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, 2005.
[ ]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 No X .
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 15, 2005.
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.
INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three months ended March 31,
2005 and 2004
Condensed Consolidated Balance Sheets -- March 31, 2005 and
December 31, 2004
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements -- March 31, 2005
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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended
March 31,
2005 2004
Revenues
Passenger $ 3,841 $ 3,678
Regional Affiliates 451 420
Cargo 151 148
Other revenues 294 257
Total operating revenues 4,737 4,503
Expenses
Wages, salaries and benefits 1,502 1,521
Aircraft fuel 996 748
Regional payments to AMR Eagle 473 393
Other rentals and landing fees 273 275
Commissions, booking fees and credit
card expense 271 288
Depreciation and amortization 245 285
Maintenance, materials and repairs 192 196
Aircraft rentals 143 148
Food service 123 136
Other operating expenses 563 538
Total operating expenses 4,781 4,528
Operating Loss (44) (25)
Other Income (Expense)
Interest income 35 14
Interest expense (175) (160)
Interest capitalized 22 17
Related party interest - net (2) -
Miscellaneous - net (7) (28)
(127) (157)
Loss Before Income Taxes (171) (182)
Income tax - -
Net Loss $ (171) $ (182)
The accompanying notes are an integral part of these financial statements.
-1-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
March 31, December 31,
2005 2004
Assets
Current Assets
Cash $ 147 $ 117
Short-term investments 2,883 2,787
Restricted cash and short-term investments 483 478
Receivables, net 1,015 821
Inventories, net 450 450
Other current assets 347 233
Total current assets 5,325 4,886
Equipment and Property
Flight equipment, net 12,183 12,304
Other equipment and property, net 2,390 2,365
Purchase deposits for flight equipment 277 277
14,850 14,946
Equipment and Property Under Capital Leases
Flight equipment, net 999 1,016
Other equipment and property, net 85 82
1,084 1,098
Route acquisition costs and airport operating
and gate lease rights, net 1,188 1,194
Other assets 3,311 3,338
$ 25,758 $25,462
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities
Accounts payable $ 1,064 $ 945
Accrued liabilities 1,883 1,853
Air traffic liability 3,687 3,183
Payable to affiliates, net 349 359
Current maturities of long-term debt 477 475
Current obligations under capital leases 126 104
Total current liabilities 7,586 6,919
Long-term debt, less current maturities 8,695 8,787
Obligations under capital leases, less
current obligations 989 1,061
Pension and postretirement benefits 4,713 4,743
Other liabilities, deferred gains and
deferred credits 4,034 4,057
Stockholder's Deficit
Common stock - -
Additional paid-in capital 3,245 3,273
Accumulated other comprehensive loss (727) (772)
Accumulated deficit (2,777) (2,606)
(259) (105)
$ 25,758 $25,462
The accompanying notes are an integral part of these financial statements.
-2-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Three Months Ended March 31,
2005 2004
Net Cash Provided by Operating Activities $ 413 $ 298
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (106) (79)
Net increase in short-term investments (96) (584)
Net (increase) decrease in restricted
cash and short-term investments (5) 26
Proceeds from sale of equipment and property 2 10
Other 2 (12)
Net cash used by investing activities (203) (639)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (143) (129)
Proceeds from issuance of long-term debt - 180
Funds transferred (to) from affiliates, net (37) 321
Net cash (used) provided by
financing activities (180) 372
Net increase in cash 30 31
Cash at beginning of period 117 118
Cash at end of period $ 147 $ 149
Activities Not Affecting Cash
Capital lease obligations incurred $ 9 $ -
The accompanying notes are an integral part of these financial statements.
-3-
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, 2004 (2004 Form
10-K). Certain amounts have been reclassified to conform with the
2005 presentation.
2.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
Company's 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):
Three Months Ended March 31,
2005 2004
Net loss, as reported $(171) $(182)
Add: Stock-based employee compensation
expense included in reported net loss 6 11
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards (21) (27)
Pro forma net loss $(186) $(198)
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123(R)). SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based
on their fair values. SFAS 123(R) is effective for public companies
beginning with the first annual period that begins after June 15,
2005 (January 1, 2006 for AMR and American). Under SFAS 123(R),
the Company will recognize compensation expense for its
participation in AMR's stock-based compensation plans for the
portion of outstanding awards for which service has not yet been
rendered, based on the grant-date fair value of those awards
calculated under SFAS 123 for pro forma disclosures. The Company
has not completed its evaluation of the impact of SFAS 123(R) on
its financial statements.
