UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2006.
[ ]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. x Yes No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer" and "large
accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer
x Non-accelerated Filer
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of July 21, 2006.
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 and six months ended
June 30, 2006 and 2005
Condensed Consolidated Balance Sheets -- June 30, 2006 and December
31, 2005
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2006 and 2005
Notes to Condensed Consolidated Financial Statements -- June 30,
2006
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
SIGNATURE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Revenues
Passenger $ 4,720 $ 4,264 $ 8,964 $ 8,106
Regional Affiliates 702 561 1,271 1,012
Cargo 206 197 392 380
Other revenues 331 274 659 535
Total operating revenues 5,959 5,296 11,286 10,033
Expenses
Wages, salaries and benefits 1,527 1,528 3,103 3,030
Aircraft fuel 1,544 1,224 2,876 2,220
Regional payments to AMR Eagle 554 510 1,086 983
Other rentals and landing fees 300 289 586 562
Commissions, booking fees
and credit card expense 286 286 555 557
Depreciation and amortization 243 240 483 485
Maintenance, materials and
repairs 187 210 374 402
Aircraft rentals 144 143 285 286
Food service 128 125 251 248
Other operating expenses 626 588 1,215 1,151
Total operating expenses 5,539 5,143 10,814 9,924
Operating Income 420 153 472 109
Other Income (Expense)
Interest income 67 28 119 63
Interest expense (200) (162) (401) (337)
Interest capitalized 7 24 14 46
Related party interest - net (11) (2) (17) (4)
Miscellaneous - net (3) - (13) (7)
(140) (112) (298) (239)
Income (Loss) Before Income Taxes 280 41 174 (130)
Income tax - - - -
Net Earnings (Loss) $ 280 $ 41 $ 174 $ (130)
The accompanying notes are an integral part of these financial statements.
1
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
June 30, December 31,
2006 2005
Assets
Current Assets
Cash $ 164 $ 133
Short-term investments 4,936 3,637
Restricted cash and short-term
investments 525 510
Receivables, net 1,097 967
Inventories, net 466 474
Other current assets 516 321
Total current assets 7,704 6,042
Equipment and Property
Flight equipment, net 11,695 11,696
Other equipment and property, net 2,326 2,352
Purchase deposits for flight equipment 176 277
14,197 14,325
Equipment and Property Under Capital Leases
Flight equipment, net 798 916
Other equipment and property, net 108 102
906 1,018
Route acquisition costs and airport
operating and gate lease rights, net 1,156 1,167
Other assets 3,414 3,489
$ 27,377 $ 26,041
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities
Accounts payable $ 1,178 $ 998
Accrued liabilities 2,193 2,205
Air traffic liability 4,440 3,615
Payable to affiliates, net 978 544
Current maturities of long-term debt 811 829
Current obligations under capital leases 97 138
Total current liabilities 9,697 8,329
Long-term debt, less current maturities 8,532 8,785
Obligations under capital leases, less
current obligations 861 922
Pension and postretirement benefits 4,956 4,998
Other liabilities, deferred gains and
deferred credits 4,088 4,186
Stockholder's Equity (Deficit)
Common stock - -
Additional paid-in capital 3,623 3,406
Accumulated other comprehensive loss (1,056) (1,087)
Accumulated deficit (3,324) (3,498)
(757) (1,179)
$ 27,377 $ 26,041
The accompanying notes are an integral part of these financial
statements.
2
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Six Months Ended June 30,
2006 2005
Net Cash Provided by Operating Activities $ 1,452 $ 918
Cash Flow from Investing Activities:
Capital expenditures (238) (222)
Net increase in short-term investments (1,299) (415)
Net increase in restricted cash and short-
term investments (15) (14)
Proceeds from sale of equipment and property 9 13
Other (6) 1
Net cash used by investing activities (1,549) (637)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (380) (299)
Reimbursement from construction reserve
account 75 -
Funds transferred from affiliates, net 433 59
Net cash provided (used) by
financing activities 128 (240)
Net increase in cash 31 41
Cash at beginning of period 133 117
Cash at end of period $ 164 $ 158
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). The condensed consolidated financial
statements also include the accounts of variable interest entities for
which the Company is the primary beneficiary. 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, 2005, as amended on July 17, 2006 (2005
Form 10-K).
Cargo fuel and security surcharge revenues of $40 million and $72
million for the three months and six months ended June 30, 2005
have been reclassified from Other revenues to Cargo revenues in the
consolidated statement of operations to conform to the current year
presentation.
2. Under the 1998 Long Term Incentive Plan, as amended (the 1998
LTIP), officers and key employees of AMR and its subsidiaries may
be granted stock options, stock appreciation rights (SARs),
restricted stock, deferred stock, stock purchase rights, other
stock-based awards and/or performance-related awards, including
cash bonuses. The total number of common shares authorized for
distribution under the 1998 Long Term Incentive Plan is 23.7
million shares (after giving effect to a one-for-one stock dividend
in 1998 and the dividend of shares of The Sabre Group, Inc. via a
spin-off in 2000). The 1998 LTIP, the successor to the 1988 Long
Term Incentive Plan (1988 LTIP), will terminate no later than May
21, 2008.
In 2003, AMR established the 2003 Employee Stock Incentive Plan
(the 2003 Plan) to provide, among other things, equity awards to
employees as part of the 2003 restructuring process. Under the
2003 Plan, employees may be granted stock options, restricted stock
and deferred stock. As of April 19, 2006, no additional shares were
available for distribution under the 2003 Plan.
