAM Association 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 regional expenses.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) |
| 2020 | | 2019 | | | | |
| (In millions, except percentage changes) | | | | | | |
Interest income | $ | 268 | | | $ | 389 | | | $ | (121) | | | (31.1) | |
Interest expense, net | (825) | | | (835) | | | 10 | | | (1.2) | |
Other income, net | 78 | | | 69 | | | 9 | | | 13.2 | |
Total nonoperating expense, net | $ | (479) | | | $ | (377) | | | $ | (102) | | | 26.9 | |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | Percent Increase (Decrease) |
| | 2017 | | 2016 | |
| | (In millions, except percentage changes) |
Interest income | | $ | 158 |
| | $ | 74 |
| | $ | 84 |
| | nm |
|
Interest expense, net | | (738 | ) | | (674 | ) | | (64 | ) | | 9.4 |
|
Other, net | | 8 |
| | (27 | ) | | 35 |
| | nm |
|
Total nonoperating expense, net | | $ | (572 | ) | | $ | (627 | ) | | $ | 55 |
| | (8.8 | ) |
American’s short-term investments in each period consisted of highly liquid investments that provided relatively nominal returns. Interest income increased $84 million principally due to an increase in interest rates, which drove more than a 50 basis point increase in average yieldsdecreased in the first nine months of 2017 as2020 compared to the 2016 period.
first nine months of 2019 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 $64 milliondecreased in the first nine months of 2017 as2020 compared to the 2016 periodfirst nine months of 2019 primarily due to higher outstanding debt as a result of aircraft financings associated with American’s fleet renewal program.
Other nonoperating expense, net in the 2016 period primarily included $36 million of net special charges consistingissuance of debt issuance and extinguishment costs associated with a bond refinancing,lower capitalized interest offset in part by $19 million of foreign currency gains.
Income Taxeslower interest expense on American's variable-rate debt.
In the first nine months of 2017,2020, 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 part of the AAG consolidated income tax return.
In the first nine months of 2020, American recorded an income tax provisionbenefit of $1.0 billion, which was substantially non-cash due to utilization of its NOLs.$1.9 billion. Substantially all of American’s income or loss before income taxes is attributable to the United States. At December 31, 2016, American had approximately $11.3 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.
See Note 45 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, 2017,2020, AAG had approximately $8.3$13.6 billion in total available liquidity and $393$508 million in restricted cash and short-term investments. Additional detail ofregarding 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, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Cash | | $ | 340 |
| | $ | 322 |
| | $ | 328 |
| | $ | 310 |
|
Short-term investments | | 5,428 |
| | 6,037 |
| | 5,425 |
| | 6,034 |
|
Undrawn revolving credit facilities | | 2,500 |
| | 2,425 |
| | 2,500 |
| | 2,425 |
|
Total available liquidity | | $ | 8,268 |
| | $ | 8,784 |
| | $ | 8,253 |
| | $ | 8,769 |
|
Given the actions we have taken in response to COVID-19 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) and projected cash flows from operations.Share Repurchase Programs
Since July 2014, our Board of Directors has approved six share repurchase programs aggregating $11.0 billion of authority. As of September 30, 2017, $677 million remained unused under a repurchase program that expires on December 31, 2018. Share repurchases under our share 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. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.Cash Dividends
During the threenine months ended September 30, 2017,2020, we repurchased 7.76.4 million shares of AAG common stock for $362$145 million at a weighted average cost per share of $46.97. During$22.77, all of which were purchased in the nine months endedfirst 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, 2017,2021. As of September 30, 2020, we repurchased 29.4 millionalso entered into the Treasury Loan Agreement, and, as a result, we will be prohibited from repurchasing shares of AAG common stock for $1.3 billion at a weighted average cost per share of $45.05. Since the inception of our share repurchase programs in July 2014, we have repurchased 257.7 million shares ofand paying dividends on AAG common stock for $10.3 billion at a weighted average cost per share of $40.05.
Cash Dividends
Our Board of Directors declaredthrough the following cash dividends duringdate that is one year after the first nine months of 2017:
|
| | | | | | | | | | | | |
Period | | Per share | | For stockholders of record as of | | Payable on | | Total (millions) |
First Quarter | | $ | 0.10 |
| | February 13, 2017 | | February 27, 2017 | | $ | 51 |
|
Second Quarter | | 0.10 |
| | May 16, 2017 | | May 30, 2017 | | 50 |
|
Third Quarter | | 0.10 |
| | August 14, 2017 | | August 28, 2017 | | 49 |
|
Total | | | | | | | | $ | 150 |
|
In October 2017, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on November 13, 2017, and payable on November 27, 2017.
Any future 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 payment of dividends may be suspended at any time at our discretion.
Sources and Uses of Cash
AAG
Operating Activities
Our net cash provided by operating activities was $4.3 billion and $5.9 billion for the first nine months of 2017 and 2016, respectively, a period-over-period decrease of $1.6 billion. The decrease was primarily due to lower profitability in the first nine months of 2017 driven by higher wage rates and fuel costs, which were offset in part by higher revenues. Additionally, we made a $256 million supplemental contribution to our pension plans in the 2017 period.
Investing Activities
Our net cash used in investing activities was $3.1 billion and $4.6 billion for the first nine months of 2017 and 2016, respectively.
Our principal investing activities in the 2017 period included expenditures of $4.6 billion for property and equipment, primarily 58 aircraft, including 20 Airbus A321 aircraft, 15 Boeing 737-800 aircraft, 12 Embraer 175 aircraft, 10 Boeing 787 Family aircraft and one Boeing 737-8 MAX aircraft, as well as a $203 million equity investment in China Southern Airlines Company Limited (China Southern Airlines). These cash outflows were offset in part by $831 million of net proceeds from the sale of property and equipment, primarily including cash proceeds from aircraft sale-leaseback transactions, and $621 million in net sales of short-term investments.
Our principal investing activities in the 2016 period included expenditures of $4.3 billion for property and equipment, primarily 77 aircraft, including 19 Airbus A321 aircraft, 18 Bombardier CRJ900 aircraft, 18 Embraer 175 aircraft, 15 Boeing 737-800 aircraft, five Boeing 787 Family aircraft and two Boeing 777 aircraft. We also had $491 million in net purchases of short-term investments.
Financing Activities
Our net cash used in financing activities was $1.2 billion and $1.3 billion for the first nine months of 2017 and 2016, respectively.
Our principal financing activities in the 2017 period included net proceeds of $2.2 billion from the issuance of debt, primarily the issuance of $1.3 billion of EETCs and $815 million borrowed in connection with the financing of certain aircraft. These cash inflows were offset in part by $1.8 billion in scheduled debt repayments, $1.4 billion in share repurchases and $150 million in dividend payments.
Our principal financing activities in the 2016 period included net proceeds of $5.4 billion from the issuance of debt, primarily including the issuance of $2.1 billion of EETCs, $1.0 billionsecured loan provided under the 2016 TermTreasury Loan Facility, an $844 million issuance of special facility revenue refunding bonds related to JFK and an additional $1.4 billion borrowed in connection with the financing of certain aircraft. These cash inflows were offset in part by $3.9 billion in share repurchases, $2.5 billion in debt repayments, primarily including the repayment of $588 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B-2 and the refunding of approximately $1.0 billion of special facility revenue bonds related to JFK, and $172 million in dividend payments.Agreement is fully repaid.
American
Operating Activities
American’s net cash provided by operating activities was $2.7 billion and $1.8 billion for the first nine months of 2017 and 2016, respectively, a period-over-period increase of $969 million. We have the ability to move funds freely between our subsidiaries to support our cash requirements. The increase in operating cash flows during the first nine months of 2017 as compared to the 2016 period was primarily due to a decrease in intercompany cash transfers from American to AAG. This increase in operating cash flows was offset in part by lower profitability in the first nine months of 2017 driven by higher wage rates and fuel costs, which were offset in part by higher revenues. Additionally, American made a $256 million supplemental contribution to its pension plans in the 2017 period.
Investing Activities
American’s net cash used in investing activities was $3.0 billion and $4.6 billion for the first nine months of 2017 and 2016, respectively.
American’s principal investing activities in the 2017 period included expenditures of $4.5 billion for property and equipment, primarily 58 aircraft, including 20 Airbus A321 aircraft, 15 Boeing 737-800 aircraft, 12 Embraer 175 aircraft, 10 Boeing 787 Family aircraft and one Boeing 737-8 MAX aircraft, as well as a $203 million equity investment in China Southern Airlines. These cash outflows were offset in part by $816 million of net proceeds from the sale of property and equipment, primarily including cash proceeds from aircraft sale-leaseback transactions, and $621 million in net sales of short-term investments.
American’s principal investing activities in the 2016 period included expenditures of $4.2 billion for property and equipment, primarily 77 aircraft, including 19 Airbus A321 aircraft, 18 Bombardier CRJ900 aircraft, 18 Embraer 175 aircraft, 15 Boeing
737-800 aircraft, five Boeing 787 Family aircraft and two Boeing 777 aircraft. American also had $491 million in net purchases of short-term investments.
Financing Activities
American’s net cash provided by financing activities was $302 million and $2.8 billion for the first nine months of 2017 and 2016, respectively.
American’s principal financing activities in the 2017 period included net proceeds of $2.2 billion from the issuance of debt, primarily the issuance of $1.3 billion of EETCs and $815 million borrowed in connection with the financing of certain aircraft. These cash inflows were offset in part by $1.8 billion in scheduled debt repayments.
American’s principal financing activities in the 2016 period included net proceeds of $5.4 billion from the issuance of debt, primarily including the issuance of $2.1 billion of EETCs, $1.0 billion provided under the 2016 Term Loan Facility, an $844 million issuance of special facility revenue refunding bonds related to JFK and an additional $1.4 billion borrowed in connection with the financing of certain aircraft. These cash inflows were offset in part by $2.5 billion in debt repayments, primarily including the repayment of $588 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B-2 and the refunding of approximately $1.0 billion of special facility revenue bonds related to JFK.
