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, 2007.
[ ]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, (817) 963-1234
including area code
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 20, 2007.
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, 2007 and 2006
Condensed Consolidated Balance Sheets -- June 30, 2007 and December
31, 2006
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2007 and 2006
Notes to Condensed Consolidated Financial Statements -- June 30,
2007
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,
2007 2006 2007 2006
Revenues
Passenger $4,673 $4,720 $8,999 $8,964
Regional Affiliates 658 702 1,216 1,271
Cargo 200 206 401 392
Other revenues 322 331 639 659
Total operating revenues 5,853 5,959 11,255 11,286
Expenses
Wages, salaries and benefits 1,496 1,527 3,007 3,103
Aircraft fuel 1,479 1,544 2,754 2,876
Regional payments to AMR Eagle 579 554 1,123 1,086
Other rentals and landing fees 284 300 585 586
Commissions, booking fees and
credit card expense 268 286 517 555
Depreciation and amortization 248 243 490 483
Maintenance, materials and repairs 208 187 403 374
Aircraft rentals 149 144 297 285
Food service 130 128 255 251
Other operating expenses 618 626 1,247 1,215
Total operating expenses 5,459 5,539 10,678 10,814
Operating Income 394 420 577 472
Other Income (Expense)
Interest income 84 67 160 119
Interest expense (182) (200) (369) (401)
Interest capitalized 5 7 14 14
Related party interest - net (21) (11) (41) (17)
Miscellaneous - net (9) (3) (19) (13)
(123) (140) (255) (298)
Income Before Income Taxes 271 280 322 174
Income tax - - - -
Net Earnings $ 271 $ 280 $322 $ 174
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,
2007 2006
Assets
Current Assets
Cash $ 213 $ 120
Short-term investments 5,607 4,527
Restricted cash and short-term investments 470 468
Receivables, net 1,192 957
Inventories, net 485 465
Other current assets 456 213
Total current assets 8,423 6,750
Equipment and Property
Flight equipment, net 11,377 11,524
Other equipment and property, net 2,368 2,343
Purchase deposits for flight equipment 177 177
13,922 14,044
Equipment and Property Under Capital Leases
Flight equipment, net 726 765
Other equipment and property, net 88 99
814 864
Route acquisition costs and airport operating
and gate lease rights, net 1,148 1,143
Other assets 2,869 3,049
$ 27,176 $25,850
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 1,278 $ 987
Accrued liabilities 1,966 2,164
Air traffic liability 4,607 3,782
Payable to affiliates, net 1,583 1,071
Current maturities of long-term debt 946 1,012
Current obligations under capital leases 123 101
Total current liabilities 10,503 9,117
Long-term debt, less current maturities 7,315 7,787
Obligations under capital leases, less
current obligations 730 824
Pension and postretirement benefits 5,341 5,340
Other liabilities, deferred gains and
deferred credits 3,809 3,848
Stockholders' Equity (Deficit)
Common stock - -
Additional paid-in capital 3,817 3,667
Accumulated other comprehensive loss (1,327) (1,399)
Accumulated deficit (3,012) (3,334)
(522) (1,066)
$ 27,176 $25,850
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,
2007 2006
Net Cash Provided by Operating Activities $1,534 $1,452
Cash Flow from Investing Activities:
Capital expenditures (337) (238)
Net increase in short-term investments (1,080) (1,299)
Net increase in restricted cash and
short-term investments (2) (15)
Proceeds from sale of equipment and property 20 9
Other 4 (6)
Net cash used by investing activities (1,395) (1,549)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (610) (380)
Reimbursement from construction reserve account 59 75
Funds transferred from affiliates, net 505 433
Net cash provided (used) by financing
activities (46) 128
Net increase in cash 93 31
Cash at beginning of period 120 133
Cash at end of period $ 213 $ 164
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/A
for the year ended December 31, 2006 (2006 Form 10-K).
