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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to .
Commission file number 1-2691.
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1502798
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (817) 963-1234
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of July 15, 2002.
The registrant meets the conditions set forth in, and is filing
this form with the reduced disclosure format prescribed by,
General Instructions H(1)(a) and (b) of Form 10-Q.
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INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and six months ended
June 30, 2002 and 2001
Condensed Consolidated Balance Sheets - June 30, 2002 and December
31, 2001
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements - June 30,
2002
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
<s> <c> <c> <c> <c>
Revenues
Passenger $3,747 $4,645 $7,231 $8,580
Cargo 141 188 274 362
Other revenues 222 315 413 584
Total operating revenues 4,110 5,148 7,918 9,526
Expenses
Wages, salaries and benefits 2,017 2,008 3,989 3,640
Aircraft fuel 621 802 1,118 1,472
Depreciation and amortization 299 316 603 594
Other rentals and landing fees 284 298 552 534
Maintenance, materials and
repairs 248 246 478 480
Aircraft rentals 208 218 427 358
Food service 178 217 347 398
Commissions to agents 149 244 300 456
Special charges - 586 - 586
Other operating expenses 737 914 1,457 1,721
Total operating expenses 4,741 5,849 9,271 10,239
Operating Loss (631) (701) (1,353) (713)
Other Income (Expense)
Interest income 18 22 36 44
Interest expense (123) (93) (250) (169)
Interest capitalized 21 35 41 74
Related party interest - net 5 (11) 10 (22)
Miscellaneous - net 4 36 (4) 30
(75) (11) (167) (43)
Loss Before Income Taxes (706) (712) (1,520) (756)
Income tax benefit (220) (257) (492) (267)
Net Loss $(486) $ (455) $(1,028) $(489)
</Table>
The accompanying notes are an integral part of these financial statements.
1
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
<Table>
<Caption>
June 30, December 31,
2002 2001
Assets
<s> <c> <c>
Current Assets
Cash $ 191 $ 117
Short-term investments 2,352 2,856
Receivables, net 1,530 1,371
Inventories, net 676 752
Deferred income taxes 846 844
Other current assets 179 519
Total current assets 5,774 6,459
Equipment and Property
Flight equipment, net 13,519 13,151
Other equipment and property, net 2,234 2,000
Purchase deposits for flight equipment 607 834
16,360 15,985
Equipment and Property Under Capital Leases
Flight equipment, net 1,372 1,492
Other equipment and property, net 92 95
1,464 1,587
Goodwill 1,252 1,293
Route acquisition costs 829 829
Airport operating and gate lease rights, net 446 459
Other assets 4,228 3,865
$ 30,353 $ 30,477
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 1,478 $ 1,717
Accrued liabilities 2,189 2,017
Air traffic liability 3,059 2,763
Payable to affiliates, net 69 66
Current maturities of long-term debt 255 421
Current obligations under capital leases 119 189
Total current liabilities 7,169 7,173
Long-term debt, less current maturities 7,165 6,530
Obligations under capital leases, less 1,331 1,396
current obligations
Deferred income taxes 1,789 1,465
Postretirement benefits 2,611 2,538
Other liabilities, deferred gains and
deferred credits 5,808 5,896
Stockholder's Equity
Common stock - -
Additional paid-in capital 2,550 2,596
Accumulated other comprehensive loss (70) (145)
Retained earnings 2,000 3,028
4,480 5,479
$ 30,353 $ 30,477
</Table>
The accompanying notes are an integral part of these financial
statements.
2
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
<Table>
<Caption>
Six Months Ended June 30,
2002 2001
<s> <c> <c>
Net Cash Provided by (Used for) Operating
Activities $ (53) $ 732
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (846) (1,924)
Acquisition of Trans World Airlines, Inc. - (742)
Net decrease in short-term investments 504 352
Proceeds from sale of equipment and property 160 204
Other 36 (6)
Net cash used for investing activities (146) (2,116)
Cash Flow from Financing Activities:
Payments on long-term debt and capital lease
obligations (296) (159)
Proceeds from issuance of long-term debt 612 1,433
Funds transferred between affiliates, net (43) 285
Net cash provided by financing activities 273 1,559
Net increase in cash 74 175
Cash at beginning of period 117 86
Cash at end of period $ 191 $ 261
</Table>
The accompanying notes are an integral part of these financial
statements.