Commitments
Significant Indebtedness
As of September 30, 2017, AAG and American had $24.9 billion and $23.1 billion, respectively, including current maturities of $2.5 billion and $2.0 billion, respectively, in long-term debt and capital leases. During the nine months ended September 30, 2017, there have been no material changes in our significant indebtedness as discussed in our 2016 Form 10-K, except as discussed in Note 5 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A and Note 3 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B.
Collateral RelatedCertain Covenants
Certain of our debt financing agreements (including our secured notes, term loans, revolving credit facilities and spare engine EETCs) contain loan to value ratio covenants and require us to appraise the related collateral annually.annually or semiannually. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold or 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 collateral)or investment securities), or pay down such financing, in whole or in part. As of September 30, 2017,the most recent applicable measurement dates, we were in compliance with each of the foregoing collateral coverage teststests. Additionally, 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 our Treasury Term Loan Facility contains a debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in mandatory prepayment of the Treasury Term Loan Facility.
Sources and Uses of Cash
AAG
Operating Activities
Our net cash used in operating activities was $3.7 billion for the 2013 Credit Facilities,first nine months of 2020 as compared to net cash provided by operating activities of $3.2 billion for 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 demand 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, we received cash proceeds of $4.2 billion in the first nine months of 2020 associated with the PSP Financial Assistance. In the first nine months of 2020, we also recorded a $1.4 billion special charge for salary and medical costs associated with certain team members who opted in to 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. We expect cash payments under these programs of approximately $200 million in the fourth quarter of 2020 and approximately $600 million in 2021 with the remaining payments in 2022 and beyond.
Investing Activities
Our net cash used in investing activities was $6.0 billion and $2.9 billion for the first nine months of 2020 and 2019, respectively.
Our principal investing activities in the first nine months of 2020 included $4.5 billion in net purchases of short-term investments, expenditures of $1.8 billion for property and equipment, including 10 Airbus 321neo 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. 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 $9.7 billion for the first nine months of 2020 as compared to net cash used in financing activities of $296 million for the first nine months of 2019.
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 Credit Facilities,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 PSP 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 FacilitiesFacility, $550 million under the Treasury Term Loan Facility, $500 million in aggregate principal amount of 3.75% unsecured senior notes due 2025 and the December 2016 Credit Facilities$360 million issuance of special facility revenue bonds 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 most recent measurement dates.$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 of 2019 included $2.8 billion in debt repayments, consisting of $1.7 billion in scheduled debt repayments and the prepayment of $1.1 billion of secured loans. We also had $825 million in share repurchases and $135 million in dividend payments. These cash outflows were offset in part by $3.6 billion in net proceeds from the issuance of debt, including the issuance of $750 million aggregate principal amount of 5.000% senior notes and the financing of certain aircraft and spare engines.
American
Operating Activities
American’s net cash used in operating activities was $90 million for the first nine months of 2020 as compared to net cash provided by operating activities of $2.9 billion for the first nine months of 2019. The $3.0 billion period-over-period decrease in operating cash flows was primarily due 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 to American's reduced schedule and cost reduction actions. Additionally, American received cash proceeds of $3.7 billion in the first nine months of 2020 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 to 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. American expects cash payments under these programs of approximately $200 million in the fourth quarter of 2020 and approximately $600 million in 2021 with the remaining payments in 2022 and beyond.
Investing Activities
American’s net cash used in investing activities was $6.0 billion and $2.8 billion for the first nine months of 2020 and 2019, respectively.
American’s principal investing activities in the first nine months of 2020 included $4.5 billion in net purchases of short-term investments, expenditures of $1.8 billion for property and equipment, including 10 Airbus 321neo 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. 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 $6.1 billion for the first nine months of 2020 as compared to net cash used in financing activities of $76 million for the first nine months of 2019.
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 RatingsFacility, $550 million under the Treasury Term Loan Facility and the $360 million issuance of special facility revenue bonds. 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.
The following table details AAGAmerican’s principal financing activities in the first nine months of 2019 included $2.8 billion in debt repayments, consisting of $1.7 billion in scheduled debt repayments and American’s credit ratings asthe prepayment of $1.1 billion of secured loans, offset in part by $2.8 billion in net proceeds from the issuance of debt for the financing of certain aircraft and spare engines.
Commitments
Significant Indebtedness
As of September 30, 2017:
|
| |
| Current Rating |
S&P Local Issuer Credit Rating | BB- |
Fitch Issuer Default Credit Rating | BB- |
Moody’s Corporate Family Rating (1)
| Ba3 |
| |
(1)
| The credit agency does not rate this category for American. |
A decrease2020, AAG had $33.0 billion in long-term debt, including current maturities of $2.6 billion. As of September 30, 2020, American had $28.9 billion in long-term debt, including current maturities of $2.6 billion. All material changes in our credit ratings could causesignificant indebtedness since our borrowing costs2019 Form 10-K are discussed in Note 6 to increase, which would increase our interest expenseAAG’s Condensed Consolidated Financial Statements in Part I, Item 1A and could affect our net income, and our credit ratings could adversely affect our abilityNote 4 to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a declineAmerican’s Condensed Consolidated Financial Statements in our business and in our ability to satisfy our obligations under our indebtedness.
Part I, Item 1B.
Aircraft and Engine Purchase Commitments
As of September 30, 2017,2020, we had definitive purchase agreements with Airbus, Boeing and Embraer for the acquisition of the following mainline and regional aircraft:aircraft (1):
| | | | Remainder of 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 and Thereafter | | Total | | Remainder of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and Thereafter | | Total |
Airbus | | | | | | | | | | | | | | | Airbus | | | | | | | | | | | | | |
A320neo Family | | — |
| | — |
| | 25 |
| | 25 |
| | 25 |
| | 25 |
| | 100 |
| |
A350 XWB | | — |
| | — |
| | — |
| | 2 |
| | 5 |
| | 15 |
| | 22 |
| |
A320 Family (2) | | A320 Family (2) | 6 | | | 16 | | | 26 | | | 8 | | | 22 | | | 20 | | | 98 | |
Boeing | | | | | | | | | | | | | | | Boeing | |
737-800 | | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| |
737 MAX Family | | 3 |
| | 16 |
| | 20 |
| | 20 |
| | 20 |
| | 20 |
| | 99 |
| |
737 MAX Family (3) | | 737 MAX Family (3) | 8 | | | 18 | | | 10 | | | — | | | — | | | 40 | | | 76 | |
787 Family | | 3 |
| | 6 |
| | 2 |
| | — |
| | — |
| | — |
| | 11 |
| 787 Family | 7 | | | 13 | | | — | | | 6 | | | 6 | | | 13 | | | 45 | |
Embraer | | | | | | | | | | | | | | | Embraer | |
ERJ175 (1) | | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| |
E175 | | E175 | 6 | | | 5 | | | — | | | — | | | — | | | — | | | 11 | |
Total | | 15 |
| | 22 |
| | 47 |
| | 47 |
| | 50 |
| | 60 |
| | 241 |
| Total | 27 | | | 52 | | | 36 | | | 14 | | | 28 | | | 73 | | | 230 | |
(1)Delivery schedule represents our best estimate as of the date of this report. Actual delivery dates are subject to change based on many potential factors including production delays by the manufacturer.
| |
(1)
(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. | These aircraft may be operated by wholly-owned regional subsidiaries which would operate the aircraft under capacity purchase arrangements. |
We also have agreements for 4230 spare engines to be delivered in 20172020 and beyond.