Options granted under the 1988 LTIP, 1998 LTIP and the 2003 Plan
are awarded with an exercise price equal to the fair market value
of the stock on date of grant, become exercisable in equal annual
installments over periods ranging from two to five years following
the date of grant and expire no later than ten years from the date
of grant. As of June 30, 2006, approximately 4.6 million options
outstanding under the 1998 LTIP and 2003 Plan had not vested.
Prior to January 1, 2006, American accounted 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 was recognized for stock option
grants if the exercise price of AMR's stock option grants was at or
above the fair market value of the underlying stock on the date of
grant. Effective January 1, 2006, AMR and American adopted the
fair value recognition provisions of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" (SFAS
123(R)) using the modified-prospective transition method. Under
this transition method, compensation cost recognized in 2006
includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based
on the grant-date fair value used for pro forma disclosures and (b)
compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for prior
periods have not been restated.
4
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As a result of adopting SFAS 123(R), American's net income for the
three months and six months ended June 30, 2006, was $5 million and
$16 million lower than if it had continued to account for share-
based compensation for stock options under APB 25.
Prior to January 1, 2006, AMR and American had 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
earnings (loss) if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee
compensation (in millions):
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
Net earnings (loss), as reported $ 41 $(130)
Add: Stock-based employee
compensation expense
included in reported net
earnings (loss) 11 17
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards (26) (48)
Pro forma net earnings (loss) $ 26 $(161)
On March 29, 2006, the AMR Board of Directors amended and restated
the 2003-2005 Performance Share Plan for Officers and Key
Employees, the 2004-2006 Performance Share Plan for Officers and
Key Employees, and the 2004 Agreements for Deferred Shares
(collectively, the Amended Plans). Before amendment, the plans
allowed for settlement only in cash. The three Amended Plans
permit settlement in a combination of cash and/or stock; however,
the amendments did not impact the fair value of the obligations
under the three Amended Plans. The Company anticipates using all
currently available shares under the 1998 LTIP and the 2003 Plan to
satisfy obligations under the three Amended Plans, but, based on
current estimates, a portion of the obligations will be settled in
cash. The Company will account for these obligations prospectively
as a combination of liability and equity grants. In accordance
with SFAS 123(R), the Company reclassified $187 million from
Accrued liabilities to Additional paid-in capital on March 29,
2006, representing the vested portions of the current estimated
fair value of obligations under all three of the Amended Plans that
are expected to be settled with stock.
5
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. As of June 30, 2006, the Company had commitments to acquire 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 be approximately $2.8
billion in 2011 through 2016.
4. Accumulated depreciation of owned equipment and property at June
30, 2006 and December 31, 2005 was $9.8 billion and $9.4 billion,
respectively. Accumulated amortization of equipment and property
under capital leases was $1.0 billion and $1.1 billion at June 30,
2006 and December 31, 2005, respectively.
5. As discussed in Note 8 to the consolidated financial statements
in the 2005 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 decreased $77 million during the six
months ended June 30, 2006 to $1.7 billion as of June 30, 2006.
6. As of June 30, 2006, American has issued guarantees covering
approximately $1.1 billion of AMR's unsecured debt. In addition, as
of June 30, 2006, AMR and American have issued guarantees covering
approximately $408 million of AMR Eagle's secured debt.
On March 27, 2006, American refinanced its bank credit facility.
In general, the new credit facility adjusted the amounts borrowed
under the senior secured revolving credit facility and the senior
secured term loan facility, reduced the overall interest rate on
the combined credit facility and favorably modified certain debt
covenant requirements.
6
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. The following tables provide the components of net periodic
benefit cost for the three and six months ended June 30, 2006 and 2005
(in millions):
Pension Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Components of net periodic
benefit cost
Service cost $ 100 $ 93 $ 199 $ 185
Interest cost 160 153 321 305
Expected return on assets (167) (164) (335) (329)
Amortization of:
Prior service cost 4 4 8 8
Unrecognized net loss 20 13 40 26
Net periodic benefit cost $ 117 $ 99 $ 233 $ 195
Other Postretirement Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Components of net periodic
benefit cost
Service cost $ 20 $ 19 $ 38 $ 37
Interest cost 49 49 96 99
Expected return on assets (4) (4) (8) (7)
Amortization of:
Prior service cost (3) (3) (5) (5)
Unrecognized net loss - 1 1 1
Net periodic benefit cost $ 62 $ 62 $ 122 $ 125
The Company expects to contribute approximately $250 million to its
defined benefit pension plans in 2006. The Company's estimates of
its defined benefit pension plan contributions reflect the
provisions of the Pension Funding Equity Act of 2004. Of the $250
million the Company expects to contribute to its defined benefit
pension plans in 2006, the Company contributed $119 million during
the six months ended June 30, 2006 and contributed $65 million on
July 14, 2006.
7
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8. 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
charges during the last few years. The following table summarizes
the changes since December 31, 2005 in the remaining accruals for
these charges (in millions):
Aircraft Facility
Charges Exit Costs Total
Remaining accrual
at December 31, 2005 $ 150 $ 36 $ 186
Adjustments (5) (11) (16)
Payments (9) (1) (10)
Remaining accrual
at June 30, 2006 $ 136 $ 24 $ 160
Cash outlays related to the accruals for aircraft charges and
facility exit costs will occur through 2017 and 2018, 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 income (loss). For
the three months ended June 30, 2006 and 2005, comprehensive income
was $291 million and $52 million, respectively, and for the six months
ended June 30, 2006 and 2005, comprehensive income (loss) was $205
million and $(74) million, respectively. The difference between net
earnings (loss) and comprehensive income (loss) for the three and six
months ended June 30, 2006 and 2005 is due primarily to the accounting
for the Company's derivative financial instruments.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related
commodities. As required by Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company assesses, both at the inception of
each hedge and on an on-going basis, whether the derivatives that
are used in its hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items. The Company
discontinues hedge accounting prospectively if it determines that a
derivative is no longer expected to be highly effective as a hedge
or if it decides to discontinue the hedging relationship. As a
result of its quarterly effectiveness assessment, the Company
determined that the majority of its derivatives settling during the
remainder of 2006 and in 2007 are no longer expected to be highly
effective in offsetting changes in forecasted jet fuel purchases.