3
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals and the asset impairment charge as discussed in
footnote 8, necessary to present fairly the financial position,
results of operations and cash flows for the periods indicated. The
Company's 2002 results continue to be adversely impacted by the
September 11, 2001 terrorist attacks and the resulting effect on
the economy and the air transportation industry. In addition, on
April 9, 2001, Trans World Airlines LLC (TWA LLC, a wholly owned
subsidiary of AMR Corporation) purchased substantially all of the
assets and assumed certain liabilities of Trans World Airlines,
Inc. (TWA). Accordingly, the operating results of TWA LLC are
included in the accompanying condensed consolidated financial
statements for the three and six month periods ended June 30, 2002
whereas for 2001 the results of TWA LLC were included only for the
period April 10, 2001 through June 30, 2001. When utilized in this
report, all references to American Airlines, Inc. include the
operations of TWA LLC since April 10, 2001 (collectively,
American). Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the American
Airlines, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001 ("2001 Form 10-K").
2.Accumulated depreciation of owned equipment and property at June
30, 2002 and December 31, 2001 was $8.3 billion and $8.2 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at June 30, 2002 and December 31, 2001 was $920
million and $1.0 billion, respectively.
3.The following table provides unaudited pro forma consolidated
results of operations, assuming the acquisition of TWA had occurred
as of January 1, 2001 (in millions):
Six Months Ended
June 30, 2001
Operating revenues $ 10,392
Net loss (496)
The unaudited pro forma consolidated results of operations have
been prepared for comparative purposes only. These amounts are not
indicative of the combined results that would have occurred had the
transaction actually been consummated on the date indicated above
and are not indicative of the consolidated results of operations
which may occur in the future.
4.As discussed in the notes to the consolidated financial
statements included in the Company's 2001 Form 10-K, Miami-Dade County
(the County) is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and
funding the remediation costs through landing fees and various cost
recovery methods. American has been named as a potentially
responsible party (PRP) for the contamination at MIA. During the
second quarter of 2001, the County filed a lawsuit against 17
defendants, including American, in an attempt to recover its past and
future cleanup costs (Miami-Dade County, Florida v. Advance Cargo
Services, Inc., et al. in the Florida Circuit Court). In addition to
the 17 defendants named in the lawsuit, 243 other agencies and
companies were also named as PRPs and contributors to the
contamination. American's portion of the cleanup costs cannot be
reasonably estimated due to various factors, including the unknown
extent of the remedial actions that may be required, the proportion of
the cost that will ultimately be recovered from the responsible
parties, and uncertainties regarding the environmental agencies that
will ultimately supervise the remedial activities and the nature of
that supervision.
4
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In addition, the Company is subject to environmental issues at
various other airport and non-airport locations. Management
believes, after considering a number of factors, that the ultimate
disposition of these environmental issues is not expected to
materially affect the Company's consolidated financial position,
results of operations or cash flows. Amounts recorded for
environmental issues are based on the Company's current assessments
of the ultimate outcome and, accordingly, could increase or
decrease as these assessments change.
5.As of June 30, 2002, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 11 Boeing 777-200ERs and nine
Boeing 767-300ERs. Deliveries of these aircraft are scheduled to
continue through 2008. Payments for these aircraft are expected to be
approximately $210 million during the remainder of 2002, $890 million
in 2003, $390 million in 2004 and an aggregate of approximately $1.5
billion in 2005 through 2008.
6.During the six month period ended June 30, 2002, American
borrowed approximately $372 million under various debt agreements
which are secured by aircraft. Effective interest rates on these
agreements are based on London Interbank Offered Rate plus a spread
and mature over various periods of time through 2018.
In March 2002, the Regional Airports Improvement Corporation issued
facilities sublease revenue bonds at the Los Angeles International
Airport to provide reimbursement to American for certain facility
construction costs. The proceeds of approximately $225 million
provided to American have been recorded as long-term debt on the
condensed consolidated balance sheets. These obligations bear
interest at fixed rates, with an average rate of 7.88 percent, and
mature over various periods of time, with a final maturity in 2024.