2.In March 2007, American announced its intent to pull forward the
delivery of 47 737-800 aircraft that American had previously
committed to acquire in 2013 through 2016. On June 28, 2007,
American announced that it had accelerated the delivery of six of
these aircraft into the first half of 2009. Any decisions to
accelerate additional deliveries will depend on a number of
factors, including future economic industry conditions and the
financial conditions of the Company. As of June 30, 2007, the
Company had commitments to acquire nine Boeing 737-800s in 2009 and
an aggregate of 38 Boeing 737-800s and seven Boeing 777-200ERs in
2013 through 2016. Future payments for all aircraft, including the
estimated amounts for price escalation, are currently estimated to
be approximately $2.8 billion, with the majority occurring in 2011
through 2016. However, if the Company commits to accelerating the
delivery dates of a significant number of aircraft in the future, a
significant portion of the $2.8 billion commitment will be
accelerated into earlier periods, including 2008 and 2009. The
obligation in 2008 and 2009 for the nine aircraft already pulled
forward is approximately $250 million. This amount is net of
purchase deposits currently held by the manufacturer.
3.Accumulated depreciation of owned equipment and property at June 30,
2007 and December 31, 2006 was $10.3 billion and $10.0 billion,
respectively. Accumulated amortization of equipment and property
under capital leases was $1.1 billion at both June 30, 2007 and
December 31, 2006.
4.In April 2007, the United States and the European Union approved
an "open skies" air services agreement that provides airlines from the
United States and E.U. member states open access to each other's
markets, with freedom of pricing and unlimited rights to fly beyond
the United States and beyond each E.U. member state. The provisions
of the agreement will take effect on March 30, 2008. Under the
agreement, every U.S. and E.U. airline is authorized to operate
between airports in the United States and London's Heathrow Airport.
Only three airlines besides American were previously allowed to
provide that Heathrow service. The agreement will result in the
Company facing increased competition in serving Heathrow as additional
carriers are able to obtain necessary slots and terminal facilities.
However, the Company believes that American and the other carriers who
currently have existing authorities and the related slots and
facilities will continue to hold a significant advantage after the
advent of open skies. The Company has recorded route acquisition
costs (including international routes and slots) of $846 million as of
June 30, 2007, including a significant amount related to operations at
Heathrow. The Company considers these assets indefinite life assets
under Statement of Financial Accounting Standard No. 142 "Goodwill and
Other Intangibles" and as a result they are not amortized but instead
are tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired.
The Company completed an impairment analysis on the Heathrow routes
(including slots) effective March 31, 2007 and concluded that no
impairment exists. The Company believes its estimates and assumptions
are reasonable, however, the market for LHR slots is still developing
and only a limited number of comparable transactions have occurred to
date. The Company will continue to evaluate future transactions
involving purchases of slots at LHR and the potential impact of those
transactions on the value of the Company's routes and slots.
-4-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5.On January 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes" (FIN 48). FIN 48 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the
financial statements and provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition issues.
The Company has an unrecognized tax benefit of approximately $38
million which did not change significantly during the six months
ended June 30, 2007. The application of FIN 48 would have resulted
in an immaterial change in retained earnings, except that it was
fully offset by the application of a valuation allowance. In
addition, future changes in the unrecognized tax benefit will have
no impact on the effective tax rate due to the existence of the
valuation allowance. Accrued interest on tax positions is recorded
as a component of interest expense but is not significant at June
30, 2007. The Company does not reasonably estimate that the
unrecognized tax benefit will change significantly within the next
twelve months.
The Company files its tax returns as prescribed by the tax laws of
the jurisdictions in which it operates. The Company is currently
under audit by the Internal Revenue Service for its 2001 through
2003 tax years with an anticipated closing date in 2008. The
Company's 2004 and 2005 tax years are still subject to examination.
Various state and foreign jurisdiction tax years remain open to
examination as well, though the Company believes any additional
assessment will be immaterial to its consolidated financial
statements.
As discussed in Note 8 to the consolidated financial statements in
the 2006 Form 10-K, the Company has a valuation allowance against
the full amount of its net deferred tax asset. The Company
provides a valuation allowance against deferred tax assets when it
is more likely than not that some portion, or all of its deferred
tax assets, will not be realized. The Company's deferred tax asset
valuation allowance decreased approximately $69 million during the
six months ended June 30, 2007 to $1.7 billion as of June 30, 2007,
including the impact of comprehensive income for the six months
ended June 30, 2007, changes described above from applying FIN 48
and certain other adjustments.
