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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996.
[ ]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 periods that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of November 14,1996
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 H(1)(b) of Form 10-Q.
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INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three months ended
September 30, 1996 and 1995; Nine months ended September 30, 1996
and 1995
Condensed Consolidated Balance Sheet -- September 30, 1996 and
December 31, 1995
Condensed Consolidated Statement of Cash Flows -- Nine months ended
September 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements -- September
30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Revenues
Passenger $3,533 $3,465 $10,330 $ 9,902
Cargo 163 165 494 497
Other 204 184 600 514
Total operating revenues 3,900 3,814 11,424 10,913
Expenses
Wages, salaries and
benefits 1,207 1,221 3,683 3,623
Aircraft fuel 476 401 1,354 1,151
Commissions to agents 306 325 905 939
Depreciation and
amortization 236 244 691 734
Other rentals and
landing fees 200 200 574 569
Food service 176 178 502 503
Aircraft rentals 133 150 429 454
Maintenance materials
and repairs 142 130 412 367
Other operating expenses 580 585 1,743 1,698
Total operating expenses 3,456 3,434 10,293 10,038
Operating Income 444 380 1,131 875
Other Income (Expense)
Interest income 5 6 17 17
Interest expense (81) (133) (298) (425)
Miscellaneous - net (21) (4) (21) (16)
(97) (131) (302) (424)
Income From Continuing
Operations Before
Income Taxes 347 249 829 451
Income tax provision 139 100 333 188
Income From Continuing
Operations 208 149 496 263
Income From Discontinued
Operations (less applicable
income taxes) - 63 136 197
Net Earnings $ 208 $ 212 $ 632 $ 460
The accompanying notes are an integral part of these financial statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
September 30 December 31
1996 1995
(Unaudited) (Note 1)
Assets
Current Assets
Cash $ 17 $ 70
Short-term investments 1,086 816
Receivables, net 1,122 1,013
Inventories, net 551 516
Other current assets 469 438
Total current assets 3,245 2,853
Equipment and Property
Flight equipment, net 8,632 9,096
Other equipment and property, net 1,289 1,820
9,921 10,916
Equipment and Property Under Capital Leases
Flight equipment, net 1,758 1,274
Other equipment and property, net 92 160
1,850 1,434
Route acquisition costs, net 981 1,003
Other assets, net 1,362 1,423
$ 17,359 $ 17,629
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 799 $ 742
Payables to affiliates 1,257 907
Accrued liabilities 1,563 1,789
Air traffic liability 1,919 1,467
Current maturities of long-term debt 21 49
Current maturities of long-term debt
due to Parent - 193
Current obligations under capital leases 109 101
Total current liabilities 5,668 5,248
Long-term debt, less current maturities 990 1,318
Long-term debt due to Parent 508 1,676
Obligations under capital leases,
less current maturities 1,544 1,777
Deferred income taxes 595 480
Other liabilities, deferred gains, deferred
credits and postretirement benefits 3,614 3,484
Stockholder's Equity
Common stock - -
Additional paid-in capital 1,717 1,699
Retained earnings 2,723 1,947
4,440 3,646
$ 17,359 $ 17,629
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (In millions)
Nine Months Ended
September 30,
1996 1995
Net Cash Provided by Operating Activities $1,595 $1,736
Cash Flow from Investing Activities:
Capital expenditures (333) (744)
Net increase in short-term investments (270) (328)
Proceeds from sale of equipment and
property 232 62
Net cash used for investing activities (371) (1,010)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (1,116) (268)
Funds transferred to affiliates, net (161) (377)
Net cash used for financing activities (1,277) (645)
Net increase (decrease) in cash (53) 81
Cash at beginning of period 70 13
Cash at end of period $ 17 $ 94
Cash Payments For:
Interest $ 298 $ 411
Income taxes 282 51
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and 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. The balance sheet at December 31, 1995 has been derived
from the audited financial statements at that date. Certain
amounts from 1995 have been reclassified to conform with the 1996
presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the American
Airlines, Inc. (American or the Company) Annual Report on Form 10-K
for the year ended December 31, 1995.
2.Accumulated depreciation of owned equipment and property at
September 30, 1996 and December 31, 1995, was $5.3 billion and $5.4
billion, respectively. Accumulated amortization of equipment and
property under capital leases at September 30, 1996 and December
31, 1995, was $790 million and $778 million, respectively.