7.Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended (SFAS 133). SFAS
133 required the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges are
adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in fair
value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value is immediately recognized in
earnings. The adoption of SFAS 133 did not result in a cumulative
effect adjustment being recorded to net income for the change in
accounting. However, the Company recorded a transition adjustment
of approximately $64 million in Accumulated other comprehensive
loss in the first quarter of 2001.
In addition, effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142). SFAS 142 requires the Company
to test goodwill and indefinite-lived intangible assets (for the
Company, route acquisition costs) for impairment rather than
amortize them. During the first quarter of 2002, the Company
completed its impairment analysis for route acquisition costs in
accordance with SFAS 142. The analysis did not result in an
impairment charge. During the second quarter of 2002, the Company
completed the first step of its impairment analysis related to its
$1.3 billion of goodwill and determined the Company's net book
value to be in excess of the Company's fair market value at January
1, 2002, using American as the reporting unit for purposes of the
fair value determination. As a result, the Company is in the process
of completing the second step of the impairment analysis which will
allocate the newly determined fair value of American to each of its
assets and liabilities. This allocation is expected to be
completed during the third or fourth quarter of 2002 and will
likely result in the Company recording a one-time, non-cash pre-tax
charge of up to $1.3 billion to write-down American's goodwill.
Such charge would be nonoperational in nature and would be
reflected as a cumulative effect of an accounting change in the
consolidated statements of operations.
5
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The following table provides information relating to the Company's
amortized intangible assets as of June 30, 2002 (in millions):
Accumulated Net Book
Cost Amortization Value
Amortized intangible assets:
Airport operating rights $ 449 $ 136 $ 313
Gate lease rights 209 76 133
Total $ 658 $ 212 $ 446
Airport operating and gate lease rights are being amortized on a
straight-line basis over 25 years to a zero residual value. For
the three and six month period ended June 30, 2002, the Company
recorded amortization expense of approximately $5 million and $13
million, respectively, related to these intangible assets. The
Company expects to record annual amortization expense of
approximately $26 million in each of the next five years related to
these intangible assets.
The pro forma effect of discontinuing amortization of goodwill and
route acquisition costs under SFAS 142 - assuming the Company had
adopted this standard as of January 1, 2001 - results in an adjusted
net loss of approximately $442 million and approximately $470 million,
respectively, for the three and six month periods ended June 30, 2001.
8.In conjunction with the acquisition of TWA, coupled with
revisions to the Company's fleet plan to accelerate the retirement
dates of its Fokker 100 aircraft, during the second quarter of 2001
the Company determined these aircraft were impaired under Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (SFAS 121). As a result, during the second quarter of
2001, the Company recorded an asset impairment charge of
approximately $586 million relating to the write-down of the
carrying value of 71 Fokker 100 aircraft and related rotables to
their estimated fair market values which is included in Special
charges on the accompanying consolidated statements of operations.
Management estimated the undiscounted future cash flows utilizing
models used by the Company in making fleet and scheduling
decisions. In determining the fair market value of these aircraft,
the Company considered outside third party appraisals and recent
transactions involving sales of similar aircraft. As a result of
the writedown of these aircraft to fair market value, as well as
the acceleration of the retirement dates and changes in salvage
values, depreciation and amortization will decrease by
approximately $18 million on an annualized basis.
9.The Company includes unrealized gains and losses on available-for-
sale securities, changes in minimum pension liabilities and changes
in the fair value of certain derivative financial instruments that
qualify for hedge accounting in comprehensive loss. For the three
months ended June 30, 2002 and 2001, comprehensive loss was $487
million and $457 million, respectively. In addition, for the six
months ended June 30, 2002 and 2001, comprehensive loss was $953
million and $417 million, respectively. The difference between net
loss and comprehensive loss is due primarily to the accounting for
the Company's derivative financial instruments under SFAS 133. In
addition, the six month period ended June 30, 2001 includes the
cumulative effect of the adoption of SFAS 133.
During the second quarter of 2002, the Company discontinued
entering into new foreign exchange currency put option agreements.
The fair value of the Company's remaining foreign currency put
option agreements was not material as of June 30, 2002, and all of
these agreements will expire by September 30, 2002.