3.As of March 31, 2005, the Company had commitments to acquire two
Boeing 777-200ERs in 2006 and an aggregate of 47 Boeing 737-800s and
seven Boeing 777-200ERs in 2013 through 2016. Future payments for all
aircraft, including the estimated amounts for price escalation, will
approximate $102 million in 2006 and an aggregate of approximately
$3.1 billion in 2011 through 2016.
-4-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In 2003, the Company reached concessionary agreements with certain
lessors. Certain of these agreements provide that the Company's
obligations under the related leases will revert to the original
terms if certain events occur prior to December 31, 2005,
including: (i) an event of default under the related lease (which
generally occurs only if a payment default occurs); (ii) an event
of loss with respect to the related aircraft; (iii) rejection by
the Company of the lease under the provisions of Chapter 11 of the
U.S. Bankruptcy Code; or (iv) the Company's filing for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. If any one of these
events were to occur, the Company would be responsible for
approximately $94 million in additional operating lease payments
and $119 million in additional payments related to capital leases
as of March 31, 2005. These amounts will increase by approximately
$17 million prior to the expiration of the provision on December
31, 2005. These amounts are being accounted for as contingent
rentals and will only be recognized if they become payable.
4.Accumulated depreciation of owned equipment and property at March 31,
2005 and December 31, 2004 was $9.0 billion and $8.8 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at March 31, 2005 and December 31, 2004 was $994
million and $984 million, respectively.
Effective January 1, 2005, in order to more accurately reflect the
expected useful life of its aircraft, the Company changed its
estimate of the depreciable lives of its Boeing 737-800, Boeing 757-
200 and McDonnell Douglas MD-80 aircraft from 25 to 30 years. As a
result of this change, depreciation and amortization expense and
net loss were reduced by approximately $27 million for the three
months ended March 31, 2005.
5.As discussed in Note 8 to the consolidated financial statements in
the 2004 Form 10-K, the Company has a valuation allowance against
the full amount of its net deferred tax asset. The Company's
deferred tax asset valuation allowance increased $43 million during
the three months ended March 31, 2005 to $1.3 billion as of March
31, 2005.
6.As of March 31, 2005, American has issued guarantees covering
approximately $1.3 billion of AMR's unsecured debt. In addition,
as of March 31, 2005, AMR and American have issued guarantees
covering approximately $447 million of American Eagle Airlines,
Inc. secured debt.
7.The following table provides the components of net periodic
benefit cost for the three months ended March 31, 2005 and 2004 (in
millions):
Other Postretirement
Pension Benefits Benefits
2005 2004 2005 2004
Components of net periodic
benefit cost
Service cost $ 92 $ 89 $ 18 $ 19
Interest cost 152 142 50 51
Expected return on assets (165) (142) (3) (3)
Amortization of:
Prior service cost 4 4 (2) (3)
Unrecognized net loss 13 14 - 2
Net periodic benefit cost $ 96 $ 107 $ 63 $ 66
-5-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The Company expects to contribute approximately $310 million to its
defined benefit pension plans in 2005. The Company's estimate of
its defined benefit pension plan contributions reflects the
provisions of the Pension Funding Equity Act of 2004. The effect of
the Pension Funding Equity Act was to defer (to 2006 and later
years) a portion of the minimum required contributions that would
have been due for the 2004 and 2005 plan years. Of the $310 million
the Company expects to contribute to its defined benefit pension
plans in 2005, the Company contributed approximately $138 million
during the three months ended March 31, 2005.
8.During the last few years, as a result of the events of September
11, 2001, the depressed revenue environment, high fuel prices and
the Company's restructuring activities, the Company has recorded a
number of special charges. The following table summarizes the
changes since December 31, 2004 in the remaining accruals for these
charges (in millions):
Aircraft Facility Exit Employee
Charges Costs Charges Total
Remaining accrual
at December 31, 2004 $ 126 $ 26 $ 35 $ 187
Payments (9) (2) (21) (32)
Remaining accrual
at March 31, 2005 $ 117 $ 24 $ 14 $ 155
Cash outlays related to these accruals, as of March 31, 2005, for
aircraft charges, facility exit costs and employee charges will
occur through 2014, 2018 and 2005, respectively.
9.The Company includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting,
changes in minimum pension liabilities and unrealized gains and losses
on available-for-sale securities in comprehensive loss. For the three
months ended March 31, 2005 and 2004, comprehensive loss was $126
million and $199 million, respectively. The difference between net
loss and comprehensive loss for the three months ended March 31, 2005
and 2004 is due primarily to the accounting for the Company's
derivative financial instruments.
