1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998.
[ ]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. 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 - 182,342,724 as of August 11, 1998
2
INDEX
AMR CORPORATION
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three and six months ended
June 30, 1998 and 1997
Condensed Consolidated Balance Sheet -- June 30, 1998 and December
31, 1997
Condensed Consolidated Statement of Cash Flows -- Six months ended
June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements -- June 30,
1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues
Airline Group:
Passenger - American
Airlines, Inc $3,789 $3,641 $7,367 $7,031
-American Eagle 289 256 545 504
Cargo 169 174 332 338
Other 244 221 470 425
4,491 4,292 8,714 8,298
The SABRE Group 577 449 1,131 889
Management Services Group 148 151 308 312
Less: Intergroup revenues (204) (180) (404) (361)
Total operating revenues 5,012 4,712 9,749 9,138
Expenses
Wages, salaries and
benefits 1,693 1,556 3,317 3,096
Aircraft fuel 404 471 819 991
Commissions to agents 322 329 623 643
Depreciation and amortization 324 310 647 622
Maintenance, materials and
repairs 226 219 458 414
Other rentals and
landing fees 228 227 446 445
Food service 175 173 339 334
Aircraft rentals 143 143 285 287
Other operating expenses 770 694 1,531 1,367
Total operating expenses 4,285 4,122 8,465 8,199
Operating Income 727 590 1,284 939
Other Income (Expense)
Interest income 32 31 66 58
Interest expense (92) (102) (188) (207)
Interest capitalized 25 3 43 5
Minority interest (12) (10) (25) (22)
Miscellaneous - net (4) (8) (19) (12)
(51) (86) (123) (178)
Earnings Before Income Taxes 676 504 1,161 761
Income tax provision 267 202 462 307
Net Earnings $ 409 $ 302 $ 699 $ 454
Earnings Per Common Share
Basic $ 2.38 $ 1.66 $ 4.06 $ 2.50
Diluted $ 2.30 $ 1.63 $ 3.91 $ 2.45
Number of Shares Used in
Computation
Basic 172 182 172 182
Diluted 178 185 179 185
The accompanying notes are an integral part of these financial
statements.
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AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited) (In millions)
June 30, December 31,
1998 1997
(Note 1)
Assets
Current Assets
Cash $ 108 $ 64
Short-term investments 2,124 2,370
Receivables, net 1,753 1,370
Inventories, net 651 636
Deferred income taxes 406 406
Other current assets 219 225
Total current assets 5,261 5,071
Equipment and Property
Flight equipment, net 8,588 8,543
Other equipment and property, net 1,956 1,874
Purchase deposits for flight equipment 1,164 754
11,708 11,171
Equipment and Property Under Capital Leases
Flight equipment, net 1,844 1,923
Other equipment and property, net 165 163
2,009 2,086
Route acquisition costs, net 930 945
Other assets, net 2,037 1,642
$ 21,945 $ 20,915
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,104 $ 1,021
Accrued liabilities 1,978 2,020
Air traffic liability 2,279 2,044
Current maturities of long-term debt 379 397
Current obligations under capital leases 135 135
Total current liabilities 5,875 5,617
Long-term debt, less current maturities 2,327 2,260
Obligations under capital leases, less
current obligations 1,518 1,629
Deferred income taxes 1,264 1,105
Other liabilities, deferred gains, deferred
credits and postretirement benefits 4,320 4,088
Stockholders' Equity
Common stock 182 182
Additional paid-in capital 3,073 3,104
Treasury stock (699) (485)
Retained earnings 4,085 3,415
6,641 6,216
$ 21,945 $ 20,915
The accompanying notes are an integral part of these financial
statements.
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AMR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (In millions)
Six months Ended June 30,
1998 1997
Net Cash Provided by Operating Activities $1,318 $1,059
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (1,224) (461)
Net decrease (increase) in short-term
investments 246 (434)
Investment in joint venture (140) -
Proceeds from sale of equipment and
property 179 177
Net cash used for investing activities (939) (718)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (138) (261)
Issuance of long-term debt 94 -
Repurchases of common stock (366) (158)
Proceeds from exercise of stock options 75 32
Net cash used for financing activities (335) (387)
Net increase (decrease) in cash 44 (46)
Cash at beginning of period 64 68
Cash at end of period $ 108 $ 22
Cash Payments For:
Interest $ 158 $ 214
Income taxes 273 231
The accompanying notes are an integral part of these financial
statements.
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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 balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the AMR Corporation (AMR or the
Company) Annual Report on Form 10-K/A No. 1 for the year ended
December 31, 1997.
Certain amounts from 1997 have been reclassified to conform with
the 1998 presentation.
2.Accumulated depreciation of owned equipment and property at June
30, 1998 and December 31, 1997, was $7.1 billion and $6.7 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at June 30, 1998 and December 31, 1997, was
$1.2 billion.
3.The Miami International Airport Authority is currently remediating
various environmental conditions at Miami International Airport
(Airport) and funding the remediation costs through landing fee
revenues. Future costs of the remediation effort may be borne by
carriers operating at the Airport, including American Airlines,
Inc. (American), through increased landing fees and/or other
charges. The ultimate resolution of this matter is not expected to
have a significant impact on the financial position or liquidity of
AMR.