6
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2002 and 2001
Summary American's net loss for the six months ended June 30, 2002
was $1,028 million as compared to a net loss of $489 million for the
same period in 2001. American's operating loss for the six months
ended June 30, 2002 was $1,353 million, compared to an operating loss
of $713 million for the same period in 2001. American's 2002 results
continue to be adversely impacted by the September 11, 2001 terrorist
attacks and the resulting effect on the economy and the air
transportation industry. On April 9, 2001, Trans World Airlines LLC
(TWA LLC, a wholly owned subsidiary of AMR Corporation) purchased
substantially all of the assets and assumed certain liabilities of
Trans World Airlines, Inc. (TWA). Accordingly, the operating results
of TWA LLC are included in the accompanying condensed consolidated
financial statements for the six month period ended June 30, 2002
whereas for 2001 the results of TWA LLC were included only for the
period April 10, 2001 through June 30, 2001. All references to
American Airlines, Inc. include the operations of TWA LLC since April
10, 2001 (collectively, American). In addition, American's 2001
results include: (i) a $586 million charge ($368 million after-tax)
related to the writedown of the carrying value of its Fokker 100
aircraft and related rotables in accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" (see footnote 8 to the condensed
consolidated financial statements), and (ii) a $45 million gain ($29
million after-tax) from the settlement of a legal matter related to
the Company's 1999 labor disruption.
Although traffic has continued to increase on significantly reduced
capacity since the events of September 11, 2001, the Company's 2002
revenues were down significantly year-over-year. In addition to the
residual effects of September 11, the Company's revenues continue to
be negatively impacted by the economic slowdown, seen largely in
business travel declines, the geographic distribution of the Company's
network and reduced fares. In total, the Company's revenues decreased
$1,608 million, or 16.9 percent, in 2002 versus the same period in
2001. American's passenger revenues decreased by 15.7 percent, or
$1,349 million in 2002 as compared to the same period in 2001.
American's domestic revenue per available seat mile (RASM) decreased
13.4 percent, to 8.58 cents, on a capacity decrease of 0.4 percent, to
61.3 billion available seat miles (ASMs). International RASM decreased
to 8.67 cents, or 7.7 percent, on a capacity decrease of 14 percent.
The decrease in international RASM was due to a 10.2 percent and 7.9
percent decrease in Latin American and European RASM,respectively,
slightly offset by a 5.6 percent increase in Pacific RASM. The decrease
in international capacity was driven by a 36.4 percent, 15.2 percent and
8.2 percent reduction in Pacific, European and Latin American ASMs,
respectively.
Cargo revenues decreased $88 million, or 24.3 percent, primarily due
to the same reasons as noted above.
Other revenues decreased 29.3 percent, or $171 million, due primarily
to decreases in contract maintenance work that American performs for
other airlines, and decreases in codeshare revenue and employee travel
service charges.
7
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RESULTS OF OPERATIONS (Continued)
The Company's operating expenses decreased 9.5 percent, or
approximately $968 million. American's cost per ASM increased by 0.5
percent to 11.03 cents, excluding the impact of the second quarter
2001 asset impairment charge. Wages, salaries and benefits increased
9.6 percent, or $349 million, reflecting (i) a decrease in the average
number of equivalent employees, somewhat offset by higher salaries,
and (ii) increases in the Company's pension and health insurance
costs, the latter reflecting rapidly rising medical care and
prescription drug costs. Aircraft fuel expense decreased 24 percent,
or $354 million, due primarily to a 16.1 percent decrease in the
Company's average price per gallon of fuel and a 6.7 percent decrease
in the Company's fuel consumption. Aircraft rentals increased $69
million, or 19.3 percent, due primarily the addition of TWA aircraft.
Food service decreased 12.8 percent, or $51 million, due primarily to
the Company's reduced operating schedule and change in level of food
service. Commissions to agents decreased 34.2 percent, or $156
million, due primarily to a 15.7 percent decrease in passenger
revenues and commission structure changes implemented in March 2002.