Under special IRS rules (the "Section 382 Limitation"), cumulative
stock purchases by material shareholders exceeding 50% during a 3-
year period can potentially limit a company's future use of net
operating losses (NOL's). Such limitation is currently increased
by "built-in gains", as provided by current guidance. The Company
is not currently subject to the "Section 382 Limitation", and if it
were triggered in a future period, under current tax rules, is not
expected to significantly impact the recorded value or timing of
utilization of AMR's NOL's.
Various taxes and fees assessed on the sale of tickets to end
customers are collected by the Company as an agent and remitted to
taxing authorities. These taxes and fees have been presented on a
net basis in the accompanying consolidated statement of operations
and recorded as a liability until remitted to the appropriate
taxing authority.
-5-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6.As of June 30, 2007, American had issued guarantees covering
approximately $1.1 billion of AMR's unsecured debt. In addition, as
of June 30, 2007, AMR and American had issued guarantees covering
approximately $368 million of AMR Eagle's secured debt.
On March 30, 2007, American paid in full the principal balance of
its senior secured revolving credit facility. As of June 30, 2007,
the $442 million term loan facility under the same bank credit
facility was still outstanding and the $275 million balance of the
revolving credit facility remains available to American through
maturity. The revolving credit facility amortizes at a rate of $10
million quarterly through December 17, 2007. American's
obligations under the credit facility are guaranteed by AMR.
7.On January 16, 2007, the AMR Board of Directors approved the
amendment and restatement of the 2005-2007 Performance Share Plan for
Officers and Key Employees and the 2005 Deferred Share Award Agreement
to permit settlement in a combination of cash and/or stock. However,
the amendments did not impact the fair value of the awards. As a
result, certain awards under these plans have been accounted for as
equity awards since that date and the Company reclassified $113
million from Accrued liabilities to Additional paid-in-capital in
accordance with Statement of Financial Accounting Standard No. 123
(revised 2004), "Share-Based Payment".
On January 26, 2007, AMR completed a public offering of 13 million
shares of its common stock. The Company realized $497 million from
the sale of equity. The proceeds from the transaction were
transferred to American.
-6-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8.The following tables provide the components of net periodic
benefit cost for the three and six months ended June 30, 2007 and 2006
(in millions):
Pension Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
Components of net periodic
benefit cost
Service cost $ 93 $ 100 $ 185 $ 199
Interest cost 168 160 336 321
Expected return on assets (187) (167) (374) (335)
Amortization of:
Prior service cost 4 4 8 8
Unrecognized net loss 6 20 13 40
Net periodic benefit cost $ 84 $ 117 $ 168 $ 233
Other Postretirement Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
Components of net periodic
benefit cost
Service cost $ 18 $ 20 $ 35 $ 38
Interest cost 49 49 96 96
Expected return on assets (5) (4) (9) (8)
Amortization of:
Prior service cost (3) (3) (7) (5)
Unrecognized net (gain) loss (2) - (4) 1
Net periodic benefit cost $ 57 $ 62 $ 111 $ 122
The Company expects to contribute approximately $364 million to its
defined benefit pension plans in 2007. The Company's estimates of
its defined benefit pension plan contributions reflect the
provisions of the Pension Funding Equity Act of 2004 and the
Pension Protection Act of 2006. Of the $364 million the Company
expects to contribute to its defined benefit pension plans in 2007,
the Company contributed $180 million during the six months ended
June 30, 2007 and contributed $86 million on July 13, 2007.
-7-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
9.As a result of the 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 components of these changes and the remaining
accruals for these charges (in millions):
Aircraft Facility
Charges Exit Costs Total
Remaining accrual
at December 31, 2006 $ 126 $ 19 $ 145
Payments (8) - (8)
Remaining accrual
at June 30, 2007 $ 118 $ 19 $ 137
Cash outlays related to the accruals for aircraft charges and
facility exit costs will occur through 2017 and 2018, respectively.
10.The Company includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting and
unrealized gains and losses on available-for-sale securities in
comprehensive income. For the three months ended June 30, 2007 and
2006, comprehensive income was $271 million and $291 million,
respectively, and for the six months ended June 30, 2007 and 2006,
comprehensive income was $394 million and $205 million, respectively.