4.During 1998, the Company exercised its purchase rights to acquire
25 Boeing 737-800s and 23 Boeing 777-200IGWs. As of August 14,
1998, the Company had commitments to acquire the following
aircraft: 100 Boeing 737-800s, 34 Boeing 777-200IGWs, 11 Boeing
757-200s, four Boeing 767-300ERs, 32 Embraer EMB-145s and 25
Bombardier CRJ-700s. Deliveries of these aircraft will occur
during the remainder of 1998 and will continue through 2004.
Payments for these aircraft will approximate $850 million during
the remainder of 1998, $2.6 billion in 1999, $1.9 billion in 2000
and an aggregate of approximately $2.3 billion in 2001 through
2004. The exercise of these aircraft purchase rights will allow
the Company to continue the retirement of its Boeing 727-200 and
McDonnell Douglas DC-10 fleets, which the Company anticipates to be
complete by 2004, as well as to provide for modest growth.
5.In March 1998, the Company exercised its option to sell seven MD-11
aircraft to Federal Express Corporation (FedEx), thereby committing
to sell its entire MD-11 fleet to FedEx. Eight aircraft have been
delivered as of June 30, 1998. The remaining 11 aircraft will be
delivered to FedEx between 1999 and 2003.
6.In April 1998, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend, subject to
shareholder approval of an amendment to the Company's Certificate
of Incorporation to increase the number of authorized common
shares. On May 20, 1998, the Company's shareholders approved the
amendment to the Company's Certificate of Incorporation thereby
increasing the total number of authorized shares of all classes of
stock to 770 million, of which 20 million are shares of preferred
stock (without par value) and 750 million are shares of common
stock ($1 par value). The stock split was effective on June 9,
1998 for shareholders of record on May 26, 1998. All share and
earnings per share amounts have been restated to give effect to the
stock split.
7.In July 1998, the Company's board of directors authorized
management to repurchase up to an additional $500 million of the
Company's outstanding common stock.
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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8.In January 1998, The SABRE Group completed the execution of a 25-
year information technology services agreement with US Airways.
Under the terms of the agreement, The SABRE Group will provide
substantially all of US Airways' information technology services.
In connection with the agreement, The SABRE Group purchased
substantially all of US Airways' information technology assets for
approximately $47 million and granted US Airways two tranches of
stock options, each to acquire 3 million shares of The SABRE
Group's Class A Common Stock (SABRE Common Stock). During certain
periods, US Airways may select an alternative vehicle of
substantially equivalent value in place of receiving stock. During
the first quarter of 1998, a long-term liability and a related
deferred asset equal to the number of options granted multiplied by
the difference between the exercise price of the options and the
market price of SABRE Common Stock were recorded. The asset and
liability are adjusted based on changes in the market price of
SABRE Common Stock. The deferred asset is being amortized over the
eleven-year non-cancelable portion of the agreement.
9.As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or
stockholders' equity. SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities and changes in
minimum pension liabilities, which prior to adoption were reported
separately in stockholders' equity, to be included in other
comprehensive income. During the second quarter of 1998 and 1997,
total comprehensive income was approximately $409 million and $303
million, respectively. Total comprehensive income for the six
months ended June 30, 1998 and 1997 was approximately $699 million
and $454 million, respectively.
Effective January 1, 1998, the Company adopted early the provisions
of Statement of Position No. 98-5, "Reporting on the Costs of Start-
Up Activities," (SOP 98-5). SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The
adoption of SOP 98-5 did not have a material impact on the
Company's financial position or results of operations for the six
months ended June 30, 1998.
10. The following table sets forth the computations of basic and
diluted earnings per share (in millions, except per share data):
Three Months Six Months Ended
Ended
June 30, June 30,
1998 1997 1998 1997
Numerator:
Net Earnings - Numerator for
basic and diluted earnings
per share $ 409 $ 302 $ 699 $ 454
Denominator:
Denominator for basic
earnings per share -
weighted average shares 172 182 172 182
Effect of dilutive securities:
Employee options and shares 12 14 14 10
Assumed treasury shares
purchased (6) (11) (7) (7)
Dilutive potential common shares 6 3 7 3
Denominator for diluted
earnings per share 178 185 179 185
Basic earnings per share $ 2.38 $ 1.66 $ 4.06 $ 2.50
Diluted earnings per share $ 2.30 $ 1.63 $ 3.91 $ 2.45
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1998 and 1997
Summary AMR recorded net earnings for the three months ended June 30,
1998 of $409 million, or $2.30 per common share diluted. This
compares to net earnings of $302 million, or $1.63 per common share
diluted for the second quarter of 1997. AMR's operating income of
$727 million increased 23.2 percent, or $137 million, compared to
$590 million for the same period in 1997.