As of September 30, 2017, we hadWe currently have financing commitments in place for all of the aircraft currently on order and scheduled to be delivered through April 2018. We do not2020. Additionally, we have financing commitments in place for the following44 aircraft currently on order and scheduled to be delivered through the end of 2018: elevenin 2021: 16 Airbus A320 Family aircraft, 13 Boeing 787 Family aircraft, 10 Boeing 737 MAX Family aircraft and five Embraer 175 aircraft. 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 787 Family aircraft. In addition, we737 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 substantially allthe remaining eight Boeing 737 MAX Family aircraft currently on order and scheduled to be delivered in 2019 and beyond.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 20162019 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, 20172020 (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 | | | | | | | | | | | | |
| Remainder of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and Thereafter | | Total |
American | | | | | | | | | | | | | |
Long-term debt: | | | | | | | | | | | | | |
Principal amount (a), (c) | $ | 614 | | | $ | 2,609 | | | $ | 1,653 | | | $ | 4,142 | | | $ | 4,381 | | | $ | 15,545 | | | $ | 28,944 | |
Interest obligations (b), (c) | 191 | | | 1,156 | | | 1,057 | | | 985 | | | 885 | | | 1,513 | | | 5,787 | |
Finance lease obligations | 36 | | | 128 | | | 132 | | | 110 | | | 116 | | | 171 | | | 693 | |
Aircraft and engine purchase commitments (d) | 441 | | | 866 | | | 1,669 | | | 1,518 | | | 2,531 | | | 4,768 | | | 11,793 | |
Operating lease commitments | 539 | | | 1,974 | | | 1,828 | | | 1,651 | | | 1,270 | | | 4,710 | | | 11,972 | |
Regional capacity purchase agreements (e) | 228 | | | 1,192 | | | 1,555 | | | 1,570 | | | 1,582 | | | 4,743 | | | 10,870 | |
Minimum pension obligations (f) | 130 | | | 564 | | | 607 | | | 618 | | | 654 | | | 413 | | | 2,986 | |
Retiree medical and other postretirement benefits | 6 | | | 18 | | | 18 | | | 17 | | | 29 | | | 265 | | | 353 | |
Other purchase obligations (g) | 674 | | | 2,134 | | | 1,223 | | | 895 | | | 260 | | | 1,104 | | | 6,290 | |
Total American Contractual Obligations | 2,859 | | | 10,641 | | | 9,742 | | | 11,506 | | | 11,708 | | | 33,232 | | | 79,688 | |
| | | | | | | | | | | | | |
AAG Parent and Other AAG Subsidiaries | | | | | | | | | | | | | |
Long-term debt: | | | | | | | | | | | | | |
Principal amount (a) | — | | | 2 | | | 752 | | | 2 | | | 2 | | | 3,281 | | | 4,039 | |
Interest obligations (b) | 20 | | | 142 | | | 122 | | | 103 | | | 102 | | | 366 | | | 855 | |
Operating lease commitments | 3 | | | 14 | | | 13 | | | 10 | | | 7 | | | 20 | | | 67 | |
Minimum pension obligations (f) | 3 | | | 4 | | | 4 | | | 4 | | | 5 | | | 13 | | | 33 | |
Total AAG Contractual Obligations | $ | 2,885 | | | $ | 10,803 | | | $ | 10,633 | | | $ | 11,625 | | | $ | 11,824 | | | $ | 36,912 | | | $ | 84,682 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Remainder of 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 and Thereafter | | Total |
American | | | | | | | | | | | | | | |
Debt and capital lease obligations (1) (3) | | $ | 386 |
| | $ | 2,080 |
| | $ | 2,115 |
| | $ | 3,524 |
| | $ | 2,790 |
| | $ | 12,247 |
| | $ | 23,142 |
|
Interest obligations (2) (3) | | 226 |
| | 936 |
| | 859 |
| | 751 |
| | 628 |
| | 1,847 |
| | 5,247 |
|
Aircraft and engine purchase commitments (4) | | 861 |
| | 1,691 |
| | 2,669 |
| | 2,790 |
| | 2,909 |
| | 3,688 |
| | 14,608 |
|
Operating lease commitments (5) | | 521 |
| | 2,155 |
| | 1,933 |
| | 1,745 |
| | 1,303 |
| | 4,295 |
| | 11,952 |
|
Regional capacity purchase agreements (6) | | 397 |
| | 1,447 |
| | 1,302 |
| | 1,054 |
| | 857 |
| | 2,742 |
| | 7,799 |
|
Minimum pension obligations (7) | | — |
| | 62 |
| | 1,136 |
| | 800 |
| | 793 |
| | 3,082 |
| | 5,873 |
|
Retiree medical and other postretirement benefits and other obligations (8) | | 410 |
| | 1,817 |
| | 1,266 |
| | 825 |
| | 933 |
| | 321 |
| | 5,572 |
|
Total American Contractual Obligations | | $ | 2,801 |
| | $ | 10,188 |
| | $ | 11,280 |
| | $ | 11,489 |
| | $ | 10,213 |
| | $ | 28,222 |
| | $ | 74,193 |
|
| | | | | | | | | | | | | | |
AAG Parent and Other AAG Subsidiaries | | | | | | | | | | | | | | |
Debt and capital lease obligations (1) | | $ | — |
| | $ | 500 |
| | $ | 750 |
| | $ | 506 |
| | $ | 2 |
| | $ | 22 |
| | $ | 1,780 |
|
Interest obligations (2) | | 36 |
| | 82 |
| | 67 |
| | 14 |
| | 2 |
| | 8 |
| | 209 |
|
Operating lease commitments | | 5 |
| | 17 |
| | 9 |
| | 7 |
| | 9 |
| | 16 |
| | 63 |
|
Total AAG Contractual Obligations | | $ | 2,842 |
| | $ | 10,787 |
| | $ | 12,106 |
| | $ | 12,016 |
| | $ | 10,226 |
| | $ | 28,268 |
| | $ | 76,245 |
|
| |
(1)
| Amounts represent contractual amounts due. Excludes $230 million and $8 million of unamortized debt discount, premium and issuance costs as of September 30, 2017 for American and AAG Parent, respectively. For additional information, see Note 5 and Note 3 to AAG’s and American’s Condensed Consolidated Financial Statements in Part I, Items 1A and 1B. |
| |
(2)
| For variable-rate debt, future interest obligations are estimated using the current forward rates at September 30, 2017. |
| |
(3)
| Includes $11.4 billion of future principal payments and $2.7 billion of future interest payments, respectively, as of September 30, 2017, related to EETC notes associated with mortgage financings for the purchase of certain aircraft. |
| |
(4)
| See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Liquidity and Capital Resources” for additional information about these obligations.
|
| |
(5)
| Includes $1.2 billion of future minimum lease payments related to EETC leverage leased financings of certain aircraft as of September 30, 2017. |
| |
(6)
| 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. |
| |
(7)
| Includes minimum pension contributions based on actuarially determined estimates. |
| |
(8)
| Includes retiree medical and other postretirement benefit payments and other minimum purchase obligations. |
(a)Amounts represent contractual amounts due. Excludes $337 million and $443 million of unamortized debt discount, premium and issuance costs as of September 30, 2020 for American and AAG Parent, respectively. For additional information, see Note 6 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.
(c)Includes $11.1 billion of future principal payments and $2.0 billion of future interest payments as of September 30, 2020, 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; however, the actual delivery schedule may differ from the table above, potentially materially. Additionally, the amounts in the table exclude 20 787-8 aircraft to be delivered in 2020 and 2021 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)Includes minimum pension contributions based on actuarially determined estimates as of December 31, 2019 and is 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 accruing 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 pay or otherwise satisfy on or prior to December 31, 2020.
(g)Includes purchase commitments for aircraft fuel, construction projects, flight equipment maintenance 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 COVID-19 as well as our significant financial commitments related to, among other things, new aircraft,flight equipment, the servicing and amortization of existing debt and equipment leasing arrangements, and future 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 contractual 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 or(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, or 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 6 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, or 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.
Our Board of Directors, has from time to time authorized programs to repurchase shares of our common stock, and may authorize additional share repurchase programs in the future.
Critical Accounting Policies and Estimates
In the third quarter of 2017, there were no changes toFor information regarding our critical accounting policies and estimates, from those disclosedsee disclosures in the Consolidated Financial Statements and accompanying notes contained in our 20162019 Form 10-K.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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from2016-13: 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
This ASU simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with Customers (Topic 606).”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 2014-09 completesamends the joint effortdiluted earnings per share calculation for convertible instruments by requiring the FASBuse 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 International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). Subsequently, the FASB has issued several additional ASUs to clarify the implementation. The new revenue standard applies to all companies that enter into contracts with customers to transfer goods or services andit is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. We2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020. This ASU is applicable to our 6.50% convertible senior notes due 2025, and we are assessing the impact the adoption of this ASU will adopt the new revenue standard effective January 1, 2018. Entities have the choice to apply the new revenue standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new revenue standard at the date of initial application and not adjusting comparative information. We will adopt the new revenue standard using the full retrospective method.
We are in the process of finalizing how the application of the new revenue standard will impacton our condensed consolidated financial statements. We currently expect that the new revenue standard will materially impact our liability for outstanding mileage credits earned by AAdvantage loyalty program members. We currently use the incremental cost method to account for this portion of our loyalty program liability, which values these mileage credits based on the estimated incremental cost of carrying one additional passenger. The new revenue standard will require us to change our policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater under the relative selling price approach than the value attributed to these mileage credits under the incremental cost method. The new revenue standard will also require us to reclassify certain ancillary fees to passenger revenue, which are currently included within other operating revenue.
We currently estimate that upon adoption of the new revenue standard as of January 1, 2018, our liability for outstanding mileage credits will increase by approximately $5.5 billion, offset in part by a $2.0 billion increase in our deferred tax asset, resulting in a net $3.5 billion charge to retained earnings. Additionally, after applying the new revenue standard, our 2017 passenger revenue and pre-tax income is currently estimated to increase by approximately $300 million. Finally, approximately $2.5 billion annually of ancillary revenues presently included within other revenue will be reclassified to passenger revenue. This reclassification will have no impact on total operating revenues. The foregoing estimates are subject to change.
See Note 1 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A and Note 1 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B for further information on recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AAGAAG'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 20162019 Form 10-K except as updated below.
Aircraft Fuel
As of September 30, 2017,2020, 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. 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. Our 2017Although 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 2020 forecasted mainline and regional fuel consumption, is presently approximately 4.4 billion gallons, and based on this forecast,we estimate that a one cent per gallon increase in aviationthe price of aircraft fuel price would result in a $44 million increase inour 2020 annual expense.fuel expense by $23 million.
Foreign Currency
We are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses.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, 20172020 variable-rate debt and short-term investments balances, annual interest expense on variable-ratevariable rate debt would increase by approximately $96$130 million and annual interest income on short-term investments would increase by approximately $59$80 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. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. 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 replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by Treasury securities, we cannot currently predict whether 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, we had $12.8 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.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, 20172020 was performed under the supervision and with the participation of AAG’s and American’s management, including AAG’s and American’s Chief Executive Officer (CEO)CEO and Chief Financial Officer (CFO).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, 2017.
2020 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
On December 9, 2013, AAG acquired US Airways Group and its subsidiaries. We are still in the process of integrating certain processes, technology and operations for the post-Merger combined company, and we will continue to evaluate the impact of any related changes to our internal control over financial reporting. For the quarter ended September 30, 2017,2020, there hashave been no changechanges in AAG’s or American’s internal control over financial reporting that hashave materially affected, or isare 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”reasonable assurance level as of September 30, 2017.
2020.
PART II: OTHER INFORMATION
ITEM 1. 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 Merger.acquisition of US Airways Group, Inc. (US Airways Group) by AMR (the Merger).
Pursuant to rulings of the Bankruptcy Court, the Plan established thea disputed claims reserve (the Disputed Claims ReserveReserve) to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. As of September 30, 2017, there were approximately 24.5 millionThe shares of AAG common stock remaining inissued to the Disputed Claims Reserve.Reserve 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 will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. However, weReserve. 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. To the extent thatIf 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.