The difference between net earnings and comprehensive income for the
three and six months ended June 30, 2007 and 2006 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. In doing so,
the Company uses a regression model to determine the correlation of
the change in prices of the commodities used to hedge jet fuel
(e.g. NYMEX Heating oil) to the change in the price of jet fuel.
The Company also monitors the actual dollar offset of the hedges'
market values as compared to hypothetical jet fuel hedges. The
fuel hedge contracts are generally deemed to be "highly effective"
if the R-squared is greater than 80 percent and the dollar offset
correlation is within 80 percent to 125 percent. 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.
11.On July 3, 2007, American entered into an agreement to sell
all of its shares in ARINC Incorporated. Upon closing, which is
expected to occur prior to October 31, 2007, American expects to
receive proceeds of approximately $194 million and to record a gain
on the sale of approximately $140 million. The closing of the
transaction is subject to the satisfaction of a number of
conditions, many of which are beyond American's control, and no
assurance can be given that such closing will occur.
-8-
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 our 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 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 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 and volatile fuel
prices and further increases in the price of fuel, and the
availability of fuel; the fiercely and increasingly competitive
business environment faced by the Company; industry consolidation,
competition with reorganized and reorganizing carriers; low fare
levels by historical standards and the Company's reduced pricing
power; the Company's potential need to raise additional funds and its
ability to do so on acceptable terms; changes in the Company's
corporate or 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;
labor costs that are higher than the Company's competitors;
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 the Company'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 2006
Form 10-K (see in particular Item 1A "Risk Factors" in the 2006 Form
10-K).
Overview
The Company recorded net earnings of $271 million in the second
quarter of 2007 compared to $280 million in the same period last year.
The Company's second quarter 2007 results were impacted by an
improvement in unit revenues (passenger revenue per available seat
mile) and by fuel prices that remain high by historical standards. In
addition, a significant number of weather related events impacted the
Company's second quarter results and the Company estimates these
disruptions decreased scheduled mainline departures for the second
quarter of 2007 by approximately 2.1 percent and reduced the Company's
revenue by approximately $40 million during the quarter.
-9-
Mainline passenger unit revenues increased 3.6 percent for the second
quarter due to a 1.0 point load factor increase and a 2.3 percent
increase in passenger yield (passenger revenue per passenger mile)
compared to the same period in 2006. Although load factor
performance and passenger yield showed year-over-year improvement,
passenger yield remains low by historical standards. The Company
believes this is the result of excess industry capacity and its
reduced pricing power resulting from a number of factors, including
greater cost sensitivity on the part of travelers (especially
business travelers), increased competition from LCC's and pricing
transparency resulting from the use of the internet.
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. Certain 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 11-17) in the 2006 Form 10-K. In addition, four of
the Company's largest domestic competitors have filed for bankruptcy
in the last several years and have used this process to significantly
reduce contractual labor and other costs. In order to remain
competitive and to improve its financial condition, the Company must
continue to take steps to generate additional revenues and to 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.
-10-
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 2006 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
ongoing pension funding obligations, the Company may need access to
additional funding. The Company continues to evaluate the economic
benefits and other aspects of replacing some of the older aircraft in
its fleet prior to 2013 and also continues to evaluate the appropriate
mix of aircraft in its fleet. The Company's possible financing
sources primarily include: (i) a limited amount of additional secured
aircraft debt or sale-leaseback transactions involving owned aircraft
(a very large majority of the Company's owned aircraft, including
virtually all of the Company's Section 1110-eligible aircraft, are
encumbered); (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; (vi)
unsecured debt; and (vii) issuance of equity and/or equity-like
securities. However, the availability and level of these financing
sources cannot be assured, particularly in light of the Company's
recent financial results, substantial indebtedness, current credit
ratings, high fuel prices and the financial difficulties that have
been experienced in the airline industry. The inability of the Company
to obtain additional 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 the Company's 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 secured bank credit facility which consists of a $275
million revolving credit facility, with a final maturity on June 17,
2009, and a fully drawn $442 million term loan facility, with a final
maturity on December 17, 2010 (the Revolving Facility and the Term
Loan Facility, respectively, and collectively, the Credit Facility).
On March 30, 2007, American paid in full the principal balance of the
Revolving Facility and as of June 30, 2007, it remained undrawn.