As a result, effective on July 1, 2006, all subsequent changes in
the fair value of those particular hedge contracts will be
recognized directly in earnings rather than being deferred in
Accumulated other comprehensive loss. On an economic basis, these
derivatives will continue to largely offset potential changes in
the price of jet fuel. Hedge accounting will continue to be
applied to derivatives used to hedge forecasted jet fuel purchases
that are expected to remain highly effective.
8
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10.On March 31, 2006, the Financial Accounting Standards Board
(FASB) issued an exposure draft "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R)". The proposed
standard would, among other things, require the Company to:
- Recognize the funded status of the Company's defined benefit
plans in its consolidated financial statements.
- Recognize as a component of Other comprehensive income (loss) the
actuarial gains and losses and the prior service costs and credits
that arise during the period but are not immediately recognized as
components of net periodic benefit cost.
The proposed standard would be effective for fiscal years ending
after December 15, 2006. As of December 31, 2005, the required
adjustment to the Company's balance sheet would increase the
liability for pension and postretirement benefits and increase
Accumulated other comprehensive loss by approximately $1.0 billion;
however, increases in interest rates since December 31, 2005 would
offset some portion of the required adjustment to the consolidated
balance sheet.
9
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," "may," "will," "should," and similar expressions are
intended to identify forward-looking statements. Similarly, statements
that describe the Company's objectives, plans or goals are 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 and industry
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: the materially weakened financial condition of the
Company, resulting from its significant losses in recent years; the
ability of the Company to generate additional revenues and
significantly reduce its costs; changes in economic and other
conditions beyond the Company's control, and the volatile results of
the Company's operations; the Company's substantial indebtedness and
other obligations; the ability of the Company to satisfy existing
financial or other covenants in certain of its credit agreements;
continued high fuel prices and further increases in the price of fuel,
and the availability of fuel; the fiercely competitive business
environment faced by the Company, and historically low fare levels;
competition with reorganized and reorganizing carriers; the Company's
reduced pricing power; the Company's likely need to raise additional
funds and its ability to do so on acceptable terms; changes in the
Company's business strategy; government regulation of the Company's
business; conflicts overseas or terrorist attacks; uncertainties with
respect to the Company's international operations; outbreaks of a
disease (such as SARS or avian flu) that affects travel behavior;
uncertainties with respect to the Company's relationships with
unionized and other employee work groups; increased insurance costs
and potential reductions of available insurance coverage; the
Company's ability to retain key management personnel; potential
failures or disruptions of the Company's computer, communications or
other technology systems; changes in the price of AMR's common stock;
and the ability of the Company to reach acceptable agreements with
third parties. Additional information concerning these and other
factors is contained in the Company's Securities and Exchange
Commission filings, including but not limited to the Company's 2005
Form 10-K (see in particular Item 1A "Risk Factors" in the 2005 Form
10-K).
Overview
The Company recorded net earnings of $280 million during the second
quarter of 2006 compared to $41 million in the same period last year.
The Company's second quarter 2006 results were impacted by the
continuing increase in fuel prices, offset by an improvement in unit
revenues (passenger revenue per available seat mile).
The price of jet fuel increased by 46.1 cents per gallon compared to
the second quarter of 2006. This price increase negatively impacted
fuel expense by $340 million during the quarter based on fuel
consumption of 737 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.
10
Mainline passenger unit revenues increased 11.7 percent for the
second quarter due to a 3.1 point load factor increase and a 7.6
percent increase in passenger yield (passenger revenue per passenger
mile) compared to the same period in 2005. The load factor increase
reflects an overall reduction in domestic capacity and an improvement
in economic conditions. Passenger yield showed significant year-over-
year improvement as the Company has been successful in implementing
limited fare increases to partially offset the continuing rise in the
cost of fuel; however, passenger yield remains depressed by
historical standards. The Company believes this depressed 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); pricing
transparency resulting from the use of the Internet; 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 U.S. Bankruptcy Code; other carriers
that are better hedged against rising fuel costs and able to better
absorb the current high jet fuel prices; and, more recently, fare
simplification efforts by certain carriers. The Company believes that
its reduced pricing power will persist indefinitely and possibly
permanently.
The Company's ability to become consistently profitable and its
ability to continue to fund its obligations on an ongoing basis will
depend on a number of factors, many 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 1A (on pages 11-16) in the 2005 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
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 consistently
profitable, if the overall industry revenue environment does not
continue to improve and fuel prices remain at historically high
levels for an extended period.
On June 15, 2006, the cities of Dallas and Fort Worth, Texas, DFW
International Airport, Southwest Airlines, and the Company announced
an agreement in principle to modify the Wright Amendment, which
authorizes certain flight operations at Dallas Love Field within
limited geographic areas. Southwest Airlines had been actively
seeking repeal of the Wright Amendment, with the goal of eliminating
the geographic restrictions on operations at Love Field, and the
Company had opposed those efforts. The initial agreement was later
reduced to a contract among the five parties, which became finalized
and effective on June 29, 2006. Among other things, the agreement
eventually eliminates geographic restrictions on operations while
limiting the maximum number of gates at Love Field. The Company
believes the proposed modifications are a pragmatic resolution of the
issues related to the Wright Amendment and the use of Love Field.
