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, 2005.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to .
Commission file number 1-8400.
AMR Corporation
(Exact name of registrant as specified in its charter)
Delaware 75-1825172
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (817) 963-1234
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 163,701,281 shares as of July 15, 2005.
INDEX
AMR CORPORATION
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and six months ended
June 30, 2005 and 2004
Condensed Consolidated Balance Sheets -- June 30, 2005 and December
31, 2004
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2005 and 2004
Notes to Condensed Consolidated Financial Statements -- June 30, 2005
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
SIGNATURE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Revenues
Passenger - American Airlines $ 4,264 $ 3,895 $ 8,106 7,573
- Regional Affiliates 561 505 1,012 925
Cargo 157 155 308 303
Other revenues 327 275 633 541
Total operating revenues 5,309 4,830 10,059 9,342
Expenses
Wages, salaries and benefits 1,671 1,703 3,315 3,343
Aircraft fuel 1,350 917 2,448 1,725
Other rentals and landing fees 319 301 619 606
Depreciation and amortization 286 320 576 646
Commissions, booking fees
and credit card expense 286 287 557 575
Maintenance, materials and
repairs 257 245 492 476
Aircraft rentals 147 153 295 306
Food service 127 139 252 276
Other operating expenses 637 600 1,253 1,182
Special charges - (31) - (31)
Total operating expenses 5,080 4,634 9,807 9,104
Operating Income 229 196 252 238
Other Income (Expense)
Interest income 29 14 64 28
Interest expense (223) (217) (457) (429)
Interest capitalized 24 20 47 38
Miscellaneous - net (1) (7) (10) (35)
(171) (190) (356) (398)
Income (Loss) Before Income Taxes 58 6 (104) (160)
Income tax - - - -
Net Earnings (Loss) $ 58 $ 6 $ (104) $ (160)
Earnings (Loss) Per Share
Basic $ 0.35 $ 0.04 $(0.64) $(1.00)
Diluted $ 0.30 $ 0.03 $(0.64) $(1.00)
The accompanying notes are an integral part of these financial statements.
-1-
AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
June 30, December 31,
2005 2004
Assets
Current Assets
Cash $ 166 $ 120
Short-term investments 3,233 2,809
Restricted cash and short-term investments 492 478
Receivables, net 1,052 836
Inventories, net 488 488
Other current assets 358 240
Total current assets 5,789 4,971
Equipment and Property
Flight equipment, net 15,266 15,292
Other equipment and property, net 2,471 2,426
Purchase deposits for flight equipment 285 319
18,022 18,037
Equipment and Property Under Capital Leases
Flight equipment, net 988 1,016
Other equipment and property, net 86 84
1,074 1,100
Route acquisition costs and airport operating
and gate lease rights, net 1,209 1,223
Other assets 3,400 3,442
$ 29,494 $28,773
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 1,202 $ 1,003
Accrued liabilities 1,900 2,026
Air traffic liability 4,007 3,183
Current maturities of long-term debt 738 659
Current obligations under capital leases 172 147
Total current liabilities 8,019 7,018
Long-term debt, less current maturities 12,357 12,436
Obligations under capital leases, less
current obligations 965 1,088
Pension and postretirement benefits 4,754 4,743
Other liabilities, deferred gains
and deferred credits 4,014 4,069
Stockholders' Equity (Deficit)
Preferred stock - -
Common stock 182 182
Additional paid-in capital 2,380 2,521
Treasury stock (1,154) (1,308)
Accumulated other comprehensive loss (607) (664)
Accumulated deficit (1,416) (1,312)
(615) (581)
$ 29,494 $28,773
The accompanying notes are an integral part of these financial statements.
-2-
AMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Six Months Ended June 30,
2005 2004
Net Cash Provided by Operating Activities $1,064 $ 733
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (484) (514)
Net increase in short-term investments (424) (682)
Net (increase) decrease in restricted cash
and short-term investments (14) 38
Proceeds from sale of equipment and property 18 40
Other - (10)
Net cash used by investing activities (904) (1,128)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (413) (370)
Proceeds from:
Issuance of long-term debt 287 836
Exercise of stock options 12 5
Net cash (used) provided by financing activities (114) 471
Net increase in cash 46 76
Cash at beginning of period 120 120
Cash at end of period $ 166 $ 196
Activities Not Affecting Cash
Capital lease obligations incurred $ 10 $ 10
Flight equipment acquired through seller financing $ - $ 18
The accompanying notes are an integral part of these financial statements.
-3-
AMR CORPORATION
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. The
condensed consolidated financial statements include the accounts of
AMR Corporation (AMR or the Company) and its wholly owned
subsidiaries, including (i) its principal subsidiary American
Airlines, Inc. (American) and (ii) its regional airline subsidiary,
AMR Eagle Holding Corporation and its primary subsidiaries, American
Eagle Airlines, Inc., Executive Airlines, Inc. and AMR Leasing
Corporation (collectively, AMR Eagle). For further information, refer
to the consolidated financial statements and footnotes thereto
included in the AMR Annual Report on Form 10-K for the year ended
December 31, 2004 (2004 Form 10-K).
2.The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Under APB 25, no compensation expense is
recognized for stock option grants if the exercise price of the
Company's stock option grants is at or above the fair market value
of the underlying stock on the date of grant. The Company has
adopted the pro forma disclosure features of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), as amended by Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." The following table
illustrates the effect on net earnings (loss) and earnings (loss)
per share amounts if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee
compensation (in millions, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Net earnings (loss), as reported $ 58 $ 6 $(104) $(160)
Add: Stock-based employee
compensation expense included in
reported net earnings (loss) 11 6 18 17
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods
for all awards (27) (22) (48) (49)
Pro forma net earnings (loss) $ 42 $ (10) $(134) $(192)
Earnings (loss) per share:
Basic - as reported $ 0.35 $ 0.04 $(0.64) $(1.00)
Diluted - as reported $ 0.30 $ 0.03 $(0.64) $(1.00)
Basic - pro forma $ 0.26 $(0.06) $(0.83) $(1.20)
Diluted - pro forma $ 0.23 $(0.06) $(0.83) $(1.20)
-4-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123(R)). SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based
on their fair values. SFAS 123(R) is effective January 1, 2006 for
AMR. Under SFAS 123(R), the Company will recognize compensation
expense for the portion of outstanding awards for which service has
not yet been rendered, based on the grant-date fair value of those
awards calculated under SFAS 123 for pro forma disclosures. The
Company has not completed its evaluation of the impact of SFAS
123(R) on its financial statements.