There is also pending instockholders and former convertible noteholders treated as stockholders under the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American. On April 18, 2014,Plan. In February 2020, 2.2 million shares of AAG common stock were distributed from the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non-union employees, concluding that their benefits were not vested and could be terminated. The summary judgment motion was denied with respect to all other retirees. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees. Our financial statements presently reflect these retirement programs withoutDisputed Claims Reserve. After giving effect to any modification or terminationthis distribution, as of benefits that may ultimately be implemented based uponSeptember 30, 2020, the outcomeDisputed Claims Reserve held 4.8 million shares of this proceeding.AAG common stock.
DOJPrivate Party Antitrust Civil Investigative Demand. In June 2015, we received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from us, and other airlines have announced that they have received similar requests. We are cooperating fully with the DOJ investigation. In addition, subsequentAction Related to announcement of the delivery of CIDs by the DOJ, we,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, have beenwere named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits have beenwere consolidated in the Federal District Court for the District of Columbia.Columbia (the DC Court). On October 28, 2016,June 15, 2018, we reached a settlement agreement with the Court denied a motion byplaintiffs in the airline defendantsamount of $45 million to dismissresolve all class claims in the class actions. BothU.S. lawsuits. That settlement was approved by the DOJ investigationDC 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 these lawsuits are in their relatively early stages and we intend to vigorously defend these matters vigorously.against them.
Private Party Antitrust Action Related to the Merger. On July 2,August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc.,AMR Corporation, et al., was filed in the United States District Court for the Northern District of California.Bankruptcy Court. The complaint named as defendants US Airways Group, and 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 August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On May 12, 2017, defendants filed aAugust 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment. On June 23, 2017, plaintiffs filed an opposition to defendants’ motionjudgment, and fully denied plaintiffs' cross-motion for summary judgment. BriefingThe 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 parties’ respective motions concluded on September 1, 2017; a hearing date has not yet been set.Bankruptcy Court's decision. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, we received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating fully with the DOJ with regard to its investigation.
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”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 RelatingThe 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 AAGcontain the spread of this pandemic, has resulted in a severe decline in demand for air travel, which has adversely affected our business, operations and Industry-Related Risksfinancial condition to an unprecedented extent. Measures ranging from travel restrictions, “shelter in place” 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 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, 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, airport facilities expense, salaries and benefits expense, and other volume-related expense reductions, including fuel). Nonetheless, we incurred significant negative operating cash flow in the first nine months of 2020, we continue to do so, and we expect to continue to do so until there is a significant recovery in demand for air travel. The duration and severity of the COVID-19 pandemic remain uncertain, and there can be no assurance that these actions 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. We received approximately $6.0 billion in financial assistance from Treasury through the Payroll Support Program under the CARES Act as of September 30, 2020. In connection with the financial assistance we have received under the Payroll Support Program, we are required to comply with certain provisions of the CARES Act, including the requirement that funds provided pursuant to the Payroll Support Program be used exclusively for the continuation of payment of employee wages, salaries and benefits; the requirement against involuntary furloughs and reductions in employee pay rates and benefits through September 30, 2020; the requirement that certain levels of commercial air service be maintained; provisions prohibiting the repurchase of AAG’s common stock and the payment of common stock dividends through September 30, 2021; and restrictions on the payment of certain executive compensation until March 24, 2022. Additionally, under the Payroll Support Program, we and certain of our subsidiaries are 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 to pursue 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 COVID-19 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, which could result in a material adverse effect on our business, operating results and financial condition.
The full extent of the ongoing impact of COVID-19 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, the duration and spread of COVID-19, including any recurrence of the pandemic, and related travel advisories and restrictions, the impact of COVID-19 on overall long-term demand for air travel, the impact on demand and capacity which could result from government mandates on air service 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 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, if our employees are unable 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" health orders or similar restrictions, the impact of COVID-19 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.
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 revenues.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 to 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-pandemic levels, if at all. Accordingly, we cannot predict the ultimate impact of COVID-19 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” below.dynamic.”
We will need to obtain sufficient financing or other capital to operate successfully.
Our business is very dependent onplan contemplates continued significant investments related to modernizing our fleet, improving the priceexperience of our customers 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 impactupdating our facilities. Significant capital resources will be required to execute this plan. We estimate that, based on 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. Jet fuel market prices 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 sufficiently to offset fuel price increases. Similarly, we cannot predict the effect or the actions of our competitors if the current low fuel prices remain in place for a significant period of time or fuel prices decrease in the future.
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, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, 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, additional fuel price volatility and cost increases in the future.
Our aviation fuel purchase contracts generally do not provide meaningful price protection against increases in fuel costs. Prior to the closing of the Merger, we sought to manage the risk of fuel price increases by using derivative contracts. 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. Accordingly,commitments as of September 30, 2017,2020, our planned aggregate expenditures for aircraft purchase commitments and certain engines on a consolidated basis for calendar years 2020-2024 would be approximately $8.0 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 revenue we did not have any fuel hedging contracts outstanding. As such,experienced as a result of
COVID-19. 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 assumingcontemplated in response to the impact of COVID-19; our non-investment grade credit rating; 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 do not enter into any future transactionshave undertaken since the beginning of 2020 and may be further reduced as we continue to hedge our fuel consumption,seek significant additional liquidity; and the effect the COVID-19 pandemic has had on the global economy generally and the air transportation industry in particular. Accordingly, we will continueneed substantial financing or other capital resources to finance such aircraft and engines and meet such other liquidity needs. If we are unable to arrange such 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 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 fully exposedavailable to fluctuations in fuel prices.
If in the future we enter into derivative contracts to hedge our fuel consumption, thereus, or may be available only on onerous terms and conditions. There can be no assurance that at any given time, we will be successful in obtaining financing or other needed sources of capital to operate successfully. An inability to obtain necessary financing on acceptable terms would have derivatives in place to provide any particulara material adverse impact on our business, results of operations and financial condition.
Our high level of protection against increased fuel costs or that our counterparties will be able to perform under our derivative contracts. To the extent we use derivative contracts that have the potential to create an obligation to pay upon settlement if prices decline significantly, such derivative contractsdebt and other obligations may limit our ability to benefitfund 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 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 fuel costsrelative 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 will be necessary to continue to
obtain a significant amount of additional financing in the future. Also,near term from a rapid declinevariety 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 projected pricenear 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 fuel atsignificant 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, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the Payroll Support Program be used exclusively for the continuation of payment of employee wages, salaries and benefits; the requirement 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; provisions prohibiting the repurchase of AAG common stock and the payment of common stock dividends through September 30, 2021; 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 time when we
have fuel hedging contractsresult, 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. Additionally, under the Payroll Support Program 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 and any additional financings we may be required to undertake as a result of the impact of COVID-19, could also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business, and could materially adversely impactaffect 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 liquidity, because hedge counterparties could require that we post collateralinterest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the formLondon 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 cashLIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or lettersrates 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 replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of credit.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 – “Aircraft Fuel.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, we had $12.8 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.
The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect our business.
We believe that our future success will depend in large part on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Among other things, the CARES Act imposes 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. Such restrictions, over time, will likely result in lower executive compensation in the airline industry than is prevailing in other industries which may present 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 or have repaid their Treasury loans prior to us. Any inability to 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 air carrier.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-termnear term survival rather thanat the expense of long-term viability.
Low-cost carriers including(including so-called ultra-low-cost carriers,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, and 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 couldare expected to continue to have an impact on our revenues and overall performance. For example, as a result of divestitures completed in connection with gaining regulatory approval for the Merger, low-fare, low-cost carriers have gained additional access in a number of markets, including Ronald Reagan Washington National Airport (DCA), a slot-controlled airport. In addition, weWe and several other large network carriers have announced “basic economy”implemented “Basic Economy” fares designed to more effectively compete against low-cost carriers and, but we cannot predict whether these initiatives will be successful or the competitive reaction of thesuccessful. While historically these carriers have provided competition in domestic markets, we have recently experienced new competition from low-cost carriers.carriers on international routes, including low-cost airlines executing international long-haul expansion strategies. The actions of theexisting or future low-cost carriers, including those described above, could have a material adverse effect on our operations and financial performance.
Our presence in international marketsWe 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 not as extensive as that ofcomprehensive, compared to some of our competitors. 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 includingin the Gulf region. These carriers basedhave 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 three largest of which weultimate 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. 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 such as we have recently experienced in Brazil and Venezuela, when any foreign countriescountry we serve suffersuffers adverse local economic conditions.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 an increasinga substantial number of countries around the world, provide international airlines with open access to U.S. markets.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.
We are party to antitrust-immunized cooperation agreements with British Airways, Iberia, Finnair, Royal Jordanian, Japan Airlines, LAN Airlines and LAN Peru. As part of the antitrust-immunized relationships, we have alsoAmerican has established a transatlantic joint business agreements (JBAs)agreement (JBA) with British Airways, Iberia and Finnair, and separatelya transpacific JBA with Japan Airlines. In October 2017, American Airlines and its transatlantic partners executed an amendeda JBA relating to Australia and restated JBA which, among other things, extends the term of the agreement. Also, we had previously signed a revised JBANew Zealand with Qantas Airways, and applied foreach of which has been granted antitrust immunity. The transatlantic JBA relationship benefits from a grant of antitrust immunity withfrom the U.S. Department of Transportation (DOT) for the revised relationship, but we withdrew that application in November 2016 after itand was tentatively deniedreviewed by the DOT.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 intendcontinue to filefully 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 newresult 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 this year,to add Aer Lingus, which if granted, would allow usis owned by the parent company of British Airways and Iberia, to expand that relationship further. In addition, we have signed JBAs with certain air carriers of the LATAM Airlines Group and have applied for approval in the relevant jurisdictions affected by such agreements, which applications have been approved in Brazil, Colombia and Uruguay, but are still pending before other relevant authorities, including the DOT and in Chile.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 suchany of the foregoing arrangements or any other arrangements that may ultimately be implemented.
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 result in lowerdecrease our overall market share and revenues for us.revenues. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.