American's obligations under the Credit Facility are guaranteed by
AMR.
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 1.30 to 1.00 for the four
quarter period ending June 30, 2007, and will increase gradually for
each four quarter period ending on each fiscal quarter thereafter
until it reaches 1.50 to 1.00 for the four quarter period ending June
30, 2009. AMR and American were in compliance with the Liquidity
Covenant and the EBITDAR covenant as of June 30, 2007 and expect to be
able to continue to comply with these covenants. However, given fuel
prices that are high by historical standards 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 these
covenants, and there are no assurances that AMR and American 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 and otherwise have a
material adverse impact on the Company.
-11-
Pension Funding Obligation
The Company expects to contribute approximately $364 million to its
defined benefit pension plans in 2007. The Company's estimates of its
defined benefit pension plan contributions reflect the provisions of
the Pension Funding Equity Act of 2004 and the Pension Protection Act
of 2006. Of the $364 million the Company expects to contribute to
its defined benefit pension plans in 2007, the Company contributed
$180 million during the six months ended June 30, 2007 and
contributed $86 million on July 13, 2007.
The U.S Congress is currently considering legislation that would
allow commercial airline pilots to fly until age 65. The Federal
Aviation Administration currently requires commercial pilots to
retire once they reach age 60. The Company has not completed its
evaluation of the impact of the proposed legislation on its financial
statements; however, the proposed legislation could have a material
impact on the Company's valuation of its liability for pension and
postretirement benefits.
Compensation
As described in Note 7 to the condensed consolidated financial
statements, during 2006 and January 2007, the AMR Board of Directors
approved the amendment and restatement of all of the outstanding
performance share plans, the related performance share agreements and
deferred share agreements that required settlement in cash. The plans
were amended to permit settlement in cash and/or stock; however, the
amendments did not impact the fair value of the awards under the
plans. These changes were made in connection with a grievance filed
by the Company's three labor unions which asserted that a cash
settlement may be contrary to a component of the Company's 2003 Annual
Incentive Program agreement with the unions.
American has a profit sharing program that provides variable
compensation that rewards frontline employees when American achieves
certain financial targets. Generally, the profit sharing plan
provides for a profit sharing pool for eligible employees equal to 15
percent of pre-tax income of American in excess of $500 million.
Based on current conditions, the Company's condensed consolidated
financial statements include an accrual for profit sharing. There can
be no assurance that the Company's forecasts will approximate actual
results. Additionally, reductions in the Company's forecasts of
income for 2007 could result in the reversal of a portion or all of
the previously recorded profit sharing expense.
Cash Flow Activity
At June 30, 2007, the Company had $5.8 billion in unrestricted cash
and short-term investments, an increase of $1.2 billion from December
31, 2006, and $275 million available under the Revolving Facility.
Net cash provided by operating activities in the six-month period
ended June 30, 2007 was $1.5 billion, an increase of $82 million over
the same period in 2006 primarily due to the Company's management of
capacity. The Company contributed $180 million to its defined benefit
pension plans in the first six months of 2007 compared to $119
million during the first six months of 2006.
Capital expenditures for the first six months of 2007 were $337
million and primarily included aircraft modifications and the cost of
improvements at New York's John F. Kennedy airport (JFK). A
significant portion of the Company's construction costs at JFK have
been reimbursed through a fund established from a previous financing
transaction.
On January 26, 2007, AMR completed a public offering of 13 million
shares of its common stock. The Company realized $497 million from
the sale of equity. The proceeds from the transaction were
transferred to American.
In the past, the Company has from time to time refinanced, redeemed or
repurchased its debt and taken other steps to reduce its debt or lease
obligations or otherwise improve its balance sheet. Going forward,
depending on market conditions, its cash position or other
considerations, the Company may continue to take such actions.
-12-
RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2007 and 2006
Revenues
The Company's revenues decreased approximately $31 million, or 0.3
percent, to $11.3 billion for the six months ended June 30, 2007 from
the same period last year. American's passenger revenues increased
by 0.4 percent, or $35 million, while capacity (ASM) decreased by 3.4
percent. American's passenger load factor increased 0.9 points to
80.9 percent and passenger revenue yield per passenger mile increased
by 2.8 percent to 13.19 cents. This resulted in an increase in
American's passenger RASM of 4.0 percent to 10.67 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, 2007
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 10.56 1.5% 53.9 (3.9)%
International 10.87 8.5 30.4 (2.7)
DOT Latin America 11.23 7.0 15.0 0.5
DOT Atlantic 10.70 6.1 12.0 (1.8)
DOT Pacific 9.86 22.8 3.4 (17.4)
The Company's Regional Affiliates include two 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, decreased $55 million, or 4.3 percent, to $1.2 billion as a
result of decreased capacity, load factors and passenger yield.
Regional Affiliates' traffic decreased 1.7 percent to 4.9 billion
revenue passenger miles (RPMs) and capacity decreased 0.6 percent to
6.7 billion ASMs, resulting in a 0.9 point decrease in the passenger
load factor to 73.0 percent.
-13-
Operating Expenses
The Company's total operating expenses decreased 1.3 percent, or $136
million, to $10.7 billion for the six months ended June 30, 2007
compared to the same period in 2006. American's mainline operating
expenses per ASM in the six months ended June 30, 2007 increased 1.8
percent compared to the same period in 2006 to 11.03 cents. These
increases are due primarily to a significant number of weather related
cancellations in 2007.
(in millions) Six Months
Ended Change Percentage
Operating Expenses June 30, 2007 from 2006 Change
Wages, salaries and benefits $ 3,007 $ (96) (3.1)%
Aircraft fuel 2,754 (122) (4.2)
Regional payments to AMR Eagle 1,123 37 3.4
Other rentals and landing fees 585 (1) (0.2)
Commissions, booking fees
and credit card expense 517 (38) (6.8)
Depreciation and amortization 490 7 1.4
Maintenance, materials and
repairs 403 29 7.8
Aircraft rentals 297 12 4.2
Food service 255 4 1.6
Other operating expenses 1,247 32 2.6
Total operating expenses $ 10,678 $(136) (1.3)%
Other Income (Expense)
Interest income increased $41 million in the six months ended June 30,
2007 compared to the same period in 2006 due primarily to an increase
in short-term investment balances. Interest expense decreased $32
million as a result of a decrease in the Company's long-term debt
balance.
Income Tax
The Company did not record a net tax provision associated with its
second quarter 2007 and 2006 earnings due to the Company providing a
valuation allowance, as discussed in Note 5 to the condensed
consolidated financial statements.
-14-
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, 2007 and 2006 (in millions):
Six Months Ended
June 30,
2007 2006
Revenues:
Regional Affiliates $1,216 $1,271
Other 49 50
$1,265 $1,321
Expenses:
Payments to Regional $1,222 $1,184
Affiliates
Other incurred expenses 156 159
$1,378 $1,343
In addition, passengers connecting to American's flights from American
Connection and AMR Eagle flights generated passenger revenues for
American flights of $878 million and $867 million for the six months
ended June 30, 2007 and 2006, respectively, which are included in
Revenues - Passenger in the consolidated statements of operations.
Outlook
The Company currently expects third quarter 2007 mainline unit cost to
increase approximately 2.4 percent year over year. Full year 2007
mainline unit costs are expected to increase approximately 2.3 percent
versus 2006.
Capacity for American's mainline jet operations is expected to decline
more than 2.4 percent in the third quarter of 2007 compared to the
third quarter of 2006. Mainline capacity is expected to decline
approximately 2.1 percent in the full year 2007 compared to 2006.
-15-
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 2006 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, 2007 cost per gallon of fuel. Based on
projected 2007 and 2008 fuel usage through June 30, 2008, such an
increase would result in an increase to aircraft fuel expense of
approximately $483 million in the twelve months ended June 30, 2008,
inclusive of the impact of fuel hedge instruments outstanding at June
30, 2007. Comparatively, based on projected 2007 fuel usage, such an
increase would have resulted in an increase to aircraft fuel expense
of approximately $478 million in the twelve months ended December 31,
2007, inclusive of the impact of fuel hedge instruments outstanding at
December 31, 2006. 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. In doing so, the Company uses a regression model
to determine the correlation of the change in prices of the
commodities used to hedge jet fuel (e.g. NYMEX Heating oil) to the
change in the price of jet fuel. The Company also monitors the actual
dollar offset of the hedges' market values as compared to hypothetical
jet fuel hedges. The fuel hedge contracts are generally deemed to be
"highly effective" if the R-squared is greater than 80 percent and the
dollar offset correlation is within 80 percent to 125 percent. 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 of June 30, 2007, the Company had effective hedges, primarily
collars, covering approximately 31 percent of its estimated remaining
2007 fuel requirements and an insignificant amount of its estimated
fuel requirements thereafter. The consumption hedged for the
remainder of 2007 is capped at an average price of approximately $62
per barrel of crude oil. A deterioration of the Company's financial
position could negatively affect the Company's ability to hedge fuel
in the future.