3.As of June 30, 2005, the Company had commitments to acquire:
two Embraer regional jets in July 2005; two Boeing 777-200ERs in
2006; and an aggregate of 47 Boeing 737-800s and seven Boeing 777-
200ERs in 2013 through 2016. Future payments for all aircraft,
including the estimated amounts for price escalation, will
approximate $35 million during the remainder of 2005, $101 million
in 2006 and an aggregate of approximately $2.8 billion in 2011
through 2016. The Company has pre-arranged financing or backstop
financing for all aircraft deliveries in 2005 and 2006.
In 2003, the Company reached concessionary agreements with certain
lessors. Certain of these agreements provide that the Company's
obligations under the related leases will revert to the original
terms if certain events occur prior to December 31, 2005,
including: (i) an event of default under the related lease (which
generally occurs only if a payment default occurs); (ii) an event
of loss with respect to the related aircraft; (iii) rejection by
the Company of the lease under the provisions of Chapter 11 of the
U.S. Bankruptcy Code; or (iv) the Company's filing for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. If any one of these
events were to occur, the Company would be responsible for
approximately $113 million in additional operating lease payments
and $119 million in additional payments related to capital leases
as of June 30, 2005. These amounts will decrease by approximately
$3 million prior to the expiration of the provision on December 31,
2005. These amounts are being accounted for as contingent rentals
and will only be recognized if they become payable.
4.Accumulated depreciation of owned equipment and property at June 30,
2005 and December 31, 2004 was $10.0 billion and $9.6 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at both June 30, 2005 and December 31, 2004 was
$1.0 billion.
Effective January 1, 2005, in order to more accurately reflect the
expected useful life of its aircraft, the Company changed its
estimate of the depreciable lives of its Boeing 737-800, Boeing 757-
200 and McDonnell Douglas MD-80 aircraft from 25 to 30 years. As a
result of this change, Depreciation and amortization expense was
reduced by approximately $27 million and $54 million, respectively,
for the three and six months ended June 30, 2005. Also, year over
year net earnings for the second quarter 2005 increased $0.13 per
diluted share and the net loss for the six months ended June 30,
2005 decreased $0.33 per share.
5.As discussed in Note 8 to the consolidated financial statements
in the 2004 Form 10-K, the Company has a valuation allowance against
the full amount of its net deferred tax asset. The Company's deferred
tax asset valuation allowance increased $6 million during the six
months ended June 30, 2005 to $839 million as of June 30, 2005. As a
result of historical and current losses, the Company did not provide
for a net tax benefit associated with its loss in the six month period
ended June 30, 2005.
6.During the six-month period ended June 30, 2005, AMR Eagle borrowed
approximately $287 million (net of discount), under various debt
agreements, related to the purchase of regional jet aircraft. These
debt agreements are secured by the related aircraft, have an
effective interest rate of 5.0 percent, are guaranteed by AMR and
mature over various periods of time through 2021.
-5-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of June 30, 2005, AMR has issued guarantees covering
approximately $928 million of American's tax-exempt bond debt and
American's fully drawn $819 million credit facility. American has
issued guarantees covering approximately $1.3 billion of AMR's
unsecured debt. In addition, as of June 30, 2005, AMR and American
have issued guarantees covering approximately $447 million of AMR
Eagle's secured debt and AMR has issued guarantees covering an
additional $2.9 billion of AMR Eagle's secured debt.
7.The following tables provide the components of net periodic
benefit cost for the three and six months ended June 30, 2005 and 2004
(in millions):
Pension Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Components of net periodic benefit cost
Service cost $ 93 $ 90 $ 185 $ 179
Interest cost 153 141 305 283
Expected return on assets (164) (142) (329) (284)
Amortization of:
Prior service cost 4 3 8 7
Unrecognized net loss 13 15 26 29
Net periodic benefit cost $ 99 $ 107 $ 195 $ 214
Other Postretirement Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Components of net periodic benefit cost
Service cost $ 19 $ 19 $ 37 $ 38
Interest cost 49 50 99 101
Expected return on assets (4) (3) (7) (6)
Amortization of:
Prior service cost (3) (2) (5) (5)
Unrecognized net loss 1 2 1 4
Net periodic benefit cost $ 62 $ 66 $125 $132
The Company expects to contribute approximately $310 million to its
defined benefit pension plans in 2005. This estimate reflects the
provisions of the Pension Funding Equity Act of 2004, which
deferred (to 2006 and later years) a portion of the minimum
required contributions that would have been due for the 2004 and
2005 plan years. Of the $310 million the Company expects to
contribute this year, the Company contributed $213 million during
the six months ended June 30, 2005.
-6-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8.As a result of the events of September 11, 2001, the depressed
revenue environment, high fuel prices and the Company's
restructuring activities, the Company has recorded a number of
special charges during the last few years. The following table
summarizes the changes since December 31, 2004 in the accruals for
these charges (in millions):
Aircraft Facility Employee
Charges Exit Costs Charges Total
Remaining accrual at
December 31, 2004 $ 129 $ 26 $ 36 $ 191
Payments (10) (3) (31) (44)
Remaining accrual at
June 30, 2005 $ 119 $ 23 $ 5 $ 147
Cash outlays related to these accruals, as of June 30, 2005, for
aircraft charges, facility exit costs and employee charges will
occur through 2014, 2018 and 2005, respectively.
9.The Company includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting,
changes in minimum pension liabilities and unrealized gains and
losses on available-for-sale securities in comprehensive income
(loss). For the three months ended June 30, 2005 and 2004,
comprehensive income was $70 million and $6 million, respectively,
and for the six months ended June 30, 2005 and 2004, comprehensive
loss was $(47) million and $(177) million, respectively. The
difference between net earnings (loss) and comprehensive income
(loss) for the three and six months ended June 30, 2005 and 2004 is
due primarily to the accounting for the Company's derivative
financial instruments.
