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 March 31, 2006.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to .
Commission file number 1-8400.
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, (817) 963-1234
including area code
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer" and "large
accelerated filer" in Rule 12b-2 of the Exchange Act.
x Large Accelerated Filer Accelerated Filer Non-accelerated
Filer
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). 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 - 189,388,036 shares as of April 14, 2006.
INDEX
AMR CORPORATION
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three months ended March 31,
2006 and 2005
Condensed Consolidated Balance Sheets -- March 31, 2006 and
December 31, 2005
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 2006 and 2005
Notes to Condensed Consolidated Financial Statements -- March 31,
2006
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits
SIGNATURE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Ended March 31,
2006 2005
Revenues
Passenger - American Airlines $ 4,244 $ 3,841
- Regional Affiliates 569 451
Cargo 186 183
Other revenues 345 275
Total operating revenues 5,344 4,750
Expenses
Wages, salaries and benefits 1,729 1,644
Aircraft fuel 1,473 1,097
Other rentals and landing fees 316 300
Depreciation and amortization 287 290
Commissions, booking fees and
credit card expense 269 271
Maintenance, materials and repairs 236 235
Aircraft rentals 146 148
Food service 124 125
Other operating expenses 649 617
Total operating expenses 5,229 4,727
Operating Income 115 23
Other Income (Expense)
Interest income 53 36
Interest expense (261) (235)
Interest capitalized 7 23
Miscellaneous - net (6) (9)
(207) (185)
Loss Before Income Taxes (92) (162)
Income tax - -
Net Loss $ (92) $ (162)
Basic and Diluted Loss Per Share $ (0.49) $ (1.00)
The accompanying notes are an integral part of these financial statements.
-1-
AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
March 31, December 31,
2006 2005
Assets
Current Assets
Cash $ 144 $ 138
Short-term investments 4,124 3,676
Restricted cash and short-term
investments 510 510
Receivables, net 1,073 991
Inventories, net 494 515
Other current assets 475 334
Total current assets 6,820 6,164
Equipment and Property
Flight equipment, net 14,785 14,843
Other equipment and property, net 2,383 2,406
Purchase deposits for flight equipment 228 278
17,396 17,527
Equipment and Property Under Capital Leases
Flight equipment, net 856 916
Other equipment and property, net 110 103
966 1,019
Route acquisition costs and airport
operating and gate lease rights, net 1,188 1,194
Other assets 3,548 3,591
$ 29,918 $ 29,495
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 1,160 $ 1,078
Accrued liabilities 2,210 2,388
Air traffic liability 4,189 3,615
Current maturities of long-term debt 1,049 1,077
Current obligations under capital leases 136 162
Total current liabilities 8,744 8,320
Long-term debt, less current maturities 12,292 12,530
Obligations under capital leases, less
current obligations 873 926
Pension and postretirement benefits 5,126 4,998
Other liabilities, deferred gains and
deferred credits 4,155 4,199
Stockholders' Equity (Deficit)
Preferred stock - -
Common stock 195 195
Additional paid-in capital 2,140 2,258
Treasury stock (384) (779)
Accumulated other comprehensive loss (958) (979)
Accumulated deficit (2,265) (2,173)
(1,272) (1,478)
$ 29,918 $ 29,495
The accompanying notes are an integral part of these financial statements.
-2-
AMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Three Months Ended March 31,
2006 2005
Net Cash Provided by Operating Activities $ 789 $ 465
Cash Flow from Investing Activities:
Capital expenditures (104) (242)
Net increase in short-term investments (448) (103)
Net increase in restricted cash and short-
term investments - (5)
Proceeds from sale of equipment and
property 6 3
Other - 2
Net cash used by investing activities (546) (345)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (364) (235)
Proceeds from:
Issuance of long-term debt - 142
Reimbursement from construction reserve
account 48 -
Exercise of stock options 79 1
Net cash used by financing activities (237) (92)
Net increase in cash 6 28
Cash at beginning of period 138 120
Cash at end of period $ 144 $ 148
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. and Executive Airlines, Inc. (collectively, AMR
Eagle). The condensed consolidated financial statements also include
the accounts of variable interest entities for which the Company is
the primary beneficiary. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the AMR Annual Report on Form 10-K for the year ended December 31,
2005 (2005 Form 10-K).
Cargo fuel and security surcharge revenues of $32 million for the
three months ended March 31, 2005 have been reclassified from Other
revenues to Cargo revenues in the consolidated statement of
operations to conform to the current year presentation.
2. Under the 1998 Long Term Incentive Plan, as amended (the 1998
LTIP), officers and key employees of AMR and its subsidiaries may
be granted stock options, stock appreciation rights (SARs),
restricted stock, deferred stock, stock purchase rights, other
stock-based awards and/or performance-related awards, including
cash bonuses. The total number of common shares authorized for
distribution under the 1998 Long Term Incentive Plan is 23,700,000
shares (after giving effect to a one-for-one stock dividend in 1998
and the dividend of shares of The Sabre Group, Inc. via a spin-off
in 2000). The 1998 LTIP, the successor to the 1988 Long Term
Incentive Plan (1988 LTIP), will terminate no later than May 21,
2008.
In 2003, the Company established the 2003 Employee Stock Incentive
Plan (the 2003 Plan) to provide, among other things, equity awards
to employees as part of the 2003 restructuring process. Under the
2003 Plan, employees may be granted stock options, restricted stock
and deferred stock. The total number of shares authorized for
distribution under the 2003 Plan is 42,680,000 shares.
Options granted under the 1988 LTIP, 1998 LTIP and the 2003 Plan
are awarded with an exercise price equal to the fair market value
of the stock on date of grant, become exercisable in equal annual
installments over periods ranging from three to five years
following the date of grant and expire no later than ten years from
the date of grant. As of March 31, 2006, approximately 16.2
million options outstanding under the 1998 LTIP and the 2003 Plan
had not vested.
Prior to January 1, 2006, the Company accounted 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
was recognized for stock option grants if the exercise price of the
Company's stock option grants was at or above the fair market value
of the underlying stock on the date of grant. Effective January 1,
2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123(R), "Share-
Based Payment" (SFAS 123(R)) using the modified-prospective
transition method. Under this transition method, compensation cost
recognized in the first quarter of 2006 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value
used for pro forma disclosures and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Results for prior periods have not been
restated.
-4-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As a result of adopting SFAS 123(R), the Company's net loss for the
three months ended March 31, 2006, was $11 million higher than if
it had continued to account for share-based compensation under APB
25. Basic and diluted loss per share for the three months ended
March 31, 2006 would have been $(0.43) if the Company had not
adopted SFAS 123(R), compared to the reported basic and diluted
loss per share of $(0.49).
Prior to January 1, 2006, the Company had adopted the pro forma
disclosure features of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as
amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure." The following table illustrates the effect on net
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) for the three
months ended March 31, 2005:
Net loss, as reported $ (162)
Add: Stock-based employee compensation
expense included in reported net loss 6
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards (21)
Pro forma net loss $ (177)
Loss per share:
Basic and diluted - as reported $ (1.00)
Basic and diluted - pro forma $ (1.09)
On March 29, 2006, the AMR Board of Directors amended and restated
the 2003-2005 Performance Share Plan for Officers and Key
Employees, the 2004-2006 Performance Share Plan for Officers and
Key Employees, and the 2004 Agreements for Deferred Shares
(collectively, the Amended Plans). Before amendment, the plans
allowed for settlement only in cash. The three Amended Plans
permit settlement in a combination of cash and/or stock; however,
the amendments did not impact the fair value of the obligations
under the three Amended Plans. The Company anticipates using all
currently available shares under the 1998 LTIP and the 2003 Plan to
satisfy obligations under the three Amended Plans, but, based on
current estimates, a portion of the obligations will be settled in
cash. The Company will account for these obligations prospectively
as a combination of liability and equity grants. In accordance
with SFAS 123(R), the Company reclassified $187 million from
Accrued liabilities to Additional paid-in capital on March 29,
2006, representing the vested portions of the current estimated
fair value of obligations under all three of the Amended Plans that
are expected to be settled with stock.
3. As of March 31, 2006, the Company had commitments to acquire
one Boeing 777-200ER in the remainder of 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 $51 million in 2006
and an aggregate of approximately $2.8 billion in 2011 through
2016. The Company has the ability to access pre-arranged backstop
financing for the Boeing 777-200ER scheduled to be delivered in
2006.
4. Accumulated depreciation of owned equipment and property at March
31, 2006 and December 31, 2005 was $10.5 billion and $10.4 billion,
respectively. Accumulated amortization of equipment and property
under capital leases was $1.1 billion at both March 31, 2006 and
December 31, 2005.
-5-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. As discussed in Note 8 to the consolidated financial statements in
the 2005 Form 10-K, the Company has a valuation allowance against
the full amount of its net deferred tax asset. The Company's
deferred tax asset valuation allowance increased $25 million during
the three months ended March 31, 2006 to $1.4 billion as of March
31, 2006.
6. On March 27, 2006, American refinanced its bank credit facility.
In general, the new credit facility adjusted the amounts borrowed
under the senior secured revolving credit facility and the senior
secured term loan facility, reduced the overall interest rate on the
combined credit facility and favorably modified certain debt covenant
requirements.
The total amount of the credit facility is $773 million. The
credit facility consists of a $325 million senior secured revolving
credit facility and a $448 million senior secured term loan
facility (the Revolving Facility and the Term Loan Facility,
respectively, and collectively, the Credit Facility). The Term
Loan Facility matures on December 17, 2010 and amortizes quarterly
at a rate of $1 million. The Revolving Facility amortizes at a
rate of $10 million quarterly through December 17, 2007 and has a
final maturity of June 17, 2009.
Advances under either facility can be made, at American's election,
as LIBOR rate advances or base rate advances. Interest accrues at
the LIBOR rate or base rate, as applicable, plus, in either case,
the applicable margin. The applicable margin with respect to the
Revolving Facility can range from 2.50 percent to 4.00 percent per
annum in the case of LIBOR advances, and from 1.50 percent to 3.00
percent per annum in the case of base rate advances, depending upon
the senior secured debt rating of the Credit Facility. Based on
current ratings, the applicable margin with respect to the
Revolving Facility is 3.50 percent per annum, in the case of LIBOR
advances, and 2.50 percent per annum, in the case of base rate
advances. The applicable margin with respect to the Term Loan
Facility is 3.25 percent per annum in the case of LIBOR advances,
and 2.25 percent per annum in the case of base rate advances. As
of March 31, 2006, the Credit Facility had an effective interest
rate of 8.29 percent.
The Credit Facility continues to be secured by the same aircraft.
The Credit Facility continues to require periodic appraisals of the
current market value of the aircraft and requires that American
pledge more aircraft or cash collateral if the loan amount equals
more than 50% of the appraised value (after giving effect to
sublimits for specified categories of aircraft). The Credit
Facility also continues to be secured by all of American's existing
route authorities between the United States and Tokyo, Japan,
together with certain slots, gates and facilities that support the
operation of such routes. In addition, AMR's guarantee of the
Credit Facility continues to be secured by a pledge of all the
outstanding shares of common stock of American.
The Credit Facility contains a covenant (the Liquidity Covenant)
requiring American to maintain unrestricted cash, unencumbered
short term investments and amounts available for drawing under
committed revolving credit facilities which have a final maturity
of at least 12 months after the date of determination, of not less
than $1.25 billion. This requirement remains unchanged.
In addition, the Credit Facility continues to contain a covenant
(the EBITDAR Covenant) requiring AMR to maintain, for each period
of four consecutive fiscal quarters ending on the dates indicated
below, a minimum ratio of cash flow (defined as consolidated net
income, before dividends, 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 minimum required ratios for the four quarter
periods ending as of specified dates for both the previous credit
facility and the refinanced Credit Facility are as set forth below:
-6-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Four Quarter Period Ending Original Refinanced
Credit Credit
Facility Facility
Cash Flow Cash Flow
Coverage Coverage
Ratio Ratio
March 31, 2006 1.20:1.00 1.00:1.00
June 30, 2006 1.25:1.00 1.00:1.00
September 30, 2006 1.30:1.00 1.10:1.00
December 31, 2006 1.30:1.00 1.20:1.00
March 31, 2007 1.35:1.00 1.30:1.00
June 30, 2007 1.40:1.00 1.30:1.00
September 30, 2007 1.40:1.00 1.35:1.00
December 31, 2007 1.40:1.00 1.40:1.00
March 31, 2008 1.50:1.00 1.40:1.00
June 30, 2008 1.50:1.00 1.40:1.00
September 30, 2008 1.50:1.00 1.40:1.00
December 31, 2008 1.50:1.00 1.40:1.00
March 31, 2009 1.50:1.00 1.40:1.00
June 30, 2009 (and each
fiscal quarter thereafter) 1.50:1.00 1.50:1.00
AMR and American were in compliance with the Liquidity Covenant and
the EBITDAR Covenant as of March 31, 2006 and expect to be able to
continue to comply with these covenants. However, given the
historically high price of fuel and the volatility of fuel prices
and revenues, it is difficult to assess whether AMR and American
will, in fact, be able to continue to comply with the Liquidity
Covenant and, in particular, the EBITDAR Covenant, and there are no
assurances that AMR and American will be able to comply with these
covenants.
As of March 31, 2006, AMR had issued guarantees covering
approximately $1.7 billion of American's tax-exempt bond debt and
American had issued guarantees covering approximately $1.2 billion
of AMR's unsecured debt. In addition, as of March 31, 2006, AMR
and American had issued guarantees covering approximately $408
million of AMR Eagle's secured debt and AMR has issued guarantees
covering an additional $2.7 billion of AMR Eagle's secured debt.
The Company's 4.25 percent Senior Convertible Notes due 2023 have
become convertible into shares of AMR common stock. As provided in
the indenture under which the Notes were issued, the Notes became
convertible because the sale price of AMR's common stock for at
least 20 trading days in a period of 30 consecutive trading days
ending on the last trading day of the calendar quarter ended March
31, 2006, was greater than 120 percent of the conversion price per
share of AMR common stock. The Company's 4.50 percent Senior
Convertible Notes due 2024 have not become convertible.
-7-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. The following table provides the components of net periodic
benefit cost for the three months ended March 31, 2006 and 2005
(in millions):
Other
Postretirement
Pension Benefits Benefits
2006 2005 2006 2005
Components of net periodic
benefit cost
Service cost $ 99 $ 92 $ 18 $ 18
Interest cost 161 152 47 50
Expected return on assets (168) (165) (4) (3)
Amortization of:
Prior service cost 4 4 (2) (2)
Unrecognized net loss 20 13 1 -
Net periodic benefit cost $ 116 $ 96 $ 60 $ 63
The Company expects to contribute approximately $250 million to its
defined benefit pension plans in 2006. This estimated contribution
reflects the provisions of the Pension Funding Equity Act of 2004
which deferred (to 2006 and later plan years) a portion of the
minimum required contributions that would have been due for the
2004 and 2005 plan years. Of the $250 million the Company expects
to contribute to its defined benefit pension plans in 2006, the
Company contributed $36 million during the three months ended March
31, 2006 and contributed $84 million on April 14, 2006.
8. As a result of the events of September 11, 2001, the depressed
revenue environment, high fuel prices and the Company's restructuring
activities, the Company has recorded a number of charges during the
last few years. The following table summarizes the changes since
December 31, 2005 in the remaining accruals for these charges (in
millions):
Aircraft Facility
Charges Exit Costs Total
Remaining accrual
at December 31,2005 $ 152 $ 36 $ 188
Adjustments (8) (7) (15)
Payments (8) - (8)
Remaining accrual
at March 31, 2006 $ 136 $ 29 $ 165
Cash outlays related to the accruals for aircraft charges and
facility exit costs will occur through 2017 and 2018, respectively.
-8-
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 loss. For
the three months ended March 31, 2006 and 2005, comprehensive loss
was $71 million and $117 million, respectively. The difference
between net loss and comprehensive loss for the three months ended
March 31, 2006 and 2005 is due primarily to the accounting for the
Company's derivative financial instruments.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related
commodities. As required by Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company assesses, both at the inception of
each hedge and on an on-going basis, whether the derivatives that
are used in its hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items. The Company
discontinues hedge accounting prospectively if it determines that a
derivative is no longer expected to be highly effective as a hedge
or if it decides to discontinue the hedging relationship. As a
result of its quarterly effectiveness assessment, the Company
determined that certain of its derivatives settling during the
remainder of 2006 are no longer expected to be highly effective in
offsetting changes in forecasted jet fuel purchases. As a result,
effective on January 1, 2006, all subsequent changes in the fair
value of those particular hedge contracts are being recognized
directly in Miscellaneous-net rather than being deferred in
Accumulated other comprehensive loss. Such amount is not expected
to be material. Hedge accounting will continue to be applied to
derivatives used to hedge forecasted jet fuel purchases that are
expected to remain highly effective.
10. The following table sets forth the computations of basic and
diluted loss per share (in millions, except per share data):
Three Months Ended March 31,
2006 2005
Numerator:
Net loss - numerator for basic and
diluted loss per share $ (92) $ (162)
Denominator:
Denominator for basic and diluted loss
per share - weighted-average shares 186 161
Basic and diluted loss per share $ (0.49) $ (1.00)
For the three month periods ended March 31, 2006 and 2005,
approximately 72 million shares issuable upon conversion of the
Company's convertible notes or related to employee stock options,
performance share plans, 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," "may," "will," "should," 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: the materially weakened financial condition of the
Company, resulting from its significant losses in recent years; the
ability of the Company to generate additional revenues and
significantly reduce its costs; changes in economic and other
conditions beyond the Company's control, and the volatile results of
the Company's operations; the Company's substantial indebtedness and
other obligations; the ability of the Company to satisfy existing
financial or other covenants in certain of its credit agreements;
continued high fuel prices and further increases in the price of fuel,
and the availability of fuel; the fiercely competitive business
environment faced by the Company, and historically low fare levels;
competition with reorganized and reorganizing carriers; the Company's
reduced pricing power; the Company's need to raise additional funds
and its ability to do so on acceptable terms; changes in the Company's
business strategy; government regulation of the Company's business;
conflicts overseas or terrorist attacks; uncertainties with respect to
the Company's international operations; outbreaks of a disease (such
as SARS or avian flu) that affects travel behavior; uncertainties with
respect to the Company's relationships with unionized and other
employee work groups; increased insurance costs and potential
reductions of available insurance coverage; the Company's ability to
retain key management personnel; potential failures or disruptions of
the Company's computer, communications or other technology systems;
changes in the price of the Company's common stock; and the ability of
the Company to reach acceptable agreements with third parties.
Additional information concerning these and other factors is contained
in the Company's Securities and Exchange Commission filings, including
but not limited to the Company's 2005 Form 10-K (see in particular
Item 1A "Risk Factors" in the 2005 Form 10-K).
Overview
The Company incurred a $92 million net loss in the first quarter of
2006 compared to a net loss of $162 million in the same period last
year. The Company's first quarter 2006 results were impacted by the
continuing increase in fuel prices, offset by an improvement in unit
revenues (passenger revenue per available seat mile). The Company's
first quarter 2005 results included a benefit of $69 million related
to certain excise tax refunds - - $55 million of which was recorded in
aircraft fuel expense and $14 million in interest income.
Fuel price increases resulted in a year-over-year increase of 51.9
cents per gallon for the first quarter (including the benefit of the
6.9 cents per gallon impact of the fuel excise tax refund in 2005
discussed above). This price increase negatively impacted fuel expense
by $403 million (including the benefit of the $55 million fuel excise
tax refund in 2005 discussed above) during the quarter based on AMR
fuel consumption of 776 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 10.8 percent for the first
quarter due to a 1.8 point load factor increase and an 8.2 percent
increase in passenger yield (passenger revenue per passenger mile)
compared to the same period in 2005. Although load factor performance
and passenger 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 U.S. Bankruptcy
Code; other carriers that are better hedged against rising fuel costs
and able to better absorb the current high jet fuel prices; and, more
recently, fare simplification efforts by certain carriers. The Company
believes that its reduced pricing power will persist indefinitely and
possibly permanently.
The Company's ability to become profitable and its ability to continue
to fund its obligations on an ongoing basis will depend on a number of
factors, many of which are largely beyond the Company's control. Some
of the risk factors that affect the Company's business and financial
results are referred to under "Forward-Looking Information" above and
are discussed in the Risk Factors listed in Item 1A (on pages 11-16)
in the 2005 Form 10-K. As the Company seeks to improve its financial
condition, it must continue to take steps to generate additional
revenues and to significantly reduce its costs. Although the Company
has a number of initiatives underway to address its cost and revenue
challenges, the ultimate success of these initiatives is not known at
this time and cannot be assured. It will be very difficult, absent
continued restructuring of its operations, for the Company to continue
to fund its obligations on an ongoing basis, or to become profitable,
if the overall industry revenue environment does not continue to
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 2005 Form 10-K. As of the
date of this Form 10-Q, the Company believes it should have sufficient
liquidity to fund its operations for the foreseeable future, including
repayment of debt and capital leases, capital expenditures and other
contractual obligations. However, to maintain sufficient liquidity as
the Company continues to implement its restructuring and cost
reduction initiatives, and because the Company has significant debt,
lease and other obligations in the next several years, as well as
substantial pension funding obligations, the Company will 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 recent financial results,
substantial indebtedness, reduced credit ratings, high fuel prices,
the historically weak revenues and the financial difficulties being
experienced in the airline industry. The inability of the Company to
obtain additional funding on acceptable terms would have a material
adverse impact on the ability of the Company to sustain its operations
over the long-term.
The Company's substantial indebtedness and other obligations could
have important consequences. For example, they could: (i) limit the
Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes, or
adversely affect the terms on which such financing could be obtained;
(ii) require the Company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness and other
obligations, thereby reducing the funds available for other purposes;
(iii) make the Company more vulnerable to economic downturns; (iv)
limit 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.
-11-
Credit Facility Covenants
American has a credit facility (the Credit Facility) consisting of a
fully drawn $325 million senior secured revolving credit facility with
a final maturity on June 17, 2009 and a fully drawn $448 million term
loan facility with a final maturity on December 17, 2010. The Credit
Facility was recently refinanced as described in Note 6 to the
condensed consolidated financial statements. The Credit Facility
contains a covenant (the Liquidity Covenant) requiring American to
maintain, as defined, unrestricted cash, unencumbered short term
investments and amounts available for drawing under committed
revolving credit facilities of not less than $1.25 billion for each
quarterly period through the life of the Credit Facility. In addition,
the Credit Facility contains a covenant (the EBITDAR Covenant)
requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized
interest), income taxes, depreciation and amortization and rentals,
adjusted for certain gains or losses and non-cash items) to fixed
charges (comprising interest expense (less capitalized interest) and
rentals). The required ratio was 1.00 to 1.00 for the four quarter
period ending March 31, 2006 and will increase gradually to 1.50 to
1.00 for the four quarter period ending June 30, 2009 and for each
four quarter period ending on each fiscal quarter thereafter. AMR and
American were in compliance with the Liquidity Covenant and the
EBITDAR covenant as of March 31, 2006 and expect to be able to
continue to comply with these covenants. However, given the
historically high price of fuel and the volatility of fuel prices and
revenues, it is difficult to assess whether AMR and American will, in
fact, be able to continue to comply with the Liquidity Covenant and,
in particular, the EBITDAR Covenant, and there are no assurances that
AMR and American will be able to comply with these covenants. Failure
to comply with these covenants would result in a default under the
Credit Facility which - - if the Company did not take steps to obtain
a waiver of, or otherwise mitigate, the default - - could result in a
default under a significant amount of the Company's other debt and
lease obligations and otherwise adversely affect the Company.
Pension Funding Obligation
The Company expects to contribute approximately $250 million to its
defined benefit pension plans in 2006. The Company's estimates of its
defined benefit pension plan contributions reflect the provisions of
the Pension Funding Equity Act of 2004. Of the $250 million the
Company expects to contribute to its defined benefit pension plans in
2006, the Company contributed $36 million during the three months
ended March 31, 2006 and contributed $84 million on April 14, 2006.
Under Generally Accepted Accounting Principles, the Company's defined
benefit plans were underfunded as of December 31, 2005 by $3.2 billion
based on the Projected Benefit Obligation (PBO) and by $2.3 billion
based on the Accumulated Benefit Obligation (ABO) (refer to Note 10 to
the consolidated financial statements in the 2005 Form 10-K). The
Company's funded status at December 31, 2005 under the relevant ERISA
funding standard is similar to its funded status using the ABO
methodology. Due to uncertainties regarding significant assumptions
involved in estimating future required contributions to its defined
benefit pension plans, such as interest rate levels, the amount and
timing of asset returns, and, in particular, the impact of proposed
legislation currently pending the reconciliation process of the U.S.
Congress, the Company is not able to reasonably estimate its future
required contributions beyond 2006. However, absent significant
legislative relief or significant favorable changes in market
conditions, or both, the Company could be required to fund in 2007 a
majority of the underfunded balance under the relevant ERISA funding
standard. Even with significant legislative relief (including
proposed airline-specific relief), the Company's 2007 required minimum
contributions are expected to be higher than the Company's 2006
contributions.
Cash Flow Activity
At March 31, 2006, the Company had $4.3 billion in unrestricted cash
and short-term investments, an increase of $454 million from December
31, 2005. Net cash provided by operating activities in the three-
month period ended March 31, 2006 was $789 million, an increase of
$324 million over the same period in 2005 primarily due to an increase
in the Air traffic liability. The Company contributed $36 million to
its defined benefit pension plans in the first quarter of 2006
compared to $138 million during the first quarter of 2005.
Capital expenditures for the first three months of 2006 were $104
million and primarily included the acquisition of one Boeing 777-200ER
aircraft and the cost of improvements at New York's John F. Kennedy
airport (JFK). Substantially all of the Company's construction costs
at JFK will be reimbursed through a fund established from a previous
financing transaction.
-12-
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2006 and 2005
Revenues
The Company's revenues increased approximately $594 million, or 12.5
percent, to $5.3 billion in the first quarter of 2006 from the same
period last year. American's passenger revenues increased by 10.5
percent, or $403 million, on approximately flat capacity (available
seat mile) (ASM). American's passenger load factor increased 1.8
points to 77.2 percent while passenger yield increased by 8.2 percent
to 12.85 cents. This resulted in an increase in passenger revenue per
available seat mile (RASM) of 10.8 percent to 9.93 cents. Following is
additional information regarding American's domestic and international
RASM and capacity:
Three Months Ended March 31, 2006
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 10.09 13.8% 27.6 (2.2)%
International 9.62 5.2 15.1 3.7
DOT Latin America 10.46 10.9 7.7 (2.8)
DOT Atlantic 9.06 0.7 5.5 7.1
DOT Pacific 7.79 (3.6) 1.8 26.3
The Company's Regional Affiliates include two wholly owned
subsidiaries, American Eagle Airlines, Inc. and Executive Airlines,
Inc. (collectively, AMR Eagle), and two independent carriers with
which American has capacity purchase agreements, Trans States
Airlines, Inc. (Trans States) and Chautauqua Airlines, Inc.
(Chautauqua).
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $118 million, or 26.2 percent, to $569 million as a
result of increased capacity, load factors and passenger yield.
Regional Affiliates' traffic increased 20.8 percent to 2.3 billion
revenue passenger miles (RPMs), while capacity increased 11.7 percent
to 3.3 billion ASMs, resulting in a 5.2 point increase in the
passenger load factor to 69.9 percent. Passenger yield increased 4.4
percent to 24.97 cents.
Cargo revenues increased 1.6 percent, or $3 million, to $186 million
as a result of a $10 million increase in fuel surcharges offset by a
3.3 percent decrease in cargo ton miles.
Other revenues increased 25.5 percent, or $70 million, to $345 million
due in part to increased third-party maintenance contracts obtained by
the Company's maintenance and engineering group and increases in
certain passenger fees.
Operating Expenses
The Company's total operating expenses increased 10.6 percent, or $502
million, to $5.2 billion in the first quarter of 2006 compared to the
first quarter of 2005. American's mainline operating expenses per ASM
in the first quarter of 2006 increased 10.3 percent to 10.81 cents
compared to the first quarter of 2005. These increases are due
primarily to a 38.4 percent increase in American's price per gallon of
fuel in the first quarter of 2006 relative to the first quarter of
2005 (including the benefit of a $55 million fuel excise tax refund in
2005). 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 and/or disruptions
in the supply of fuel would further adversely affect the Company's
financial condition and results of operations.
-13-
(in millions) Three Months
Ended Change Percentage
Operating Expenses March 31, 2006 from 2005 Change
Wages, salaries and
benefits $ 1,729 $ 85 5.2%
Aircraft fuel 1,473 376 34.3 (a)
Other rentals and
landing fees 316 16 5.3
Depreciation and
amortization 287 (3) (1.0)
Commissions, booking fees
and credit card expense 269 (2) (0.7)
Maintenance, materials
and repairs 236 1 0.4
Aircraft rentals 146 (2) (1.4)
Food service 124 (1) (0.8)
Other operating expenses 649 32 5.2
Total operating expenses $ 5,229 $ 502 10.6%
(a) Aircraft fuel expense increased primarily due to a 38.4 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 3.3 percent decrease in American's
fuel consumption.
Other Income (Expense)
Interest expense increased $26 million due primarily to an increase in
variable interest rates.
Income Tax Benefit
The Company did not record a net tax benefit associated with its first
quarter 2006 and 2005 losses due to the Company providing a valuation
allowance, as discussed in Note 5 to the condensed consolidated
financial statements.
-14-
Operating Statistics
The following table provides statistical information for American and
Regional Affiliates for the three months ended March 31, 2006 and
2005.
Three Months Ended
March 31,
2006 2005
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 33,015 32,327
Available seat miles (millions) 42,752 42,854
Cargo ton miles (millions) 521 539
Passenger load factor 77.2% 75.4%
Passenger revenue yield per passenger
mile (cents) 12.85 11.88
Passenger revenue per available seat
mile (cents) 9.93 8.96
Cargo revenue yield per ton mile (cents) 35.65 33.95
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 10.81 9.80
Fuel consumption (gallons, in millions) 705 729
Fuel price per gallon (cents) (**) 189.0 136.6
Operating aircraft at period-end 700 727
Regional Affiliates
Revenue passenger miles (millions) 2,277 1,885
Available seat miles (millions) 3,257 2,916
Passenger load factor 69.9% 64.7%
(*) Excludes $654 million and $583 million of expense incurred
related to Regional Affiliates in 2006 and 2005, respectively.
(**) Includes the benefit of a $55 million fuel excise tax refund in
2005.
Operating aircraft at March 31, 2006, 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 Plus 32
McDonnell Douglas MD-80 327 Total 304
Total 700
The average aircraft age for American's and AMR Eagle's aircraft is
13.2 years and 6.5 years, respectively.
Of the operating aircraft listed above, seven operating leased Saab
340B Plus aircraft were in temporary storage as of March 31, 2006. In
addition, the Company decided in the first quarter to temporarily
store 27 MD-80 aircraft subsequent to March 31, 2006. Consistent with
the previously announced 2006 capacity plan, these aircraft are not
required for current operations due to efficiency initiatives
implemented by the Company. As of the date of this Form 10-Q, 15 of
the 27 aircraft had been temporarily stored.
-15-
Owned and leased aircraft not operated by the Company at March 31,
2006, included:
American Airlines Aircraft AMR Eagle Aircraft
Boeing 777-200 Extended Range 1 Embraer 145 10
Boeing 767-200 2 Saab 340B/340B Plus 45
Boeing 767-200 Extended Range 2 Total 55
Fokker 100 4
McDonnell Douglas MD-80 27
Total 36
American leased its Boeing 777-200ER not operated by the Company to
The Boeing Company for a period of up to twelve months beginning in
December 2005.
AMR Eagle leased its 10 owned Embraer 145s that are not operated by
AMR Eagle to Trans States Airlines, Inc.
Outlook
The Company currently expects second quarter 2006 mainline unit costs
to increase more than seven percent year over year and full year 2006
mainline unit costs to increase approximately five percent year over
year.
Capacity for American's mainline jet operations is expected to decline
about one percent in the second quarter of 2006 compared to the second
quarter of 2005 and also in the full year 2006 compared to 2005.
-16-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the Company's 2005 Form 10-K. The
change in market risk for aircraft fuel is discussed below for
informational purposes.
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 March 31, 2006 cost per gallon of fuel. Based on
projected 2006 and 2007 fuel usage through March 31, 2007, such an
increase would result in an increase to aircraft fuel expense of
approximately $549 million in the twelve months ended March 31, 2007,
inclusive of the impact of effective fuel hedge instruments
outstanding at March 31, 2006, 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 2006 fuel usage, such
an increase would have resulted in an increase to aircraft fuel
expense of approximately $528 million in the twelve months ended
December 31, 2006, inclusive of the impact of fuel hedge instruments
outstanding at December 31, 2005. The change in market risk is
primarily due to the increase in fuel prices.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related commodities.
As required by Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the
Company assesses, both at the inception of each hedge and on an on-
going basis, whether the derivatives that are used in its hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items. The Company discontinues hedge accounting
prospectively if it determines that a derivative is no longer expected
to be highly effective as a hedge or if it decides to discontinue the
hedging relationship. As a result of its quarterly effectiveness
assessment, the Company determined that certain of its derivatives
settling during the remainder of 2006 are no longer expected to be
highly effective in offsetting changes in forecasted jet fuel
purchases. As a result, effective on January 1, 2006, all subsequent
changes in the fair value of those particular hedge contracts are
being recognized directly in Miscellaneous-net rather than being
deferred in Accumulated other comprehensive loss. Such amount is not
expected to be material. 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 March 31, 2006, the Company had effective hedges, including
option contracts and collars, covering approximately 15 percent of its
estimated remaining 2006 fuel requirements and an insignificant amount
of its estimated fuel requirements thereafter. The consumption hedged
for the remainder of 2006 is capped at an average price of
approximately $58 per barrel of crude oil. A deterioration of the
Company's financial position could negatively affect the Company's
ability to hedge fuel in the future.
-17-
Item 4. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
Exchange Act. This term refers to the controls and procedures of a
company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Company's disclosure controls and procedures as
of March 31, 2006. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of March 31,
2006. During the quarter ending on March 31, 2006, there was no change
in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-18-
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1999, a class action lawsuit was filed, and in
November 1999 an amended complaint was filed, against AMR, American,
AMR Eagle, Airlines Reporting Corporation, and the Sabre Group
Holdings, Inc. in the United States District Court for the Central
District of California, Western Division (Westways World Travel, Inc.
v. AMR Corp., et al.). The lawsuit alleges that requiring travel
agencies to pay debit memos to American for violations of American's
fare rules (by customers of the agencies): (1) breaches the Agent
Reporting Agreement between American and AMR Eagle and the plaintiffs;
(2) constitutes unjust enrichment; and (3) violates the Racketeer
Influenced and Corrupt Organizations Act of 1970 (RICO). On July 9,
2003, the court certified a class that included all travel agencies
who have been or will be required to pay money to American for debit
memos for fare rules violations from July 26, 1995 to the present.
The plaintiffs sought to enjoin American from enforcing the pricing
rules in question and to recover the amounts paid for debit memos,
plus treble damages, attorneys' fees and costs. On February 24, 2005,
the court decertified the class. The claims against Airlines
Reporting Corporation have been dismissed, and in September 2005, the
Court granted Summary Judgment in favor of the Company and all other
defendants. Plaintiffs have filed an appeal to the United States
Court of Appeals for the Ninth Circuit. Although the Company believes
that the litigation is without merit, a final adverse court decision
could impose restrictions on the Company's relationships with travel
agencies, which could have a material adverse impact on the Company.
Between April 3, 2003 and June 5, 2003, three lawsuits were filed by
travel agents some of whom opted out of a prior class action (now
dismissed) to pursue their claims individually against American, other
airline defendants, and in one case against certain airline defendants
and Orbitz LLC. (Tam Travel et. al., v. Delta Air Lines et. al., in
the United States District Court for the Northern District of
California - San Francisco (51 individual agencies), Paula Fausky
d/b/a Timeless Travel v. American Airlines, et. al, in the United
States District Court for the Northern District of Ohio Eastern
Division (29 agencies) and Swope Travel et al. v. Orbitz et. al. in
the United States District Court for the Eastern District of Texas,
Beaumont Division (6 agencies)). Collectively, these lawsuits seek
damages and injunctive relief alleging that the certain airline
defendants and Orbitz LLC: (i) conspired to prevent travel agents from
acting as effective competitors in the distribution of airline tickets
to passengers in violation of Section 1 of the Sherman Act; (ii)
conspired to monopolize the distribution of common carrier air travel
between airports in the United States in violation of Section 2 of the
Sherman Act; and that (iii) between 1995 and the present, the airline
defendants conspired to reduce commissions paid to U.S.-based travel
agents in violation of Section 1 of the Sherman Act. These cases have
been consolidated in the United States District Court for the Northern
District of Ohio, Eastern Division. American is vigorously defending
these lawsuits. A final adverse court decision awarding substantial
money damages or placing restrictions on the Company's distribution
practices would have a material adverse impact on the Company.
On August 19, 2002, a class action lawsuit seeking monetary damages
was filed, and on May 7, 2003, an amended complaint was filed in the
United States District Court for the Southern District of New York
(Power Travel International, Inc. v. American Airlines, Inc., et al.)
against American, Continental Airlines, Delta Air Lines, United
Airlines, and Northwest Airlines, alleging that American and the other
defendants breached their contracts with the agency and were unjustly
enriched when these carriers at various times reduced their base
commissions to zero. The as yet uncertified class includes all travel
agencies accredited by the Airlines Reporting Corporation "whose base
commissions on airline tickets were unilaterally reduced to zero by"
the defendants. The claims against Delta Air Lines have been
dismissed, and the case is stayed as to United Airlines and Northwest
Airlines since they filed for bankruptcy. 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, 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 plaintiffs in the Kimmell
and Rosenberg cases filed amended complaints on June 24, 2005. The
Company is vigorously defending these suits and believes the suits are
without merit. However, a final adverse court decision awarding
substantial money damages would have a material adverse impact on the
Company.
American is defending two 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. In Harrington v. Delta Air Lines, Inc., et al., (filed
November 24, 2004 in the United States District Court for the District
of Massachusetts), the plaintiffs 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 against American
and numerous other airline defendants. Additionally, the same
attorneys representing the Harrington plaintiffs have filed a qui tam
suit entitled Teitelbaum v. Alaska Airlines, et al. American was
notified it is a defendant in this case in December 2005. This case,
also pending in the United States District Court for the District of
Massachusetts, asserts essentially the same claims (but also asserts
that the United States has been damaged) and requests essentially the
same relief on behalf of the United States. 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 a material adverse impact on the Company.
On March 11, 2004, a patent infringement lawsuit was filed against
AMR, American, AMR Eagle Holding Corporation, and American Eagle in
the United States District Court for the Eastern District of Texas
(IAP Intermodal, L.L.C. v. AMR Corp., et al.). The case was
consolidated with eight similar lawsuits filed against a number of
other unaffiliated airlines, including Continental, Northwest, British
Airways, Air France, Pinnacle Airlines, Korean Air and Singapore
Airlines (as well as various regional affiliates of the foregoing).
The plaintiff alleges that the airline defendants infringe three
patents, each of which relates to a system of scheduling vehicles
based on freight and passenger transportation requests received from
remote computer terminals. The plaintiff is seeking past and future
royalties of over $30 billion dollars, injunctive relief, costs and
attorneys' fees. On September 7, 2005, the court issued a memorandum
opinion that interpreted disputed terms in the patents. The plaintiff
dismissed its claims without prejudice to its right to appeal the
September 7, 2005 opinion, and the plaintiff is pursuing such an
appeal. Although the Company believes that the plaintiff's claims are
without merit and is vigorously defending the lawsuit, a final adverse
court decision awarding substantial money damages or placing material
restrictions on existing scheduling practices would have a material
adverse impact on the Company.
-20-
On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
and the Association of Professional Flight Attendants (APFA), the
Union which represents the Company's flight attendants (Ann M.
Marcoux, et al., v. American Airlines Inc., et al. in the United
States District Court for the Eastern District of New York). While a
class has not yet been certified, the lawsuit seeks on behalf of all
of American's flight attendants or various subclasses to set aside,
and to obtain damages allegedly resulting from, the April 2003
Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor
agreements the Company successfully reached with its unions in order
to avoid filing for bankruptcy in 2003. In a related case (Sherry
Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States
District Court for the Eastern District of New York), the court denied
a preliminary injunction against implementation of the RPA on June 30,
2003. The Marcoux suit alleges various claims against the Union and
American relating to the RPA and the ratification vote on the RPA by
individual Union members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the Union of its duty of fair representation to
its members, violation by the Company of provisions of the Railway
Labor Act (RLA) through improper coercion of flight attendants into
voting or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). On
March 28, 2006, the district court dismissed all of various state law
claims against the Company, all but one of the LMRDA claims against
the APFA , and the claimed violations of RICO. This leaves the
claimed violations of the RLA and the duty of fair representation
against the Company and the APFA (as well as one LMRDA claim and one
claim against the APFA of a breach of the union constitution).
Although the Company believes the case against it is without merit and
both the Company and the Union are vigorously defending the lawsuit, a
final adverse court decision invalidating the RPA and awarding
substantial money damages would have a material adverse impact on the
Company.
On February 14, 2006, the Antitrust Division of the United States
Department of Justice (the "DOJ") served the Company with a grand jury
subpoena as part of an ongoing investigation into possible criminal
violations of the antitrust laws by certain domestic and foreign air
cargo carriers. At this time, the Company does not believe it is a
target of the DOJ investigation. The New Zealand Commerce Commission
notified the Company on February 17, 2006 that it is also
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On
February 22, 2006, the Company received a letter from the Swiss
Competition Commission informing the Company that it too is
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges.
The Company intends to cooperate fully with these investigations. In
the event that these investigations uncover violations of the U.S.
antitrust laws or the competition laws of some other jurisdiction,
such findings and related legal proceedings could have a material
adverse impact on the Company.
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Approximately 25 purported class action lawsuits (Animal Land, Inc. v.
Air Canada et al. filed in the United States District Court for the
Eastern District of New York on February 17, 2006; Joan Adams v.
British Airways et al. filed in the United States District Court for
the Eastern District of New York on February 22, 2006; Rock
International Transport v. Air Canada et al. filed in the United
States District Court for the Eastern District of New York on February
24, 2006; Helen's Wooden Crafting Co. v. Air Canada et al. filed in
the United States District Court for the Eastern District of New York
on February 24, 2006; ABM Int'l, Inc. v. Ace Aviation Holdings, Inc.
et al. filed in the United States District Court for the Eastern
District of New York on February 28, 2006; Blumex USA, Inc. v. Air
Canada et al. filed in the United States District Court for the
Northern District of Illinois on March 1, 2006; Mamlaka Video v. Air
Canada et al. filed in the United States District Court for the
Eastern District of New York on March 3, 2006; Spraying Systems Co. v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the Eastern District of New York on March 3, 2006; Mitchell
Spitz v. Air France-KLM et al. filed in the United States District
Court for the Eastern District of New York on March 6, 2006; JCK
Industries, Inc. v. British Airways, PLC et al. filed in the United
States District Court for the Eastern District of New York on March 6,
2006; Marc Seligman v. Air Canada et al. filed in the United States
District Court for the Southern District of Florida on March 6, 2006;
CID Marketing and Promotion Inc. v. AMR Corporation et al. filed in
the United States District Court for the Eastern District of
Pennsylvania on March 7, 2006; Lynn Culver v. Air Canada et al. filed
in the United States District Court for the District of Columbia on
March 8, 2006; JSL Carpet Corp. v. ACE Aviation Holdings, Inc. et al.
filed in the United States District Court for the Eastern District of
New York on March 10, 2006; Y. Hata & Co, Ltd. v. Air France-KLM et
al. filed in the United States District Court for the Northern
District of California on March 13, 2006; FTS International Express v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the District of Columbia on March 15, 2006; Thule, Inc. v.
Air Canada et al. filed in the United States District Court for the
Eastern District of New York on March 28, 2006; Rosetti Handbags and
Accessories, Ltd. v. Air France ADS et al. filed in the United States
District Court for the Eastern District of New York on March 31, 2006;
W.I.T. Entertainment Inc. v. AMR Corporation et al. filed in the
United States District Court for the Southern District of Florida on
April 3, 2006; Jeff Rapps v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
April 7, 2006; Funke Design Build, Inc. v. AMR Corporation et al.
filed in the United States District Court for the Northern District of
Illinois on April 7, 2006; Sul-American Export Inc. v. Air France ADS
et al. filed in the United States District Court for the Eastern
District of New York on April 7, 2006; La Regale Ltd. v. British
Airways PLC et al. filed in the Untied States District Court for the
Eastern District of New York on April 12, 2006; J.A. Transport Inc. v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the District of Columbia on April 12, 2006; and Caribe Air
Cargo, Inc. v. ACE Aviation Holdings, Inc. et al. filed in the United
States District Court for the District of Columbia on April 13, 2006)
have been filed against the Company and certain foreign and domestic
air carriers alleging that the defendants violated U.S. antitrust laws
by illegally conspiring to set prices and surcharges on cargo
shipments. These cases are expected to be consolidated in an as yet
undetermined court together with approximately 33 other class action
lawsuits in which the Company has not been named as a defendant.
Plaintiffs are seeking trebled money damages and injunctive relief.
American will vigorously defend these lawsuits; however, any adverse
judgment could have a material adverse impact on the Company.
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Item 5. Other Information
American has announced a pay plan, funded at 1.5 percent of base
salaries, for all American employees on U.S. payroll, to be effective
May 1, 2006. On April 19, 2006, the Board approved 1.5 percent
increases in the base salaries for officers (including the executive
officers of AMR and American), to be effective May 1, 2006.
On April 19, 2006, the Board of Directors of the Company revised its
Governance Policies (the "Policies"), so that beginning with the
election of directors at the Corporation's annual meeting in 2007, any
nominee for director who receives a greater number of votes "WITHHELD"
than votes "FOR" (a "Majority Withheld Vote") in an uncontested
election will be required to promptly tender his or her resignation to
the Nominating / Corporate Governance Committee of the Board. The
Nominating / Corporate Governance Committee will consider the best
interests of the Company and its stockholders and recommend to a
committee of independent directors of the Board whether to accept the
tendered resignation or to take some other action. This committee of
the Board, composed only of those directors who did not receive a
Majority Withheld Vote, will consider the Nominating / Corporate
Governance Committee's recommendation and take action within 90 days
following the uncontested election. Thereafter, the committee's
decision and an explanation of how the decision was reached will be
publicly disclosed. If one or more members of the Nominating /
Corporate Governance Committee receive a Majority Withheld Vote, then
the Board will create a special committee of independent directors who
did not receive a Majority Withheld Vote to consider the resignation
offers of all directors receiving a Majority Withheld Vote and
determine whether to accept the tendered resignation(s) or to take
some other action and promptly disclose their decision. Any director
who receives a Majority Withheld Vote and tenders his or her
resignation will not participate in the committee determination,
unless the only directors who did not receive a Majority Withheld Vote
in the same election constitute three or fewer independent directors.
The foregoing is a summary of the director resignation procedure. The
entire procedure is set forth in Section 18 of the Policies, which is
available on the Company's Investor Relations website located at
www.aa.com/investorrelations by clicking on the "Corporate Governance"
link. The Policies are also available in print to any stockholder who
so requests. Such a request should be sent to the Corporate Secretary
at the following address:
AMR Corporation
Corporate Secretary
P.O. Box 619696, MD 5675
Dallas/Fort Worth International Airport, Texas 75261-9616
Item 6. Exhibits
The following exhibits are included herein:
10 Amended and Restated Credit Agreement Dated March 27, 2006
12 Computation of ratio of earnings to fixed charges for the three
months ended March 31, 2006 and 2005.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a- 14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a- 14(a).
32 Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code).
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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: April 20, 2006 BY: /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
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