-6-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Information
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in documents
incorporated herein by reference, the words "expects," "plans,"
"anticipates," "indicates," "believes," "forecast," "guidance,"
"outlook" and similar expressions are intended to identify forward-
looking statements. Forward-looking statements include, without
limitation, the Company's expectations concerning operations and
financial conditions, including changes in capacity, revenues, and
costs, future financing plans and needs, overall economic conditions,
plans and objectives for future operations, and the impact on the
Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate
solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events, or otherwise.
Forward-looking statements are subject to a number of factors that
could cause the Company's actual results to differ materially from the
Company's expectations. The following factors, in addition to other
possible factors not listed, could cause the Company's actual results
to differ materially from those expressed in forward-looking
statements: changes in economic, business and financial conditions;
the Company's substantial indebtedness; continued high fuel prices and
the availability of fuel; further increases in the price of fuel; the
impact of events in Iraq; conflicts in the Middle East or elsewhere;
the highly competitive business environment faced by the Company, with
increasing pricing transparency and competition from low cost carriers
and financially distressed carriers; historically low fare levels and
fare simplification initiatives (both of which could result in a
further deterioration of the revenue environment); the ability of the
Company to reduce its costs further without adversely affecting
operational performance and service levels; uncertainties with respect
to the Company's international operations; changes in the Company's
business strategy; actions by U.S. or foreign government agencies; the
possible occurrence of additional terrorist attacks; another outbreak
of a disease (such as SARS) that affects travel behavior;
uncertainties with respect to the Company's relationships with
unionized and other employee work groups; the inability of the Company
to satisfy existing financial or other covenants in certain of its
credit agreements; the availability and terms of future financing; the
ability of the Company to reach acceptable agreements with third
parties; and increased insurance costs and potential reductions of
available insurance coverage. Additional information concerning these
and other factors is contained in the Company's Securities and
Exchange Commission filings, including but not limited to the 2004
Form 10-K.
Overview
The Company incurred a $171 million net loss during the first quarter
of 2005 compared to a net loss of $182 million in the same period last
year. The Company's first quarter 2005 results were impacted by the
continuing increase in fuel prices, offset by only a modest
improvement in unit revenues (passenger revenue per available seat
mile), a benefit of $69 million related to certain excise tax refunds
relating to prior years - - $55 million in aircraft fuel expense and
$14 million in interest income - - and a $27 million decrease in
depreciation expense related to a change in the depreciable lives of
certain aircraft types.
Fuel price increases resulted in a year-over-year increase of 35.6
cents per gallon for the first quarter (including the benefit of the
7.5 cents per gallon impact of the fuel excise tax refund discussed
above). This price increase negatively impacted fuel expense by $259
million (including the benefit of the $55 million fuel excise tax
refund discussed above) during the quarter based on fuel consumption
of 729 million gallons. Continuing high fuel prices, additional
increases in the price of fuel, and/or disruptions in the supply of
fuel would further adversely affect the Company's financial condition
and its results of operations.
-7-
Mainline unit revenues increased 3.7 percent for the first quarter
due to a 4.3 point load factor increase, offset by a 2.1 percent
decrease in passenger yield (passenger revenue per passenger mile)
compared to the same period in 2004. The Company believes this
decline in passenger yield is due in large part to a corresponding
decline in the Company's pricing power. The Company's reduced pricing
power is the product of several factors, including: greater cost
sensitivity on the part of travelers (particularly business
travelers); greater competition from low-cost carriers and from
carriers that have recently reorganized or are reorganizing,
including under the protection of Chapter 11 of the Bankruptcy Code;
significant increases in overall capacity during 2004 and continuing
into 2005 that exceeded economic growth; and, more recently, fare
simplification efforts by certain carriers. The Company believes that
its reduced pricing power will persist indefinitely and possibly
permanently.
During the first quarter, the Company continued to work - under the
basic tenets of the Turnaround Plan - with its unions and employees
to identify and implement additional initiatives designed to increase
efficiencies and revenues and reduce costs. As part of this effort,
it recently announced jointly with Transport Workers Union leadership
from American's Maintenance and Engineering Center in Tulsa, OK an
initiative to transform the Tulsa maintenance center into a future
profit center. In addition, American and all of its unions jointly
issued a statement during the first quarter regarding defined benefit
pension plan legislation that supports a position that better
protects employees' retirement benefits by making it more flexible
and affordable for companies to fund them. The Company will continue
to work with its labor unions and employees as its business partners
on the need for continuous improvement under the Turnaround Plan.