Because the Wright Amendment is a federal law, Congress must approve
legislation for the proposed changes to be enacted.
11
LIQUIDITY AND CAPITAL RESOURCES
Significant Indebtedness and Future Financing
The Company remains heavily indebted and has significant obligations
(including substantial pension funding obligations), as described more
fully under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2005 Form 10-K. As of the
date of this Form 10-Q, the Company believes 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. However, to maintain sufficient liquidity as
the Company continues to implement its restructuring and cost
reduction initiatives, and because the Company has significant debt,
lease and other obligations in the next several years, as well as
substantial pension funding obligations, the Company will likely 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 recent financial
results, substantial indebtedness, 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 any necessary funding on acceptable terms would have
a material adverse impact on the ability of the Company to sustain its
operations over the long-term.
The Company's substantial indebtedness and other obligations could
have important consequences. For example, they 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 and other
obligations, 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 credit facility (the Credit Facility) consisting of a
fully drawn $315 million senior secured revolving credit facility with
a final maturity on June 17, 2009 and a fully drawn $447 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 $1.25 billion
for each quarterly period through the life of the Credit Facility. 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). The required ratio was 1.00 to 1.00 for the four quarter
period ending June 30, 2006 and will increase gradually to 1.50 to
1.00 for the four quarter period ending June 30, 2009 and for each
four quarter period ending on each fiscal quarter thereafter. AMR and
American were in compliance with the Liquidity Covenant and the
EBITDAR covenant as of June 30, 2006 and expect to be able to continue
to comply with these covenants. However, 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, in fact, be able to
continue to comply with the Liquidity Covenant and, in particular, the
EBITDAR Covenant, and there are no assurances that AMR and American
will be able to comply with these covenants. 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
and otherwise adversely affect the Company.
12
Pension Funding Obligation
The Company expects to contribute approximately $250 million to its
defined benefit pension plans in 2006. The Company's estimates of its
defined benefit pension plan contributions reflect the provisions of
the Pension Funding Equity Act of 2004. Of the $250 million the
Company expects to contribute to its defined benefit pension plans in
2006, the Company contributed $119 million during the six months ended
June 30, 2006 and contributed $65 million on July 14, 2006.
Under Generally Accepted Accounting Principles, the Company's defined
benefit plans were underfunded as of December 31, 2005 by $3.2 billion
based on the Projected Benefit Obligation (PBO) and by $2.3 billion
based on the Accumulated Benefit Obligation (ABO) (refer to Note 10 to
the consolidated financial statements in the 2005 Form 10-K). The
Company's funded status at December 31, 2005 under the relevant
Government funding standard is similar to its funded status using the
ABO methodology. 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, in particular, the impact of
proposed legislation currently pending the reconciliation process of
the U.S. Congress, the Company is not able to reasonably estimate its
future required contributions beyond 2006. However, absent significant
legislative relief or significant favorable changes in market
conditions, or both, the Company could be required to fund in 2007 a
majority of the underfunded balance under the relevant Government
funding standard. Even with significant legislative relief (including
proposed airline-specific relief), the Company's 2007 required minimum
contributions are expected to be higher than the Company's 2006
contributions.
Cash Flow Activity
At June 30, 2006, the Company had $5.1 billion in unrestricted cash
and short-term investments, an increase of $1.3 billion from December
31, 2005. Net cash provided by operating activities in the six
months ended June 30, 2006 was $1.5 billion, an increase of $534
million over the same period in 2005 primarily due to an increase in
the Air traffic liability resulting from improved economic
conditions. The Company contributed $119 million to its defined
benefit pension plans in the first six months of 2006 compared to
$213 million during the first six months of 2005.
Capital expenditures for the first six months of 2006 were $238
million and primarily included the acquisition of two Boeing 777-
200ER aircraft and the cost of improvements at New York's John F.
Kennedy airport (JFK). Substantially all of the Company's
construction costs at JFK will be reimbursed through a fund
established from a previous financing transaction.
13
RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2006 and 2005
Revenues
The Company's revenues increased approximately $1.3 billion, or 12.5
percent, to $11.3 billion for the six months ended June 30, 2006 from
the same period last year. American's passenger revenues increased
by 10.6 percent, or $858 million, while capacity (available seat
mile) (ASM) decreased by 0.6 percent. American's passenger load
factor increased 2.5 points to 80.0 percent and passenger revenue
yield per passenger mile increased by 7.8 percent to 12.83 cents.
This resulted in an increase in American's passenger revenue per
available seat mile (RASM) of 11.3 percent to 10.26 cents. Following
is additional information regarding American's domestic and
international RASM and capacity based on geographic areas defined by
the Department of Transportation (DOT):
Six Months Ended June 30, 2006
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 10.40 13.3% 56.1 (2.8)%
International 10.02 7.6 31.3 3.7
DOT Latin America 10.50 14.1 15.0 (2.7)
DOT Atlantic 10.09 3.3 12.2 6.4
DOT Pacific 8.03 (2.5) 4.1 24.2
Regional Affiliates include two AMR wholly owned subsidiaries,
American Eagle Airlines, Inc. and Executive Airlines, Inc.