Ongoing data security requirementsAdditionally, our AAdvantage loyalty program, which is an important element of our sales and obligationsmarketing 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 increase our costs,be volatile and any significant data security incident could disrupt our operations and harm our reputation,fluctuate due to seasonality.
Our business, results of operations and financial condition.condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:
•actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, 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 States 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, an outbreak of a contagious disease such as 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, 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 requiresis very dependent on the appropriateprice and secure utilizationavailability of customer, employee, business partner and other sensitive information, and confidenceaircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the networkssupply of aircraft fuel could have a significant negative impact on consumer demand, our operating results and systems that allow usliquidity.
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 operate. We cannot be certainhighly 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 will notmay be the target of attacks onable to increase our networks and intrusions intofares, 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 data, particularly given recent advances in technical capabilities, and increased financial and political motivations to carry out cyber-attacks on physical systems, gain unauthorized access to information, and make information unavailable for use through, for example, ransomware or denial-of-service attacks, and otherwise exploit new and existing vulnerabilities in our infrastructure. The risk of a data security incident or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Furthermore,competitors in response to these threats there has been heightened legislative and regulatory focus on attacks on critical infrastructures, including thosechanges in fuel prices.
Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the transportation sector, and on data securityfuture availability, price volatility or cost of aircraft fuel. Natural disasters (including hurricanes or similar events in the U.S. Southeast and abroad (particularlyon 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 European Union (EU)), including requirements for varying levels of data subject notificationcost 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 eventfuture. 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 data security incident.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.
In addition, manyOur 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 commercial partners, including credit card companies,future fuel needs remain unclear due to uncertainties regarding air travel demand. Accordingly, as of September 30, 2020, we did not have imposed data security standardsany 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 we must meet. In particular,it will remain so and any increase in fuel prices, coupled with the severe reduction in demand we are required byexperiencing, during 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 data security incident or our failure to comply with applicable U.S. or foreign data security regulations or other data security standards may impact our brand and expose us to litigation and regulatory enforcement actions, resulting in fines, sanctions or other penalties. Such actions could further harm our reputation, adversely impact our relationship with our customers, employees, and stockholders, result in material financial impact, and disrupt business operations. Failure to appropriately address these issues could also give rise to similar legal risks and damages.
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 causeCOVID-19 pandemic will materially affect 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, and substantial non-cancelable obligations under aircraft and related spare engine purchase agreements. Moreover, currently a substantial portion of our assets are pledged to secure our indebtedness. Our substantial indebtedness and other obligations could have important consequences. For example, they:
may make it more difficult for us to satisfy our obligations under our indebtedness;
may 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 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;
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;
contain restrictive covenants that could:
limit our ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends;
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; and
result in an event of default under our indebtedness.
Further, a substantial portion of our indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate for deposits of U.S. dollars (LIBOR). LIBOR tends to fluctuate based on general interest rates, rates set by the 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 these interest rates 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.adverse manner. See also the discussion of interest rate risk in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk –“Interest.Aircraft Fuel.”
These obligations 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.
We will need to obtain sufficient financing or other capital to operate successfully.
Our business plan contemplates significant investments in modernizing our fleet. Significant capital resources will be required to execute this plan. We estimate that, based on our commitments as of September 30, 2017, our planned aggregate expenditures for aircraft purchase commitments and certain engines on a consolidated basis for calendar years 2017-2021 would be approximately $10.9 billion. Accordingly, we will need substantial financing or other capital resources to finance such aircraft. If we are unable to arrange financing for such aircraft 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 or may seek to negotiate deferrals for such aircraft with the aircraft manufacturers. Depending on numerous factors, 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 at the time we seek 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. An inability to obtain necessary financing on acceptable terms would have a material adverse impact on our business, results of operations and financial condition.
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. Currently, our minimum funding obligation for our pension plans is subject to favorable temporary funding rules that are scheduled to expire at the end of 2017. Our minimum pension funding obligations are likely to increase materially beginning in 2019, when we will be required to make contributions relating to the 2018 fiscal year. In addition, we may have significant obligations for other postretirement benefits, the ultimate amount of which depends on, among other things, the outcome of an adversary proceeding related to retiree medical and other postretirement benefits and life insurance obligations filed in the Chapter 11 Cases.
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 processing companies, under certain conditions (including, with respect to certain agreements, the failure of American 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. We are not currently required 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. An increase in the current holdbacks, up to and including 100% of relevant advanced ticket sales, could 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.
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.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 Labor Relations” in our 20162019 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 athis “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, slow-downs, sick-outs or other similar activity, against us. Nonetheless, there is a risk that disgruntled 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 20162019 Form 10-K.
The inability to maintain
As of December 31, 2019, approximately 85% of our employees were represented for collective bargaining purposes by labor costs at competitive levels would harm our financial performance.
unions. Currently, we believe our labor costs are 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 someseveral important new labor agreements now and other agreements mayare 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,negotiations.
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 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.
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 the employee profit sharing program we instituted effective January 1, 2016movements 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 the mid-contract adjustment we providedexecutives, agents or other third parties. Damage to our flight attendantsreputation or brand image or loss of customer confidence in our services could adversely affect our business and pilotsfinancial 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 2017. Asparticular airline travel, and these negative perceptions could continue even after the pandemic subsides. Actual or perceived risk of December 31, 2016, approximately 85% ofinfection on our employees were represented for collective bargaining purposes by labor unions. Some of our unions have broughtflights has had, and may continue to bring grievances to binding arbitration, including those related to wages. Unions may also bring court actions and may seek to compel us to engage in bargaining processes where we believe we have no such obligation. If successful, there is a risk these judicial or arbitral avenues could create material additional costs that we did not anticipate.
Interruptions or disruptions in service at one of our key facilities could have, a material adverse impacteffect on the public's perception of us, which has harmed, and may continue to harm, our operations.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 COVID-19 will be sufficient to restore the confidence of consumers in the safety of air travel.
We operate principally through hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenixare at risk of losses and Washington, D.C. Substantially alladverse 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 flights either originate inregional, codeshare or fly into onejoint business operators.
In a modern world where news can be captured and travel rapidly, we are at risk of these locations. A significant interruptionadverse publicity stemming from any public incident involving our company, our people or disruption in service atour brand. Such an incident could involve the actual or alleged behavior of any of our employees. Further, if our personnel, one of our hubs resultingaircraft, 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 air traffic control (ATC) delays, weather conditions, natural disasters, growth constraints, relations with third-party service providers, failurean incident or accident. In addition, any such incident, accident, catastrophe or action involving our personnel, one of computer systems, disruptions at
airport facilitiesour aircraft (or personnel and aircraft of our regional operators and our codeshare partners), or other key facilities used by us to managea type of aircraft fleet could create an adverse public perception, which could harm our operations, labor relations, power supplies, fuel supplies, terrorist activities, or otherwise couldreputation, result in the cancellationair travelers being reluctant to fly on our aircraft or delay of a significant portionthose of our flightsregional operators or codeshare partners, and as a result, could have a severeadversely impact 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 office space. As airports around the world become more congested, we are not always able 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 due to inadequate facilities at desirable airports. Further, our operating costs at airports at which we operate, including our hubs, may increase significantly because of capital improvements at such airports that we may be required to fund, directly or indirectly. In some circumstances, such costs could be imposed by the relevant airport authority without our approval.
In addition, operations at three major domestic airports, certain smaller domestic airports and certain foreign airports served by us are regulated by governmental entities through the use of slots or similar regulatory mechanisms which 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 Federal Aviation Administration (FAA) currently regulates the allocation of slots or slot exemptions at DCA and two New York City airports: John F. Kennedy International Airport and La Guardia Airport (LGA). In addition to slot restrictions, operations at LGA and DCA are also limited based on the stage length of the flight. Our operations at these airports generally require the allocation of slots or similar regulatory authority. Similarly, our operations at international airports in Beijing, Frankfurt, London Heathrow, Paris, Tokyo and other airports outside the U.S. are regulated by local slot authorities pursuant to the International Airline Trade Association (IATA) Worldwide Scheduling Guidelines and applicable local law. 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. We cannot provide any assurance that regulatory changes regarding the allocation of slots or similar regulatory authority will not have a material adverse impact on our operations.
Our ability to provide service can also be impaired at airports, such as Chicago O’Hare International Airport (ORD) and Los Angeles International Airport, where the airport gate and other facilities are 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.
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, primarily under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risks of disruptions to their operations, which may 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 necessary personnel, including in particular pilots, and other risk factors, such as an out-of-court or bankruptcy restructuring of any of our regional operators. Many 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. Volatility in fuel prices, disruptions to capital markets 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. For example, one of our significant third-party operators of regional capacity, Republic, commenced a Chapter 11 bankruptcy in 2016. In connection with Republic’s bankruptcy process, we restructured our contractual relationship with Republic and received an approximate 25% equity interest in Republic in consideration for our unsecured claim in the case. We may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and
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, provision of information technology and services, regional operations, aircraft maintenance, ground services and facilities, reservations 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 and online travel agents (OTAs) (e.g., Expedia, including its booking sites Orbitz and Travelocity, and The Priceline Group), to distribute a significant portion of our airline tickets, and we expect in the future to continue to rely on these channels and hope 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 call centers and our website. 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 third-party distribution channels, while maintaining an industry-competitive cost structure. These imperatives may affect our relationships with GDSs and OTAs, including as consolidation of OTAs continues or is proposed to continue, and require us to make significant investments in potential new distribution technologies. 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.
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 has passed laws, and the DOT, the FAA, the Transportation Security Administration, and the Department of Homeland Security and several of their respective international counterparts have issued regulations and a number of directives and other regulations,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. Additionally,aircraft, and in some instances have resulted in the temporary grounding of aircraft types altogether (including the March 2019 grounding of all Boeing 737 MAX aircraft, including the 24 aircraft in our fleet, which remains in place as of the date of this report), or otherwise caused substantial disruption and resulted in material costs to us and lost revenues. The FAA is presently considering regulations that would impose a cap on ticket change fees charged by airlines.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.