-16-
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, 2007. 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, 2007. During the
quarter ending on June 30, 2007, 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.
-17-
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. The cases, 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 (71 agencies) were consolidated for pre-trial purposes in the
United States District Court for the Northern District of Ohio,
Eastern Division. 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. On September 23,
2005, the Fausky plaintiffs dismissed their claims with prejudice. On
September 14, 2006, the court dismissed with prejudice 28 of the Swope
plaintiffs. American continues to vigorously defend these lawsuits.
A final adverse court decision awarding substantial money damages or
placing material restrictions on the Company's distribution practices
would have a material adverse impact on the Company.
-18-
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.
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 American'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 American 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 APFA and
American relating to the RPA and the ratification vote on the RPA by
individual APFA members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the APFA of its duty of fair representation to
its members, violation by American 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 American, all but one of the LMRDA claims against the
APFA, and the claimed violations of RICO. This left the claimed
violations of the RLA and the duty of fair representation against
American and the APFA (as well as one LMRDA claim and one claim
against the APFA of a breach of its constitution). By letter dated
February 9, 2007, plaintiffs' counsel informed counsel for the
defendants that plaintiffs do not intend to pursue the LMRDA claim
against APFA further. Although the Company believes the case against
it is without merit and both American and the APFA 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.
-19-
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. On
December 19, 2006 and June 12, 2007, the Company received requests for
information from the European Commission, seeking information
regarding the Company's corporate structure, revenue and pricing
announcements for air cargo shipments to and from the European Union.
On January 23, 2007, the Brazilian competition authorities, as part of
an ongoing investigation, conducted an unannounced search of the
Company's cargo facilities in Sao Paulo, Brazil. The Brazilian
authorities are investigating whether the Company and certain other
foreign and domestic air carriers violated Brazilian competition laws
by illegally conspiring to set fuel surcharges on cargo shipments. On
June 27, 2007, the Company received a request for information from the
Australian Competition and Consumer Commission seeking information
regarding fuel surcharges imposed by the Company on cargo shipments to
and from Australia and regarding the structure of the Company's cargo
operations. The Company intends to cooperate fully with these
investigations and inquiries. In the event that these or other
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.
Approximately 44 purported class action lawsuits have been filed in
the U.S. 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, along with other purported class action lawsuits in which
the Company was not named, were consolidated in the United States
District Court for the Eastern District of New York as In re Air Cargo
Shipping Services Antitrust Litigation, 06-MD-1775 on June 20, 2006.
Plaintiffs are seeking trebled money damages and injunctive relief.
The Company has not been named as a defendant in the consolidated
complaint filed by the plaintiffs. However, the plaintiffs have not
released any claims that they may have against the Company, and the
Company may later be added as a defendant in the litigation. If the
Company is sued on these claims, it will vigorously defend the suit,
but any adverse judgment could have a material adverse impact on the
Company. Also, on January 23, 2007, the Company was served with a
purported class action complaint filed against the Company, American,
and certain foreign and domestic air carriers in the Supreme Court of
British Columbia in Canada (McKay v. Ace Aviation Holdings, et al.).
The plaintiff alleges that the defendants violated Canadian
competition laws by illegally conspiring to set prices and surcharges
on cargo shipments. The complaint seeks compensatory and punitive
damages under Canadian law. On June 22, 2007, the plaintiffs agreed
to dismiss their claims against the Company. The dismissal is without
prejudice, and the Company could be brought back into the litigation
at a future date. If litigation is recommenced against the Company in
the Canadian courts, the Company will vigorously defend itself;
however, any adverse judgment could have a material adverse impact on
the Company.