(collectively, AMR Eagle), and two independent carriers with which
American has capacity purchase agreements, Trans States Airlines,
Inc. (Trans States) and Chautauqua Airlines, Inc. (Chautauqua).
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $259 million, or 25.6 percent, to $1.3 billion as
a result of increased capacity, load factors and passenger yield.
Regional Affiliates' traffic increased 17.6 percent to 4.9 billion
revenue passenger miles (RPMs), while capacity increased 9.3 percent
to 6.7 billion ASMs, resulting in a 5.3 point increase in the
passenger load factor to 73.9 percent.
Cargo revenues increased 3.2 percent, or $12 million, to $392 million
as a result of a $20 million increase in fuel surcharges offset by a
1.4 percent decrease in cargo ton miles.
Other revenues increased 23.2 percent, or $124 million, to $659
million due in part to increased third-party maintenance contracts
obtained by the Company's maintenance and engineering group and
increases in certain passenger fees.
14
Operating Expenses
The Company's total operating expenses increased 9.0 percent, or $890
million, to $10.8 billion for the six months ended June 30, 2006
compared to the same period in 2005. American's mainline operating
expenses per ASM in the six months ended June 30, 2006 increased 9.3
percent compared to the same period in 2005 to 10.84 cents. These
increases are due primarily to a 32.8 percent increase in American's
price per gallon of fuel in the first half of 2006 relative to the
same period in 2005, including the impact of a $55 million fuel excise
tax refund received in March 2005.
(in millions) Six Months
Ended Change Percentage
Operating Expenses June 30,2006 from 2005 Change
Wages, salaries and benefits $ 3,103 $ 73 2.4%
Aircraft fuel 2,876 656 29.5 (a)
Regional payments to AMR Eagle 1,086 103 10.5 (b)
Other rentals and landing fees 586 24 4.3
Commissions, booking fees
and credit card expense 555 (2) (0.4)
Depreciation and amortization 483 (2) (0.4)
Maintenance, materials
and repairs 374 (28) (7.0)
Aircraft rentals 285 (1) (0.3)
Food service 251 3 1.2
Other operating expenses 1,215 64 5.6
Total operating expenses $ 10,814 $ 890 9.0%
(a) Aircraft fuel expense increased primarily due to a 32.8 percent
increase in American's price per gallon of fuel (including the benefit
of a $55 million fuel excise tax refund received in March 2005 and the
impact of fuel hedging) offset by a 2.4 percent decrease in American's
fuel consumption.
(b) Regional payment to AMR Eagle increased primarily as a result of
increased capacity and fuel costs.
Other Income (Expense)
Other income (expense), historically a net expense, increased $59
million due primarily to a decrease in interest capitalized of $32
million due to the capitalization of certain construction costs at JFK
in 2005. Both interest income and interest expense increased during
2006 versus 2005. Interest income increased due to increases in
interest rates and cash and short-term investment balances. Interest
expense increased due to an increase in interest rates.
Income Tax
The Company did not record a net tax provision (benefit) associated
with its earnings (loss) for the six months ended June 30, 2006 and
2005 due to the Company providing a valuation allowance, as discussed
in Note 5 to the condensed consolidated financial statements.
15
Regional Affiliates
The following table summarizes the combined capacity purchase activity
for the American Connection carriers and AMR Eagle for the six months
ended June 30, 2006 and 2005 (in millions):
Six Months Ended
June 30,
2006 2005
Revenues:
Regional Affiliates $1,271 $1,012
Other 50 43
$1,321 $1,055
Expenses:
Payment to Regional Affiliates $1,184 $1,073
Other incurred expenses 159 137
$1,343 $1,210
In addition, passengers connecting to American's flights from American
Connection and AMR Eagle flights generated passenger revenues for
American flights of $867 million and $744 million for the six months
ended June 30, 2006 and 2005, respectively, which are included in
Revenues - Passenger in the consolidated statements of operations.
Outlook
The Company currently expects third quarter 2006 mainline unit costs
to increase nearly seven percent year over year. Full year 2006
mainline unit costs are also expected to increase approximately seven
percent versus 2005.
Capacity for American's mainline jet operations is expected to decline
more than two percent in the third quarter of 2006 compared to the
third quarter of 2005. Mainline capacity is expected to decline
approximately one percent in the full year 2006 compared to 2005.
16
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 2005 Form 10-K. The
change in market risk for aircraft fuel is discussed below for
informational purposes due to the sensitivity of the Company's
financial results to changes in fuel prices.
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 June 30, 2006 cost per gallon of fuel. Based on
projected 2006 and 2007 fuel usage through June 30, 2007, such an
increase would result in an increase to aircraft fuel expense of
approximately $489 million in the twelve months ended June 30, 2007,
inclusive of the impact of fuel hedge instruments outstanding at June
30, 2006. Comparatively, based on projected 2006 fuel usage, such an
increase would have resulted in an increase to aircraft fuel expense
of approximately $477 million in the twelve months ended December 31,
2006, inclusive of the impact of fuel hedge instruments outstanding at
December 31, 2005. The change in market risk is primarily due to the
increase in fuel prices.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related commodities.
As required by Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the
Company assesses, both at the inception of each hedge and on an on-
going basis, whether the derivatives that are used in its hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items. The Company discontinues hedge accounting
prospectively if it determines that a derivative is no longer expected
to be highly effective as a hedge or if it decides to discontinue the
hedging relationship. As a result of its quarterly effectiveness
assessment, the Company determined that more than 65 percent of its
derivatives, based on market value, settling during the remainder of
2006 and in 2007 are no longer expected to be highly effective in
offsetting changes in forecasted jet fuel purchases. As a result,
effective on July 1, 2006, all subsequent changes in the fair value of
those particular hedge contracts will be recognized directly in
earnings rather than being deferred in Accumulated other comprehensive
loss. On an economic basis, these derivatives will continue to largely
offset potential changes in the price of jet fuel. Hedge accounting
will continue to be applied to derivatives used to hedge forecasted
jet fuel purchases that are expected to remain highly effective.