-7-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10.The following table sets forth the computations of basic and
diluted earnings (loss) per share (in millions, except per share
data):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Numerator:
Net earnings (loss) - numerator
for basic earnings (loss) per share $ 58 $ 6 $(104) $(160)
Interest on senior convertible notes 6 - - -
Net earnings (loss) adjusted for
interest on convertible debt -
numerator for diluted earnings
(loss) per share $ 64 $ 6 $(104) $(160)
Denominator:
Denominator for basic earnings
(loss) per share - weighted-
average shares 163 160 162 160
Effect of dilutive securities:
Senior convertible notes 32 - - -
Employee options and shares 40 42 - -
Assumed treasury shares purchased (19) (19) - -
Dilutive potential common shares 53 23 - -
Denominator for diluted earnings
(loss) per share - adjusted
weighted-average shares 216 183 162 160
Basic earnings (loss) per share $0.35 $0.04 $(0.64) $(1.00)
Diluted earnings (loss) per share $0.30 $0.03 $(0.64) $(1.00)
Approximately 28 million shares related to employee stock options were
not added to the denominator for the three months ended June 30, 2005
because the options' exercise prices were greater than the average
market price of the common shares. Approximately 61 million shares
issuable upon conversion of the Company's convertible notes, employee
stock options and deferred stock were not added to the denominator
for the three months ended June 30, 2004. The inclusion of such shares
would be antidilutive.
For the six months ended June 30, 2005 and 2004, approximately 29
million shares related to employee stock options were not added to the
denominator because the options' exercise prices were greater than the
average market price of the common shares. Additionally,
approximately 51 million and 57 million shares issuable upon
conversion of the Company's convertible notes, employee stock options
and deferred stock were not added to the denominator because inclusion
of such shares would be antidilutive.
-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" and similar expressions are intended to identify forward-
looking statements. Forward-looking statements include, without
limitation, the Company's expectations concerning operations and
financial conditions, including changes in capacity, revenues and
costs, future financing plans and needs, overall economic conditions,
plans and objectives for future operations, and the impact on the
Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate
solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events, or otherwise.
Forward-looking statements are subject to a number of factors that
could cause the Company's actual results to differ materially from the
Company's expectations. The following factors, in addition to other
possible factors not listed, could cause the Company's actual results
to differ materially from those expressed in forward-looking
statements: changes in economic, business and financial conditions;
the Company's substantial indebtedness; continued high fuel prices and
the availability of fuel; further increases in the price of fuel; the
impact of events in Iraq; conflicts in the Middle East or elsewhere;
the highly competitive business environment faced by the Company,
characterized by increasing pricing transparency and competition from
low cost carriers and financially distressed carriers; historically
low fare levels and fare simplification initiatives (both of which
could result in a further deterioration of the revenue environment);
the ability of the Company to reduce its costs further without
adversely affecting operational performance and service levels;
uncertainties with respect to the Company's international operations;
changes in the Company's business strategy; actions by U.S. or foreign
government agencies; the possible occurrence of additional terrorist
attacks; another outbreak of a disease (such as SARS) that affects
travel behavior; uncertainties with respect to the Company's
relationships with unionized and other employee work groups; the
inability of the Company to satisfy existing financial or other
covenants in certain of its credit agreements; the availability and
terms of future financing; the ability of the Company to reach
acceptable agreements with third parties; and increased insurance
costs and potential reductions of available insurance coverage.
Additional information concerning these and other factors is contained
in the Company's Securities and Exchange Commission filings, including
but not limited to the 2004 Form 10-K.
Overview
The Company recorded net earnings of $58 million during the second
quarter of 2005 compared to $6 million in the same period last year.
The Company's second quarter 2005 results were impacted by the
continuing increase in fuel prices, offset by an improvement in unit
revenues (passenger revenue per available seat mile) and a $27 million
decrease in depreciation expense related to a change in the
depreciable lives of certain aircraft types described in Note 4 to the
Condensed Consolidated Financial Statements.
Fuel price increases resulted in a year-over-year increase of 52.8
cents per gallon for the second quarter. This price increase
negatively impacted fuel expense by $434 million during the quarter
based on fuel consumption of 823 million gallons. Continuing high
fuel prices, additional increases in the price of fuel, and/or
disruptions in the supply of fuel would further adversely affect the
Company's financial condition and its results of operations.
-9-
Mainline passenger unit revenues increased 7.0 percent for the second
quarter due to a 3.8 point load factor increase and a 1.9 percent
increase in passenger yield (passenger revenue per passenger mile)
compared to the same period in 2004. Although load factor performance
continues to show significant year-over-year improvement, passenger
yield remains depressed by historical standards. The Company believes
this depressed passenger yield is due in large part to a corresponding
decline in the Company's pricing power. The Company's reduced pricing
power is the product of several factors, including: greater cost
sensitivity on the part of travelers (particularly business
travelers); greater competition from low-cost carriers and from
carriers that have recently reorganized or are reorganizing, including
under the protection of Chapter 11 of the Bankruptcy Code; significant
increases in overall capacity during 2004 and continuing into 2005
that exceeded economic growth; and, more recently, fare simplification
efforts by certain carriers. The Company believes that its reduced
pricing power will persist indefinitely and possibly permanently.
The Company continues to work - under the basic tenets of the
Turnaround Plan - with its unions and employees to identify and
implement additional initiatives designed to increase efficiencies and
revenues and reduce costs. During the second quarter, the Company's
numerous network, product and other initiatives implemented during the
past several years continued to benefit its financial results. In
addition, its employees showed a remarkable ability to efficiently and
courteously handle the record load factors during the quarter. The
Company will continue to work with its labor unions and employees as
its business partners on the need for continuous improvement under the
Turnaround Plan.
The Company's ability to become profitable and its ability to continue
to fund its obligations on an ongoing basis will depend on a number of
factors, some of which are largely beyond the Company's control. Some
of the risk factors that affect the Company's business and financial
results are referred to under "Forward-Looking Information" above and
are discussed in the Risk Factors listed in Item 7 (on pages 35-38) in
the 2004 Form 10-K. As the Company seeks to improve its financial
condition, it must continue to take steps to generate additional
revenues and to significantly reduce its costs. Although the Company
has a number of initiatives underway to address its cost and revenue
challenges, the adequacy and ultimate success of these initiatives is
not known at this time and cannot be assured. It will be very
difficult, absent continued restructuring of its operations, for the
Company to continue to fund its obligations on an ongoing basis or to
become profitable if the overall industry revenue environment does not
improve and fuel prices remain at historically high levels for an
extended period.