On June 20, 2006, 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
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 this or other
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.
Approximately 52 purported class action lawsuits have been filed in
the U.S. 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, along with other purported class action
lawsuits in which the Company was not named, were consolidated in the
United States District Court for the Northern District of California
as In re International Air Transportation Surcharge Antitrust
Litigation, M 06-01793 on October 25, 2006. On July 9, 2007, the
Company was named as a defendant in the consolidated complaint.
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.
American is defending a lawsuit (Love Terminal Partners, L.P. et al.
v. The City of Dallas, Texas et al.) filed on July 17, 2006 in the
United States District Court in Dallas. The suit was brought by two
lessees of facilities at Dallas Love Field Airport against American,
the cities of Fort Worth and Dallas, Southwest Airlines, Inc., and the
Dallas/Fort Worth International Airport Board. The suit alleges that
an agreement by and between the five defendants with respect to Dallas
Love Field violates Sections 1 and 2 of the Sherman Act. Plaintiffs
seek injunctive relief and compensatory and statutory damages.
American will vigorously defend this lawsuit; however, any adverse
judgment could have a material adverse impact on the Company.
-20-
On August 21, 2006, a patent infringement lawsuit was filed against
American and American Beacon Advisors, Inc. (a wholly-owned subsidiary
of the Company), in the United States District Court for the Eastern
District of Texas (Ronald A. Katz Technology Licensing, L.P. v.
American Airlines, Inc., et al.). This case has been consolidated in
the Central District of California for pre-trial purposes with
numerous other cases brought by the plaintiff against other
defendants. The plaintiff alleges that American and American Beacon
infringe a number of the plaintiff's patents, each of which relates to
automated telephone call processing systems. The plaintiff is seeking
past and future royalties, 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 automated telephone call system operations
would have a material adverse impact on the Company.
American is defending a lawsuit (Kelley Kivilaan v. American Airlines,
Inc.), filed on September 16, 2004 in the United States District Court
for the Middle District of Tennessee. The suit was brought by a
flight attendant who seeks to represent a purported class of current
and former flight attendants. The suit alleges that several of the
Company's medical benefits plans discriminate against females on the
basis of their gender in not providing coverage in all circumstances
for prescription contraceptives. Plaintiff seeks injunctive relief
and monetary damages. A motion for class certification has been
filed, but the case has not yet been certified as a class action.
American will vigorously defend this lawsuit; however, any adverse
judgment could have a material adverse impact on the Company.
-21-
Item 5. Other Information
As discussed in the Company's Proxy Statement, the Compensation
Committee of the Company's Board of Directors conducts annually a
comprehensive review of compensation for the executive officers of the
Company and American with independent compensation consultants engaged
by the Committee. At the July 2007 meetings of the Compensation
Committee and the Board, the following compensation initiatives were
approved (effective July 23, 2007):
- 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. An attachment to the form SAR
Agreement notes the stock-settled stock appreciation right grants to
the executive officers, effective July 23, 2007.
- Grants of deferred shares pursuant to the form of Deferred Share
Award Agreement for 2007 ("Deferred Share Agreement"). The form of
the Deferred Share Agreement is attached as Exhibit 10.2 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 23, 2007.
- Grants of performance shares pursuant to the form of Performance
Share Agreement ("Performance Share Agreement") under the 2007 - 2009
Performance Share Plan for Officers and Key Employees ("Performance Share
Plan"). The form of the Performance Share Agreement and Performance Share
Plan are attached as Exhibit 10.3 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 23, 2007.
- A grant of 58,000 career performance shares (effective July 23,
2007) pursuant to the terms of the Career Performance Shares, Deferred
Stock Award Agreement between the Company and Gerard J. Arpey, dated
as of July 25, 2005. The form of this agreement is attached as
Exhibit 10.6 to the Company's report on Form 10-Q for the quarterly
period ended June 30, 2005.
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 Form of 2007 Deferred Share Award Agreement (with awards to
executive officers noted)
10.3 Form of Performance Share Agreement under the 2007 - 2009
Performance Share Plan for Officers and Key Employees and the
2007 - 2009 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, 2007 and 2006.
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).
-22-
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 24, 2007 BY: /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
-23-