3.As discussed in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, the Miami International Airport Authority
is currently remediating various environmental conditions at Miami
International Airport (Airport) and funding the remediation costs
through landing fee revenues. Some of the costs of the remediation
effort may be borne by carriers currently operating at the Airport,
including American, through increased landing fees. The ultimate
resolution of this matter is not expected to have a significant
impact on the financial position or liquidity of American.
4.On June 11, 1996, AMR announced its plans to create a worldwide
alliance between American and British Airways Plc. Subject to
regulatory approval, the two carriers will coordinate their
passenger and cargo activities between the U.S. and Europe,
introduce extensive code-sharing across each other's networks and
establish full reciprocity between their frequent flyer programs.
5.On July 2, 1996, AMR completed the reorganization of its
information technology businesses known as The SABRE Group into a
separate, wholly-owned subsidiary of AMR known as The SABRE Group
Holdings, Inc. and its direct and indirect subsidiaries (the
"Reorganization").
Prior to the Reorganization, most of The SABRE Group's business
units were divisions of American. As part of the Reorganization,
all of the businesses of The SABRE Group, including American's
SABRE Travel Information Network, SABRE Computer Services, SABRE
Development Services, and SABRE Interactive divisions
(collectively, the Information Services Group), and certain
buildings, equipment, and American's leasehold interest in certain
other buildings used by The SABRE Group were combined in
subsidiaries of American, which were then dividended to AMR. Also
as part of the Reorganization, $850 million of American's long-term
debt owed to AMR was repaid through the transfer by American to AMR
of an $850 million debenture issued by The SABRE Group Holdings,
Inc. to American. The Reorganization resulted in an increase to
American's retained earnings of approximately $150 million,
representing the amount of the debenture transferred to AMR in
excess of the carrying value of the assets and liabilities of the
Information Services Group as of July 2, 1996.
The results of operations of the Information Services Group have
been reflected in the consolidated statement of operations as
income from discontinued operations. The amounts shown are net of
income taxes of $38 million for the three months ended September
30, 1995, and $82 million and $118 million for the nine months
ended September 30, 1996 and 1995, respectively. Revenues from the
operations of the Information Services Group were $357 million for
the three months ended September 30, 1995, and $700 million and
$1.1 billion for the nine months ended September 30, 1996 and 1995,
respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.During the quarter ended June 30, 1996, American and The SABRE
Group completed the negotiations of certain agreements, and the
parties have agreed to apply the financial terms of such agreements
as of January 1, 1996.
Pursuant to a new technology services agreement dated July 1, 1996,
The SABRE Group will perform data processing and solutions services
for American. The agreement reflects the recent downward trend in
market prices for data processing services, and has a base term
that expires on June 30, 2006. With limited exceptions and for the
term of the agreement, American is required to continue purchasing
from The SABRE Group those information technology services which
The SABRE Group provided American immediately prior to the
execution of the agreement. New services, however, including most
new applications development work, can be competitively bid by
American. The agreement also provides for periodic price
adjustments which, among other things, take into account the market
for similar services provided by other companies.
Pursuant to a marketing cooperation agreement dated July 1, 1996,
American will provide marketing support for The SABRE Group's
products targeted to travel agencies until June 30, 2006. For such
support, The SABRE Group will pay American a fee of between $20
million and $30 million in 1996 and between $10 million and $30
million in subsequent years based upon the success of SABRE as
measured by increased bookings. Additionally, American will
support The SABRE Group's promotion of certain other products until
2001, for which The SABRE Group will pay American a marketing fee
based upon booking volume. The agreement also cancels formerly
agreed upon payments made by American to The SABRE Group for market
support of passenger sales on American. In 1995, such payments by
American to The SABRE Group were approximately $21 million. With
limited exceptions, the marketing cooperation agreement does not
restrict American from distributing its airline products and
services directly to corporate or individual consumers.
Additionally, American and The SABRE Group are parties to travel
agreements dated July 1, 1996, pursuant to which The SABRE Group is
entitled to purchase personal travel for its employees and retirees
at reduced fares, and business travel at a discount for certain
flights on American. The Travel Privileges Agreement and the
Corporate Travel Agreement expire on June 30, 2008 and June 30,
1998, respectively.