The Company's ability to become profitable and its ability to
continue to fund its obligations on an ongoing basis will depend on a
number of factors, some of which are largely beyond the Company's
control. Some of the risk factors that affect the Company's business
and financial results are referred to under "Forward-Looking
Information" above and are discussed in the Risk Factors listed in
Item 7 (on pages 27-30) in the 2004 Form 10-K. As the Company seeks
to improve its financial condition, it must continue to take steps to
generate additional revenues and to significantly reduce its costs.
Although the Company has a number of initiatives underway to address
its cost and revenue challenges, the adequacy and ultimate success of
these initiatives is not known at this time and cannot be assured.
It will be very difficult, absent continued restructuring of its
operations, for the Company to continue to fund its obligations on an
ongoing basis or to become profitable if the overall industry revenue
environment does not improve and fuel prices remain at historically
high levels for an extended period.
OTHER INFORMATION
Significant Indebtedness and Future Financing
During 2002, 2003 and 2004, in addition to refinancing its $834
million credit facility with a new $850 million credit facility (in
December 2004), the Company raised an aggregate of approximately $3.8
billion of financing, mostly to fund capital commitments (mainly for
aircraft and facilities) and operating losses. The Company ended the
quarter with $3.0 billion of unrestricted cash and short-term
investments. The Company believes that it should have sufficient
liquidity to fund its operations for the foreseeable future, including
repayment of debt and capital leases, capital expenditures and other
contractual obligations. Nonetheless, the Company remains heavily
indebted and has significant obligations (including substantial
pension funding obligations) due in 2005 and thereafter, as described
more fully under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 2004 10-K.
Accordingly, to maintain sufficient liquidity as the Company continues
to implement its restructuring and cost reduction initiatives, the
Company will need access to additional funding. The Company's possible
financing sources primarily include: (i) a limited amount of
additional secured aircraft debt (a very large majority of the
Company's owned aircraft, including virtually all of the Company's
Section 1110-eligible aircraft, are encumbered) or sale-leaseback
transactions involving owned aircraft; (ii) debt secured by new
aircraft deliveries; (iii) debt secured by other assets; (iv)
securitization of future operating receipts; (v) the sale or
monetization of certain assets; and (vi) unsecured debt. However, the
availability and level of these financing sources cannot be assured,
particularly in light of the Company's reduced credit ratings, high
fuel prices, historically weak revenues and the financial difficulties
being experienced in the airline industry. The inability of the
Company to obtain additional funding would have a material negative
impact on the ability of the Company to sustain its operations over
the long-term.
-8-
The Company's substantial indebtedness could have important
consequences. For example, it could: (i) limit the Company's ability
to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes, or
adversely affect the terms on which such financing could be obtained;
(ii) require the Company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness, thereby reducing
the funds available for other purposes; (iii) make the Company more
vulnerable to economic downturns; (iv) limit its ability to withstand
competitive pressures and reduce its flexibility in responding to
changing business and economic conditions; and (v) limit the Company's
flexibility in planning for, or reacting to, changes in its business
and the industry in which it operates.
Credit Facility Covenants
American has a fully drawn $850 million credit facility (the Credit
Facility) which consists of a $600 million senior secured revolving
credit facility with a final maturity on June 17, 2009 and a $250
million term loan facility with a final maturity on December 17, 2010.
The Credit Facility contains a covenant (the Liquidity Covenant)
requiring American to maintain, as defined, unrestricted cash,
unencumbered short term investments and amounts available for drawing
under committed revolving credit facilities of not less than $1.5
billion for each quarterly period through September 30, 2005 and $1.25
billion for each quarterly period thereafter. American was in
compliance with the Liquidity Covenant as of March 31, 2005 and
expects to be able to continue to comply with this covenant. In
addition, the Credit Facility contains a covenant (the EBITDAR
Covenant) requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized
interest), income taxes, depreciation and amortization and rentals,
adjusted for certain gains or losses and non-cash items) to fixed
charges (comprising interest expense (less capitalized interest) and
rentals). This ratio was 0.85 to 1.00 for the four quarter period
ending March 31, 2005 and will increase gradually to 1.50 to 1.00 for
the four quarter period ending March 31, 2008 and for each four
quarter period ending on each fiscal quarter thereafter. AMR was in
compliance with the EBITDAR covenant as of March 31, 2005 and expects
to be able to continue to comply with this covenant in the near term.