Special charges of $586 million related to the writedown of the
carrying value of the Company's Fokker 100 aircraft and related
rotables during the second quarter of 2001 (see footnote 8 to the
condensed consolidated financial statements). Other operating
expenses decreased 15.3 percent, or $264 million, due primarily to
decreases in contract maintenance work that American performs for
other airlines, and decreases in travel and incidental costs, credit
card and booking fees, advertising and promotion costs, and data
processing expenses, which were partially offset by higher insurance
and security costs.
Other income (expense) increased $124 million due to the following:
Interest income decreased 18.2 percent, or $8 million, due primarily
to decreases in interest rates. Interest expense increased $81
million, or 47.9 percent, resulting primarily from the increase in the
Company's long-term debt. Interest capitalized decreased $33 million,
or 44.6 percent, due primarily to a decrease in purchase deposits for
flight equipment. Related party interest - net increased $32 million
due primarily to higher receivable balances from affiliated entities
versus 2001. Miscellaneous-net decreased $34 million due primarily to
a $45 million gain recorded during the second quarter of 2001 from the
settlement of a legal matter related to the Company's 1999 labor
disruption.
The effective tax rate for the six months ended June 30, 2002 was
impacted by a $57 million charge resulting from a provision in
Congress' economic stimulus package that changes the period for
carrybacks of net operating losses (NOLs). This change allows the
Company to carry back 2001 and 2002 NOLs for five years, rather than
two years under the existing law, allowing the Company to more quickly
recover its NOLs. The extended NOL carryback did however, result in
the displacement of foreign tax credits taken in prior years. These
credits are now expected to expire before being utilized by the
Company, resulting in this charge.
OTHER INFORMATION
Net cash used for operating activities in the six month period ended
June 30, 2002 was $53 million, a decrease of $785 million over the
same period in 2001, due primarily to an increase in the Company's net
loss. Included in net cash used for operating activities during the
first six months of 2002 was approximately $658 million received by
the Company as a result of the utilization of its 2001 NOL's. Capital
expenditures for the first six months of 2002 were $846 million and
included the acquisition of seven Boeing 757-200s and three Boeing 777-
200ER aircraft. These capital expenditures were financed primarily
through secured mortgage agreements. Proceeds from the sale of
equipment and property of $160 million include the proceeds received
upon delivery of three McDonnell Douglas MD-11 aircraft to FedEx.
As of June 30, 2002, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 11 Boeing 777-200ERs and nine
Boeing 767-300ERs. Deliveries of these aircraft are scheduled to
continue through 2008. Payments for these aircraft are expected to be
approximately $210 million during the remainder of 2002, $890 million
in 2003, $390 million in 2004 and an aggregate of approximately $1.5
billion in 2005 through 2008.
In June 2002, Standard & Poor's downgraded the credit ratings of
American, and the credit ratings of a number of other major airlines.
The long-term credit ratings of American were removed from Standand &
Poor's Credit Watch with negative implications and were given a
negative outlook. Any additional reductions in American's credit
ratings could result in increased borrowing costs to the Company and
might limit the availability of future financing needs.
8
<Page> 11
In addition to the Company's approximately $2.5 billion in cash and
short-term investments as of June 30, 2002, the Company has available
a variety of future financing sources, including, but not limited to:
(i) the receipt of the remainder of the U.S. Government grant
authorized by the Air Transportation Safety and System Stabilization
Act (the Act), which is estimated to be in excess of $40 million, (ii)
additional secured aircraft debt, (iii) the availability of the
Company's $1 billion credit facility, (iv) sale-leaseback transactions
of owned property, including aircraft and real estate, (v) the
recovery of past federal income taxes paid as a result of a provision
in the recently passed economic stimulus package regarding NOL
carrybacks, (vi) tax-exempt borrowings for airport facilities, (vii)
securitization of future operating receipts, and (viii) unsecured
borrowings. No assurance can be given that any of these financing
sources will be available on terms acceptable to the Company.
However, the Company believes it will meet its current financing
needs.
Pursuant to the Act, the Government made available to air carriers,
subject to certain conditions, up to $10 billion in federal government
guarantees of certain loans. American did not seek such loan
guarantees.