LIQUIDITY AND CAPITAL RESOURCES
Significant Indebtedness and Future Financing
The Company remains heavily indebted and has significant obligations
(including substantial pension funding obligations) due in 2005 and
thereafter, as described more fully under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the 2004 Form 10-K. 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. Nonetheless, to
maintain sufficient liquidity as the Company continues to implement
its restructuring and cost reduction initiatives, the Company will
need access to additional funding. The Company's possible financing
sources primarily include: (i) a limited amount of additional secured
aircraft debt (a very large majority of the Company's owned aircraft,
including virtually all of the Company's Section 1110-eligible
aircraft, are encumbered) or sale-leaseback transactions involving
owned aircraft; (ii) debt secured by new aircraft deliveries; (iii)
debt secured by other assets; (iv) securitization of future operating
receipts; (v) the sale or monetization of certain assets; (vi)
unsecured debt; and (vii) 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 and American's
reduced credit ratings, high fuel prices, the historically weak fare
environment and the financial difficulties being experienced in the
airline industry. The inability of the Company to obtain additional
funding would have a material negative impact on the ability of the
Company to sustain its operations over the long-term.
-10-
The Company's substantial indebtedness could have important
consequences. For example, it could: (i) limit the Company's ability
to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes, or
adversely affect the terms on which such financing could be obtained;
(ii) require the Company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness, thereby reducing
the funds available for other purposes; (iii) make the Company more
vulnerable to economic downturns; (iv) limit its ability to withstand
competitive pressures and reduce its flexibility in responding to
changing business and economic conditions; and (v) limit the Company's
flexibility in planning for, or reacting to, changes in its business
and the industry in which it operates.
Credit Facility Covenants
American has a credit facility (the Credit Facility) consisting of a
fully drawn $570 million senior secured revolving credit facility with
a final maturity on June 17, 2009 and a fully drawn $248.5 million
term loan facility with a final maturity on December 17, 2010. The
Credit Facility contains a covenant (the Liquidity Covenant) requiring
American to maintain, as defined, unrestricted cash, unencumbered
short term investments and amounts available for drawing under
committed revolving credit facilities of not less than $1.5 billion
for each quarterly period through September 30, 2005 and $1.25 billion
for each quarterly period thereafter. American was in compliance with
the Liquidity Covenant as of June 30, 2005 and expects to be able to
continue to comply with this covenant. In addition, the Credit
Facility contains a covenant (the EBITDAR Covenant) requiring AMR to
maintain a ratio of cash flow (defined as consolidated net income,
before interest expense (less capitalized interest), income taxes,
depreciation and amortization and rentals, adjusted for certain gains
or losses and non-cash items) to fixed charges (comprising interest
expense (less capitalized interest) and rentals). The required ratio
was 0.85 to 1.00 for the four quarter period ending June 30, 2005 and
will increase gradually to 1.50 to 1.00 for the four quarter period
ending March 31, 2008 and for each four quarter period ending on each
fiscal quarter thereafter. AMR was in compliance with the EBITDAR
covenant as of June 30, 2005 and expects to be able to continue to
comply with this covenant in the near term.
Given the historically high price of fuel and the volatility of fuel
prices and revenues, it is difficult to assess whether AMR and
American will be able to continue to comply with the Liquidity
Covenant and in particular the EBITDAR Covenant, and there are no
assurances that 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.
Pension Funding Obligation
The Company expects to contribute approximately $310 million to its
defined benefit pension plans in 2005. This estimate reflects the
provisions of the Pension Funding Equity Act of 2004. Due to
uncertainties regarding significant assumptions involved in estimating
future required contributions to its defined benefit pension plans,
such as interest rate levels, the amount and timing of asset returns,
and the impact of proposed legislation (discussed further below), the
Company is not able to reasonably estimate its future required
contributions beyond 2005. However, based on the current regulatory
environment and market conditions, the Company expects that its 2006
minimum required contributions will exceed its 2005 expected
contributions. Of the $310 million the Company expects to contribute
to its defined benefit pension plans in 2005, the Company contributed
$213 million during the first six months of 2005.
Various defined benefit pension reform proposals are currently under
consideration by the Government, which could have a significant - -
positive or negative - - impact on the Company's future required
pension contributions. The likely outcome of these proposals is
currently unclear.
-11-
Cash Flow Activity
At June 30, 2005, the Company had $3.4 billion in unrestricted cash
and short-term investments, an increase of $470 million from December
31, 2004. Net cash provided by operating activities in the six-month
period ended June 30, 2005 was $1.1 billion, an increase of $331
million over the same period in 2004. The increase was primarily the
result of an increase in the Air traffic liability due to a modest
improvement in the revenue environment, offset to a certain degree by
the $213 million pension contribution. Capital expenditures for the
first six months of 2005 were $484 million and included the
acquisition of 18 Embraer 145 aircraft and the cost of improvements at
New York's John F. Kennedy airport.
During the six-month period ended June 30, 2005, AMR Eagle borrowed
approximately $287 million (net of discount), under various debt
agreements, related to the purchase of regional jet aircraft. These
debt agreements are secured by the related aircraft, have an effective
interest rate of 5.0 percent, are guaranteed by AMR and mature over
various periods of time through 2021.
On July 1, 2005, American completed the re-marketing of $198 million
of DFW-FIC Series 2000A Unsecured Revenue Refunding Bonds in three
subseries which mature May 1, 2029. Certain municipalities originally
issued these special facility revenue bonds primarily to improve
airport facilities that are leased by American and accounted for as
operating leases. They were acquired by American in 2003 under a
mandatory tender provision; thus, American received the proceeds from
the remarketing in July and recorded the obligation in Other
liabilities, deferred gains and deferred credits.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 2005 and 2004
Revenues
The Company's revenues increased approximately $479 million, or 9.9
percent, to $5.3 billion in the second quarter of 2005 from the same
period last year. American's passenger revenues increased by 9.5
percent, or $369 million, on a capacity (available seat mile) (ASM)
increase of 2.3 percent. American's passenger load factor increased
3.8 points to 79.5 percent and passenger revenue yield per passenger
mile increased by 1.9 percent to 11.91 cents. This resulted in an
increase in American's passenger revenue per available seat mile
(RASM) of 7.0 percent to 9.47 cents. Following is additional
information regarding American's domestic and international RASM and
capacity:
Three Months Ended June 30, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 9.48 8.0% 29.4 (1.6)%
International 9.47 5.1 15.6 10.7
Latin America 8.95 4.7 7.4 9.4
Europe 10.39 8.3 6.4 7.6
Pacific 8.36 (4.9) 1.8 30.5
Regional affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $56 million, or 11.1 percent, to $561 million as a
result of increased capacity and load factors. Regional affiliates'
traffic increased 24.8 percent to 2.3 billion revenue passenger miles
(RPMs), while capacity increased 20.5 percent to 3.2 billion ASMs,
resulting in a 2.5 point increase in the passenger load factor to 72.2
percent.