DOT consumer rules, that took effectand rules promulgated by certain analogous agencies in 2010 requireother countries we serve, dictate procedures for customer handling during long onboard delays, further regulate airline interactions with passengers, including passengers with disabilities, through the reservationsticketing process, at the airport, and onboard the aircraft, and require disclosures concerning airline fares and ancillary fees such as baggage fees. The DOT has been aggressively investigating alleged violations of these rules. Other DOT rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international airlines. In 2020, the DOT is expected to implement a number of new regulations that will impact us, including disability rules for accessible lavatories and refunds for checked bag fees in the event of certain delays in delivery.
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.
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 whichthat 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;
•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 (for example, a “passenger bill of rights”);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; and
•the adoption of more restrictive locally-imposed noise restrictions.restrictions; and
•restrictions on travel or special guidelines regarding aircraft occupancy or hygiene related to COVID-19.
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 United States National Airspace System (the ATC system)system is not successfully managingmodernizing to meet the growing demand for U.S. air travel. Air traffic controllers rely on outdated procedures and technologies that are routinely overwhelmed and compel airlines, including ourselves, to fly inefficient routes or take significant delays on the ground. The ATC system’s inability to handlemanage 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 20142015 and 2017, respectively, at the ATC systems in Chicago took weeks to recover following a fire in the ATC tower at ORD, whichWashington Air Route Control Center resulted in thousandscancellations and delays of cancelled flights.hundreds of flights traversing the greater Washington, D.C. airspace.
TheIn the early 2000s, the FAA has embarked on transforminga path to modernize the national airspace system, to includeincluding migration from the current radar-based air traffic controlATC system to a GPS-based system. This modernization of the ATC modernization,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 ATCthis modernization will be available to the public and the airlines.airlines, including ourselves. Failure to update the ATC system in a timely manner and the substantial funding requirementscosts that may be imposed on airlines, ofincluding ourselves, in order to fund a modernized ATC system may have a material adverse effect on our business. We support legislative efforts that would establish a nimble not-for-profit entity better suited
Further, our business has been adversely impacted when government agencies have ceased to manageoperate as expected including due to partial shut-downs, sequestrations or similar events and the long-term investmentsCOVID-19 pandemic. These events have resulted in, technologyamong other things, reduced demand for air travel, an actual or perceived reduction in ATC and provide a governance structure needed to successfully implement NextGensecurity screening resources and improverelated travel delays, as well as disruption in the operationability of the air traffic control system.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, 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 routes, such an eventmarkets, 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, and other alliance arrangements by and among other airlines could impair the value of our business and assets on the open skies routes. For example,
Brexit occurred on January 31, 2020 under 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, including London Heathrow Airport (LHR). As a resultterms of the agreement we face increased competition in these markets, including LHR. The pendingon 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 be 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 end on December 31, 2020, with a potential extension of up to two years, although the United Kingdom government previously passed legislation preventing any such extension of the transition period and the deadline to request such an extension has passed. 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. Changesregime, including in relation to commercial air service. The precise scope of traffic rights between the EU and the United Kingdom remains uncertain and therefore 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, 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.
The U.S. government has negotiated “open skies” agreementsWe operate a global business with many countries, which allow unrestricted route authority access betweensignificant operations outside of the U.S. Our current international activities 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 notprospects have open skies agreements.
The airline industry is heavily taxed.
The airline industry is subject to extensive government feesbeen 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 permittedfuture could be adversely affected by federal legislation, most major U.S. airports impose a passenger facility charge per passenger on us. In addition,government policies, reversals or delays in the governmentsopening of foreign countriesmarkets, increased competition in which we operate imposeinternational markets, the performance of our alliance, joint business and codeshare partners in a given market, exchange controls or other restrictions on U.S. airlines, including us, various feesrepatriation of funds, currency and taxes,political risks (including changes in exchange rates and these assessments have been increasingcurrency devaluations), environmental regulation, increases 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 notand 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 suspending a significant portion of our international flights through the summer of 2021 and delaying the introduction of certain new 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-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 expenses, they represent an additional cost toperformance, 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 customers. There are continuing efforts in Congress and in other countries to raise different portionsassets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of the various taxes, fees, and charges imposed on airlines and their passengers, and wemore stringent repatriation restrictions, may not be able to recover all of these charges from our customers. Increases in such taxes, fees and charges could negatively impactmaterially adversely affect our business, results of operations and financial condition.
Under DOT regulations, all governmental taxes and fees mustMore generally, our industry may be includedaffected by any deterioration in global trade relations, including shifts in the pricestrade 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 quotepurchase, including certain of our aircraft and related parts, are sourced from suppliers located in foreign countries, and the imposition of new tariffs, or advertise to our customers. Due to the competitive revenue environment, many increasesany increase in these fees and taxes have been absorbedexisting tariffs, by the airline industry rather than being passedU.S. government in respect of the importation of such products could materially increase the amounts we pay for them. In particular, on toOctober 2, 2019, the customer. Further increases in fees and taxes may reduce demand for air travel, and thus our revenues.
Potential tax reform inOffice of the U.S. may result in significant changes to U.S. federal income taxation law, including changes toTrade Representative (USTR), as part of an ongoing dispute with the U.S. federal income taxation of corporations (including us), which could,EU before the World Trade Organization (WTO) concerning, among other things, resultaircraft subsidies, was authorized by an arbitration tribunal of the WTO to impose up to $7.5 billion per year in a lower corporate taximport tariffs on certain goods originating from the EU. In October 2019, the USTR imposed tariffs on certain imports from the EU, including certain Airbus aircraft that we previously contracted to purchase, which were initially subject to an ad valorem duty of 10%. On February 14, 2020, the USTR increased such duty to 15% effective March 18, 2020. While the scope and rate the elimination of certain tax deductionsthese tariffs are subject to change, if and preferences, and impacts to the international tax environment. Weextent these tariffs are currently unable to predict whether such changes will occur and, if so, the impact such changes would haveimposed 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 be 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 end on December 31, 2020, with a potential extension of up to two years, although the United Kingdom government previously passed legislation preventing any such extension of the transition period and the deadline to request such an extension has passed. We face risks associated with Brexit, notably given the extent of our subsidiaries.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. The precise scope of traffic rights between the EU and the United Kingdom remains uncertain and therefore 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, could materially adversely affect our business, model that are designed to increase revenues may not be successfulresults of operations and may cause operational difficulties or decreased demand.financial condition.
We have recently instituted, and intend to institute in the future, changes to our business model to increase revenues and offset costs. These measures include premium economy service, basic economy service and charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. 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 you 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. Also, any new and 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.
The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnelMoreover, 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 business.
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. We believecontinue to fully cooperate with the CMA and, in September 2020, the CMA adopted interim measures that our future success will depend in large parteffectively 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. The impact on our abilitybusiness 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 retainBrexit, cannot be predicted, including whether or attract highly qualified management, technicalnot regulators will continue to approve or impose material conditions on our business activities. Any of these effects, and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel would have a material adverse effect onothers we cannot anticipate, could 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-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 operate a global business with international operations that are subject to economicrisks associated with climate change, including increased regulation of our CO2 emissions and political instabilitythe potential increased impacts of severe weather events on our operations and infrastructure.
Efforts to transition to a low-carbon future have been,increased the focus by global, regional and national regulators on climate change and greenhouse gas (GHG)emissions, including carbon dioxide (CO2). In particular, the International Civil Aviation Organization is in the process of adopting rules, including those pertaining to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), that will require American to limit the CO2 emissions of a significant majority of our international flights.
At this time, the costs of our obligations under CORSIA are uncertain and cannot be fully predicted. For example, we will not directly control our CORSIA compliance costs during the CORSIA Pilot and First Phases because such phases include a sharing mechanism for the growth in emissions for the global aviation sector. In addition, there is uncertainty with respect to the future supply, demand and price of sustainable or lower carbon aircraft fuel, carbon offset credits and technologies that could allow us to reduce our emissions of CO2. 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 may continue to be, adversely affected by numerous events, circumstancesadopt, GHG emission or government actions beyond our control.
We operate a global business with operations outside of the U.S. Our current international activities and prospects have been and in the futureclimate-related goals that could be adversely affected by 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 ofimpact our operations including the inabilityor require us to obtainmake changes or retain needed route authorities and/or slots. In particular, fluctuationsinvestments in foreign currencies, including devaluations, exchange controlsour infrastructure.
All such climate change-related regulatory activity and other restrictions on the repatriation of funds, have significantly affected anddevelopments may continue to significantly affect our operating performance, liquidity and the value of any cash held outside the U.S. in local currency.
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.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.
The United Kingdom held a referendumFinally, 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 June 2016 regarding its membershipweather 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 EU in which a majorityclimate 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 United Kingdom electorate voted in favormateriality of the British government taking the necessary action for the United Kingdom to leave the EU. In March 2017, the United Kingdom served notice of its decision to withdraw to the EU, formally initiating the withdrawal process. Serving this notice began the two-year period for the United Kingdom to negotiate the terms for its withdrawal from the EU. At this time, it is not certain what steps will need to be taken to facilitate the United Kingdom’s exit from the EU. The implications of the United Kingdom withdrawing from the EU are similarly unclear at present because it is unclear what relationship the United Kingdom will have with the EU after withdrawal. We face risksany potential losses or costs associated with the uncertainty following the referendum and the consequences that may flow from the decision to exit the EU, notably given the extentphysical effects of our passenger and cargo traffic that flows between the U.S. and the EU via LHR in the United Kingdom. Among other things, the exit of the United Kingdom from the EU could adversely affect European or worldwide economic or market conditions and could contribute to further instability in global financial markets. In addition, the exit of the United Kingdom from the EU has created uncertainty as to the future trade relationship between the EU and the United Kingdom, including as to air traffic services. The exit of the United Kingdom could also lead to legal and regulatory uncertainty and 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. The impact on our business of any treaties, laws and regulations that replace the existing EU counterparts cannot be predicted. Any of these effects, and others we cannot anticipate, could materially adversely affect our business, results of operations and financial condition.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 the environment and noise reduction, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. Compliance
with environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties.