As a result of the September 11, 2001 events, aviation insurers have
significantly reduced the maximum amount of insurance coverage
available to commercial air carriers for liability to persons other
than employees or passengers for claims resulting from acts of
terrorism, war or similar events (war-risk coverage). At the same
time, they significantly increased the premiums for such coverage as
well as for aviation insurance in general. Pursuant to authority
granted in the Act, the Government has supplemented the commercial war-
risk insurance until August 17, 2002 with a third party liability
policy to cover losses to persons other than employees or passengers
for renewable 60-day periods. In the event the insurance carriers
reduce further the amount of insurance coverage available or the
Government fails to renew war-risk insurance, the Company's operations
and/or financial position, results of operations or cash flows would
be adversely impacted.
As discussed in the Company's 2001 Form 10-K, a provision in the
current Allied Pilots Association (APA) contract freezes the number of
ASMs and block hours flown on American's two letter marketing code by
American's regional carrier partners when American pilots are on
furlough (the ASM cap). As AMR Eagle continues to accept previously
ordered regional jets, this ASM cap would be reached sometime in 2002,
necessitating actions to insure compliance with the ASM cap. American
is working with its regional partners to accomplish this. Actions
currently being taken and considered by AMR Eagle to reduce its
capacity are discussed in the Company's 2001 Form 10-K. In addition,
American is removing its code from flights of the AmericanConnection
carriers, which are independent carriers that provide feed to
American's St. Louis hub. American believes that the combination of
these actions will enable it to comply with this ASM cap through 2002
and for sometime beyond.
In addition, another provision in the current APA contract limits the
total number of regional jets with more than 44 seats flown under the
American code by American's regional carrier partners to 67 aircraft.
Similar to the above, as AMR Eagle continues to accept previously
ordered Bombardier CRJ aircraft, this cap would be reached in early
2003. In order to ensure American remains in compliance with this
provision, AMR Eagle has reached an agreement in principle to dispose
of 14 Embraer 145 aircraft. Ultimately, these airplanes will be
acquired by Trans States Airlines, an AmericanConnection carrier. Trans
States Airlines will operate these aircraft under its two letter airline
code and expects to deploy these aircraft at its St. Louis hub where it
feeds American. The potential transaction still requires the consent of
certain third parties, including the companies financing these aircraft,
and is subject to the negotiation of final documentation.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 142 requires the Company to test goodwill and
indefinite-lived intangible assets (for the Company, route acquisition
costs) for impairment rather than amortize them. During the first
quarter of 2002, the Company completed its impairment analysis for
route acquisition costs in accordance with SFAS 142. The analysis did
not result in an impairment charge. During the second quarter of
2002, the Company completed the first step of its impairment analysis
related to its $1.3 billion of goodwill and determined the Company's
net book value to be in excess of the Company's fair market value at
January 1, 2002, using American as the reporting unit for purposes of
the fair value determination. As a result, the Company is in the process
of completing the second step of the impairment analysis which will
allocate the newly determined fair value of American to each of its assets
and liabilities. This allocation is expected to be completed during
the third or fourth quarter of 2002 and will likely result in the
Company recording a one-time, non-cash pre-tax charge of up to $1.3
billion to write-down American's goodwill. Such charge would be
nonoperational in nature and would be reflected as a cumulative effect
of an accounting change in the consolidated statements of operations.
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OUTLOOK
Capacity for American is expected to be down approximately two percent
in the third quarter of 2002 compared to last year's third quarter
levels. For the third quarter of 2002, the Company expects traffic to
be about flat as compared to last year's third quarter levels.
Pressure to reduce costs will continue, although the Company will
continue to see higher benefit and security costs, increased insurance
premiums, and greater interest expense. However, the Company expects
to see a slight decrease in fuel prices as compared to the third
quarter of 2001 and the continued decline in commission expense due to
the commission changes implemented earlier in 2002. In total,
American's unit costs, excluding special items, for the third quarter
of 2002 are expected to be down approximately 3.5 percent from last
year's third quarter level. Notwithstanding the expected decrease in
unit costs however, given the revenue pressures seen in the first half
of the year and expected to continue into the third quarter, the
Company expects to incur a sizable loss in the third quarter and a
significant loss for 2002.