7.Under a credit agreement between American and The SABRE Group dated
July 1, 1996, The SABRE Group is required to borrow from American,
and American is required to lend to The SABRE Group, amounts
required by The SABRE Group to fund its daily cash requirements.
In addition, American may, but is not required to, borrow from The
SABRE Group to fund its daily cash requirements and The SABRE Group
is required to lend to American if The SABRE Group has excess cash
available. The maximum available borrowing under the agreement at
any time is $100 million for American and $300 million for The
SABRE Group, with rates generally based on the lender's cost of
funds plus an additional spread based upon the borrower's credit
risk. No amounts were outstanding under the agreement as of
September 30, 1996.
8.During June and July 1996, American prepaid cancelable leases it
had on 12 of its Boeing 767-300 aircraft totaling $565 million.
9.On September 2, 1996, American and the Allied Pilots Association
(APA) reached a tentative agreement on a new labor contract. The
agreement must be ratified by the APA Board of Directors and, if
approved, must be submitted to the APA membership for final
ratification. The Company anticipates a final decision on
ratification by December 31,1996.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the Nine Months Ended September 30, 1996 and 1995
As discussed in Note 5, as of July 2, 1996, AMR completed the
reorganization of The SABRE Group (the "Reorganization"). Thus, the
results of operations of American's Information Services Group has
been reflected in the consolidated statement of operations as income
from discontinued operations. Following the Reorganization, American
operates in only one business segment, and, as such, the discussion
below relates only to the operations of what was formerly American's
Airline Group.
American recorded income from continuing operations for the first nine
months of 1996 of $496 million. This compares to income from
continuing operations of $263 million for the same period last year.
American's operating income was $1.1 billion for the first nine months
of 1996 compared to $875 million for the first nine months of 1995.
American's passenger revenues increased by 4.3 percent, $428 million,
during the first nine months of 1996 versus the same period last year.
American's yield (the average amount one passenger pays to fly one
mile) of 13.06 cents increased by 2.4 percent compared to the same
period in 1995. Domestic yields increased 2.9 percent from the first
nine months of 1995. International yields increased 1.4 percent over
the first nine months of 1995, due primarily to a 4.1 percent increase
in Europe.
American's traffic or revenue passenger miles (RPMs) increased 1.9
percent to 79.1 billion miles for the nine months ended September 30,
1996. American's capacity or available seat miles (ASMs) decreased
1.2 percent to 115.1 billion miles in the first nine months of 1996,
primarily as a result of approximately 12 fewer operating aircraft,
partially offset by increases in jet stage length and aircraft
productivity. Jet stage length increased 5.0 percent and aircraft
productivity, as measured by miles flown per aircraft per day,
increased 2.3 percent compared with the first nine months of 1995.
American's domestic traffic increased 2.4 percent on capacity
decreases of 1.5 percent and international traffic grew 0.7 percent on
capacity decreases of 0.4 percent. The increase in international
traffic was driven by a 5.0 percent increase in traffic to Latin
America on capacity growth of 4.9 percent, partially offset by a 3.5
percent decrease in traffic to Europe on a capacity decrease of 5.8
percent.
Although not quantifiable, some portion of the passenger revenue
increase is attributable to the January 1, 1996 expiration of the ten
percent federal excise tax on airline travel. The excise tax was
reinstated on August 27, 1996 and is set to expire again on December
31, 1996.
Other revenues increased 16.7 percent, $86 million, primarily due to
increases in aircraft maintenance work and airport ground services
performed by American for other airlines and increased employee travel
service charges.
American's operating expenses increased 2.5 percent, $255 million.
Jet Airline cost per ASM increased by 3.4 percent to 8.84 cents.
Aircraft fuel expense increased 17.6 percent, $203 million, due to an
18.1 percent increase in American's average price per gallon.
American expects that the average price per gallon for jet fuel will
continue to increase in the fourth quarter of 1996. Maintenance
materials and repairs expense increased 12.3 percent, $45 million,
due primarily to the timing of scheduled maintenance occurring in 1996
compared to the same period in 1995, and maintenance work performed in
1996 on certain Boeing 727 aircraft purchased off lease in late 1995,
and the maturing of the Boeing 757 and 767 fleets.
Other Income (Expense) decreased 28.8 percent or $122 million.