As of June 30, 2006, the Company had effective hedges, including
option contracts and collars, covering approximately 34 percent of its
estimated remaining 2006 fuel requirements and an insignificant amount
of its estimated fuel requirements thereafter. The consumption hedged
for the remainder of 2006 is capped at an average price of
approximately $66 per barrel of crude oil. As discussed above, the
majority of these contracts were determined to be ineffective
beginning July 1, 2006. A deterioration of the Company's financial
position could negatively affect the Company's ability to hedge fuel
in the future.
17
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 June 30, 2006. 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 June 30, 2006. During the
quarter ending on June 30, 2006, 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.
18
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, American, AMR Eagle,
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.
The plaintiffs sought 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. On February 24, 2005,
the court decertified the class. The claims against Airlines
Reporting Corporation have been dismissed, and in September 2005, the
Court granted Summary Judgment in favor of the Company and all other
defendants. Plaintiffs have filed an appeal to the United States
Court of Appeals for the Ninth Circuit. 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 a material 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, 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 a material 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 claims against Delta Air Lines have been
dismissed, and the case is stayed as to United Airlines and Northwest
Airlines since they filed for bankruptcy. On April 19, 2006, a
stipulation was filed dismissing American from the lawsuit with
prejudice.
19
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, 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) were 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 Court dismissed the cases but allowed leave to amend, and the
plaintiffs in the Kimmell and Rosenberg cases filed amended complaints
on June 24, 2005. The Kimmell and Rosenberg plaintiffs have
voluntarily dismissed with prejudice the remaining claims and waived
their right to appeal on all issues.
American is defending an appeal of a lawsuit, filed as a class action
but not certified as such, arising from allegedly improper failure to
refund certain governmental taxes and fees collected by American upon
the sale of nonrefundable tickets when such tickets are not used for
travel. In Harrington v. Delta Air Lines, Inc., et al., (filed
November 24, 2004 in the United States District Court for the District
of Massachusetts), the plaintiffs sought unspecified actual damages
(trebled), declaratory judgment, injunctive relief, costs, and
attorneys' fees. The suit asserted various causes of action,
including breach of contract, conversion, and unjust enrichment
against American and numerous other airline defendants. The defendants
filed a motion to dismiss which was granted. Plaintiffs have filed a
notice of appeal with the First Circuit Court of Appeals. American is
vigorously defending the suit and believes it to be without merit.
However, a final adverse court decision requiring American to refund
collected taxes and/or fees could have a material adverse impact on
the Company. Additionally, the same attorneys representing the
Harrington plaintiffs filed a qui tam suit entitled Teitelbaum v.
Alaska Airlines, et al. in the United States District Court for the
District of Massachusetts. American was notified that it was a
defendant in this case in December 2005. This case asserted
essentially the same claims as in the Harrington case, and asserted
that the United States had been damaged and requested essentially the
same relief on behalf of the United States. The Teitelbaum plaintiffs
have voluntarily dismissed the case.
On March 11, 2004, a patent infringement lawsuit was filed against
AMR, American, AMR Eagle Holding Corporation, and American Eagle 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. On September 7, 2005, the court issued a memorandum
opinion that interpreted disputed terms in the patents. The plaintiff
dismissed its claims without prejudice to its right to appeal the
September 7, 2005 opinion, and the plaintiff is pursuing such an
appeal. 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 a material
adverse impact on the Company.
20
On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
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 (RLA) 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). On
March 28, 2006, the district court dismissed all of various state law
claims against the Company, all but one of the LMRDA claims against
the APFA, and the claimed violations of RICO. This leaves the
claimed violations of the RLA and the duty of fair representation
against the Company and the APFA (as well as one LMRDA claim and one
claim against the APFA of a breach of the union constitution).
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 a material adverse impact on the
Company.
On February 14, 2006, the Antitrust Division of the United States
Department of Justice (the "DOJ") served the Company with a grand jury
subpoena as part of an ongoing investigation into possible criminal
violations of the antitrust laws by certain domestic and foreign air
cargo carriers. At this time, the Company does not believe it is a
target of the DOJ investigation. The New Zealand Commerce Commission
notified the Company on February 17, 2006 that it is also
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On
February 22, 2006, the Company received a letter from the Swiss
Competition Commission informing the Company that it too is
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges.
The Company intends to cooperate fully with these investigations. In
the event that these investigations uncover violations of the U.S.
antitrust laws or the competition laws of some other jurisdiction,
such findings and related legal proceedings could have a material
adverse impact on the Company.
21
Approximately 38 purported class action lawsuits (Animal Land, Inc. v.
Air Canada et al. filed in the United States District Court for the
Eastern District of New York on February 17, 2006; Joan Adams v.