Cargo revenues increased 1.3 percent, or $2 million, due to a 3.3
percent increase in cargo revenue yield per ton miles somewhat offset
by a 1.6 percent decrease in cargo ton miles.
-12-
Operating Expenses
The Company's total operating expenses increased 9.6 percent, or $446
million, to $5.1 billion in the second quarter of 2005 compared to the
second quarter of 2004. American's mainline operating expenses per
ASM in the second quarter of 2005 increased 5.6 percent compared to
the second quarter of 2004 to 10.03 cents. These increases are due
primarily to a 46.9 percent increase in American's price per gallon of
fuel in the second quarter of 2005 relative to the second quarter of
2004. The Company's operating and financial results are significantly
affected by the price of jet fuel. Continuing high fuel prices,
additional increases in the price of fuel, or disruptions in the
supply of fuel, would further adversely affect the Company's financial
condition and results of operations. In addition, the Company
recorded an adjustment of approximately $31 million in Special charges
in the second quarter of 2004 (see explanation below).
(in millions) Three Months
Ended Change Percentage
Operating Expenses June 30, 2005 from 2004 Change
Wages, salaries and benefits $ 1,671 $ (32) (1.9)%
Aircraft fuel 1,350 433 47.2 (a)
Other rentals and landing fees 319 18 6.0
Depreciation and amortization 286 (34) (10.6) (b)
Commissions, booking fees
and credit card expense 286 (1) (0.3)
Maintenance, materials and
repairs 257 12 4.9
Aircraft rentals 147 (6) (3.9)
Food service 127 (12) (8.6)
Other operating expenses 637 37 6.2
Special charges - 31 NM (c)
Total operating expenses $ 5,080 $ 446 9.6%
(a)Aircraft fuel expense increased primarily due to a 46.9 percent
increase in American's price per gallon of fuel offset by a 1.7
percent decrease in American's fuel consumption.
(b)Depreciation and amortization expense decreased primarily due to
a change in the estimate of the depreciable lives of the Company's
Boeing 737-800, Boeing 757-200 and McDonnell Douglas MD-80 aircraft
from 25 to 30 years, which decreased depreciation and amortization
expense by approximately $27 million in the three months ended June
30, 2005.
(c)Special charges for 2004 included the reversal of reserves
previously established for (i) aircraft return costs of $20 million
and (ii) employee severance of $11 million.
Other Income (Expense)
Other income (expense), historically a net expense, decreased $19
million due primarily to an increase in interest income of $15 million
which resulted from increases in interest rates and short-term
investments.
Income Tax
The Company did not record a net tax provision associated with its
second quarter 2005 and 2004 earnings due to the Company providing a
valuation allowance, as discussed in Note 5 to the condensed
consolidated financial statements.
-13-
Operating Statistics
The following table provides statistical information for American and
Regional Affiliates for the three months ended June 30, 2005 and 2004.
Three Months Ended June 30,
2005 2004
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 35,795 33,323
Available seat miles (millions) 45,018 43,997
Cargo ton miles (millions) 558 567
Passenger load factor 79.5% 75.7%
Passenger revenue yield per passenger
mile (cents) 11.91 11.69
Passenger revenue per available seat
mile (cents) 9.47 8.85
Cargo revenue yield per ton mile (cents) 28.14 27.24
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 10.03 9.50
Fuel consumption (gallons, in millions) 749 762
Fuel price per gallon (cents) 163.4 111.2
Operating aircraft at period-end 727 748
Regional Affiliates
Revenue passenger miles (millions) 2,317 1,857
Available seat miles (millions) 3,211 2,665
Passenger load factor 72.2% 69.7%
(*) Excludes $627 million and $517 million of expense incurred
related to Regional Affiliates in 2005 and 2004, respectively.
Operating aircraft at June 30, 2005, included:
American Airlines Aircraft AMR Eagle Aircraft
Airbus A300-600R 34 Bombardier CRJ-700 25
Boeing 737-800 77 Embraer 135 39
Boeing 757-200 143 Embraer 140 59
Boeing 767-200 Extended Range 16 Embraer 145 106
Boeing 767-300 Extended Range 58 Super ATR 41
Boeing 777-200 Extended Range 45 Saab 340B Plus 25
McDonnell Douglas MD-80 354 Total 295
Total 727
The average aircraft age for American's and AMR Eagle's aircraft is
12.7 years and 5.6 years, respectively.
Of the operating aircraft listed above, 18 McDonnell Douglas MD-80s -
- - 11 owned, five operating leased and two capital leased - - were in
temporary storage as of June 30, 2005.
-14-
Owned and leased aircraft not operated by the Company at June 30,
2005, included:
American Airlines Aircraft AMR Eagle Aircraft
Boeing 767-200 2 Embraer 145 10
Boeing 767-200 Extended Range 3 Saab 340B/340B Plus 60
Fokker 100 4 Total 70
McDonnell Douglas MD-80 7
Total 16
As part of the Company's fleet simplification initiative, American has
agreed to sell certain aircraft. As of June 30, 2005, remaining owned
aircraft to be delivered under these agreements include two Boeing 767-
200 Extended Range and two Boeing 767-200 aircraft.
AMR Eagle has leased its 10 owned Embraer 145s that are not operated
by AMR Eagle to Trans States Airlines, Inc.
For the Six Months Ended June 30, 2005 and 2004
Revenues
The Company's revenues increased approximately $717 million, or 7.7
percent, to $10.1 billion for the six months ended June 30, 2005 from
the same period last year. American's passenger revenues increased by
7.0 percent, or $533 million, on a capacity (ASM) increase of 1.5
percent. American's passenger load factor increased 4.0 points to
77.5 percent while passenger revenue yield per passenger mile remained
constant at 11.90 cents. This resulted in an increase in American's
passenger RASM of 5.4 percent to 9.22 cents. Following is additional
information regarding American's domestic and international RASM and
capacity:
Six Months Ended June 30, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 9.18 6.0% 57.7 (2.9)%
International 9.31 4.2 30.2 11.0
Latin America 9.20 2.4 15.4 11.1
Europe 9.77 8.9 11.5 7.0
Pacific 8.23 (4.2) 3.3 27.8
Regional affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $87 million, or 9.4 percent, to $1.0 billion as a
result of increased capacity and load factors. Regional affiliates'
traffic increased 23.7 percent to 4.2 billion RPMs, while capacity
increased 19.7 percent to 6.1 billion ASMs, resulting in a 2.3 point
increase in the passenger load factor to 68.6 percent.