Interest expense decreased $127 million due to repayments of
intercompany debt, the retirement of debt prior to scheduled maturity,
and scheduled debt repayments. Other expense in the third quarter of
1996 includes a $21 million provision for a cash payment representing
American's share of a multi-carrier travel agency class action
litigation settlement.
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OTHER
AMR signed a 20-year services agreement with Canadian Airlines
International Ltd. (Canadian) in 1994 (the "Services Agreement"),
under which American provides a variety of management, technical and
administrative services to Canadian. To provide certain of these
services, American entered into subcontracting arrangements with The
SABRE Group (the "Canadian Subcontract"). American and The SABRE
Group currently have approximately $8 million and $41 million of
deferred costs, respectively, associated with the installation and
implementation of certain systems for Canadian under the terms of the
Services Agreement and Canadian Subcontract. These costs were to be
recovered over the first ten years of the contract. Under certain
circumstances, American has agreed to reimburse The SABRE Group for
any unrecovered deferred costs and has guaranteed payment to The SABRE
Group of the fees it will be entitled to receive pursuant to the terms
of the Canadian Subcontract for all such services actually performed
by The SABRE Group.
On November 1, 1996, Canadian announced that it was taking certain
actions to improve its cash flow. Among other things, Canadian has
asked its vendors -- including AMR -- to reduce the pricing of the
services they provide. As a result, the revenues American receives in
connection with the Services Agreement may be reduced in the future
and American may incur additional expenses resulting from the
guarantee to The SABRE Group of its fees under the Canadian
Subcontract. Revenues from the Services Agreement for the nine months
ended September 30, 1996 for American and The SABRE Group were
approximately $14 million and $39 million, respectively. As American
is currently considering Canadian's request, any decrease in revenues
and/or increase in expenses is not readily determinable at this time.
In addition, AMR is currently assessing the recoverability of the
costs deferred by American and The SABRE Group in connection with the
Services Agreement. If these costs are determined to be
unrecoverable, American will be required to take a charge to 1996
earnings to reflect the write down of its deferred costs, as well as
those costs deferred by The SABRE Group pursuant to the reimbursement
provision of the Canadian Subcontract discussed above.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In January, 1985, American announced a new fare category, the
"Ultimate SuperSaver," a discount, advance purchase fare that carried
a 25 percent penalty upon cancellation. On December 30, 1985, a class
action lawsuit was filed in Circuit Court, Cook County, Illinois
entitled Johnson vs. American Airlines, Inc. The Johnson plaintiffs
allege that the 10 percent federal excise transportation tax should be
excluded from the "fare" upon which the 25 percent penalty is
assessed. The case has not been certified as a class action. Summary
judgment was granted in favor of American but subsequently reversed
and vacated by the Illinois Appellate court. American believes the
matter is without merit and is vigorously defending the lawsuit.
American has been sued in two class action cases that have been
consolidated in the Circuit Court of Cook County, Illinois, in
connection with certain changes made to American's AAdvantage frequent
flyer program in May, 1988. (Wolens, et al v. American Airlines, Inc.,
No. 88 CH 7554, and Tucker v. American Airlines, Inc., No. 89 CH 199.)
In both cases, the plaintiffs seek to represent all persons who joined
the AAdvantage program before May 1988. Currently, the plaintiffs
allege that, on that date, American implemented changes that limited
the number of seats available to participants traveling on certain
awards and established blackout dates during which no AAdvantage seats
would be available for certain awards and that these changes breached
American's contracts with AAdvantage members. Plaintiffs seek money
damages for such alleged breach and attorneys' fees. Previously the
plaintiffs also alleged violation of the Illinois Consumer Fraud and
Deceptive Business Practice Act (Consumer Fraud Act) and sought
punitive damages, attorneys' fees and injunctive relief preventing
American from making changes to the AAdvantage program. American
originally moved to dismiss all of the claims, asserting that they
were preempted by the Federal Aviation Act and barred by the Commerce
Clause of the U.S. Constitution.
Initially, the trial court denied American's preemption motions,
but certified its decision for interlocutory appeal. In December
1990, the Illinois Appellate Court held that plaintiffs' claims for an
injunction are preempted by the Federal Aviation Act, but that
plaintiffs' claims for money damages could proceed. On March 12,
1992, the Illinois Supreme Court affirmed the decision of the
Appellate Court. American sought a writ of certiorari from the U.S.
