<Page> 1
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 March 31, 2003.
[ ]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 by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). 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 April 30, 2003.
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 months ended March 31,
2003 and 2002
Condensed Consolidated Balance Sheets -- March 31, 2003 and December 31,
2002
Condensed Consolidated Statements of Cash Flows -- Three months ended
March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements -- March 31, 2003
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
<Page> 3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
<Table>
<Caption>
Three Months Ended
March 31,
2003 2002
<s> <c> <c>
Revenues
Passenger $ 3,394 $ 3,484
Regional Affiliates 326 22
Cargo 134 133
Other 254 196
Total operating revenues 4,108 3,835
Expenses
Wages, salaries and benefits 2,014 1,972
Aircraft fuel 682 497
Depreciation and amortization 297 304
Regional carrier payments 371 23
Other rentals and landing fees 268 268
Commissions, booking fees and credit
card expense 255 298
Maintenance, materials and repairs 195 230
Aircraft rentals 184 219
Food service 148 169
Other operating expenses 597 577
Total operating expenses 5,011 4,557
Operating Loss (903) (722)
Other Income (Expense)
Interest income 13 18
Interest expense (149) (127)
Interest capitalized 18 20
Related party interest - net 3 5
Miscellaneous - net (14) (8)
(129) (92)
Loss Before Income Taxes and Cumulative
Effect of Accounting Change (1,032) (814)
Income tax benefit - (272)
Loss Before Cumulative Effect of
Accounting Change (1,032) (542)
Cumulative Effect of Accounting
Change, Net of Tax Benefit - (889)
Net Loss $ (1,032) $(1,431)
</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>
March 31, December 31,
2003 2002
<s> <c> <c>
Assets
Current Assets
Cash $ 156 $ 100
Short-term investments 1,104 1,834
Restricted cash and short-term investments 550 783
Receivables, net 862 836
Income tax receivable 24 539
Inventories, net 566 572
Other current assets 265 94
Total current assets 3,527 4,758
Equipment and Property
Flight equipment, net 12,972 12,887
Other equipment and property, net 2,368 2,362
Purchase deposits for flight equipment 602 694
15,942 15,943
Equipment and Property Under Capital Leases
Flight equipment, net 1,307 1,329
Other equipment and property, net 111 89
1,418 1,418
Route acquisition costs and airport operating
and gate lease rights, net 1,244 1,257
Other assets 4,380 4,274
$ 26,511 $ 27,650
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities
Accounts payable $ 1,003 $ 1,129
Accrued liabilities 2,307 2,409
Air traffic liability 2,781 2,614
Payable to affiliates, net 10 76
Current maturities of long-term debt 532 603
Current obligations under capital leases 126 126
Total current liabilities 6,759 6,957
Long-term debt, less current maturities 8,798 8,729
Obligations under capital leases, less
current obligations 1,255 1,322
Postretirement benefits 2,701 2,654
Other liabilities, deferred gains and
deferred credits 7,032 7,041
Stockholder's Equity (Deficit)
Common stock - -
Additional paid-in capital 2,669 2,598
Accumulated other comprehensive loss (1,204) (1,184)
Retained deficit (1,499) (467)
(34) 947
$ 26,511 $ 27,650
</Table>
The accompanying notes are an integral part of these financial statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
<Table>
<Caption>
Three Months Ended March 31,
2003 2002
<s> <c> <c>
Net Cash Used for Operating Activities $(398) $ (446)
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (292) (508)
Net decrease in short-term investments 730 904
Net decrease (increase) in restricted cash
and short-term investments 233 (169)
Proceeds from sale of equipment and property 28 12
Lease prepayments through bond redemption,
net of bond reserve fund (235) -
Other 22 -
Net cash provided by investing activities 486 239
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (85) (175)
Redemption of bonds (86) -
Proceeds from issuance of long-term debt 134 469
Funds transferred from affiliates, net 5 (62)
Net cash (used) provided by
financing activities (32) 232
Net increase in cash 56 25
Cash at beginning of period 100 99
Cash at end of period $ 156 $ 124
</Table>
The accompanying notes are an integral part of these financial statements.
-3-
<Page> 6
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 with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. American Airlines, Inc. (American or the Company) is a
wholly owned subsidiary of AMR Corporation (AMR). 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, 2002 (2002 Form
10-K). Certain amounts from 2002 have been reclassified to conform
with the 2003 presentation.
The Company's Regional Affiliates include two wholly owned
subsidiaries of AMR, American Eagle Airlines, Inc. (American Eagle)
and Executive Airlines, Inc. (Executive) (collectively, AMR Eagle),
and two independent carriers, Trans States Airlines, Inc. (Trans
States) and Chautauqua Airlines, Inc. (Chautauqua). In 2002,
American had a fixed fee per block hour agreement with Chautauqua.
In 2003, American had fixed fee per block hour agreements with
American Eagle, Executive, Trans States and Chautauqua.
2.In February 2003, American asked its labor leaders and other
employees for approximately $1.8 billion in permanent, annual
savings through a combination of changes in wages, benefits and
work rules. The requested $1.8 billion in savings was divided by
work group as follows: $660 million - pilots; $620 million -
Transportation Workers Union represented employees; $340 million -
flight attendants; $100 million - management and support staff; and
$80 million - agents and representatives. References in this
document to American's three major unions include: the Allied
Pilots Association (the APA); the Transportation Workers Union (the
TWU); and the Association of Professional Flight Attendants (the
APFA).
On March 31, 2003, American announced that it had reached
agreements with its three major unions (the Labor Agreements). It
also reported various changes in the pay plans and benefits for non-
unionized personnel including officers and other management (the
Management Reductions). The anticipated cost savings arising from
the Labor Agreements and the Management Reductions met the targeted
annual savings of $1.8 billion.
On April 16, 2003, the Company reported that the members of
American's three major unions had ratified the Labor Agreements.
Thereafter, published reports of actions the Company had taken in
2002 to retain key executives led two of the unions to indicate
that they would not certify the ratification process and might
initiate another vote on the Labor Agreements. The Company's
actions included (i) the funding of supplemental pension benefits
for the officers of American by means of a secular trust (the
supplemental pension benefits provide benefits the officers would
have received under the terms and conditions of American's defined
benefit plans, but for limitations imposed by ERISA) and (ii) the
execution of retention agreements whereby American would make cash
payments to certain officers in January 2004 and January 2005.