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 strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of 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 somecertain cases even ifwhere 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, whereand 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.
We are subject to risks associated with climate change, including increased regulation to reduce emissions of greenhouse gases.
There is increasing global regulatory focus on climate change and greenhouse gas (GHG) emissions. For example, in October 2016, International Civil Aviation Organization (ICAO) passed a resolution adopting the ICAO Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is a global, market-based emissions offset program to encourage carbon-neutral growth beyond 2020. The CORSIA was supported by the board of Airlines For America (the principal U.S. airline trade association) and IATA (the principal international airline trade association), and by American and many other U.S. and foreign airlines. The CORSIA will increase operating costs for American and most other airlines, including other U.S. airlines that operate internationally, but the implementation of a global program, as compared to regional emission reduction schemes, should help to ensure that these costs will be more predictable and more evenly applied to American and its competitors. The CORSIA is expected to be implemented in phases, beginning in 2021. Certain details still need to be developed and the impact of the CORSIA cannot be fully predicted. While we do not anticipate any significant emissions allowance expenditures in 2017, compliance with the CORSIA or similar emissions-related requirements could significantly increase our operating costs beyond 2017. Further, the potential impact of the CORSIA or other emissions-related requirements on our costs will ultimatelyWe depend on a limited number of factors,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, by the end of 2020 all of our mainline aircraft will have been manufactured by either Airbus or Boeing and all of our regional aircraft will have been 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, 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 baseline emissions,design defects, mechanical problems, contractual performance by suppliers, adverse perception by the pricepublic that would result in customer avoidance of emission allowancesany of our aircraft or offsetsany action by the FAA or any other regulatory authority resulting in an inability to operate our aircraft, even temporarily. In particular, in March 2019, the FAA ordered the grounding of all Boeing 737 MAX aircraft, which remains in place as of the date of this report.
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 future flights subjectaircraft we operate. If, for any reason, we are unable to such emissions-related requirements. Theseaccept 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, haveor reductions to our schedule, thereby reducing revenues. If new aircraft orders are not been completely definedfilled on a timely basis, we could face higher financing and could fluctuate.
operating costs than planned. In addition, in December 2015, atif the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, over 190 countries,aircraft we receive do not meet expected performance or quality standards, including the United States, reached an agreement (the Paris Agreement) to reduce global greenhouse gas emissions. While the United States has since announced that it will withdraw from the Paris Agreement and there is no express reference to aviation in that agreement, to the extent countries implement that agreement or impose other climate change regulations, either 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 aviation industry or with respectFAA grounded all Boeing 737 MAX aircraft, including the 24 aircraft in our fleet. For the duration of the Boeing 737 MAX grounding, we have been unable to related industriestake delivery of the Boeing 737 MAX aircraft we have on order from Boeing and have in some instances been required 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 as the aviation fuel industry, itfinancings and obtain alternate financing and financing commitments for these aircraft. Such a need to obtain substitute financing could have an adverse direct or indirect effect on our business.
The Environmental Protection Agency (EPA) recently issued an endangerment finding that aircraft engine GHG emissions cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare, which is a precursor to EPA regulation of aircraft engine GHG emission standards. It is anticipated thatmaterial and any such standards established bysubstitute financing may not be available at all or may require that we agree to terms and conditions less favorable than the EPA would closely align with emission standards currently being developed by ICAO. In February 2016,previously obtained financings and financing commitments. Further, once the ICAO Committee on Aviation Environmental Protection recommended that ICAO adopt carbon dioxide certification standards that would apply to new type aircraft certified beginning in 2020, and would be phased in for newly manufactured existing aircraft type designs starting in 2023.
In addition, several states have adopted or are considering initiatives to regulate emissions of GHGs, primarily through the planned development of GHG emissions inventories and/or regional GHG cap and trade programs. Depending on the
scope of such regulation, certain of our facilities and operations, or the operations of our suppliers, maygrounding has been lifted, we will be subject to additional operatingtraining 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 permitoperational requirements likely resulting in increased operating costs.
These regulatory efforts, both internationally and inuncertainties regarding the U.S. attiming of the federaldelivery of Boeing 737 MAX aircraft we have on order and state levels, are still developing, andhow rapidly we cannot yet determine what the final regulatory programs or their impact will be able to take delivery of and integrate such Boeing 737 MAX aircraft into our fleet could potentially result in the U.S., the EU or in other areas in which we do business. However, such climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions. Such activity may also impact us indirectly by increasingfurther significant constraints on our operating costs, including fuel costs.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 impacted 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 other 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 you 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.
Among the principal risks of integrating our businesses and operations are the risks relating to integrating various computer, communications and other technology systems that will be necessary to operate US Airways and American as a single airline and to achieve cost synergies by eliminating redundancies in the businesses. While we have to date successfully integrated severalmany 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. The integration of these systems inIn 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 forecast.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 you 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.
We are at risk of lossesEvolving data security and adverse publicity stemming fromprivacy requirements could increase our costs, and any publicsignificant data security incident accident involvingcould disrupt our personnel or aircraft or the personnel or aircraft of our regional or codeshare operators.
If our personnel or one of our aircraft, 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 or catastrophe, 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 or catastrophe. In the event
that our insurance is inapplicable or not adequate, we may be forced to bear substantial losses from an incident or accident. In addition, any such incident, accident or catastrophe involving our personnel or one of our aircraft (or personnel and aircraft of our regional operators and our codeshare partners) could create an adverse public perception, which couldoperations, harm our reputation, result in air travelers being reluctantexpose us to fly on our aircraft or those of our regional operators or codeshare partners,legal risks and otherwise materially adversely impactaffect our business, results of operations and financial condition.
DelaysOur 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 scheduled aircraft deliveriestoday’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 have been the target of cybersecurity attacks 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 could 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 lossattacks; 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. 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 anticipated fleettime. 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 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, 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 failureexpect to maintain these reduced levels of new aircraftcapacity for the foreseeable future. We expect the disruption to perform as expected, services resulting from the COVID-19 pandemic to adversely affect our regional operators, some of whom
may adversely impactexperience 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.
The successIn addition, our reliance upon others to provide essential services on behalf of our business depends on, among other things, effectively managing the number and types of aircraft we operate. In many cases, the aircraft we intend to operate are not yetoperations may result in our fleet, butrelative 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 have contractual commitmentsdecide to purchaseserve. 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 lease them. If for any reason we were unable to acceptat all. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or secure deliveries of new aircraft on contractually scheduled delivery dates, thisotherwise, could have a negativematerial 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) and Ronald Reagan Washington National Airport (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 Airport 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 we cannot predict whether such exemptions will continue to be granted or whether we ultimately could be at risk of losing valuable operating rights. We cannot provide any assurance that regulatory changes regarding the allocation of slots, the continued enforcement of a perimeter rule or similar regulatory authority 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 gate 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. 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 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. Our failure to integrate newly purchased aircraft into our fleet as planned might require us to seek extensionsWe have limited control, particularly in the short term, over the operation, quality or maintenance of many of the terms for some leased aircraftservices on which our operations depend and over whether vendors of such services will improve or otherwise delay the exit of certain aircraft fromcontinue to provide services that are essential to our fleet. Such unanticipated extensions or delays may require usbusiness.
Changes to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs. If new aircraft orders are not filled on a timely basis, we could face higher 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 and reliability, our business results of operationsmodel that are designed to increase revenues may not be successful and financial condition could be adversely impacted.may cause operational difficulties or decreased demand.
We dependhave 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 suppliers for aircraft, aircraft engineslarge 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 parts.
implement additional initiatives. We depend on a limited numbercannot assure that these measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated withthese initiatives may create logistical challenges that could harm the supplyoperational performance of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppliers,our airline or adverse perception by the public that would result in customer avoidancedecreased demand. Also, our
implementation of any new or in actions byincreased fees might reduce the FAA resulting in an inability to operate our aircraft.
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:
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 ATC systems;
increases in costs of safety, security, and environmental measures;
outbreaks of diseases that affect travel behavior; and
weather and natural disasters.
In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus or any other similar 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. 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 duringon our airline or across the winter,industry in general, particularly if weakened economic conditions make our revenues in the firstcustomers 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 fourth quarters of the year could be weaker than revenues in the second and third quarters of the year.
A higher than normal number of pilot retirements, more stringent duty time regulations, increased flight hour requirements for commercial airline pilots and other factors have caused a shortage of pilots which could materiallyany inability to protect them may adversely affect our business.business and financial results.
We currentlyconsider 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 a higher than normal numberused certain of pilots eligibleour branding and AAdvantage loyalty program intellectual property as collateral for retirement. Among other things,various financings (including the extensionTreasury Loan Agreement), which contain covenants that impose restrictions on the use of pilot careers facilitated bysuch intellectual property and, in the FAA’s 2007 modificationcase of the mandatory retirement age from age 60Treasury Loan Agreement, on certain amendments or changes to age 65 has now been fully implemented, resulting in large numbers of pilots in the industry approaching the revised mandatory retirement age. Further, in July 2013, the FAA issued regulations that increased the flight hours required for pilots working for airlines certificated under Part 121 of the Federal Aviation Regulations. In addition, on January 4, 2014, more stringent pilot flight and duty time requirements under Part 117 of the Federal Aviation Regulations took effect.our AAdvantage loyalty program. These and other factors, including reductions in the number of military pilots being trained by the U.S. armed forces and available as commercial pilots upon their retirement from military service,covenants may 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 to hire pilots to replace retiring pilots. We believe that this industry-wide pilot shortage is becoming an increasing problem for airlines in the United States. Our 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 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.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 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 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 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, 2016,2019, we had available NOL Carryforwards of approximately $10.5$9.1 billion for regular federal income tax purposes whichthat will expire, if unused, beginning in 2022,2023, and approximately $3.7$3.0 billion for state income tax purposes whichthat will expire, if unused, between
2017 2020 and 2036.2039. 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). WeIn 2013, we experienced an ownership change in connection with our emergence from the Chapter 11 Casesbankruptcy 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 $8.9$7.3 billion of unlimited NOL still remaining at December 31, 2016)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 (attributableattributable to US Airways Group and its subsidiaries)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 the Chapter 11 Casesbankruptcy 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 Restated Certificate of Incorporation (Certificate of Incorporation) contains transfer restrictions applicable to certain substantial stockholders. 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.”