Cargo revenues increased 1.7 percent, or $5 million, due to a 0.9
percent increase in cargo ton miles in addition to a 0.9 percent
increase in cargo revenue yield per ton mile.
-15-
Operating Expenses
The Company's total operating expenses increased 7.7 percent, or $703
million, to $9.8 billion for the six months ended June 30, 2005
compared to the same period in 2004. American's mainline operating
expenses per ASM in the six months ended June 30, 2005 increased 4.5
percent compared to the same period in 2004 to 9.92 cents. These
increases are due primarily to a 41.4 percent increase in American's
price per gallon of fuel in the first half of 2005 relative to the
same period in 2004, including the impact of a $55 million fuel excise
tax refund received in March 2005.
(in millions) Six Months
Ended Change Percentage
Operating Expenses June 30, 2005 from 2004 Change
Wages, salaries and benefits $ 3,315 $ (28) (0.8)%
Aircraft fuel 2,448 723 41.9 (a)
Other rentals and landing fees 619 13 2.1
Depreciation and amortization 576 (70) (10.8) (b)
Commissions, booking fees and
credit card expense 557 (18) (3.1)
Maintenance, materials and repairs 492 16 3.4
Aircraft rentals 295 (11) (3.6)
Food service 252 (24) (8.7)
Other operating expenses 1,253 71 6.0
Special charges - 31 NM (c)
Total operating expenses $ 9,807 $ 703 7.7%
(a)Aircraft fuel expense increased primarily due to a 41.4 percent
increase in American's price per gallon of fuel (including the benefit
of a $55 million fuel excise tax refund received in March 2005 and the
impact of fuel hedging) offset by a 1.7 percent decrease in American's
fuel consumption.
(b)Depreciation and amortization expense decreased primarily due to a
change in the estimate of the depreciable lives of the Company's
Boeing 737-800, Boeing 757-200 and McDonnell Douglas MD-80 aircraft
from 25 to 30 years, which decreased depreciation and amortization
expense by approximately $54 million in the six months ended June 30,
2005.
(c)Special charges for 2004 included the reversal of reserves
previously established for (i) aircraft return costs of $20 million
and (ii) employee severance of $11 million.
Other Income (Expense)
Other income (expense), historically a net expense, decreased $42
million due primarily to the following: Interest income increased $36
million due primarily to a $14 million interest refund related to the
fuel excise tax refund discussed above and increases in interest rates
and short-term investments. Interest expense increased $28 million
due primarily to increases in variable interest rates. Miscellaneous-
net decreased $25 million, due primarily to the accrual during the
first quarter of 2004 of a $23 million award rendered by an
independent arbitrator and relating to a grievance filed by the Allied
Pilots Association.
Income Tax
The Company did not record a net tax benefit associated with its
losses for the six months ended June 30, 2005 and 2004 due to the
Company providing a valuation allowance, as discussed in Note 5 to the
condensed consolidated financial statements.
-16-
Operating Statistics
The following table provides statistical information for American and
Regional Affiliates for the six months ended June 30, 2005 and 2004.
Six Months Ended June 30,
2005 2004
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 68,123 63,613
Available seat miles (millions) 87,872 86,594
Cargo ton miles (millions) 1,098 1,088
Passenger load factor 77.5% 73.5%
Passenger revenue yield per
passenger mile (cents) 11.90 11.90
Passenger revenue per available
seat mile (cents) 9.22 8.75
Cargo revenue yield per ton mile (cents) 28.08 27.83
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 9.92 9.49
Fuel consumption (gallons, in millions) (**) 1,478 1,503
Fuel price per gallon (cents) 150.2 106.2
Regional Affiliates
Revenue passenger miles (millions) 4,202 3,396
Available seat miles (millions) 6,126 5,118
Passenger load factor 68.6% 66.3%
(*) Excludes $1.2 billion and $1.0 billion of expense incurred
related to Regional Affiliates in 2005 and 2004, respectively.
(**) Includes the benefit of the 3.7 cents per gallon impact of a
$55 million fuel excise tax refund in 2005.
Outlook
The Company currently expects third quarter 2005 mainline unit costs
to be approximately 10.37 cents and full year 2005 mainline unit costs
to be approximately 10.20 cents, including the impact of the $55
million fuel excise tax refund received in March 2005.
Capacity for American's mainline jet operations is expected to
increase about 2.7 percent in the third quarter of 2005 compared to
the third quarter of 2004 and about 2.4 percent for the full year 2005
compared to 2004.
-17-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Except as discussed below, there have been no material changes in
market risk from the information provided in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk of the Company's 2004 Form
10-K.
The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analyses presented do
not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management
may take to mitigate the Company's exposure to such changes.
Therefore, actual results may differ. The Company does not hold or
issue derivative financial instruments for trading purposes.
Aircraft Fuel The Company's earnings are affected by changes in the
price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships
fuel and maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel, heating oil, and crude oil hedging
contracts. Market risk is estimated as a hypothetical 10 percent
increase in the June 30, 2005 cost per gallon of fuel. Based on
projected 2005 and 2006 fuel usage through June 30, 2006, such an
increase would result in an increase to aircraft fuel expense of
approximately $514 million in the twelve months ended June 30, 2006,
inclusive of the impact of fuel hedge instruments outstanding at June
30, 2005, and assumes the Company's fuel hedging program remains
effective under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
Comparatively, based on projected 2005 fuel usage, such an increase
would have resulted in an increase to aircraft fuel expense of
approximately $377 million in the twelve months ended December 31,
2005, inclusive of the impact of fuel hedge instruments outstanding at
December 31, 2004. The change in market risk is primarily due to the
increase in fuel prices.
As of June 30, 2005, the Company had hedged an insignificant
percentage of its estimated 2005, 2006 and 2007 fuel requirements with
option contracts.