Given the economic turmoil affecting the Company and the industry,
in 2002 the Compensation Committee of the AMR Board of Directors
decided that it was necessary to offer certain key officers
retention agreements to ensure that the officers remained in the
employ of the Company for two years. In light of the controversy
surrounding the retention agreements, they were voluntarily
cancelled in April 2003.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
On April 25, 2003, American announced that it had reached agreement
with the leaders of its three major unions on modifications to the
Labor Agreements (the Modified Labor Agreements). The principal
modifications were a shorter duration and the ability to initiate
the process of re-negotiating the Modified Labor Agreements after
three years. Even with these modifications, the Modified Labor
Agreements continue to meet the targeted annual savings. On April
24, 2003, the Company announced that its Board of Directors had
accepted the resignation of Donald J. Carty (CEO of the Company and
AMR). The Company also announced that Edward A. Brennan (a
Director of AMR since 1987) had been named Chairman of AMR and that
Gerard J. Arpey (President and COO of the Company and AMR) had been
named CEO of the Company and AMR and a director of AMR. On April
24, 2003 and April 25, 2003, the three major unions certified the
ratification of the Modified Labor Agreements.
Of the approximately $1.8 billion in savings, approximately $1.0
billion relate to wage and benefit reductions while the remaining
approximately $.8 billion will be accomplished through changes in
work rules which will result in additional job reductions. The
Company expects to incur severance and benefits related charges in
connection with these job reductions beginning in the second
quarter of 2003. The amount of such charges could not be reasonably
estimated at the time of the filing of this Form 10-Q. Wage
reductions became effective on April 1, 2003 for officers and May
1, 2003 for all other employees. Reductions related to benefits
and work rule changes will be phased in over time. The Company
expects total savings from wages, benefits and work rule changes to
be approximately $200 million in the second quarter of 2003, $400
million in the third quarter of 2003 and $450 million ($1.8 billion
annually) in the fourth quarter of 2003. In connection with the
changes in wages, benefits and work rules, the Modified Labor
Agreements provide for the issuance to American's employees of
approximately 38 million shares of AMR stock in the form of stock
options which will generally vest over a three year period (see
Note 10 for additional information).
In addition, subsequent to the ratification of the Modified Labor
Agreements, the Company has reached concessionary agreements with
certain vendors, lessors, lenders and suppliers (the Vendors, and
with the agreements the Vendor Agreements). Generally, under the
terms of these Vendor Agreements the Company will receive the
benefit of lower rates and charges for certain goods and services,
and more favorable rent and financing terms with respect to certain
of its aircraft. In return for these concessions the Company
anticipates that it will issue over time up to 2.8 million shares
of AMR's common stock to Vendors who have reached agreements with
the Company. The annual cost savings from the Vendors are estimated
to be in excess of $170 million.
Even with the Modified Labor Agreements, the savings from
Management Reductions and the Vendor Agreements, the Company may
nonetheless need to initiate a filing under Chapter 11 of the U.S.
Bankruptcy Code (a Chapter 11 filing) because its financial
condition will remain weak and its prospects uncertain. Among
other things, the following factors have had and/or may have a
negative impact on the Company's business and financial results:
the continued weakness of the U. S. economy; the residual effects
of the war in Iraq; the fear of another terrorist attack; the SARS
(Severe Acute Respiratory Syndrome) outbreak; the inability of the
Company to satisfy the liquidity requirements or other covenants in
certain of its credit arrangements (see Note 11); or the inability
of the Company to access the capital markets for additional
financing.
-5-
<Page> 8
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3.In April 2003, the President signed the Emergency Wartime
Supplemental Appropriations Act, 2003 (the Act) which includes
aviation-related assistance provisions. The Act authorizes payment
of (i) $100 million to compensate air carriers for the direct costs
associated with the strengthening of flight deck doors and locks
and (ii) $2.3 billion to reimburse air carriers for increased
security costs which shall be distributed in proportion to amounts
each has paid or collected as of the date of enactment in passenger
security and air carrier security fees to the Transportation
Security Administration. In addition, the Act suspends the
collection of the passenger security fee from June 1, 2003 until
October 1, 2003 and extends war-risk insurance through August 30,
2004. The Act also limits the total cash compensation for the two
most highly compensated named executive officers for certain
airlines, including the Company, during the period April 1, 2003 to
April 1, 2004 to the amount of salary received by such officers in
2002. A violation of this executive compensation provision would
require the carrier to repay the government for the amount of its
reimbursement for increased security costs as described in item
(ii) above. The Company does not anticipate any difficulties in
complying with this limitation on executive compensation. The
Company estimates that its reimbursement under the Act, excluding
the impact of suspending the security fee from June 1, 2003 until
October 1, 2003, will be in the range of $300 million to $320
million. This reimbursement will be recorded as a reduction to
operating expenses. The Company's compensation for the direct costs
associated with strengthening cockpit doors will be recorded as a
reduction to capitalized flight equipment. The reimbursement
payment from the government is expected in May 2003; the
compensation payment is expected sometime this summer.
4.The Company accounts for its participation in AMR's stock-based
compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related Interpretations. Under APB 25, no compensation expense
is recognized for stock option grants if the exercise price of the
stock option grants is at or above the fair market value of the
underlying stock on the date of grant. The Company has adopted the
pro forma disclosure features of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". The following table illustrates the effect on net
loss if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation (in
millions, except per share amounts):
Three Months Ended March 31,
2003 2002
Net loss, as reported $(1,032) $(1,431)
Add: Stock-based employee compensation
expense included in reported net
loss, net of tax (2) 8
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of tax (10) (16)
Pro forma net loss $(1,044) $(1,439)
-6-
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5.In 2001, the Company recorded fleet impairment and other special
charges related to the events of September 11, 2001. In 2002, the
Company recorded fleet impairments and other special charges
related to initiatives to reduce costs, reduce capacity and
simplify its aircraft fleet. Furthermore, as a part of its
restructuring initiatives, the Company incurred $25 million in
severance charges in the first quarter of 2003, which are included
in Wages, salaries and benefits in the consolidated statement of
operations. The following table summarizes the components of these
charges and the remaining accruals for future lease payments, lease
return and storage costs, facilities closure costs and employee
severance and benefit costs (in millions):
Aircraft Facility Employee
Charges Exit Costs Charges Total
Remaining accrual at
December 31, 2002 $ 206 $ 17 $ 44 $ 267
Severance charges - - 25 25
Payments (32) (2) (31) (65)
Remaining accrual at
March 31, 2003 $ 174 $ 15 $ 38 $ 227
6.The Company has restricted cash and short-term investments
related to projected workers' compensation obligations and various
other obligations. As of March 31, 2003, projected workers'
compensation obligations were secured by restricted cash and short-
term investments of $386 million and various other obligations were
secured by restricted cash and short-term investments of $164 million.