Given the historically high price of fuel and the volatility of fuel
prices and revenues, it is difficult to assess whether AMR and
American will be able to continue to comply with the Liquidity
Covenant and in particular the EBITDAR Covenant, and there are no
assurances that they will be able to do so. Failure to comply with
these covenants would result in a default under the Credit Facility
which - - if the Company did not take steps to obtain a waiver of, or
otherwise mitigate, the default - - could result in a default under a
significant amount of the Company's other debt and lease obligations.
Pension Funding Obligation
The Company expects to contribute approximately $310 million to its
defined benefit pension plans in 2005. The Company's estimates of its
defined benefit pension plan contributions reflect the provisions of
the Pension Funding Equity Act of 2004. Due to uncertainties
regarding significant assumptions involved in estimating future
required contributions to its defined benefit pension plans, such as
interest rate levels, the amount and timing of asset returns, and the
impact of proposed legislation, the Company is not able to reasonably
estimate its future required contributions beyond 2005. However,
based on the current regulatory environment and market conditions,
the Company expects that its 2006 minimum required contributions will
exceed its 2005 expected contributions. Of the $310 million the
Company expects to contribute to its defined benefit pension plans in
2005, the Company contributed approximately $138 million during the
three months ended March 31, 2005.
Other Operating and Investing Activities
Net cash provided by operating activities in the three-month period
ended March 31, 2005 was $413 million, an increase of $115 million
over the same period in 2004. The Company contributed $138 million
to its defined benefit pension plans in the first quarter of 2005
compared to $213 million during the first quarter of 2004.
Capital expenditures for the first three months of 2005 were $106
million and primarily included the cost of improvements at New York's
John F. Kennedy airport.
-9-
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2005 and 2004
Revenues
The Company's revenues increased approximately $234 million, or 5.2
percent, to $4.7 billion in the first quarter of 2005 from the same
period last year. American's passenger revenues increased by 4.4
percent, or $163 million, on a capacity (available seat mile) (ASM)
increase of 0.6 percent. American's passenger load factor increased
4.3 points to 75.4 percent while passenger revenue yield per
passenger mile decreased by 2.1 percent to 11.88 cents. This
resulted in an increase in passenger revenue per available seat mile
(RASM) of 3.7 percent to 8.96 cents. Following is additional
information regarding American's domestic and international RASM and
capacity:
Three Months Ended March 31, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 8.87 3.9% 28.3 (4.2)%
International 9.15 3.2 14.6 11.4
Latin America 9.44 0.4 7.9 12.8
Europe 9.00 9.6 5.2 6.2
Pacific 8.08 (3.4) 1.5 24.6
Regional affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $31 million, or 7.4 percent, to $451 million as a
result of increased capacity and load factors. Regional affiliates'
traffic increased 22.5 percent to 1.9 billion revenue passenger miles
(RPMs), while capacity increased 18.9 percent to 2.9 billion ASMs,
resulting in a 2.0 point increase in the passenger load factor to
64.7 percent.
Operating Expenses
The Company's total operating expenses increased 5.6 percent, or $253
million, to $4.8 billion in the first quarter of 2005 compared to the
first quarter of 2004. American's mainline operating expenses per ASM
in the first quarter of 2005 increased 3.3 percent compared to the
first quarter of 2004 to 9.80 cents. These increases are due primarily
to a 35.2 percent increase in American's price per gallon of fuel in
the first quarter of 2005 (including the benefit of the 7.5 percent
impact of a $55 million fuel excise tax refund) relative to the first
quarter of 2004. The Company's operating and financial results are
significantly affected by the price of jet fuel. Continuing high fuel
prices, additional increases in the price of fuel, or disruptions in
the supply of fuel, would further adversely affect the Company's
financial condition and results of operations.
(in millions) Three Months
Ended Change Percentage
Operating Expenses March 31,2005 from 2004 Change
Wages, salaries and benefits $ 1,502 $(19) (1.2)%
Aircraft fuel 996 248 33.2 (a)
Regional payments to AMR Eagle 473 80 20.4 (b)
Other rentals and landing fees 273 (2) (0.7)
Commissions, booking fees
and credit card expense 271 (17) (5.9)
Depreciation and amortization 245 (40) (14.0) (c)
Maintenance, materials
and repairs 192 (4) (2.0)
Aircraft rentals 143 (5) (3.4)
Food service 123 (13) (9.6)
Other operating expenses 563 25 4.6
Total operating expenses $ 4,781 $ 253 5.6%
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(a)Aircraft fuel expense increased due to a 35.2 percent increase in
American's price per gallon of fuel (including the benefit of the
7.5 percent impact of a $55 million fuel excise tax refund
received in March 2005 and the impact of fuel hedging) offset by
a 1.6 percent decrease in American's fuel consumption. The
Company expects to receive a small amount of additional fuel
excise tax refunds in 2005.