Item 4. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
Exchange Act. This term refers to the controls and procedures of a
company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Company's disclosure controls and procedures as
of June 30, 2005. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2005. During the
quarter ending on June 30, 2005, there was no change in the Company's
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
-18-
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1999, a class action lawsuit was filed, and in November
1999 an amended complaint was filed, against AMR Corporation, American
Airlines, Inc., AMR Eagle Holding Corporation, Airlines Reporting
Corporation, and the Sabre Group Holdings, Inc. in the United States
District Court for the Central District of California, Western
Division (Westways World Travel, Inc. v. AMR Corp., et al.). The
lawsuit alleges that requiring travel agencies to pay debit memos to
American for violations of American's fare rules (by customers of the
agencies): (1) breaches the Agent Reporting Agreement between American
and AMR Eagle and the plaintiffs; (2) constitutes unjust enrichment;
and (3) violates the Racketeer Influenced and Corrupt Organizations
Act of 1970 (RICO). On July 9, 2003, the court certified a class that
included all travel agencies who have been or will be required to pay
money to American for debit memos for fare rules violations from July
26, 1995 to the present. On February 24, 2005, the court decertified
the class. The remaining two plaintiffs seek to enjoin American from
enforcing the pricing rules in question and to recover the amounts
paid for debit memos, plus treble damages, attorneys' fees, and costs.
The Company is vigorously defending the lawsuit. Although the Company
believes that the litigation is without merit, a final adverse court
decision could impose restrictions on the Company's relationships with
travel agencies, which could have an adverse impact on the Company.
Between April 3, 2003 and June 5, 2003, three lawsuits were filed by
travel agents some of whom opted out of a prior class action (now
dismissed) to pursue their claims individually against American
Airlines, Inc., other airline defendants, and in one case against
certain airline defendants and Orbitz LLC. (Tam Travel et. al., v.
Delta Air Lines et. al., in the United States District Court for the
Northern District of California - San Francisco (51 individual
agencies), Paula Fausky d/b/a Timeless Travel v. American Airlines,
et. al, in the United States District Court for the Northern District
of Ohio Eastern Division (29 agencies) and Swope Travel et al. v.
Orbitz et. al. in the United States District Court for the Eastern
District of Texas Beaumont Division (6 agencies)). Collectively,
these lawsuits seek damages and injunctive relief alleging that the
certain airline defendants and Orbitz LLC: (i) conspired to prevent
travel agents from acting as effective competitors in the distribution
of airline tickets to passengers in violation of Section 1 of the
Sherman Act; (ii) conspired to monopolize the distribution of common
carrier air travel between airports in the United States in violation
of Section 2 of the Sherman Act; and that (iii) between 1995 and the
present, the airline defendants conspired to reduce commissions paid
to U.S.-based travel agents in violation of Section 1 of the Sherman
Act. These cases have been consolidated in the United States District
Court for the Northern District of Ohio Eastern Division. American is
vigorously defending these lawsuits. A final adverse court decision
awarding substantial money damages or placing restrictions on the
Company's distribution practices would have an adverse impact on the
Company.
On August 19, 2002, a class action lawsuit seeking monetary damages
was filed, and on May 7, 2003, an amended complaint was filed in the
United States District Court for the Southern District of New York
(Power Travel International, Inc. v. American Airlines, Inc., et al.)
against American, Continental Airlines, Delta Air Lines, United
Airlines, and Northwest Airlines, alleging that American and the other
defendants breached their contracts with the agency and were unjustly
enriched when these carriers at various times reduced their base
commissions to zero. The as yet uncertified class includes all travel
agencies accredited by the Airlines Reporting Corporation "whose base
commissions on airline tickets were unilaterally reduced to zero by"
the defendants. The case is stayed as to United Airlines, since it
filed for bankruptcy. American is vigorously defending the lawsuit.
Although the Company believes that the litigation is without merit, a
final adverse court decision awarding substantial money damages or
forcing the Company to pay agency commissions would have an adverse
impact on the Company.
-19-
Miami-Dade County (the County) is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American and AMR
Eagle have been named as potentially responsible parties (PRPs) for
the contamination at MIA. During the second quarter of 2001, the
County filed a lawsuit against 17 defendants, including American
Airlines, Inc., in an attempt to recover its past and future cleanup
costs (Miami-Dade County, Florida v. Advance Cargo Services, Inc., et
al. in the Florida Circuit Court). The Company is vigorously defending
the lawsuit. In addition to the 17 defendants named in the lawsuit,
243 other agencies and companies were also named as PRPs and
contributors to the contamination. The case is currently stayed while
the parties pursue an alternative dispute resolution process. The
County has proposed draft allocation models for remedial costs for the
Terminal and Tank Farm areas of MIA. While it is anticipated that
American and AMR Eagle will be allocated equitable shares of remedial
costs, the Company does not expect the allocated amounts to have a
material adverse effect on the Company.
Four cases (each being a purported class action) have been filed
against American arising from the disclosure of passenger name records
by a vendor of American. The cases are: Kimmell v. AMR, et al. (U.
S. District Court, Texas), Baldwin v. AMR, et al. (U. S. District
Court, Texas), Rosenberg v. AMR, et al. (U. S. District Court, New
York) and Anapolsky v. AMR, et al. (U.S. District Court, New York).
The Kimmell suit was filed in April 2004. The Baldwin and Rosenberg
cases were filed in May 2004. The Anapolsky suit was filed in
September 2004. The suits allege various causes of action, including
but not limited to, violations of the Electronic Communications
Privacy Act, negligent misrepresentation, breach of contract and
violation of alleged common law rights of privacy. In each case
plaintiffs seek statutory damages of $1000 per passenger, plus
additional unspecified monetary damages. The Court dismissed the
cases but allowed leave to amend, and the Kimmell and Rosenberg cases
have been refiled. The Company is vigorously defending these suits
and believes the suits are without merit. However, a final adverse
court decision awarding a maximum amount of statutory damages would
have an adverse impact on the Company.
American is defending three lawsuits, filed as class actions but not
certified as such, arising from allegedly improper failure to refund
certain governmental taxes and fees collected by the Company upon the
sale of nonrefundable tickets when such tickets are not used for
travel. The suits are: Coleman v. American Airlines, Inc., No.
101106, filed December 31, 2002, pending (on appeal) before the
Supreme Court of Oklahoma. The Coleman Plaintiffs seek actual damages
(not specified) and interest. Hayes v. American Airlines, Inc., No.
04-3231, pending in the United States District Court for the Eastern
District of New York, filed July 2, 2004. The Hayes Plaintiffs seek
unspecified damages, declaratory judgment, costs, attorneys' fees, and
interest. Harrington v. Delta Air Lines, Inc., et. al., No. 04-
12558, pending in the United States District Court for the District of
Massachusetts, filed November 4, 2004. The Harrington plaintiffs seek
unspecified actual damages (trebled), declaratory judgment, injunctive
relief, costs, and attorneys' fees. The suits assert various causes
of action, including breach of contract, conversion, and unjust
enrichment. The Company is vigorously defending the suits and
believes them to be without merit. However, a final adverse court
decision requiring the Company to refund collected taxes and/or fees
could have an adverse impact on the Company.