In response to these financial challenges, the Company has undertaken
a comprehensive review of its business to better align its cost
structure with the current revenue environment, aimed at improving
productivity, simplifying operations and reducing costs. The Company
has begun to implement certain of these changes, including a fleet
simplification program, adjustments to its operating schedule and
increased airport automation, and will continue to refine its business
throughout the coming months.
FORWARD-LOOKING INFORMATION
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in
documents incorporated herein by reference, the words "expects,"
"plans," "anticipates," "believes," and similar expressions are
intended to identify forward-looking statements. Other forward-
looking statements include statements which do not relate solely to
historical facts, such as, without limitation, statements which
discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise. Forward-looking statements are subject
to a number of factors that could cause actual results to differ
materially from our expectations. Additional information concerning
these and other factors is contained in the Company's Securities and
Exchange Commission filings, including but not limited to 2001 Form
10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the 2001 Form 10-K.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1999, a class action lawsuit was filed, and in November
1999 an amended complaint was filed, against AMR Corporation, American
Airlines, Inc., AMR Eagle Holding Corporation, Airlines Reporting
Corporation, and the Sabre Group Holdings, Inc. in the United States
District Court for the Central District of California, Western
Division (Westways World Travel, Inc. v. AMR Corp., et al.). The
lawsuit alleges that requiring travel agencies to pay debit memos to
American for violations of American's fare rules (by customers of the
agencies) (1) breaches the Agent Reporting Agreement between American
and AMR Eagle and the plaintiffs, (2) constitutes unjust enrichment,
and (3) violates the Racketeer Influenced and Corrupt Organizations
Act of 1970 (RICO). The as yet uncertified class includes all travel
agencies who have been or will be required to pay monies to American
for debit memos for fare rules violations from July 26, 1995 to the
present. The plaintiffs seek to enjoin American from enforcing the
pricing rules in question and to recover the amounts paid for debit
memos, plus treble damages, attorneys' fees, and costs. The Company
intends to vigorously defend the lawsuit. Although the Company
believes that the litigation is without merit, an adverse court
decision could impose restrictions on the Company's relationships with
travel agencies which restrictions could have an adverse impact on the
Company.
On May 13, 1999, the United States (through the Antitrust Division of
the Department of Justice) sued AMR Corporation, American Airlines,
Inc., and AMR Eagle Holding Corporation in federal court in Wichita,
Kansas. The lawsuit alleges that American unlawfully monopolized or
attempted to monopolize airline passenger service to and from
Dallas/Fort Worth International Airport (DFW) by increasing service
when new competitors began flying to DFW, and by matching these new
competitors' fares. The Department of Justice seeks to enjoin
American from engaging in the alleged improper conduct and to impose
restraints on American to remedy the alleged effects of its past
conduct. On April 27, 2001, the U.S. District Court for the District
of Kansas granted American's motion for summary judgment. On June 26,
2001, the U.S. Department of Justice appealed the granting of
American's motion for summary judgment. The parties have submitted
briefs to the 10th Circuit Court of Appeals, which has scheduled the
case for oral argument on September 23, 2002. The Company intends to
defend the lawsuit vigorously. A final adverse court decision
imposing restrictions on the Company's ability to respond to
competitors would have an adverse impact on the Company.
Between May 14, 1999 and June 7, 1999, seven class action lawsuits
were filed against AMR Corporation, American Airlines, Inc., and AMR
Eagle Holding Corporation in the United States District Court in
Wichita, Kansas seeking treble damages under federal and state
antitrust laws, as well as injunctive relief and attorneys' fees (King
v. AMR Corp., et al.; Smith v. AMR Corp., et al.; Team Electric v. AMR
Corp., et al.; Warren v. AMR Corp., et al.; Whittier v. AMR Corp., et
al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp., et al.).
Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by increasing service when new competitors began flying
to DFW, and by matching these new competitors' fares. Two of the
suits (Smith and Wright) also allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by offering discounted fares to corporate purchasers, by
offering a frequent flyer program, by imposing certain conditions on
the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several
classes of consumers, the broadest of which is all persons who
purchased tickets for air travel on American into or out of DFW from
1995 to the present. On November 10, 1999, the District Court stayed
all of these actions pending developments in the case brought by the
Department of Justice. As a result, to date no class has been
certified. The Company intends to defend these lawsuits vigorously.