Our abilityThe 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 useexpand our NOL Carryforwards also will dependnetwork 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 taxable income generatedour 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 future periods.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 NOL Carryforwardsimposition 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 expire before we can generate sufficient taxable income to use them.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 isand indefinite-lived intangible assets are not amortized, but isare assessed for impairment at least annually. In accordance with applicable accounting standards, we are required to assess our indefinite-lived intangible assets for impairment on an annual basis,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. Anairlines, 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.
The price of AAG common stock has recently been and may in the future be volatile.
The market price of AAG common stock has fluctuated in the past, and may fluctuate substantially in the future, due to a variety of factors, many of which are beyond our control, including:
AAG’s•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;
movements in fuel prices;
•expectations regarding our capital deployment program, including ourany existing or potential future share repurchase programprograms and any future dividend payments that may be declared by our Board of Directors;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);
•new regulatory pronouncements and changes in regulatory guidelines;
•general and industry-specific economic conditions;
the success or failure of AAG’s integration efforts;
•changes in our key personnel;
distributions of shares of AAG common stock pursuant to the Plan, including distributions from the disputed claims reserve established under the plan of reorganization upon the resolution of the underlying claims;
•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 convertible securities, options, warrants, restricted stock unit awards, stock appreciation rights, or similar rights;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;
•increases or decreases in reported holdings by insiders or other significant stockholders; and
•fluctuations in trading volume; and
changes in market values of airline companies as well as general market conditions.volume.
We have ceased making repurchases of our common stock and paying dividends on our common stock as required by the CARES Act. 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 repurchase our common stock pursuant to our share repurchase programs or continue to pay dividends on our common stockdo 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 hashad approved sixseven share repurchase programs aggregating $11.0$13.0 billion of authority. As of September 30, 2017, $6772020, there was $420 million remained unusedof remaining authority to repurchase shares under our current $2.0 billion share repurchase program. In connection with our receipt of payroll support under the CARES Act, 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 repurchase programresult, we are prohibited from repurchasing shares of AAG common stock through the date that expires on December 31, 2018. Shareis one year after the secured loan provided under the Treasury Loan Agreement is fully repaid. If we determine to make any share repurchases in the future, such repurchases under our share 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.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 and other relevant factors. TheOur repurchase programsof AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice.
Although ourOur Board of Directors commenced declaring quarterly cash dividends in July 2014 as part of our capital deployment program,program. In connection with our receipt of payroll support under the CARES Act, 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. 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.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 be able to pay dividends in the future.
In addition, any future repurchases of AAG common stock pursuantor payment of dividends, or any determination to our share repurchase programs and any futurecease 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, our share repurchase programs and 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 share repurchase programsof 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 itthey will do so because the market priceso.
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" in our 2019 10-K. These restrictions may adversely affect the ability of certain holders of AAG common stock may decline belowand our other equity interests to vote such interests and adversely affect the levels at which we repurchasedability of persons to acquire shares of AAG common stock and short-term stock price fluctuations could reduce the program’s effectiveness.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 Second Amended and Restated Bylaws, (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 prohibition against stockholders calling special meetingsmeeting unless they hold at least 20% of stockholders;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.
AAG’s CertificateThe issuance or sale of Incorporation and Bylaws include provisions that limit voting and acquisition and dispositionshares of our equity interests.
Our Certificate of Incorporation and Bylaws include certain provisions that limit voting and ownership and disposition of our equity interests. 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 personsrights to acquire shares of AAGour common stock, or warrants issued to Treasury under the Payroll Support Program and in connection with the loan under the CARES Act, could depress the trading price of our common stock and the Convertible Notes.
We may conduct future offerings of 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 equity interests.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). If these additional shares or securities are 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 following table displays informationexercise 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 our purchasessuch workforce reduction actions.
In connection with the preparation of sharesthe financial statements for the third quarter of AAG common stock during2020 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 three months ended September 30, 2017.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.
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Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan or program | | Maximum dollar value of shares that may be purchased under the plan or program (in millions) |
July 2017 | | 1,037,573 | | $51.79 | | 1,037,573 | | $985 |
August 2017 | | 3,186,417 (1) | | $46.63 | | 3,177,325 | | $837 |
September 2017 | | 3,485,296 | | $45.85 | | 3,485,296 | | $677 |
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(1)
| Includes the repurchase of 9,092 shares of AAG common stock separate from our share repurchase programs in August 2017 for less than $1 million from the Disputed Claims Reserve at the then prevailing market price in order to fund cash tax obligations resulting from distributions by the Disputed Claims Reserve. |
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 percent 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 |
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4.1 | | |
4.2 | |
4.3 | |
4.4 | |
4.5 | |
4.6 | |
4.2 | 10.1 | Trust Supplement No. 2017-2AA, dated as of August 14, 2017, between American Airlines, Inc.Loan and Wilmington Trust Company, as Trustee, to the Pass Through TrustGuarantee Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4.2 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.3 | | Trust Supplement No. 2017-2A, dated as of August 14, 2017, between American Airlines, Inc. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4.3 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.4 | | Intercreditor Agreement (2017-2), dated as of August 14, 2017, among Wilmington Trust Company, as Trustee of the American Airlines Pass Through Trust 2017-2AA and as Trustee of the American Airlines Pass Through Trust 2017-2A, National Australia Bank Limited, as Class AA Liquidity Provider and Class A Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4.4 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.5 | | Deposit Agreement (Class AA), dated as of August 14, 2017, between Wilmington Trust, National Association, as Escrow Agent, and Natixis S.A., acting through its New York Branch, as Depositary (incorporated by reference to Exhibit 4.5 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.6 | | Deposit Agreement (Class A), dated as of August 14, 2017, between Wilmington Trust, National Association, as Escrow Agent, and Natixis S.A., acting through its New York Branch, as Depositary (incorporated by reference to Exhibit 4.6 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.7 | | Escrow and Paying Agent Agreement (Class AA), dated as of August 14, 2017, among Wilmington Trust, National Association, as Escrow Agent, Goldman Sachs & Co. LLC, Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., for themselves and on behalf of the several Underwriters, Wilmington Trust Company, not in its individual capacity, but solely as Pass Through Trustee for and on behalf of American Airlines Pass Through Trust 2017-2AA, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4.7 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.8 | | Escrow and Paying Agent Agreement (Class A), dated as of August 14, 2017, among Wilmington Trust, National Association, as Escrow Agent, Goldman Sachs & Co. LLC, Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., for themselves and on behalf of the several Underwriters, Wilmington Trust Company, not in its individual capacity, but solely as Pass Through Trustee for and on behalf of American Airlines Pass Through Trust 2017-2A, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4.8 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.9 | | Note Purchase Agreement, dated as of August 14, 2017, among American Airlines, Inc., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust, National Association, as Escrow Agent, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4.9 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.10 | | Form of Participation Agreement (Participation Agreement among American Airlines, Inc., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit B to Exhibit 4.9 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
4.11 | | |
4.12 | | |
4.13 | | |
4.14 | | Revolving Credit Agreement (2017-2AA), dated as of August 14, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017-2AA, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4.14 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
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4.15 | | Revolving Credit Agreement (2017-2A), dated as of August 14, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017-2A, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4.15 to American Airlines, Inc.’s Current Report on Form 8-K filed on August 14, 2017 (Commission File No. 1-2691)). |
10.1* | | Second Amendment to the Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Credit and Guaranty Agreement, dated as of April 29, 2016,25, 2020, among American Airlines, Inc., American Airlines Group Inc., the lendersother guarantors party thereto from time to time, party thereto, Barclaysthe United States Department of the Treasury and the Bank PLC,of New York Mellon, as administrative agent, and certain other parties thereto.collateral agent.* |
10.2* | 10.2 | Third Amendment No. 13, dated as of July 13, 2020, to the AmendedA320 Family Aircraft Purchase Agreement between Airbus S.A.S., as seller, and Restated Credit And GuarantyAmerican Airlines, Inc. as buyer, dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise.* |
10.3 | Letter Agreement, dated as of August 21, 2017, amendingSeptember 4, 2020, to the AmendedPurchase Agreement No. 03735 between American Airlines, Inc. and Restated Credit and Guaranty Agreement,The Boeing Company, dated as of May 21, 2015, among American Airlines, Inc., American Airlines Group Inc., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto.February 1, 2013.* |
10.3* | 31.1 | Fourth Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc., American Airlines Group Inc., the lenders from time to time party thereto, Citibank N.A., as administrative agent, and certain other parties thereto. |
12.1 | | |
12.2 | | |
31.1 | | |
31.2 | | |
31.3 | | |
31.4 | | |
32.1 | | |
32.2 | | |
101101.1 | | Interactive data files pursuant to Rule 405 of Regulation S-T.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). |
* | |
| Confidential treatment has been requested with respect to certain portions of this agreement. |
* Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.
# Pursuant to Item 601(a)(5) 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 26, 201722, 2020 | 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 Section 13 or 15(d) 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.
| | | | | | | | | | | |
| | | |
| | | |
| | | American Airlines, Inc. |
| | | |
Date: October 26, 201722, 2020 | By: | | /s/ Derek J. Kerr |
| | | Derek J. Kerr |
| | | Executive Vice President and Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |