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, 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 Rule 12b-2 of the Exchange Act).
Yes X No .
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No X .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 165,067,635 shares as of October
14, 2005.
INDEX
AMR CORPORATION
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and nine months
ended September 30, 2005 and 2004
Condensed Consolidated Balance Sheets -- September 30, 2005 and
December 31, 2004
Condensed Consolidated Statements of Cash Flows -- Nine months
ended September 30, 2005 and 2004
Notes to Condensed Consolidated Financial Statements -- September
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 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
Revenues
Passenger - American Airlines $4,428 $3,838 $12,534 $11,411
- Regional Affiliates 570 488 1,582 1,413
Cargo 152 149 460 452
Other revenues 335 287 968 828
Total operating revenues 5,485 4,762 15,544 14,104
Expenses
Wages, salaries and benefits 1,664 1,696 4,979 5,039
Aircraft fuel 1,582 1,056 4,030 2,781
Other rentals and landing fees 337 295 956 901
Depreciation and amortization 292 317 868 963
Commissions, booking fees and
credit card expense 292 288 849 863
Maintenance, materials and
repairs 269 265 761 741
Aircraft rentals 148 152 443 458
Food service 136 145 388 421
Other operating expenses 726 593 1,979 1,775
Special charges (credits) - (18) - (49)
Total operating expenses 5,446 4,789 15,253 13,893
Operating Income (Loss) 39 (27) 291 211
Other Income (Expense)
Interest income 40 19 104 47
Interest expense (240) (219) (697) (648)
Interest capitalized 12 22 59 60
Miscellaneous - net (4) (9) (14) (44)
(192) (187) (548) (585)
Loss Before Income Taxes (153) (214) (257) (374)
Income tax - - - -
Net Loss $(153) $(214) $(257) $(374)
Basic and Diluted Loss Per Share $(0.93) $(1.33) $(1.58) $(2.33)
The accompanying notes are an integral part of these financial statements.
-1-
AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
September, 30 December, 31
2005 2004
Assets
Current Assets
Cash $ 127 $ 120
Short-term investments 3,285 2,809
Restricted cash and short-term investments 499 478
Receivables, net 1,111 836
Inventories, net 540 488
Other current assets 425 240
Total current assets 5,987 4,971
Equipment and Property
Flight equipment, net 15,111 15,292
Other equipment and property, net 2,464 2,426
Purchase deposits for flight equipment 278 319
17,853 18,037
Equipment and Property Under Capital Leases
Flight equipment, net 967 1,016
Other equipment and property, net 91 84
1,058 1,100
Route acquisition costs and airport operating
and gate lease rights, net 1,202 1,223
Other assets 3,336 3,442
$ 29,436 $28,773
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 1,101 $ 1,003
Accrued liabilities 1,957 2,026
Air traffic liability 3,851 3,183
Current maturities of long-term debt 790 659
Current obligations under capital leases 170 147
Total current liabilities 7,869 7,018
Long-term debt, less current maturities 12,292 12,436
Obligations under capital leases, less
current obligations 939 1,088
Pension and postretirement benefits 4,799 4,743
Other liabilities, deferred gains and
deferred credits 4,266 4,069
Stockholders' Equity (Deficit)
Preferred stock - -
Common stock 182 182
Additional paid-in capital 2,314 2,521
Treasury stock (1,081) (1,308)
Accumulated other comprehensive loss (575) (664)
Accumulated deficit (1,569) (1,312)
(729) (581)
$ 29,436 $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)
Nine Months Ended
September 30,
2005 2004
Net Cash Provided by Operating Activities $1,032 $ 803
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (586) (773)
Net increase in short-term investments (476) (532)
Net (increase) decrease in restricted cash
and short-term investments (21) 46
Proceeds from sale of equipment and property 25 59
Other - (12)
Net cash used by investing activities (1,058) (1,212)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (881) (575)
Proceeds from:
Issuance of long-term debt 697 975
Exercise of stock options 19 6
DFW Bond Remarketing 198 -
Net cash provided by financing activities 33 406
Net increase (decrease) in cash 7 (3)
Cash at beginning of period 120 120
Cash at end of period $ 127 $ 117
Activities Not Affecting Cash
Flight equipment acquired through seller
financing $ - $ 18
Capital lease obligations incurred $ 13 $ 10
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 loss and 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 Nine Months
Ended Ended
September 30, September 30,
2005 2004 2005 2004
Net loss, as reported $(153) $(214) $(257) $(374)
Add (Deduct): Stock-based
employee compensation
expense included in
reported net loss 8 (7) 26 10
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards (22) (9) (70) (59)
Pro forma net loss $(167) $(230) $(301) $(423)
Loss per share:
Basic and diluted-as
reported $(0.93) $(1.33) $(1.58) $(2.33)
Basic and diluted-pro forma $(1.02) $(1.43) $(1.85) $(2.64)
-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 expects that the impact of adoption on its first quarter
2006 results will be similar to the amounts disclosed in the
quarterly pro forma information in this footnote. However,
subsequent to the first quarter of 2006, the impact will decrease
significantly due to the vesting period ending for the 2003
Employee Stock Incentive Plan.