In the first quarter of 2003, the Company redeemed $339 million of tax-
exempt bonds that were backed by standby letters of credit secured by
restricted cash and short-term investments resulting in a reduction in
restricted cash and short-term investments. Of the $339 million of tax-
exempt bonds that were redeemed, $253 million were accounted for as
operating leases. Payments to redeem these tax-exempt special
facility revenue bonds are considered prepaid facility rentals and
will reduce future operating lease commitments. The remaining $86
million of tax-exempt bonds that were redeemed were accounted for as
debt and had original maturities in 2014 through 2024.
As of March 31, 2003 the Company has approximately $247 million in
fuel prepayments and credit card holdback deposits classified as
Other current assets and Other assets.
7.As of March 31, 2003, the Company had commitments to acquire the
following aircraft: two Boeing 777-200 ERs and six Boeing 767-
300ERs in 2003; and an aggregate of 47 Boeing 737-800s and nine
Boeing 777-200ERs in 2006 through 2010. Future payments for all
aircraft, including the estimated amounts for price escalation,
will approximate $330 million during the remainder of 2003, $0
million in 2004, $118 million in 2005 and an aggregate of
approximately $2.6 billion in 2006 through 2010. Boeing Capital
Corporation has agreed to provide backstop financing for all Boeing
aircraft deliveries in 2003. In return, American granted Boeing a
security interest in certain advance payments previously made and
in certain rights under the aircraft purchase agreement between
American and Boeing.
-7-
<Page> 10
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As discussed in the notes to the consolidated financial statements
included in the Company's 2002 Form 10-K, Miami-Dade County is
currently investigating and remediating various environmental
conditions at the Miami International Airport (MIA) and funding the
remediation costs through landing fees and various cost recovery
methods. American and AMR Eagle have been named as potentially
responsible parties (PRPs) for the contamination at MIA. During
the second quarter of 2001, the County filed a lawsuit against 17
defendants, including American, in an attempt to recover its past
and future cleanup costs (Miami-Dade County, Florida v. Advance
Cargo Services, Inc., et al. in the Florida Circuit Court). 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. In
addition, the Company is subject to environmental issues at various
other airport and non-airport locations for which it has accrued
$89 million at March 31, 2003. 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.
8.Accumulated depreciation of owned equipment and property at March
31, 2003 and December 31, 2002 was $8.1 billion and $7.8 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at March 31, 2003 and December 31, 2002 was
$1.0 billion and $971 million, respectively.
9.The Company has experienced significant cumulative losses and as a
result generated certain net operating losses available to offset
future taxes payable. As a result of the cumulative operating
losses, a valuation allowance was established against the full
amount of the Company's net deferred tax asset as of December 31,
2002. The Company provides a valuation allowance for deferred tax
assets when it is more likely than not that some portion or all of
its deferred tax assets will not be realized. During the first
quarter of 2003 the Company continued to record a valuation
allowance against its net deferred tax assets, which results in no
tax benefit being recorded for the pretax losses. The Company's
deferred tax asset valuation allowance increased $380 million in
the first quarter of 2003, to $1.1 billion as of March 31, 2003.
10.In March 2003, the Board of Directors of AMR approved the issuance
of additional shares of AMR common stock to employees and Vendors
in connection with ongoing negotiations concerning concessions. The
maximum number of shares authorized for issuance was 30 percent of
the number of shares of the Company's common stock outstanding on
March 24, 2003 (156,359,955) or approximately 46.9 million shares.
From the foregoing authorization, the Company expects to issue up
to 2.8 million shares to Vendors. Also in March 2003, the AMR
Board of Directors adopted the 2003 Employee Stock Incentive Plan
(2003 Plan) to provide equity awards to employees in
connection with wage, benefit and work rule concessions. Under
the 2003 Plan, all American employees are eligible to receive stock
awards which may include stock options, restricted stock and
deferred stock. In April 2003, the Company reached final
agreements with the unions representing American employees (the
Modified Labor Agreements, see Note 2). In connection with the
changes in wages, benefits and work rules, the Modified Labor
Agreements provide for the issuance of up to 37.9 million shares of
AMR stock in the form of stock options. On April 17, 2003
approximately 37.9 million stock options were granted to employees
at an exercise price of $5.00 per share, which is equal to the
closing price of AMR's common stock (NYSE) on that date (the grant
date). These shares will vest over a three-year period and will
expire no later than April 17, 2013. These options were granted to
members of the APA, the TWU, the APFA, agents, other non-management
personnel and management employees.
-8-
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
11.During the three-month period ended March 31, 2003, American
borrowed approximately $134 million under various debt agreements
which are secured by aircraft. Effective interest rates on these
agreements are fixed or variable based on London Interbank Offered
Rate (LIBOR) plus a spread and mature over various periods of time
through 2013. As of March 31, 2003, the effective interest rate on
these agreements ranged up to 8.81 percent.
American has a fully drawn $834 million credit facility that
expires December 15, 2005. On March 31, 2003, American and certain
lenders in such facility entered into a waiver and amendment that
(i) waived, until May 15, 2003, the requirement that American
pledge additional collateral to the extent the value of the
existing collateral was insufficient under the terms of the
facility, (ii) waived American's liquidity covenant for the quarter
ended March 31, 2003, (iii) modified the financial covenants
applicable to subsequent periods, and (iv) increased the applicable
margin for advances under the facility. On May 15, 2003, American
expects to pledge an additional 30 (non-Section 1110 eligible)
aircraft having an aggregate net book value as of March 31, 2003 of
approximately $451 million. Pursuant to the modified financial
covenants, American is required to maintain at least $1.0 billion
of liquidity, consisting of unencumbered cash and short-term
investments, for the second quarter 2003 and beyond. At this
point, it is uncertain whether the Company will be able to satisfy
this liquidity requirement.
In addition, the required ratio of EBITDAR to fixed charges has
been decreased until the period ending December 31, 2004, and the
next test of such cash flow coverage ratio will not occur until
March 31, 2004. The amendment also provided for a 50 basis point
increase in the applicable margin over LIBOR, resulting in an
effective interest rate (as of March 31, 2003) of 4.73 percent.
The interest rate will be reset again on September 17, 2003. At
American's option, interest on the facility can be calculated on
one of several different bases. For most borrowings, American
would anticipate choosing a floating rate based upon LIBOR.
As of March 31, 2003, American has issued guarantees covering
approximately $636 million of AMR's unsecured debt and AMR has
issued guarantees covering approximately $935 million of American's
tax-exempt bond debt. In addition, as of March 31, 2003, AMR and
American have issued guarantees covering approximately $521 million
of AMR Eagle's secured debt.
12.Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" (Interpretation 46)
requires the primary beneficiary of a variable interest entity to
include the assets, liabilities, and results of the activities of
the variable interest entity in its consolidated financial
statements, as well as disclosure of information about the assets
and liabilities, and the nature, purpose and activities of
consolidated variable interest entities. In addition,
Interpretation 46 requires disclosure of information about the
nature, purpose and activities of unconsolidated variable interest
entities in which the Company holds a significant variable
interest. The provisions of Interpretation 46 are effective
immediately for any variable interest entities acquired after
January 31, 2003 and effective beginning in the third quarter of
2003 for all variable interest entities acquired before February 1,
2003. This interpretation has had no impact on the Company's
consolidated statement of operations or condensed consolidated
balance sheets. Special facility revenue bonds have been issued by
certain municipalities primarily to purchase equipment and improve
airport facilities that are leased by American and accounted for as
operating leases. Approximately $2.1 billion of these bonds (with
total future payments of approximately $5.7 billion as of March 31,
2003) are guaranteed by American, AMR, or both. The Company is
currently evaluating the applicability of Interpretation 46 to
these airport lease arrangements and the possible impact on its
future consolidated results of operations and consolidated balance
sheet.
-9-
<Page> 12
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
(Interpretation 45) requires disclosures in interim and annual
financial statements about obligations under certain guarantees
issued by the Company. Furthermore, it requires recognition at the
beginning of a guarantee of a liability for the fair value of the
obligation undertaken in issuing the guarantee, with limited
exceptions including: 1) a parent's guarantee of a subsidiary's
debt to a third party, and 2) a subsidiary's guarantee of the debt
owed to a third party by either its parent or another subsidiary of
that parent. The disclosure requirements are effective for this
filing and have been included in Notes 7, 8 and 9 to the
consolidated financial statements in the 2002 Form 10-K. The
initial recognition and initial measurement provisions are only
applicable on a prospective basis for guarantees issued or modified
after December 31, 2002. This interpretation has had no impact on
the Company's consolidated statement of operations or condensed
consolidated balance sheets.
13.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 American,
route acquisition costs) for impairment rather than amortize them.
In 2002, the Company completed an impairment analysis for route
acquisition costs in accordance with SFAS 142. The analysis did not
result in an impairment charge. In addition, the Company completed
an impairment analysis related to its $1.3 billion of goodwill and
determined the Company's entire goodwill balance was impaired. In
arriving at this conclusion, the Company's net book value was
determined to be in excess of the Company's fair value at January
1, 2002, using American as the reporting unit for purposes of the
fair value determination. The Company determined its fair value as
of January 1, 2002 using various valuation methods, ultimately
using an allocation of AMR's fair value, which was determined using
market capitalization as the primary indicator of fair value. As a
result, the Company recorded a one-time, non-cash charge, effective
January 1, 2002, of $889 million (net of a tax benefit of $363
million) to write-off all of American's goodwill. This charge is
nonoperational in nature and is reflected as a cumulative effect of
accounting change in the consolidated statements of operations.
14.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 March 31, 2003 and 2002, comprehensive loss was
$(1,052) million and $(1,357) million, respectively. The
difference between net loss and comprehensive loss for the three
months ended March 31, 2003 and 2002 is due primarily to the
accounting for the Company's derivative financial instruments under
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended.
15.In 2002, American issued tickets for flights on its AMR Eagle
affiliate regional carriers, owned by AMR Eagle Holding
Corporation, a subsidiary of AMR. The revenue collected for such
tickets was prorated between American and the AMR Eagle carriers
based on the segments flown by the respective carriers. In
addition, American paid fees, recorded as a reduction in passenger
revenues, to AMR Eagle primarily for passengers connecting with
American flights. Furthermore, American provided, among other
things, communication and reservation services and other services,
including yield management and participation in American's frequent
flyer program to the AMR Eagle affiliate regional carriers. In
consideration for certain services provided, the carriers paid
American a service charge, based primarily on passengers boarded.
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Effective January 2003, American Airlines and AMR Eagle implemented
a preliminary "Fee Per Departure" agreement. Under this agreement,
American pays Eagle a fixed fee per block hour and departure to
operate regional aircraft. The block hour and departure fees are
designed to cover AMR Eagle's fully allocated costs. The Company
is in the process of implementing a definitive agreement which will
also include a margin. Assumptions for highly volatile or
uncontrollable costs such as fuel, landing fees, and aircraft
ownership are trued up to actual values on a pass through basis. In
consideration for these payments, American retains all passenger
and other revenues resulting from the Eagle operation. This
agreement will be renewed annually on January 1, without action by
either party, until either party gives written notice of
termination to the other party.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2003 and 2002
Summary American Airlines, Inc.'s (a wholly owned subsidiary of AMR
Corporation) net loss during the first quarter of 2003 was $1.0
billion compared to a net loss of $1.4 billion for the same period in
2002. The Company's first quarter 2002 results include a one-time,
non-cash charge to record the cumulative effect of a change in
accounting, effective January 1, 2002, of $889 million to write-off
all of American's goodwill upon the adoption of Statement of Financial
Accounting Standards Board No. 142 "Goodwill and Other Intangible
Assets" (see Note 13 to the condensed consolidated financial
statements). American's operating loss of $903 million increased $181
million compared to the same period in 2002.
The Company's first quarter revenues increased year-over-year due to
the Company's fixed fee per departure agreement with AMR Eagle,
discussed below and in Note 15 to the condensed consolidated financial
statements, which was effective January 1, 2003. Excluding the impact
of accounting for the Company's fixed fee per departure agreement with
AMR Eagle, the Company's first quarter 2003 revenues continued to
decrease year-over-year. The Company's revenues continue to be
negatively impacted by the economic slowdown, seen largely in business
travel declines and changes in business traveler profiles; the
geographic distribution of the Company's network; and reduced fares
due in large part to increased competition from low-cost carriers.
The Company's first quarter 2003 revenues were also negatively
impacted by the war in Iraq and the outbreak of Severe Acute
Respiratory Syndrome (SARS). The Company's revenues increased $273
million, to $4.1 billion, from the same period last year as a result
of the Company's fixed fee per departure agreement with AMR Eagle.
However, American's passenger revenues decreased by 2.6 percent, or
$90 million, in the first three months of 2003 from the same period in
2002. American's domestic revenue per available seat mile (RASM)
decreased 3.2 percent, to 8.43 cents, on a capacity increase of 1.8
percent, to 28.8 billion available seat miles (ASMs). International
RASM decreased to 8.43 cents, or 2.7 percent, on a capacity increase
of 6.5 percent. The decrease in international RASM was due to a 26.4
percent decrease in Pacific RASM slightly offset by a 1.0 percent
increase in European RASM. Latin American RASM remained flat. The
increase in international capacity was driven by a 52.4 percent and
9.8 percent increase in Pacific and European ASMs, respectively,
slightly offset by a 1.5 percent reduction in Latin American ASMs.
The Company's Regional Affiliates include two wholly owned
subsidiaries, American Eagle Airlines, Inc. (American Eagle) and
Executive Airlines, Inc. (Executive) (collectively, AMR Eagle), and
two independent carriers, Trans States Airlines, Inc. (Trans States)
and Chautauqua Airlines, Inc. (Chautauqua). In 2002, American had a
fixed fee per block hour agreement with Chautauqua. In 2003, American
had fixed fee per block hour agreements with American Eagle,
Executive, Trans States and Chautauqua. Regional Affiliates revenue
increased $304 million due primarily to the fixed fee per departure
agreements with AMR Eagle and Trans States in 2003. Certain amounts
from 2002 related to Regional Affiliates have been reclassified to
conform with the 2003 presentation.
Other revenues increased 29.6 percent, or $58 million, due primarily
to increases in ticket change fees coupled with changes to the
Company's change fee arrangements with travel agencies, increases in
airfreight service fees due primarily to fuel surcharges and increases
in AAdvantage fees.
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The Company's operating expenses increased 10.0 percent, or $454
million. Wages, salaries and benefits increased 2.1 percent, or $42
million, primarily due to increases in pension and health insurance
costs and contractual wage rate and seniority increases that are built
into the Company's labor contracts, offset by a reduction in the
average number of employees. Aircraft fuel expense increased 37.2
percent, or $185 million, due primarily to a 39.9 percent increase in
the Company's average price per gallon of fuel. Regional payments
increased $348 million due primarily to the fee per departure
agreement with AMR Eagle in 2003. Commissions, booking fees and credit
card expense decreased 14.4 percent, or $43 million, due primarily to
commission structure changes implemented in March 2002 and a 2.6
percent decrease in passenger revenues, somewhat offset by the
increase in Regional Affiliates revenue. Maintenance, materials and
repairs decreased 15.2 percent, or $35 million, due primarily to a
decrease in airframe and engine volumes at the Company's maintenance
bases resulting from a variety of factors including the retirement of
aircraft, the timing of engines returning from repair vendors and a
decrease in the number of flights; and the receipt of certain vendor
credits. Aircraft rentals decreased $35 million, or 16.0 percent, due
primarily to lease expirations and the removal of leased aircraft from
service in prior periods. Food service decreased 12.4 percent, or $21
million, due primarily to reductions in the level of food service.
Other income (expense), historically a net expense, increased $37
million due to the following: Interest income decreased 27.8 percent,
or $5 million, due primarily to decreasing short-term investment
balances. Interest expense increased $22 million, or 17.3 percent,
resulting primarily from the increase in the Company's long-term debt.
Miscellaneous-net increased 75.0 percent, or $6 million, due to the
write-down of certain investments held by the Company during the first
quarter of 2003.
The Company has experienced significant cumulative losses and as a
result generated certain net operating losses available to offset
future taxes payable. As a result of the cumulative operating losses,
a valuation allowance was established against the full amount of the
Company's net deferred tax asset as of December 31, 2002. The Company
provides a valuation allowance for deferred tax assets when it is more
likely than not that some portion or all of its deferred tax assets
will not be realized. During the first quarter of 2003 the Company
continued to record a valuation allowance against its net deferred tax
assets, which results in no tax benefit being recorded for the pretax
losses. The Company's deferred tax asset valuation allowance
increased $380 million in the first quarter of 2003, to $1.1 billion
as of March 31, 2003.
The effective tax rate for the three months ended March 31, 2002 was
impacted by a $18 million charge resulting from a provision in
Congress' economic stimulus package that changed the period for
carrybacks of net operating losses (NOLs). This change allowed the
Company to carry back 2001 and 2002 NOLs for five years, rather than
two years under the previous 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
In February 2003, American asked its labor leaders and other employees
for approximately $1.8 billion in permanent, annual savings through a
combination of changes in wages, benefits and work rules. The
requested $1.8 billion in savings was divided by work group as
follows: $660 million - pilots; $620 million - Transportation Workers
Union represented employees; $340 million - flight attendants; $100
million - management and support staff; and $80 million - agents and
representatives. References in this document to American's three
major unions include: the Allied Pilots Association (the APA); the
Transportation Workers Union (the TWU); and the Association of
Professional Flight Attendants (the APFA).
On March 31, 2003, American announced that it had reached agreements
with its three major unions (the Labor Agreements). It also reported
various changes in the pay plans and benefits for non-unionized
personnel including officers and other management (the Management
Reductions). The anticipated cost savings arising from the Labor
Agreements and the Management Reductions met the targeted annual
savings of $1.8 billion.
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<Page> 16
On April 16, 2003, the Company reported that the members of American's
three major unions had ratified the Labor Agreements. Thereafter,
published reports of actions the Company had taken in 2002 to retain
key executives led two of the unions to indicate that they would not
certify the ratification process and might initiate another vote on
the Labor Agreements. The Company's actions included (i) the funding
of supplemental pension benefits for the officers of American by means
of a secular trust (the supplemental pension benefits provide benefits
the officers would have received under the terms and conditions of
American's defined benefit plans, but for limitations imposed by
ERISA) and (ii) the execution of retention agreements whereby American
would make cash payments to certain officers in January 2004 and
January 2005. Given the economic turmoil affecting the Company and the
industry, in 2002 the Compensation Committee of the AMR Board of
Directors decided that it was necessary to offer certain key officers
retention agreements to ensure that the officers remained in the
employ of the Company for two years. In light of the controversy
surrounding the retention agreements, they were voluntarily cancelled
in April 2003.
On April 25, 2003, American announced that it had reached agreement
with the leaders of its major unions on modifications to the Labor
Agreements (the Modified Labor Agreements). The principal
modifications were a shorter duration and the ability to initiate the
process of re-negotiating the Modified Labor Agreements after three
years. Even with these modifications, the Modified Labor Agreements
continue to meet the targeted annual savings. On April 24, 2003, the
Company announced that its Board of Directors had accepted the
resignation of Donald J. Carty (CEO of the Company and AMR). The
Company also announced that Edward A. Brennan (a Director of AMR since
1987) had been named Chairman of AMR and that Gerard J. Arpey
(President and COO of the Company and AMR) had been named CEO of the
Company and AMR and a director of AMR. On April 24, 2003 and April
25, 2003, the three major unions certified the ratification of the
Modified Labor Agreements.
Of the approximately $1.8 billion in savings, approximately $1.0
billion relate to wage and benefit reductions while the remaining
approximately $.8 billion will be accomplished through changes in work
rules which will result in additional job reductions. The Company
expects to incur severance and benefits related charges in connection
with these job reductions beginning in the second quarter of 2003. The
amount of such charges could not be reasonably estimated at the time
of the filing of this Form 10-Q. Wage reductions became effective on
April 1, 2003 for officers and May 1, 2003 for all other employees.
Reductions related to benefits and work rule changes will be phased in
over time. The Company expects total savings from wages, benefits and
work rule changes to be approximately $200 million in the second
quarter of 2003, $400 million in the third quarter of 2003 and $450
million ($1.8 billion annually) in the fourth quarter of 2003. In
connection with the changes in wages, benefits and work rules, the
Modified Labor Agreements provide for the issuance to American's
employees of approximately 38 million shares of AMR stock in the form
of stock options which will generally vest over a three year period
(see Note 10 to the condensed consolidated financial statements for
additional information).
In addition, subsequent to the ratification of the Modified Labor
Agreements, the Company has reached concessionary agreements with
certain vendors, lessors, lenders and suppliers (the Vendors, and with
the agreements the Vendor Agreements). Generally, under the terms of
these Vendor Agreements the Company will receive the benefit of lower
rates and charges for certain goods and services, and more favorable
rent and financing terms with respect to certain of its aircraft. In
return for these concessions the Company anticipates that it will
issue over time up to 2.8 million shares of AMR's common stock to
Vendors who have reached agreements with the Company. The annual cost
savings from the Vendors are estimated to be in excess of $170
million.
Even with the Modified Labor Agreements, the savings from Management
Reductions and the Vendor Agreements, the Company may nonetheless need
to initiate a filing under Chapter 11 of the U.S. Bankruptcy Code (a
Chapter 11 filing) because its financial condition will remain weak
and its prospects uncertain. Among other things, the following
factors have had and/or may have a negative impact on the Company's
business and financial results: the continued weakness of the U. S.
economy; the residual effects of the war in Iraq; the fear of another
terrorist attack; the SARS (Severe Acute Respiratory Syndrome)
outbreak; the inability of the Company to satisfy the liquidity
requirements or other covenants in certain of its credit arrangements
(see Note 11 to the condensed consolidated financial statements); or
the inability of the Company to access the capital markets for
additional financing.
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<Page> 17
During 2001 and 2002, the Company raised approximately $7.5 billion of
funding to finance capital commitments and to fund operating losses.
The Company expects that it will continue to need to raise significant
additional financing in the near future to cover its liquidity needs,
until such time as (i) the cost initiatives discussed in the previous
paragraphs become fully effective and (ii) the Company returns to
profitability. The Company had approximately $1.3 billion in
unrestricted cash and short-term investments as of March 31, 2003.
The Company also had available possible future financing sources,
including, but not limited to: (i) a limited amount of additional
secured aircraft debt, (ii) sale-leaseback transactions of owned
property, including aircraft and real estate, (iii) securitization of
future operating receipts, and (iv) the potential sale of certain non-
core assets (including the Company's interests in Worldspan, a
computer reservations systems partnership). However, these financing
sources may not be available to the Company in light of its financial
condition. To the extent that the Company is unable to access capital
markets and raise additional capital, the Company will be unable to
fund its obligations and sustain its operations.
In April 2003, the President signed the Emergency Wartime Supplemental
Appropriations Act, 2003 (the Act) which includes aviation-related
assistance provisions. The Act authorizes payment of (i) $100 million
to compensate air carriers for the direct costs associated with the
strengthening of flight deck doors and locks and (ii) $2.3 billion to
reimburse air carriers for increased security costs which shall be
distributed in proportion to amounts each has paid or collected as of
the date of enactment in passenger security and air carrier security
fees to the Transportation Security Administration. In addition, the
Act suspends the collection of the passenger security fee from June 1,
2003 until October 1, 2003 and extends war-risk insurance through
August 30, 2004. The Act also limits the total cash compensation for
the two most highly compensated named executive officers for certain
airlines, including the Company, during the period April 1, 2003 to
April 1, 2004 to the amount of salary received by such officers in
2002. A violation of this executive compensation provision would
require the carrier to repay the government for the amount of its
reimbursement for increased security costs as described in item (ii)
above. The Company does not anticipate any difficulties in complying
with this limitation on executive compensation. The Company estimates
that its reimbursement under the Act, excluding the impact of
suspending the security fee from June 1, 2003 until October 1, 2003,
will be in the range of $300 million to $320 million. This
reimbursement will be recorded as a reduction to operating expenses.
The Company's compensation for the direct costs associated with
strengthening cockpit doors will be recorded as a reduction to
capitalized flight equipment. The reimbursement payment from the
government is expected in May 2003; the compensation payment is
expected sometime this summer.
American's credit ratings are significantly below investment grade. In
January 2003, Standard & Poor's and Moody's placed the credit ratings
of American on review for downgrade. In February 2003, Moody's further
downgraded the senior unsecured ratings of American and the ratings of
most of American's secured debt. The Moody's ratings remain on review
for possible downgrade. Also in February 2003, Standard & Poor's
lowered its long-term corporate credit ratings and the secured debt
rating of American. American's short-term rating was withdrawn.
Ratings on most of American's non-enhanced equipment trust
certificates were also lowered. In addition, Standard & Poor's revised
the CreditWatch implications to developing from negative. In March
2003, Standard & Poor's further lowered its long-term corporate credit
ratings for American and lowered the secured debt rating of American.
Ratings on most of American's non-enhanced equipment trust
certificates were also lowered. These reductions have increased the
Company's borrowing costs. Additional significant reductions in AMR's
or American's credit ratings would further increase its borrowing or
other costs and further restrict the availability of future financing.
In March 2003, Standard & Poor's removed AMR's common stock from the
S&P 500 index.
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American has a fully drawn $834 million credit facility that expires
December 15, 2005. On March 31, 2003, American and certain lenders in
such facility entered into a waiver and amendment that (i) waived,
until May 15, 2003, the requirement that American pledge additional
collateral to the extent the value of the existing collateral was
insufficient under the terms of the facility, (ii) waived American's
liquidity covenant for the quarter ended March 31, 2003, and (iii)
modified the financial covenants applicable to subsequent periods and
increased the applicable margin for advances under the facility. On
May 15, 2003, American expects to pledge an additional 30 (non-Section
1110 eligible) aircraft having an aggregate net book value as of March
31, 2003 of approximately $451 million. Pursuant to the modified
financial covenants, American is required to maintain at least $1.0
billion of liquidity, consisting of unencumbered cash and short-term
investments, for the second quarter 2003 and beyond. At this point,
it is uncertain whether the Company will be able to satisfy this
liquidity requirement.
In addition, the required ratio of EBITDAR to fixed charges has been
decreased until the period ending December 31, 2004, and the next test
of such cash flow coverage ratio will not occur until March 31, 2004.
The amendment also provided for a 50 basis points increase in the
applicable margin over the London Interbank Offered Rate (LIBOR),
resulting in an effective interest rate (as of March 31, 2003) of 4.73
percent. The interest rate will be reset again on September 17, 2003.
At American's option, interest on the facility can be calculated on
one of several different bases. For most borrowings, American would
anticipate choosing a floating rate based upon LIBOR.
The Company has restricted cash and short-term investments related to
projected workers' compensation obligations and various other
obligations. As of March 31, 2003, projected workers' compensation
obligations were secured by restricted cash and short-term
investments of $386 million and various other obligations were
secured by restricted cash and short-term investments of $164
million. In the first quarter of 2003, the Company redeemed $339
million of tax-exempt bonds that were backed by standby letters of
credit secured by restricted cash and short-term investments
resulting in a reduction in restricted cash and short-term
investments. Of the $339 million of tax-exempt bonds that were
redeemed, $253 million were accounted for as operating leases.
Payments to redeem these tax-exempt special facility revenue bonds
are considered prepaid facility rentals and will reduce future
operating lease commitments. The remaining $86 million of tax-exempt
bonds that were redeemed were accounted for as debt and had original
maturities in 2014 through 2024.
As of March 31, 2003 the Company has approximately $247 million in
fuel prepayments and credit card holdback deposits classified as
Other current assets and Other assets.
Net cash used for operating activities in the three-month period ended
March 31, 2003 was $398 million, a decrease of $48 million over the
same period in 2002. Included in net cash used for operating
activities was the receipt of a $515 million federal tax refund.
Capital expenditures for the first three months of 2003 were $292
million, and included the acquisition of three Boeing 767-300ERs
aircraft. These capital expenditures were financed primarily through
secured mortgage and debt agreements.
During the three-month period ended March 31, 2003, American borrowed
approximately $134 million under various debt agreements which are
secured by aircraft. Effective interest rates on these agreements are
fixed or variable based on LIBOR plus a spread and mature over various
periods of time through 2013. As of March 31, 2003, the effective
interest rate on these agreements ranged up to 8.81 percent.
As of March 31, 2003, the Company had commitments to acquire the
following aircraft: two Boeing 777-200 ERs and six Boeing 767-300ERs
in 2003; and an aggregate of 47 Boeing 737-800s and nine Boeing 777-
200ERs in 2006 through 2010. Future payments for all aircraft,
including the estimated amounts for price escalation, will approximate
$330 million during the remainder of 2003, $0 million in 2004, $118
million in 2005 and an aggregate of approximately $2.6 billion in 2006
through 2010. Boeing Capital Corporation has agreed to provide
backstop financing for all Boeing aircraft deliveries in 2003. In
return, American has granted Boeing a security interest in certain
advance payments previously made and in certain rights under the
aircraft purchase agreement between American and Boeing.
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Special facility revenue bonds have been issued by certain
municipalities primarily to purchase equipment and improve airport
facilities that are leased by American and accounted for as operating
leases. Approximately $2.1 billion of these bonds (with total future
payments of approximately $5.7 billion as of March 31, 2003) are
guaranteed by American, AMR, or both. These guarantees can only be
invoked in the event American defaults on the lease obligation and
certain other remedies are not available. Approximately $740 million
of these special facility revenue bonds contain mandatory tender
provisions that require American to repurchase the bonds at various
times through 2008, including $200 million in November 2003. Although
American has the right to remarket the bonds there can be no assurance
that these bonds will be successfully remarketed. Any payments to
redeem or purchase bonds that are not remarketed would also be
considered prepaid facility rentals and would reduce future operating
lease commitments.
In March 2003, the Board of Directors of AMR approved the issuance of
additional shares of AMR common stock to employees and Vendors in
connection with ongoing negotiations concerning concessions. The
maximum number of shares authorized for issuance was 30 percent of the
number of shares of the Company's common stock outstanding on March
24, 2003 (156,359,955) or approximately 46.9 million shares. From the
foregoing authorization, the Company expects to issue up to 2.8
million shares to Vendors. Also in March 2003, the AMR Board of
Directors adopted the 2003 Employee Stock Incentive Plan (2003 Plan)
to provide equity awards to employees in connection with wage,
benefit and work rule concessions. Under the 2003 Plan, all American
employees are eligible to receive stock awards which may include stock
options, restricted stock and deferred stock. In April 2003, the
Company reached final agreements with the unions representing American
employees (the Modified Labor Agreements, see Note 2 to the condensed
consolidated financial statements). In connection with the changes in
wages, benefits and work rules, the Modified Labor Agreements provide
for the issuance of up to 37.9 million shares of AMR stock in the form
of stock options. On April 17, 2003 approximately 37.9 million stock
options were granted to employees at an exercise price of $5.00 per
share, which is equal to the closing price of AMR's common stock
(NYSE) on that date (the grant date). These shares will vest over a
three-year period and will expire no later than April 17, 2013. These
options were granted to members of the APA, the TWU, the APFA, agents,
other non-management personnel and management employees.
A provision in the scope clause of American's former contract with
the Allied Pilots Associations (APA) limited the number of available
seat miles (ASMs) and block hours that could be flown under
American's marketing code (AA) by American's regional carrier
partners when American pilots are on furlough (the so-called ASM
cap). To ensure that American remained in compliance with the ASM
cap, American and American Eagle took several steps in 2002 to reduce
the number of ASMs flown by American's wholly-owned commuter air
carriers. As one of those measures, AMR Eagle signed a letter of
intent to sell Executive Airlines, its San Juan-based subsidiary.
Another provision in the former APA contract limited to 67 the total
number of regional jets with more than 44 seats that could be flown
under the AA code by American's regional carrier partners. As AMR
Eagle continued to accept previously-ordered Bombardier and Embraer
regional jets this cap would have been reached in early 2003. To
ensure that American remained in compliance with the 67-aircraft cap,
AMR Eagle reached an agreement to dispose of 14 Embraer ERJ-145
aircraft from its fleet. Trans States Airlines, an AmericanConnection
carrier, agreed to acquire these aircraft. Under the former contract
between AA and the APA, Trans States would have had to operate these
aircraft under its AX code, rather than the AA* code, at its St. Louis
hub.
The Labor Agreement with the APA (one of the Modified Labor
Agreements), ratified in April 2003, modified the provisions in the
APA contract described in the immediately preceding two paragraphs to
give the Company more flexibility with its American Eagle operations.
The limitations on the use of regional jets were substantially reduced
and are now tied to 110 percent of the size of American's narrowbody
aircraft fleet. As a consequence of these modifications, it is no
longer necessary to use the AX marketing code on flights operated by
Trans States as the AmericanConnection, and AMR Eagle has discontinued
its plans to sell Executive Airlines.
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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, including the uncertain financial
and business environment for the Company. These uncertainties
include, but are not limited to, the struggling economy, high fuel
prices, conflicts in the Middle East, the SARS outbreak and
historically low fare levels. Additional information concerning these
and other factors is contained in the Company's Securities and
Exchange Commission filings, including but not limited to the Form 10-
K for the year ended December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the Company's 2002 Form 10-K.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days before the filing date of this
quarterly report. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective. There have been no significant
changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to their
evaluation.
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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 money 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, a final adverse court
decision could impose restrictions on the Company's relationships with
travel agencies which 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 (United States v. AMR Corporation, et al, No. 99-1180-JTM,
United States District Court for the District of 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 (United States v. AMR Corporation, et al, No. 01-3203, United
States District Court of Appeals for the Tenth Circuit), and on
September 23, 2002, the parties presented oral arguments to the 10th
Circuit Court of Appeals, which has not yet issued its decision. 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 (see above description). 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.
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<Page> 22
On May 17, 2002, the named plaintiffs in Hall, et al. v. United
Airlines, et al., 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 over 15 other
defendant airlines conspired to reduce commissions paid to U.S.-based
travel agents in violation of Section 1 of the Sherman Act. The court
granted class action certification to the plaintiff on September 17,
2002, defining the plaintiff class as all travel agents in the United
States, Puerto Rico, and the United States Virgin Islands, who, at any
time from October 1, 1997 to the present, issued tickets,
miscellaneous change orders, or prepaid ticket advices for travel on
any of the defendant airlines. The case is stayed as to US Airways
and United Air Lines, since they filed for bankruptcy. American is
vigorously defending the lawsuit. Defendant carriers filed a motion
for summary judgment on December 10, 2002. Trial is set for September
02, 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.
On April 3, 2003, a group of 51 travel agencies opting out of the
certified class in Hall, et al. v. United Airlines (see description
above) filed a complaint styled Tam Travel et. al., v. Delta Air Lines
et. al., in the United States District Court for the Northern District
of California - San Francisco, alleging that between 1997 and the
present, American and over 20 other defendant airlines conspired to
reduce commissions paid to U.S.-based travel agents in violation of
Section 1 of the Sherman Act. American is vigorously defending the
lawsuit. A final adverse court decision awarding substantial money
damages might have an adverse impact on the Company.
On April 26, 2002, six travel agencies filed Albany Travel Co., et al.
v. Orbitz, LLC, et al., 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. On November 25, 2002, the
District Court stayed this case pending a judgment in Hall et. al. v.
United Airlines, et. al. (see above description). 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 April 25, 2002, a collection of 38 Quebec travel agencies filed
Voyages Montambault (1989), Inc. v. International Air Transport
Association, et al., seeking a declaratory judgment of the Superior
Court in Montreal, Canada that American and the other airline
defendants owe a "fair and reasonable commission" to the agencies, and
that American and the other airline defendants breached alleged
contracts with these agencies by adopting policies of not paying base
commissions. The defendants are the International Air Transport
Association, the Air Transport Association, Air Canada, American,
America West, Delta Air Lines, Grupo TACA, Northwest Airlines/KLM
Airlines, United Air Lines, US Airways, and Continental Airlines.
American is vigorously defending the lawsuit. A final adverse court
decision granting declaratory relief could expose the Company to
claims for substantial money damages or force the Company to pay
agency commissions, either of which 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., 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. Plaintiffs'
motion for certification is set for hearing on September 2, 2003.
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.
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<Page> 23
On August 14, 2002, a class action lawsuit was filed against American
Airlines, Inc. in the United States District Court for the Central
District of California, Western Division (All World Professional
Travel Services, Inc. v. American Airlines, Inc.). The lawsuit
alleges that requiring travel agencies to pay debit memos for
refunding tickets after September 11, 2001: (1) breaches the Agent
Reporting Agreement between American and plaintiff; (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 or will be required to pay
moneys to American for an "administrative service charge," "penalty
fee," or other fee for processing refunds on behalf of passengers who
were unable to use their tickets in the days immediately following the
resumption of air carrier service after the tragedies on September 11,
2001. The plaintiff seeks to enjoin American from collecting the
debit memos and to recover the amounts paid for the 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, a final adverse court decision could
impose restrictions on the Company's relationships with travel
agencies which could have an adverse impact on the Company.
On August 19, 2002, a U.S. travel agency filed Power Travel
International, Inc. v. American Airlines, Inc., et al., in New York
state court against American, Continental Airlines, Delta Air Lines,
JetBlue Airways, United Air Lines, and Northwest Airlines, alleging
that American and the other defendants breached their contracts with
the agency as well as the duty of good faith and fair dealing when
these carriers at various times reduced base commissions to zero. The
plaintiff seeks to certify a nationwide class of travel agents, but no
class has yet been certified. The plaintiff dismissed JetBlue from the
lawsuit, and the remaining defendants removed the lawsuit to the
United States District Court for the Southern District of New York.
The case is stayed as to United Air Lines, since it filed for
bankruptcy. American is vigorously defending the lawsuit. On April
17, 2003, the court granted the remaining defendants' motion to
dismiss the plaintiff's complaint with leave to replead within 20
days. A final adverse court decision awarding substantial money
damages or forcing the Company to pay agency commissions 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.
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<Page> 24
PART II
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
12 Computation of ratio of earnings to fixed charges for the three
months ended March 31, 2003 and 2002.
99 Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of section 1350, chapter 63 of
title 18, United States Code).
Form 8-Ks filed under Item 5 - Other Events
On January 22, 2003, American Airlines, Inc. filed a report on Form
8-K relating to a press release issued by AMR to announce AMR's fourth
quarter and full year 2002 earnings.
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<Page> 25
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: May 15, 2003 BY: /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and Chief
Financial Officer
<Page> 26
CERTIFICATIONS
I, Gerard J. Arpey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Gerard J. Arpey
Gerard J. Arpey
President and Chief Executive Officer
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<Page> 27
CERTIFICATIONS (Continued)
I, Jeffrey C. Campbell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and Chief
Financial Officer
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