One or more final adverse court decisions imposing restrictions on the
Company's ability to respond to competitors or awarding substantial
money damages would have an adverse impact on the Company.
On May 17, 2002, the named plaintiffs in Hall, et al. v. United
Airlines, et al., No. 7:00 CV 123-BR(1), pending in the United States
District Court for the Eastern District of North Carolina, filed an
amended complaint alleging that between 1995 and the present, American
and the other defendant airlines conspired to reduce commissions paid
to U.S.-based travel agents in violation of Section 1 of the Sherman
Act. The named plaintiffs seek to certify a nationwide class of
travel agents, but no class has yet been certified. American is
vigorously defending the lawsuit. Trial is set for April 29, 2003. A
final adverse court decision awarding substantial money damages or
placing restrictions on the Company's commission policies or practices
would have an adverse impact on the Company.
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Item 1. Legal Proceedings (Continued)
On April 26, 2002, six travel agencies filed an action in the United
States District Court for the Central District of California against
American, United Air Lines, Delta Air Lines, and Orbitz, LLC, alleging
that American and the other defendants: (i) conspired to prevent
travel agents from acting as effective competitors in the distribution
of airline tickets to passengers in violation of Section 1 of the
Sherman Act; and (ii) conspired to monopolize the distribution of
common carrier air travel between airports in the United States in
violation of Section 2 of the Sherman Act. The named plaintiffs seek
to certify a nationwide class of travel agents, but no class has yet
been certified. American is vigorously defending the lawsuit, which
is styled Albany Travel Co., et al. v. Orbitz, LLC, et al., No. 02-
3459 (ER) (AJW)x. A final adverse court decision awarding substantial
money damages or placing restrictions on the Company's distribution
practices would have an adverse impact on the Company.
On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air
Canada, et. al., No. T757-027, pending in the Federal Court of Canada,
Trial Division, Montreal, filed a statement of claim alleging that
between 1995 and the present, American, the other defendant airlines,
and the International Air Transport Association conspired to reduce
commissions paid to Canada-based travel agents in violation of
Section 45 of the Competition Act of Canada. The named plaintiffs
seek to certify a nationwide class of travel agents, but no class has
yet been certified. American is vigorously defending the lawsuit. A
final adverse court decision awarding substantial money damages or
placing restrictions on the Company's commission policies would have
an adverse impact on the Company.
Miami-Dade County (the County) is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American Airlines,
Inc. and AMR Eagle have been named as potentially responsible parties
(PRPs) for the contamination at MIA. During the second quarter of
2001, the County filed a lawsuit against 17 defendants, including
American Airlines, Inc., in an attempt to recover its past and future
cleanup costs (Miami-Dade County, Florida v. Advance Cargo Services,
Inc., et al. in the Florida Circuit Court). In addition to the 17
defendants named in the lawsuit, 243 other agencies and companies were
also named as PRPs and contributors to the contamination. American's
and AMR Eagle's portion of the cleanup costs cannot be reasonably
estimated due to various factors, including the unknown extent of the
remedial actions that may be required, the proportion of the cost that
will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will
ultimately supervise the remedial activities and the nature of that
supervision. The Company is vigorously defending the lawsuit.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
3.1 Bylaws of American Airlines, Inc., amended as of April 2, 2002.
12 Computation of ratio of earnings to fixed charges for the three
and six months ended June 30, 2002 and 2001.
Form 8-Ks filed under Item 5 - Other Events
On June 13, 2002, American Airlines, Inc. filed a report on Form 8-
K relating to a press release issued by American to announce the
appointment of Jeffrey C. Campbell as Senior Vice President - Finance
and Planning and Chief Financial Officer of the Company.
On June 19, 2002, American Airlines, Inc. filed a report on Form 8-
K to provide updated monthly guidance on unit cost, fuel, traffic and
capacity for the months of May through August 2002.
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure
On May 31, 2002, American Airlines, Inc. furnished a report on Form
8-K to provide updated monthly guidance on unit cost, fuel, traffic
and capacity for the months of March through July 2002.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: July 19, 2002 BY: /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President - Finance and
Planning and Chief Financial Officer
13