3.As of September 30, 2005, the Company had commitments to acquire
two Boeing 777-200ERs in 2006 and an aggregate of 47 Boeing 737-
800s and seven Boeing 777-200ERs in 2013 through 2016. Future
payments for all aircraft, including the estimated amounts for
price escalation, will approximate $102 million in 2006 and an
aggregate of approximately $2.8 billion in 2011 through 2016. The
Company has pre-arranged financing for all aircraft deliveries in
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 $115 million in additional operating lease payments
and $106 million in additional payments related to capital leases
as of September 30, 2005. These amounts are being accounted for as
contingent rentals and will only be recognized if they become
payable. Conversely, as part of the concessionary agreements, the
Company will recognize a gain of $37 million related to a debt
restructuring if none of the events described above occur prior to
December 31, 2005.
4.Accumulated depreciation of owned equipment and property at
September 30, 2005 and December 31, 2004 was $10.2 billion and $9.6
billion, respectively. Accumulated amortization of equipment and
property under capital leases at September 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 $81 million, respectively,
for the three and nine months ended September 30, 2005.
Additionally, the per share net loss for the three and nine months
ended September 30, 2005 decreased $0.16 and $0.50 per share,
respectively.
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 $127 million during the nine
months ended September 30, 2005 to $960 million as of September 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 nine
month period ended September 30, 2005.
-5-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6.In July 2005, American completed the re-marketing of $198 million
of DFW-FIC Series 2000A Unsecured Revenue Refunding Bonds that 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
which results in an increase to Other liabilities, deferred gains and
deferred credits where the tendered bonds had been classified pending
their use to offset certain future operating lease obligations.
In September 2005, American sold and leased back 89 spare engines
with a book value of $105 million to a variable interest entity
(VIE). The net proceeds received from third parties were $133
million. American is considered the primary beneficiary of the
activities of the VIE as American has substantially all of the
residual value risk associated with the transaction. As such,
American is required to consolidate the VIE in its financial
statements. At September 30, 2005, the book value of the engines
was included in Flight equipment, net on the condensed consolidated
balance sheet. The engines serve as collateral for the VIE's long-
term debt of $133 million at September 30, 2005, which has also
been included in the condensed consolidated balance sheet. The VIE
has no other significant operations.
Also in September 2005, American purchased certain obligations due
October 2006 with a face value of $261 million at par value from an
institutional investor. In conjunction with the purchase, American
borrowed an additional $245 million under an existing mortgage
agreement with a final maturity in December 2012 from the same
investor. The interest rate on the mortgage agreement remains
substantially unchanged. The additional borrowings required
American to grant a security interest in certain spare engines and
related collateral. The transaction was accounted for as a
modification of the original debt under Emerging Issues Task Force
Issue 96-19 "Debtor's Accounting for a Modification or Exchange of
Debt Instruments". As a result of this transaction, the Company's
2006 maturities of long-term debt decreased from $1.3 billion to
$1.1 billion.
During the nine month period ended September 30, 2005, AMR Eagle
borrowed approximately $319 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.
As of September 30, 2005, AMR had issued guarantees covering
approximately $928 million of American's tax-exempt bond debt and
American's fully drawn $803 million credit facility. American had
issued guarantees covering approximately $1.3 billion of AMR's
unsecured debt. In addition, as of September 30, 2005, AMR and
American had issued guarantees covering approximately $428 million
of AMR Eagle's secured debt and AMR had issued guarantees covering
an additional $2.8 billion of AMR Eagle's secured debt.
-6-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7.The following tables provide the components of net periodic
benefit cost for the three and nine months ended September 30, 2005
and 2004 (in millions):
Pension Benefits
Three Months Nine Months Ended
Ended September 30,
September 30,
2005 2004 2005 2004
Components of net periodic
benefit cost
Service cost $ 93 $ 89 $ 278 $ 268
Interest cost 152 142 457 425
Expected return on assets (164) (143) (493) (427)
Amortization of:
Prior service cost 4 4 12 11
Unrecognized net loss 13 15 39 44
Net periodic benefit cost $ 98 $ 107 $ 293 $ 321
Other Postretirement Benefits
Three Months Nine Months Ended
Ended September 30,
September 30,
2005 2004 2005 2004
Components of net periodic
benefit cost
Service cost $ 19 $ 19 $ 56 $ 57
Interest cost 49 51 148 152
Expected return on assets (3) (3) (10) (9)
Amortization of:
Prior service cost (2) (3) (7) (8)
Unrecognized net loss - 2 1 6
Net periodic benefit cost $ 63 $ 66 $ 188 $ 198
The Company contributed $288 million to its defined benefit pension
plans during the nine month period ended September 30, 2005, and
completed its required 2005 calendar year funding by contributing
an additional $22 million on October 14, 2005.
-7-
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 Total
Charges Exit Costs Charges
Remaining
accrual at
December 31,
2004 $ 129 $ 26 $ 36 $191
Payments (13) (5) (34) (52)
Remaining
accrual at
September 30,
2005 $ 116 $ 21 $ 2 $139
Cash outlays related to these accruals, as of September 30, 2005,
for aircraft charges, facility exit costs and employee charges will
occur through 2014, 2018 and the end of 2005, respectively.
9.The Company includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting
(primarily crude oil derivative contracts), changes in minimum pension
liabilities and unrealized gains and losses on available-for-sale
securities in comprehensive loss. For the three months ended September
30, 2005 and 2004, comprehensive loss was $121 million and $194
million, respectively, and for the nine months ended September 30,
2005 and 2004, comprehensive loss was $168 and $371 million,
respectively. The difference between net loss and comprehensive loss
for the three and nine months ended September 30, 2005 and 2004 is due
primarily to the accounting for the Company's derivative financial
instruments.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related
commodities. As required by Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company assesses, both at the inception of
each hedge and on an on-going basis, whether the derivatives that
are used in its hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items. The Company
discontinues hedge accounting prospectively if it determines that a
derivative is no longer expected to be highly effective as a hedge
or if it decides to discontinue the hedging relationship. As a
result of its quarterly effectiveness assessment, the Company
determined that all of its derivatives settling during the
remainder of 2005 and certain of its derivatives settling in 2006
are no longer expected to be highly effective in offsetting changes
in forecasted jet fuel purchases. As a result, effective on
October 1, 2005, all subsequent changes in the fair value of those
particular hedge contracts will be recognized directly in earnings
rather than being deferred in Accumulated other comprehensive loss.
Hedge accounting will continue to be applied to derivatives used to
hedge forecasted jet fuel purchases that are expected to remain
highly effective.
-8-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10.The following table sets forth the computations of basic and
diluted loss per share (in millions, except per share data):
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2004 2005 2004
Numerator:
Net loss - numerator for basic
and diluted loss per share $(153) $(214) $(257) $(374)
Denominator:
Denominator for basic and diluted
loss per share - weighted-
average shares 164 161 163 160
Basic and diluted loss per share $(0.93) $(1.33) $(1.58) $(2.33)
For the three month and nine month periods ended September 30,
2005 and 2004, approximately 82 million shares issuable upon
conversion of the Company's convertible notes or related to
employee stock options and deferred stock were not added to the
denominator because inclusion of such shares would be antidilutive
or because the options' exercise prices were greater than the
average market price of the common shares.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Information
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in documents
incorporated herein by reference, the words "expects," "plans,"
"anticipates," "indicates," "believes," "forecast," "guidance,"
"outlook" 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 incurred a $153 million net loss during the third quarter
of 2005 compared to a net loss of $214 million in the same period last
year. The Company's third quarter 2005 results were impacted by the
continuing increase in fuel prices and certain other costs, offset by
an improvement in revenues, 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, and productivity improvements and other cost
reductions resulting from progress under the Turnaround Plan. The
Company's third quarter 2005 results were also impacted by an $80
million charge for the termination of a contract and a $22 million
credit for the reversal of an insurance reserve.
Fuel price increases resulted in a year-over-year increase of 62.6
cents per gallon for the third quarter. This price increase negatively
impacted fuel expense by $525 million during the quarter based on fuel
consumption of 839 million gallons. Continuing high fuel prices,
additional increases in the price of fuel, and/or disruptions in the
supply of fuel would further adversely affect the Company's financial
condition and its results of operations.
-10-
Mainline passenger unit revenues increased 12.6 percent for the third
quarter due to a 3.3 point load factor increase and an 8.0 percent
increase in passenger yield (passenger revenue per passenger mile)
compared to the same period in 2004. Although load factor performance
and yield showed 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); pricing transparency resulting from the use of the
internet; greater competition from low-cost carriers and from carriers
that have recently reorganized or are reorganizing, including under
the protection of Chapter 11 of the Bankruptcy Code; other carriers
that are well hedged against rising fuel costs and able to better
absorb the current high jet fuel prices; and, more recently, fare
simplification efforts by certain carriers. The Company believes that
its reduced pricing power will persist indefinitely and possibly
permanently.
The Company's ability to become 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), 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.
-11-
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 $555 million senior secured revolving credit facility with
a final maturity on June 17, 2009 and a fully drawn $248 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 September 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 0.90 to 1.00 for the four quarter period ending September 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 September 30, 2005 and expects to be able to
continue to comply with this covenant for the period ending December
31, 2005. However, given the historically high price of fuel and the
volatility of fuel prices and revenues, it is difficult to assess
whether AMR and American will, in fact, be able to continue to comply
with the Liquidity Covenant and in particular the EBITDAR Covenant,
and there are no assurances that AMR and American will be able to
comply with these covenants. Failure to comply with these covenants
would result in a default under the Credit Facility which - - if the
Company did not take steps to obtain a waiver of, or otherwise
mitigate, the default - - could result in a default under a
significant amount of the Company's other debt and lease obligations.
Pension Funding Obligation
The Company contributed $288 million to its defined benefit pension
plans during the nine month period ended September 30, 2005, and
completed its required 2005 calendar year funding by contributing an
additional $22 million on October 14, 2005. Due to uncertainty
regarding the impact of proposed legislation, the Company is not yet
able to reasonably estimate its future required contributions beyond
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. Based on the current regulatory environment and
market conditions, the Company expects that its 2006 minimum required
contributions will exceed its 2005 contributions; however, there are
certain scenarios where the Company's 2006 minimum required
contribution would be less than the 2005 amount.
-12-
Cash Flow Activity
At September 30, 2005, the Company had $3.4 billion in unrestricted
cash and short-term investments, an increase of $483 million from
December 31, 2004. Net cash provided by operating activities in the
nine-month period ended September 30, 2005 was $1.0 billion, an
increase of $229 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. Capital
expenditures for the first nine months of 2005 were $586 million and
included the acquisition of 20 Embraer 145 aircraft and the cost of
improvements at New York's John F. Kennedy airport.
In July 2005, American completed the re-marketing of $198 million of
DFW-FIC Series 2000A Unsecured Revenue Refunding Bonds that 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
which results in an increase to Other liabilities, deferred gains and
deferred credits where the tendered bonds had been classified pending
their use to offset certain future operating lease obligations.
In September 2005, American sold and leased back 89 spare engines with
a book value of $105 million to a variable interest entity (VIE). The
net proceeds received from third parties were $133 million. American
is considered the primary beneficiary of the activities of the VIE as
American has substantially all of the residual value risk associated
with the transaction. As such, American is required to consolidate
the VIE in its financial statements. At September 30, 2005, the book
value of the engines was included in Flight equipment, net on the
condensed consolidated balance sheet. The engines serve as collateral
for the VIE's long-term debt of $133 million at September 30, 2005,
which has also been included in the condensed consolidated balance
sheet. The VIE has no other significant operations.
Also in September 2005, American purchased certain obligations due
October 2006 with a face value of $261 million at par value from an
institutional investor. In conjunction with the purchase, American
borrowed an additional $245 million under an existing mortgage
agreement with a final maturity in December 2012 from the same
investor. The interest rate on the mortgage agreement remains
substantially unchanged. The additional borrowings required American
to grant a security interest in certain spare engines and related
collateral. The transaction was accounted for as a modification of
the original debt under Emerging Issues Task Force Issue 96-19
"Debtor's Accounting for a Modification or Exchange of Debt
Instruments". As a result of this transaction, the Company's 2006
maturities of long-term debt decreased from $1.3 billion to $1.1
billion.
During the nine-month period ended September 30, 2005, AMR Eagle
borrowed approximately $319 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.
The New York City Industrial Development Agency is in the process of
offering up to $770 million of special facility revenue bonds on
behalf of American. Proceeds from these bonds would generally be used
to reimburse American for certain construction costs related to
facility improvements at John F. Kennedy International Airport. If
these bonds are issued, American would be responsible for debt service
on the bonds and would consolidate the debt in its financial
statements. American can give no assurance as to whether or when
these bonds will be issued or, if issued, as to the amount of the
bonds that will be issued.
-13-
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2005 and 2004
Revenues
The Company's revenues increased approximately $723 million, or 15.2
percent, to $5.5 billion in the third quarter of 2005 from the same
period last year. American's passenger revenues increased by 15.4
percent, or $590 million, on a capacity (available seat mile) (ASM)
increase of 2.5 percent. American's passenger load factor increased
3.3 points to 81.2 percent and passenger revenue yield per passenger
mile increased by 8.0 percent to 11.96 cents. This resulted in an
increase in American's passenger revenue per available seat mile
(RASM) of 12.6 percent to 9.71 cents. Following is additional
information regarding American's domestic and international RASM and
capacity:
Three Months Ended September 30, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 9.4 13.8% 29.6 0.1%
International 10.2 10.1 16.0 7.1
Latin America 9.9 14.3 7.5 3.8
Europe 11.1 10.8 6.6 5.5
Pacific 8.3 (9.0) 1.8 31.4
Regional affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $82 million, or 16.8 percent, to $570 million as a
result of increased capacity and load factors. Regional affiliates'
traffic increased 21.8 percent to 2.4 billion revenue passenger miles
(RPMs), while capacity increased 17.1 percent to 3.3 billion ASMs,
resulting in a 2.7 point increase in the passenger load factor to 71.7
percent.
Cargo revenues increased 2.0 percent, or $3 million, to $152 million
as a result of a 1.9 percent increase in cargo ton miles. In
addition, the cargo division saw a $13 million increase in fuel
surcharges and other service fees. These amounts are included in
Other revenues which are discussed below.
Other revenues increased 16.7 percent, or $48 million, to $335 million
due in part to increased cargo fuel surcharges, increased third-party
maintenance contracts obtained by the Company's maintenance and
engineering group, and increases in certain passenger fees.
Operating Expenses
The Company's total operating expenses increased 13.7 percent, or $657
million, to $5.4 billion in the third quarter of 2005 compared to the
third quarter of 2004. American's mainline operating expenses per ASM
in the third quarter of 2005 increased 9.7 percent compared to the
third quarter of 2004 to 10.62 cents. These increases are due
primarily to a 49.6 percent increase in American's price per gallon of
fuel in the third quarter of 2005 relative to the third 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.
The Company's 2005 third quarter expenses were impacted by an $80
million charge for the termination of a contract and a $22 million
credit for the reversal of an insurance reserve. The Company recorded
an $18 million adjustment in Special charges in the third quarter of
2004 (see explanation below).
-14-
(in millions) Three Months
Ended Increase /
Operating Expenses September 30, (Decrease) Percentage
2005 from 2004 Change
Wages, salaries and benefits $1,664 $ (32) (1.9)%
Aircraft fuel 1,582 526 49.8 (a)
Other rentals and landing fees 337 42 14.2 (b)
Depreciation and amortization 292 (25) (7.9)
Commissions, booking fees
and credit card expense 292 4 1.4
Maintenance, materials and
repairs 269 4 1.5
Aircraft rentals 148 (4) (2.7)
Food service 136 (9) (6.2)
Other operating expenses 726 133 22.4 (c)
Special charges (credits) - 18 NM (d)
Total operating expenses $5,446 $ 657 13.7%
(a) Aircraft fuel expense increased primarily due to a 49.6 percent
increase in American's price per gallon of fuel offset by a 1.3
percent decrease in American's fuel consumption.
(b) Other rentals and landing fees increased primarily due to
additional landing fees resulting from higher rates.
(c) Other operating expenses increased primarily due to a charge of
$80 million related to the termination of a contract somewhat offset
by a $22 million credit for the reversal of an insurance reserve. An
increase in communications charges of $23 million, primarily due to
increased international services, also contributed to the increase in
the account.
(d) Special charges (credits) for 2004 included the reversal of
reserves previously established for facility exit costs of $18
million.
Other Income (Expense)
Other income (expense), historically a net expense, increased $5
million with offsetting $21 million increases in both interest income
and interest expense due primarily to higher balances and interest
rates.
Income Tax
The Company did not record a net tax benefit associated with its third
quarter 2005 and 2004 losses due to the Company providing a valuation
allowance, as discussed in Note 5 to the condensed consolidated
financial statements.
-15-
Operating Statistics
The following table provides statistical information for American and
Regional Affiliates for the three months ended September 30, 2005 and
2004.
Three Months Ended
September 30,
2005 2004
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 37,025 34,659
Available seat miles (millions) 45,613 44,515
Cargo ton miles (millions) 539 529
Passenger load factor 81.2% 77.9%
Passenger revenue yield per passenger
mile (cents) 11.96 11.07
Passenger revenue per available seat
mile (cents) 9.71 8.62
Cargo revenue yield per ton mile (cents) 28.23 28.11
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 10.62 9.68
Fuel consumption (gallons, in millions) 763 773
Fuel price per gallon (cents) 187.6 125.4
Operating aircraft at period-end 727 734
Regional Affiliates
Revenue passenger miles (millions) 2,386 1,959
Available seat miles (millions) 3,326 2,840
Passenger load factor 71.7% 69.0%
(*) Excludes $650 million and $539 million of expense incurred
related to Regional Affiliates in 2005 and 2004, respectively.
Operating aircraft at September 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 145 108
Boeing 767-300 Extended Range 58 Super ATR 41
Boeing 777-200 Extended Range 45 Saab 340B/340B Plus 28
McDonnell Douglas MD-80 354 Total 300
Total 727
The average aircraft age for American's and AMR Eagle's aircraft is
13.0 years and 5.9 years, respectively.
Of the operating aircraft listed above, 24 McDonnell Douglas MD-80s -
- - 13 owned, five operating leased and six capital leased - - as well
as two Saab 340B Plus were in temporary storage as of September 30,
2005.
-16-
Owned and leased aircraft not operated by the Company at September 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 53
Fokker 100 4 Total 63
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 September 30, 2005, remaining
owned aircraft to be delivered under these agreements include one
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 Nine Months Ended September 30, 2005 and 2004
Revenues
The Company's revenues increased approximately $1.4 billion, or 10.2
percent, to $15.5 billion for the nine months ended September 30, 2005
from the same period last year. American's passenger revenues
increased by 9.8 percent, or $1.1 billion, on a capacity (ASM)
increase of 1.8 percent. American's passenger load factor increased
3.8 points to 78.8 percent and passenger revenue yield per passenger
mile increased 2.7 percent to 11.92 cents. This resulted in an
increase in American's passenger RASM of 7.9 percent to 9.39 cents.