Supreme Court; and on October 5, 1992, the Court vacated the decision
of the Illinois Supreme Court and remanded the cases for
reconsideration in light of the U.S. Supreme Court's decision in
Morales v. TWA, et al, which interpreted the preemption provisions of
the Federal Aviation Act very broadly. On December 16, 1993, the
Illinois Supreme Court rendered its decision on remand, holding that
plaintiffs' claims seeking an injunction are preempted, but that
identical claims for compensatory and punitive damages are not
preempted. On February 8, 1994, American filed a petition for a writ
of certiorari in the U.S. Supreme Court. The Illinois Supreme Court
granted American's motion to stay the state court proceeding pending
disposition of American's petition in the U.S. Supreme Court. The
matter was argued before the U.S. Supreme Court on November 1, 1994,
and on January 18, 1995, the U.S. Supreme Court issued its opinion
ending a portion of the suit against American. The U.S. Supreme Court
held that a) plaintiffs' claim for violation of the Illinois Consumer
Fraud Act is preempted by federal law -- entirely ending that part of
the case and eliminating plaintiffs' claim for punitive damages; and
b) certain breach of contract claims are not preempted by federal law.
The U.S. Supreme Court did not determine, however, whether the
contract claims asserted by the plaintiffs are preempted, and
therefore, remanded the case to the state court for further
proceedings. Subsequently, plaintiffs filed an amended complaint
seeking damages solely for a breach of contract claim. In the event
that the plaintiffs' breach of contract claim is eventually permitted
to proceed in the state court, American intends to vigorously defend
the case.
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Legal Proceedings (continued)
In December, 1993, American announced that the number of miles
required to claim a certain travel award under American's AAdvantage
frequent flyer program would be increased effective February 1, 1995.
On February 1, 1995 a class action lawsuit entitled Gutterman vs.
American Airlines, Inc. was filed in the Circuit Court of Cook County,
Illinois. The Gutterman plaintiffs claim that this increase in
mileage level violated the terms and conditions of the agreement
between American and AAdvantage members. On February 9, 1995, a
virtually identical class action lawsuit entitled Benway vs. American
Airlines, Inc. was filed in District Court, Dallas County, Texas.
After limited discovery and prior to class certification, a summary
judgment dismissing the Benway case was entered by the Dallas County
Court in July 1995. On March 11, 1996, American's motion to dismiss
the Gutterman lawsuit was denied. American filed a motion for
reconsideration which was also denied on July 11, 1996. American's
motion for summary judgment is still pending. No class has been
certified in the Gutterman lawsuit and to date no discovery has been
undertaken. American believes the Gutterman complaint is without
merit and is vigorously defending the lawsuit.
On February 10, 1995, American capped travel agency commissions
for one-way and round trip domestic tickets at $25 and $50,
respectively. Immediately thereafter, numerous travel agencies, and
two travel agency trade association groups, filed class action
lawsuits against American and other major air carriers (Continental,
Delta, Northwest, United, USAir and TWA) that had independently
imposed similar limits on travel agency commissions. The suits were
transferred to the United States District Court for the District of
Minnesota, and consolidated as a multi-district litigation captioned
In Re: Airline Travel Agency Commission Antitrust Litigation. On
September 3, 1996, American reached a tentative settlement with
plaintiffs whereby American agreed, inter alia, to pay $21.3 million
in exchange for a release from all claims. A hearing has been
scheduled for November 15, 1996, at which time the court will consider
approval of the settlement.
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PART II
Item 6. Exhibits and Reports on Form 8-K
10.2 Information Technology Services Agreement, dated July 1, 1996,
between American and The SABRE Group, Inc. (Incorporated by
reference to Exhibit 10.6 of The SABRE Group Holdings, Inc.' s
Registration Statement on Form S-1 (No. 333-09747), as
amended.) (Confidential treatment has been granted for
portions of this agreement and the omitted information has
been filed separately pursuant to applicable regulations of
the Securities and Exchange Commission.)
27 Financial Data Schedule.
American filed a report on Form 8-K dated July 17, 1996 relative to
the completion of the reorganization of The SABRE Group.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: November 14, 1996 BY: /s/ Gerard J. Arpey
Gerard J. Arpey
Senior Vice President - Finance and
Planning and Chief Financial Officer
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