On March 11, 2004, a patent infringement lawsuit was filed against AMR
Corporation, American Airlines, Inc., AMR Eagle Holding Corporation,
and American Eagle Airlines, Inc. in the United States District Court
for the Eastern District of Texas (IAP Intermodal, L.L.C. v. AMR
Corp., et al.). The case was consolidated with eight similar lawsuits
filed against a number of other unaffiliated airlines, including
Continental, Northwest, British Airways, Air France, Pinnacle
Airlines, Korean Air and Singapore Airlines (as well as various
regional affiliates of the foregoing). The plaintiff alleges that the
airline defendants infringe three patents, each of which relates to a
system of scheduling vehicles based on freight and passenger
transportation requests received from remote computer terminals. The
plaintiff is seeking past and future royalties of over $30 billion
dollars, injunctive relief, costs and attorneys' fees. Although the
Company believes that the plaintiff's claims are without merit and is
vigorously defending the lawsuit, a final adverse court decision
awarding substantial money damages or placing material restrictions on
existing scheduling practices would have an adverse impact on the
Company.
-20-
On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
Airlines, Inc. and the Association of Professional Flight Attendants
(APFA), the Union which represents the Company's flight attendants
(Ann M. Marcoux, et al., v. American Airlines Inc., et al. in the
United States District Court for the Eastern District of New York).
While a class has not yet been certified, the lawsuit seeks on behalf
of all of American's flight attendants or various subclasses to set
aside, and to obtain damages allegedly resulting from, the April 2003
Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor
agreements the Company successfully reached with its unions in order
to avoid filing for bankruptcy in 2003. In a related case (Sherry
Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States
District Court for the Eastern District of New York), the court denied
a preliminary injunction against implementation of the RPA on June 30,
2003. The Marcoux suit alleges various claims against the Union and
American relating to the RPA and the ratification vote on the RPA by
individual Union members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the Union of its duty of fair representation to
its members, violation by the Company of provisions of the Railway
Labor Act through improper coercion of flight attendants into voting
or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
Although the Company believes the case against it is without merit and
both the Company and the Union are vigorously defending the lawsuit, a
final adverse court decision invalidating the RPA and awarding
substantial money damages would have an adverse impact on the Company.
-21-
Item 4. Submission of Matters to a Vote of Security Holders
The owners of 145,835,117 shares of common stock, or 90.45 percent of
shares outstanding, were represented at the annual meeting of
stockholders on May 18, 2005 at the American Airlines Training &
Conference Center, Flagship Auditorium, 4501 Highway 360 South, Fort
Worth, Texas.
Elected as directors of the Company, each receiving a minimum of
102,645,549 votes were:
Gerard J. Arpey Michael A. Miles
John W. Bachmann Philip J. Purcell
David L. Boren Joe M. Rodgers
Edward A. Brennan Judith Rodin, Ph.D.
Armando M. Codina Matthew K. Rose
Earl G. Graves Roger T. Staubach
Ann M. Korologos
Stockholders ratified the Audit Committee's decision to retain Ernst
& Young LLP as independent auditors for the Company for the 2005
fiscal year. The vote was 144,834,159 in favor, 642,416 against, and
358,541 abstaining.
Stockholders rejected a proposal to limit the terms of future outside
directors. The proposal was submitted by Evelyn Y. Davis. The vote
was 4,410,390 in favor, 77,076,068 against, 612,872 abstaining and
63,735,787 not voting.
Item 5. Other Information
The 1999 Stock Appreciation Rights Plan for Directors grants
annually to each outside Director 1,185 stock appreciation
rights (SARs)(the "SAR Plan"). This SARs grant is a
component of an outside Director's compensation. As noted
in the Company's 2005 proxy statement (page 13, the "Proxy
Statement"), the American Jobs Creation Act has called into
doubt the viability of the SAR Plan. The Board has
determined to terminate the SAR Plan. In lieu of the annual
grant of 1,185 SARs, Directors will receive annually an
additional grant of units under the 2004 Directors Unit
Incentive Plan (the "DUIP"). The DUIP, as amended, is
attached as Exhibit 10.5 to this Form 10-Q. An attachment to
the DUIP notes the 2005 awards.
As discussed in the Proxy Statement, the Compensation
Committee of the Board annually conducts a comprehensive
review of compensation for the officers and other key
employees. At its July meeting the Compensation Committee
approved the following compensation initiatives (effective
July 25, 2005):
- The form of stock option agreement under the 1998 Long
Term Incentive Plan, as amended. The form is
attached as Exhibit 10.3 to this Form 10-Q. An attachment
to this form of stock option agreement notes the stock
option grants to the Company's executive officers;
- The form of deferred unit agreement for 2005. The form
is attached as Exhibit 10.2 to this Form 10-Q. An
attachment to this form of deferred unit agreement notes
the deferred unit grants to the Company's executive
officers;
- The form of performance unit agreement for the
2005/2007 performance period. The form is attached as
Exhibit 10.1 to this Form 10-Q. An attachment to this form
of performance unit agreement notes the performance unit
grants to the Company's executive officers; and
- A Career Performance Shares Award Agreement between the
Company and Gerard J. Arpey, its Chairman, President and
CEO. This agreement is attached as Exhibit 10.6 to this
Form 10-Q.
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Item 6. Exhibits
The following exhibits are included herein:
10.1 Form of 2005 - 2007 Performance Unit Agreement (with awards to
executive officers noted)
10.2 Form of 2005 Deferred Unit Award Agreement (with awards to executive
officers noted)
10.3 Form of 2005 Stock Option under the 1998 Long Term Incentive
Plan, as amended (with awards to executive officers noted)
10.4 Form of 2005 Stock Option Agreement under the 2003 Employee Stock
Incentive Plan
10.5 2004 Directors Unit Incentive Plan, as amended
10.6 Career Performance Shares, Deferred Stock Award Agreement between AMR
Corporation and Gerard J. Arpey dated as of July 25, 2005
10.7 Letter Agreement dated May 5, 2005 between The Boeing Company and
American Airlines, Inc. Portions of this agreement have been omitted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission.
12 Computation of ratio of earnings to fixed charges for the three
and six months ended June 30, 2005 and 2004.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32 Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code).
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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.
AMR CORPORATION
Date: July 25, 2005 BY: /s/ James A. Beer
James A. Beer
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
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