Following is additional information regarding American's domestic and
international RASM and capacity:
Nine Months Ended September 30, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 9.3 8.6% 87.3 (1.9)%
International 9.6 6.2 46.1 9.7
Latin America 9.4 6.3 22.9 8.6
Europe 10.3 9.6 18.1 6.4
Pacific 8.3 (5.9) 5.1 29.1
Regional affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $169 million, or 12.0 percent, to $1.6 billion as a
result of increased capacity and load factors. Regional affiliates'
traffic increased 23.0 percent to 6.6 billion RPMs, while capacity
increased 18.8 percent to 9.5 billion ASMs, resulting in a 2.4 point
increase in the passenger load factor to 69.7 percent.
Cargo revenues increased 1.8 percent, or $8 million, to $460 million
as a result of a 1.2 percent increase in cargo ton miles in addition
to a 0.7 percent increase in cargo revenue yield per ton mile. In
addition, the cargo division saw a $38 million increase in fuel
surcharges and other service fees. These amounts are included in
Other revenues which are discussed below.
Other revenues increased 16.9 percent, or $140 million, to $968
million due in part to increased cargo fuel surcharges, increased
third-party maintenance contracts obtained by the Company's
maintenance and engineering group, and increases in certain passenger
fees.
-17-
Operating Expenses
The Company's total operating expenses increased 9.8 percent, or $1.4
billion, to $15.3 billion for the nine months ended September 30, 2005
compared to the same period in 2004. American's mainline operating
expenses per ASM in the nine months ended September 30, 2005 increased
6.3 percent compared to the same period in 2004 to 10.16 cents. These
increases are due primarily to a 44.5 percent increase in American's
price per gallon of fuel in 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) Nine Months
Ended Increase /
September 30, (Decrease) Percentage
Operating Expenses 2005 from 2004 Change
Wages, salaries and benefits $4,979 $(60) (1.2)%
Aircraft fuel 4,030 1,249 44.9 (a)
Other rentals and landing fees 956 55 6.1
Depreciation and amortization 868 (95) (9.9)
Commissions, booking fees and
credit card expense 849 (14) (1.6)
Maintenance, materials and
repairs 761 20 2.7
Aircraft rentals 443 (15) (3.3)
Food service 388 (33) (7.8)
Other operating expenses 1,979 204 11.5 (b)
Special charges (credits) - 49 NM (c)
Total operating expenses $15,253 $1,360 9.8%
(a) Aircraft fuel expense increased primarily due to a 44.5 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 1.5 percent decrease in American's
fuel consumption.
(b) Other operating expenses increased in part due to a charge of $80
million related to the termination of a contract somewhat offset by a
$22 million credit for the reversal of an insurance reserve.
Increases in communications charges of $51 million and information
technology spending of $15 million also contributed to the increase in
the account.
(c) Special charges (credits) for 2004 included the reversal of
reserves previously established for aircraft return costs of $20
million, facility exit costs of $18 million and employee severance of
$11 million.
Other Income (Expense)
Other income (expense), historically a net expense, decreased $37
million. Interest income increased $57 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 $49 million due primarily to
increases in variable interest rates. Miscellaneous-net decreased $30
million, reflecting the accrual during the first quarter of 2004 of a
$23 million award rendered by an independent arbitrator related 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 nine months ended September 30, 2005 and 2004 due to
the Company providing a valuation allowance, as discussed in Note 5 to
the condensed consolidated financial statements.
-18-
Operating Statistics
The following table provides statistical information for American and
Regional Affiliates for the nine months ended September 30, 2005 and
2004.
Nine Months Ended
September 30,
2005 2004
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 105,147 98,271
Available seat miles (millions) 133,485 131,109
Cargo ton miles (millions) 1,636 1,617
Passenger load factor 78.8% 75.0%
Passenger revenue yield per passenger
mile (cents) 11.92 11.61
Passenger revenue per available seat
mile (cents) 9.39 8.70
Cargo revenue yield per ton mile (cents) 28.11 27.92
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 10.16 9.56
Fuel consumption (gallons, in millions) 2,242 2,276
Fuel price per gallon (cents) (**) 162.9 112.7
Regional Affiliates
Revenue passenger miles (millions) 6,588 5,355
Available seat miles (millions) 9,452 7,958
Passenger load factor 69.7% 67.3%
(*) Excludes $1.9 billion and $1.5 billion of expense incurred
related to Regional Affiliates in 2005 and 2004, respectively.