(b)Regional payment to AMR Eagle increased primarily as a result of
increased capacity.
(c)Depreciation and amortization expense decreased primarily due to
a change in the estimate of the depreciable lives of the Company's
Boeing 737-800, Boeing 757-200 and McDonnell Douglas MD-80 aircraft
from 25 to 30 years, which decreased depreciation and amortization
expense by approximately $27 million in the first quarter of 2005.
Other Income (Expense)
Interest income increased $21 million due primarily to a $14 million
interest refund related to the fuel excise tax refund discussed above
and increases in interest rates. Interest expense increased $15
million due primarily to increases in variable interest rates.
Miscellaneous-net decreased $21 million, due primarily to the accrual
during the first quarter of 2004 of a $23 million award rendered by an
independent arbitrator and relating to a grievance filed by the Allied
Pilots Association.
Income Tax Benefit
The Company did not record a net tax benefit associated with its first
quarter 2005 and 2004 losses due to the Company providing a valuation
allowance, as discussed in Note 5 to the condensed consolidated
financial statements.
Regional Affiliates
The following table summarizes the combined capacity purchase activity
for the American Connection carriers and AMR Eagle for the three
months ended March 31, 2005 and 2004 (in millions):
Three Months Ended
March 31,
2005 2004
Revenues:
Regional Affiliates $ 451 $ 420
Other 20 19
$ 471 $ 439
Expenses:
Regional payments $ 517 $ 433
Other incurred expenses 66 55
$ 583 $ 488
In addition, passengers connecting to American's flights from American
Connection and AMR Eagle flights generated passenger revenues for
American flights of $350 million and $326 million in the first quarter
of 2005 and 2004, respectively, which are included in Revenues -
Passenger in the consolidated statements of operations.
Outlook
The Company currently expects second quarter 2005 mainline unit costs
to be approximately 10.19 cents and full year 2005 mainline unit costs
to be approximately 10.03 cents including the impact of the $55
million fuel excise tax refund.
Capacity for American's mainline jet operations is expected to
increase about 1.7 percent in the second quarter of 2005 compared to
the second quarter of 2004 and about 2.6 percent for the full year
2005 compared to 2004.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Except as discussed below, 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 2004 Form
10-K.
The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analyses presented do
not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management
may take to mitigate the Company's exposure to such changes.
Therefore, actual results may differ. The Company does not hold or
issue derivative financial instruments for trading purposes.
Aircraft Fuel The Company's earnings are affected by changes in the
price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships
fuel and maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel, heating oil, and crude oil hedging
contracts. Market risk is estimated as a hypothetical 10 percent
increase in the March 31, 2005 cost per gallon of fuel. Based on
projected 2005 and 2006 fuel usage through March 31, 2006, such an
increase would result in an increase to aircraft fuel expense of
approximately $495 million in the twelve months ended March 31, 2006,
inclusive of the impact of fuel hedge instruments outstanding at March
31, 2005, and assumes the Company's fuel hedging program remains
effective under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
Comparatively, based on projected 2005 fuel usage, such an increase
would have resulted in an increase to aircraft fuel expense of
approximately $343 million in the twelve months ended December 31,
2005, inclusive of the impact of fuel hedge instruments outstanding at
December 31, 2004. The change in market risk is primarily due to the
increase in fuel prices.
As of March 31, 2005, the Company had hedged an insignificant
percentage of its estimated 2005, 2006 and 2007 fuel requirements with
option contracts.
Item 4. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
Exchange Act. This term refers to the controls and procedures of a
company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Company's disclosure controls and procedures as
of March 31, 2005. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of March 31,
2005. During the quarter ending on March 31, 2005, there was no change
in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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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). On July 9, 2003, the court certified a class that
included all travel agencies who have been or will be required to pay
money to American for debit memos for fare rules violations from July
26, 1995 to the present. On February 24, 2005, the court decertified
the class. The remaining two 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 is to vigorously defending 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.