British Airways et al. filed in the United States District Court for
the Eastern District of New York on February 22, 2006; Rock
International Transport v. Air Canada et al. filed in the United
States District Court for the Eastern District of New York on February
24, 2006; Helen's Wooden Crafting Co. v. Air Canada et al. filed in
the United States District Court for the Eastern District of New York
on February 24, 2006; ABM Int'l, Inc. v. Ace Aviation Holdings, Inc.
et al. filed in the United States District Court for the Eastern
District of New York on February 28, 2006; Blumex USA, Inc. v. Air
Canada et al. filed in the United States District Court for the
Northern District of Illinois on March 1, 2006; Mamlaka Video v. Air
Canada et al. filed in the United States District Court for the
Eastern District of New York on March 3, 2006; Spraying Systems Co. v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the Eastern District of New York on March 3, 2006; Mitchell
Spitz v. Air France-KLM et al. filed in the United States District
Court for the Eastern District of New York on March 6, 2006; JCK
Industries, Inc. v. British Airways, PLC et al. filed in the United
States District Court for the Eastern District of New York on March 6,
2006; Marc Seligman v. Air Canada et al. filed in the United States
District Court for the Southern District of Florida on March 6, 2006;
CID Marketing and Promotion Inc. v. AMR Corporation et al. filed in
the United States District Court for the Eastern District of
Pennsylvania on March 7, 2006; Lynn Culver v. Air Canada et al. filed
in the United States District Court for the District of Columbia on
March 8, 2006; JSL Carpet Corp. v. ACE Aviation Holdings, Inc. et al.
filed in the United States District Court for the Eastern District of
New York on March 10, 2006; Y. Hata & Co, Ltd. v. Air France-KLM et
al. filed in the United States District Court for the Northern
District of California on March 13, 2006; FTS International Express v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the District of Columbia on March 15, 2006; Thule, Inc. v.
Air Canada et al. filed in the United States District Court for the
Eastern District of New York on March 28, 2006; Rosetti Handbags and
Accessories, Ltd. v. Air France ADS et al. filed in the United States
District Court for the Eastern District of New York on March 31, 2006;
W.I.T. Entertainment Inc. v. AMR Corporation et al. filed in the
United States District Court for the Southern District of Florida on
April 3, 2006; Jeff Rapps v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
April 7, 2006; Funke Design Build, Inc. v. AMR Corporation et al.
filed in the United States District Court for the Northern District of
Illinois on April 7, 2006; Sul-American Export Inc. v. Air France ADS
et al. filed in the United States District Court for the Eastern
District of New York on April 7, 2006; La Regale Ltd. v. British
Airways PLC et al. filed in the United States District Court for the
Eastern District of New York on April 12, 2006; J.A. Transport Inc. v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the District of Columbia on April 12, 2006; Caribe Air
Cargo, Inc. v. ACE Aviation Holdings, Inc. et al. filed in the United
States District Court for the District of Columbia on April 13, 2006;
Gold Eye Distributors, Inc. v. Air France ADS et al. filed in the
United States District Court for the Eastern District of New York on
April 14, 2006; Ralph Olarte v. British Airways PLC et al. filed in
the United States District Court for the District of Columbia on April
19, 2006; Capogiro LLC v. ACE Aviation Holdings, Inc. et al. filed in
the United States District Court for the District of Columbia on April
20, 2006; Ali Fayazi v. British Airways PLC et al. filed in the United
States District Court for the Eastern District of New York on April
26, 2006; Janice Perlman v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
May 9, 2006; Leslie Young v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
May 12, 2006; Craig Antell, M.D. v. British Airways PLC et al. filed
in the United States District Court for the Eastern District of New
York on May 16, 2006; Eurotrendz v. British Airways PLC et al. filed
in the United States District Court for the Eastern District of New
York on May 18, 2006; David Asher Rakoff v. British Airways PLC et al.
filed in the United States District Court for the Eastern District of
New York on May 22, 2006; Kalla Hirschbein v. British Airways PLC et
al. filed in the United States District Court for the Eastern District
of New York on June 1, 2006; Association des Utilisateurs du Transport
de Fret v. ACE Aviation Holdings, Inc. et al. filed in the United
States District Court for the District of Columbia on June 6, 2006;
and McDuffee New York, Inc. v. ACE Aviation Holdings, Inc. et al.
filed in the United States District Court for the Northern District of
Illinois on June 27, 2006) have been filed against the Company and
certain foreign and domestic air carriers alleging that the defendants
violated U.S. antitrust laws by illegally conspiring to set prices and
surcharges on cargo shipments. These cases have been consolidated in
the United States District Court for the Eastern District of New York,
together with approximately 46 other class action lawsuits in which
the Company has not been named as a defendant. Plaintiffs are seeking
trebled money damages and injunctive relief. American will vigorously
defend these lawsuits; however, any adverse judgment could have a
material adverse impact on the Company.
On June 20, 2006, DOJ served the Company with a grand jury subpoena as
part of an ongoing investigation into possible criminal violations of
the antitrust laws by certain domestic and foreign passenger carriers.
At this time, the Company does not believe it is a target of the DOJ
investigation. The Company intends to cooperate fully with this
investigation. In the event that these investigations uncover
violations of the U.S. antitrust laws or the competition laws of some
other jurisdiction, such findings and related legal proceedings could
have a material adverse impact on the Company.