(**) Includes the benefit of 2.5 cents per gallon impact from the
$55 million fuel excise tax refund in 2005.
Outlook
The Company expects to post -- at the current level of fuel prices --
a significant loss in the fourth quarter.
The Company currently expects fourth quarter mainline unit costs to be
approximately 11.42 cents, including the 0.09 cent favorable impact of
the $37 million potential gain discussed in Note 3 to the condensed
consolidated financial statements.
Capacity for American's mainline jet operations is expected to remain
approximately flat in the fourth quarter of 2005 compared to the
fourth quarter of 2004.
-19-
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 September 30, 2005 cost per gallon of fuel. Based on
projected 2005 and 2006 fuel usage through September 30, 2006, such an
increase would result in an increase to aircraft fuel expense of
approximately $948 million in the twelve months ended September 30,
2006, inclusive of the impact of effective fuel hedge instruments
outstanding at September 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.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related commodities.
As required by Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the
Company assesses, both at the inception of each hedge and on an on-
going basis, whether the derivatives that are used in its hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items. The Company discontinues hedge accounting
prospectively if it determines that a derivative is no longer expected
to be highly effective as a hedge or if it decides to discontinue the
hedging relationship. As a result of its quarterly effectiveness
assessment, the Company determined that all of its derivatives
settling during the remainder of 2005 and certain of its derivatives
settling in 2006 are no longer expected to be highly effective in
offsetting changes in forecasted jet fuel purchases. As a result,
effective on October 1, 2005, all subsequent changes in the fair value
of those particular hedge contracts will be recognized directly in
earnings rather than being deferred in Accumulated other comprehensive
loss. Hedge accounting will continue to be applied to derivatives used
to hedge forecasted jet fuel purchases that are expected to remain
highly effective.
As of September 30, 2005, the Company had hedged an insignificant
percentage of its estimated remaining 2005, 2006 and 2007 fuel
requirements with option contracts.
-20-
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 September 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 September 30,
2005. During the quarter ending on September 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.
-21-
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. In September 2005, the Court granted Summary Judgment in
favor of the Company and all other defendants. The time for
plaintiffs to file a notice of appeal has not yet run. 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.
-22-
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. On September 7,
2005, the court issued a memorandum opinion that interpreted disputed
terms in the patents. The plaintiff dismissed its claims without
prejudice to its right to appeal the September 7, 2005 opinion.
Although the Company believes that the plaintiff's claims are without
merit and is vigorously defending the lawsuit, a final adverse court
decision awarding substantial money damages or placing material
restrictions on existing scheduling practices would have an adverse
impact on the Company.
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On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
Airlines, Inc. and the Association of Professional Flight Attendants
(APFA), the Union which represents the Company's flight attendants
(Ann M. Marcoux, et al., v. American Airlines Inc., et al. in the
United States District Court for the Eastern District of New York).
While a class has not yet been certified, the lawsuit seeks on behalf
of all of American's flight attendants or various subclasses to set
aside, and to obtain damages allegedly resulting from, the April 2003
Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor
agreements the Company successfully reached with its unions in order
to avoid filing for bankruptcy in 2003. In a related case (Sherry
Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States
District Court for the Eastern District of New York), the court denied
a preliminary injunction against implementation of the RPA on June 30,
2003. The Marcoux suit alleges various claims against the Union and
American relating to the RPA and the ratification vote on the RPA by
individual Union members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the Union of its duty of fair representation to
its members, violation by the Company of provisions of the Railway
Labor Act through improper coercion of flight attendants into voting
or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
Although the Company believes the case against it is without merit and
both the Company and the Union are vigorously defending the lawsuit, a
final adverse court decision invalidating the RPA and awarding
substantial money damages would have an adverse impact on the Company.
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Item 6. Exhibits
The following exhibits are included herein:
10 Trust Agreement Under Supplemental Executive Retirement Program
for Officers of American Airlines, Inc Participating in the $uper
$aver Plus Plan.
12 Computation of ratio of earnings to fixed charges for the three
and nine months ended September 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: October 21, 2005 BY: /s/ James A. Beer
James A. Beer
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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