Between April 3, 2003 and June 5, 2003, three lawsuits were filed by
travel agents some of whom opted out of a prior class action (now
dismissed) to pursue their claims individually against American
Airlines, Inc., other airline defendants, and in one case against
certain airline defendants and Orbitz LLC. (Tam Travel et. al., v.
Delta Air Lines et. al., in the United States District Court for the
Northern District of California - San Francisco (51 individual
agencies), Paula Fausky d/b/a Timeless Travel v. American Airlines,
et. al, in the United States District Court for the Northern District
of Ohio Eastern Division (29 agencies) and Swope Travel et al. v.
Orbitz et. al. in the United States District Court for the Eastern
District of Texas Beaumont Division (6 agencies)). Collectively,
these lawsuits seek damages and injunctive relief alleging that the
certain airline defendants and Orbitz LLC: (i) conspired to prevent
travel agents from acting as effective competitors in the distribution
of airline tickets to passengers in violation of Section 1 of the
Sherman Act; (ii) conspired to monopolize the distribution of common
carrier air travel between airports in the United States in violation
of Section 2 of the Sherman Act; and that (iii) between 1995 and the
present, the airline defendants conspired to reduce commissions paid
to U.S.-based travel agents in violation of Section 1 of the Sherman
Act. These cases have been consolidated in the United States District
Court for the Northern District of Ohio Eastern Division. American is
vigorously defending these lawsuits. 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 August 19, 2002, a class action lawsuit seeking monetary damages
was filed, and on May 7, 2003 an amended complaint was filed in the
United States District Court for the Southern District of New York
(Power Travel International, Inc. v. American Airlines, Inc., et al.)
against American, Continental Airlines, Delta Air Lines, United
Airlines, and Northwest Airlines, alleging that American and the other
defendants breached their contracts with the agency and were unjustly
enriched when these carriers at various times reduced their base
commissions to zero. The as yet uncertified class includes all travel
agencies accredited by the Airlines Reporting Corporation "whose base
commissions on airline tickets were unilaterally reduced to zero by"
the defendants. The case is stayed as to United Airlines, since it
filed for bankruptcy. American is vigorously defending the lawsuit.
Although the Company believes that the litigation is without merit, 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.
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Miami-Dade County (the County) is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American and AMR
Eagle have been named as potentially responsible parties (PRPs) for
the contamination at MIA. During the second quarter of 2001, the
County filed a lawsuit against 17 defendants, including American
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). The Company is vigorously defending
the lawsuit. 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. The case is currently stayed while
the parties pursue an alternative dispute resolution process. The
County has proposed draft allocation models for remedial costs for the
Terminal and Tank Farm areas of MIA. While it is anticipated that
American and AMR Eagle will be allocated equitable shares of remedial
costs, the Company does not expect the allocated amounts to have a
material adverse effect on the Company.
Four cases (each being a purported class action) have been filed
against American arising from the disclosure of passenger name records
by a vendor of American. The cases are: Kimmell v. AMR, et al. (U.
S. District Court, Texas), Baldwin v. AMR, et al. (U. S. District
Court, Texas), Rosenberg v. AMR, et al. (U. S. District Court, New
York) and Anapolsky v. AMR, et al. (U.S. District Court, New York).
The Kimmell suit was filed in April 2004. The Baldwin and Rosenberg
cases were filed in May 2004. The Anapolsky suit was filed in
September 2004. The suits allege various causes of action, including
but not limited to, violations of the Electronic Communications
Privacy Act, negligent misrepresentation, breach of contract and
violation of alleged common law rights of privacy. In each case
plaintiffs seek statutory damages of $1000 per passenger, plus
additional unspecified monetary damages. The Company is vigorously
defending these suits and believes the suits are without merit.
However, a final adverse court decision awarding a maximum amount of
statutory damages would have an adverse impact on the Company.
American is defending three lawsuits, filed as class actions but not
certified as such, arising from allegedly improper failure to refund
certain governmental taxes and fees collected by the Company upon the
sale of nonrefundable tickets when such tickets are not used for
travel. The suits are: Coleman v. American Airlines, Inc., No.
101106, filed December 31, 2002, pending (on appeal) before the
Supreme Court of Oklahoma. The Coleman Plaintiffs seek actual damages
(not specified) and interest. Hayes v. American Airlines, Inc., No.
04-3231, pending in the United States District Court for the Eastern
District of New York, filed July 2, 2004. The Hayes Plaintiffs seek
unspecified damages, declaratory judgment, costs, attorneys' fees, and
interest. Harrington v. Delta Air Lines, Inc., et. al., No. 04-
12558, pending in the United States District Court for the District of
Massachusetts, filed November 4, 2004. The Harrington plaintiffs seek
unspecified actual damages (trebled), declaratory judgment, injunctive
relief, costs, and attorneys' fees. The suits assert various causes
of action, including breach of contract, conversion, and unjust
enrichment. The Company is vigorously defending the suits and
believes them to be without merit.
On March 11, 2004, a patent infringement lawsuit was filed against AMR
Corporation, American Airlines, Inc., AMR Eagle Holding Corporation,
and American Eagle Airlines, Inc. in the United States District Court
for the Eastern District of Texas (IAP Intermodal, L.L.C. v. AMR
Corp., et al.). The case was consolidated with eight similar lawsuits
filed against a number of other unaffiliated airlines, including
Continental, Northwest, British Airways, Air France, Pinnacle
Airlines, Korean Air and Singapore Airlines (as well as various
regional affiliates of the foregoing). The plaintiff alleges that the
airline defendants infringe three patents, each of which relates to a
system of scheduling vehicles based on freight and passenger
transportation requests received from remote computer terminals. The
plaintiff is seeking past and future royalties of over $30 billion
dollars, injunctive relief, costs and attorneys' fees. Although the
Company believes that the plaintiff's claims are without merit and is
vigorously defending the lawsuit, a final adverse court decision
awarding substantial money damages or placing material restrictions on
existing scheduling practices would have an adverse impact on the
Company.
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On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
Airlines, Inc. and the Association of Professional Flight Attendants
(APFA), the Union which represents the Company's flight attendants
(Ann M. Marcoux, et al., v. American Airlines Inc., et al. in the
United States District Court for the Eastern District of New York).
While a class has not yet been certified, the lawsuit seeks on behalf
of all of American's flight attendants or various subclasses to set
aside, and to obtain damages allegedly resulting from, the April 2003
Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor
agreements the Company successfully reached with its unions in order
to avoid filing for bankruptcy in 2003. In a related case (Sherry
Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States
District Court for the Eastern District of New York), the court denied
a preliminary injunction against implementation of the RPA on June 30,
2003. The Marcoux suit alleges various claims against the Union and
American relating to the RPA and the ratification vote on the RPA by
individual Union members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the Union of its duty of fair representation to
its members, violation by the Company of provisions of the Railway
Labor Act through improper coercion of flight attendants into voting
or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
Although the Company believes the case against it is without merit and
both the Company and the Union are vigorously defending the lawsuit, a
final adverse court decision invalidating the RPA and awarding
substantial money damages would have an adverse impact on the Company.
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Item 5. Other Information
American has announced a pay plan, funded at 1.5 percent, for all
American employees on U.S. payroll, to be effective May 1, 2005. On
April 20, 2005, the Board approved increases in the base salaries for
officers (including the executive officers of AMR and American). For
the executive officers the increase is effective May 1, 2005, and
will equal 1.5 percent of the current base salary.
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, 2005 and 2004.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32 Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code).
Form 8-Ks filed under Item 1.01 - Entry into a Material Definitive
Agreement and Item 9.01 Financial Statements and Exhibits
On February 4, 2005, American filed a report on Form 8-K to provide
the 2005 Annual Incentive Plan for American.
Form 8-Ks furnished under Item 2.02 - Results of Operations and
Financial Condition and filed under Item 8.01 - Other Events and Item
9.01 - Financial Statements and Exhibits
On January 19, 2005, American filed a report on Form 8-K to furnish a
press release issued by its parent company, AMR Corporation, to
announce AMR's and American's fourth quarter and full year 2004
results.
Form 8-Ks filed under Item 8.01 - Other Events
On January 5, 2005, American filed a report on Form 8-K to provide a
press release issued to report the Company's December traffic.
On February 4, 2005, American filed a report on Form 8-K to provide a
press release issued to report the Company's January traffic.
On March 3, 2005, American filed a report on Form 8-K to provide a
press release issued to report the Company's February traffic.
On March 29, 2005, American furnished a report on Form 8-K to provide
actual fuel cost, unit cost and capacity and traffic information for
January and February as well as certain forecasts of unit cost,
revenue performance and fuel prices, capacity and traffic estimates,
liquidity expectations and other matters for March, the first quarter
and the full year 2005.
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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: April 21, 2005 BY: /s/ James A. Beer
James A. Beer
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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