22
Approximately 17 purported class action lawsuits (Saldana v. American
Airlines, Inc. et al. filed in the United States District Court for
the Southern District of New York on June 23, 2006; McGovern v. AMR
Corporation, et al. filed in the United States District Court for the
Northern District of Illinois on June 23, 2006; Baharani v. British
Airways PLC et al. filed in the United States District Court for the
Southern District of Florida on June 23, 2006; Boccara v. British
Airways PLC et al. filed in the United States District Court for the
Northern District of Florida on June 23, 2006; Chin v. AMR Corporation
et al. filed in the United States District Court for the Northern
District of Illinois on June 26, 2006; McDuffee New York, Inc. v. ACE
Aviation Holdings, Inc. et al. filed in the United States District
Court for the Northern District of Illinois on June 27, 2006; McGrath
v. AMR Corporation et al. filed in the United States District Court
for the Northern District of Illinois on June 27, 2006; Fadden v. AMR
Corporation et al. filed in the United States District Court for the
Northern District of Illinois on June 28, 2006; Szeleqski v. AMR
Corporation et al. filed in the United States District Court for the
Northern District of Illinois on June 28, 2006; Golin v. AMR
Corporation et al. filed in the United States District Court for the
Northern District of California on June 29, 2006; Mazzocco v. AMR
Corporation et al. filed in the United States District Court for the
Eastern District of New York on June 29, 2006; McIntyre Group, Ltd. v.
AMR Corporation et al. filed in the United States District Court for
the Northern District of California on June 29, 2006; Miller v.
British Airways PLC et al. filed in the United States District Court
for the Eastern District of Pennsylvania on June 29, 2006; Nelson v.
AMR Corporation filed in the United States District Court for the
Eastern District of New York on June 29, 2006; Weiss v. British
Airways PLC et al. filed in the United States District Court for the
Eastern District of Pennsylvania on June 30, 2006; Marco v. American
Airlines, Inc. et al. filed in the United States District Court for
the Central District of California on June 30, 2006; and Finegan v.
British Airways PLC et al., filed in the United States District Court
for the Eastern District of New York on July 6, 2006) have been filed
against the Company and certain foreign and domestic air carriers
alleging that the defendants violated U.S. antitrust laws by illegally
conspiring to set prices and surcharges for passenger transportation.
These cases are expected to be consolidated in an as yet undetermined
court together with approximately 32 other class action lawsuits in
which the Company has not been named as a defendant. Plaintiffs are
seeking trebled money damages and injunctive relief. American will
vigorously defend these lawsuits; however, any adverse judgment could
have a material adverse impact on the Company.
23
Item 5. Other Information
As discussed in the AMR Proxy Statement, the Compensation
Committee of the AMR Board of Directors conducts annually a
comprehensive review of compensation for the executive officers of
AMR and American with independent compensation consultants engaged
by the Committee. At the July 2006 meetings of the Compensation
Committee and the Board, the following compensation initiatives were
approved (effective July 24, 2006):
- Grants of stock-settled stock appreciation rights pursuant to the
form of Stock Appreciation Right Agreement ("SAR Agreement"), attached
as Exhibit 10.1 to this Form 10-Q, and the corresponding Amendment to
the AMR Corporation 1998 Long Term Incentive Plan, as Amended, dated
as of July 19, 2006, attached as Exhibit 10.2 to this Form 10-Q. An
attachment to the form SAR Agreement notes the stock-settled stock
appreciation right grants to the executive officers, effective July
24, 2006.
- Grants of deferred shares pursuant to the form of Deferred Share
Award Agreement for 2006 ("Deferred Share Agreement"). The form of
the Deferred Share Agreement is attached as Exhibit 10.3 to this Form
10-Q, and an attachment to the form Deferred Share Agreement notes the
deferred share grants to the executive officers, effective July 24,
2006.
- Grants of performance shares pursuant to the form of Performance
Share Agreement ("Performance Share Agreement") under the 2006 - 2008
Performance Share Plan for Officers and Key Employees. The form of
the Performance Share Agreement is attached as Exhibit 10.4 to this
Form 10-Q, and an attachment to the form Performance Share Agreement
notes the performance share grants to the executive officers,
effective July 24, 2006.
For Gerard J. Arpey, the Committee determined that an increase of Mr.
Arpey's compensation was necessary based on several considerations,
including:
- According to the data and recommendations of the Committee's
independent compensation consultants, the adjustments were required to
begin to bring Mr. Arpey's compensation more in-line with median CEO
compensation at comparably-sized companies and other airlines.
- The need to retain Mr. Arpey over the long-term.
- Mr. Arpey declined base salary increases upon his promotion to
CEO in 2003, and in each of 2004 and 2005 (other than the 1.5% pay
increase offered to all management employees).
- Internal equity related to the market-rate salary of the
Company's new Chief Financial Officer.
At the July 2006 meetings of the Committee and the Board, the
following compensation initiatives were therefore approved for Mr.
Arpey:
- Base salary increase to $650,000.
- Long-term incentive grants (effective July 24, 2006), comprised of:
- 77,500 stock-settled Stock Appreciation Rights
- 22,000 Deferred Shares
- 100,000 Performance Shares
- 58,000 career performance shares (pursuant to the terms of the
Career Performance Shares, Deferred Stock Award Agreement between the
Company and Mr. Arpey, dated as of July 25, 2005. The form of this
agreement is attached as Exhibit 10.6 to AMR's report on Form
10-Q for the quarterly period ended June 30, 2005.)
24
Item 6. Exhibits
The following exhibits are included herein:
10.1 Form of Stock Appreciation Right Agreement under the 1998 Long
Term Incentive Plan, as Amended (with awards to executive officers
noted)
10.2 Amendment to the 1998 Long Term Incentive Plan, as Amended, dated
as of July 19, 2006
10.3 Form of 2006 Deferred Share Award Agreement (with awards to
executive officers noted)
10.4 Form of Performance Share Agreement under the 2006 - 2008
Performance Share Plan for Officers and Key Employees (with awards
to executive officers noted)
12 Computation of ratio of earnings to fixed charges for the three
and six months ended June 30, 2006 and 2005.
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).
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: July 25, 2006 BY: /s/Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
26