AMR's operations fall within three major lines of business - the
Airline Group, which includes American Airlines, Inc.'s Passenger and
Cargo Divisions and AMR Eagle Holding Corporation; The SABRE Group,
which includes AMR's information technology and consulting
businesses; and the Management Services Group, which includes AMR's
airline management, aviation services, and investment service
activities.
The following sections provide a discussion of AMR's results by
reporting segment, which are described in AMR's Annual Report on Form
10-K/A No. 1 for the year ended December 31, 1997. The minority
interest in the earnings of consolidated subsidiaries of $12 million
and $25 million for the three and six months ended June 30, 1998 and
$10 million and $22 million for the three and six months ended June
30, 1997, has not been allocated to a reporting segment.
AIRLINE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Three Months Ended
June 30,
1998 1997
Revenues
Passenger - American Airlines, Inc. $3,789 $3,641
- American Eagle 289 256
Cargo 169 174
Other 244 221
4,491 4,292
Expenses
Wages, salaries and benefits 1,449 1,345
Aircraft fuel 404 471
Commissions to agents 322 329
Depreciation and amortization 258 260
Maintenance, materials and repairs 223 215
Other operating expenses 1,229 1,192
Total operating expenses 3,885 3,812
Operating Income 606 480
Other Expense (40) (77)
Earnings Before Income Taxes $ 566 $ 403
Average number of equivalent employees 91,500 90,500
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RESULTS OF OPERATIONS (continued)
OPERATING STATISTICS
Three Months Ended
June 30,
1998 1997
American Airlines Jet Operations
Revenue passenger miles (millions) 27,923 27,318
Available seat miles (millions) 38,963 38,738
Cargo ton miles (millions) 509 521
Passenger load factor 71.7% 70.5%
Breakeven load factor 58.9% 60.0%
Passenger revenue yield per
passenger miles (cents) 13.57 13.33
Passenger revenue per available
seat miles (cents) 9.72 9.40
Cargo revenue yield per ton mile (cents) 32.75 32.88
Operating expenses per available
seat mile (cents) 9.25 9.15
Fuel consumption (gallons, in millions) 711 697
Fuel price per gallon (cents) 55.0 65.3
Fuel price per gallon, excluding
fuel taxes (cents) 50.3 60.4
Operating aircraft at period-end 641 644
American Eagle
Revenue passenger miles (millions) 708 652
Available seat miles (millions) 1,099 1,047
Passenger load factor 64.5% 62.3%
Operating aircraft at period-end 206 203
Operating aircraft at June 30, 1998, included:
American Airlines American Eagle Aircraft:
Aircraft:
Airbus A300-600R 35 ATR 42 40
Boeing 727-200 78 Embraer 145 8
Boeing 757-200 90 Super ATR 43
Boeing 767-200 8 Saab 340B 90
Boeing 767-200 Extended 22 Saab 340B Plus 25
Range
Boeing 767-300 Extended 44 Total 206
Range
Fokker 100 75
McDonnell Douglas DC-10-10 13
McDonnell Douglas DC-10-30 5
McDonnell Douglas MD-11 11
McDonnell Douglas MD-80 260
Total 641
87.8% of American's aircraft fleet is Stage III, a classification of
aircraft meeting noise standards as promulgated by the Federal
Aviation Administration.
Average aircraft age is 10.5 years for American's aircraft and 5.45
years for American Eagle aircraft.
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RESULTS OF OPERATIONS (continued)
The Airline Group's revenues increased $199 million, or 4.6 percent,
in the second quarter of 1998 versus the same period last year.
American's passenger revenues increased by 4.1 percent, or $148
million, primarily as a result of strong demand for air travel driven
by continual economic growth in the U.S. and Europe and a healthy
pricing environment. American's yield (the average amount one
passenger pays to fly one mile) of 13.57 cents increased by 1.8
percent compared to the same period in 1997. Domestic yields
increased 4.5 percent from the second quarter of 1997. International
yields decreased 4.1 percent, primarily due to a 9.2 percent decrease
in the Pacific and a 7.6 percent decrease in Latin America. The
decrease in Pacific yields was primarily due to the weakness in Asian
economies and increased industry capacity while the decrease in Latin
America was due primarily to an increase in industry capacity in
Central and South America and a decline in economic conditions.
American's traffic or revenue passenger miles (RPMs) increased 2.2
percent to 27.9 billion miles for the quarter ended June 30, 1998.
American's capacity or available seat miles (ASMs) increased 0.6
percent to 39.0 billion miles in the second quarter of 1998.
American's domestic traffic increased 0.9 percent despite capacity
decreases of 2.2 percent and international traffic grew 5.2 percent
on capacity increases of 7.2 percent. The increase in international
traffic was driven by an 11.0 percent increase in traffic to Latin
America on capacity growth of 12.0 percent and an 11.8 percent
increase in traffic to the Pacific on capacity growth of 26.9
percent, partially offset by a 1.2 decrease in traffic to Europe on a
capacity decrease of 1.7 percent.
The Airline Group's other revenues increased $23 million, or 10.4
percent, primarily as a result of increased administrative and
employee travel service charges and service contracts.
The Airline Group's operating expenses increased 1.9 percent, or $73
million. American's Jet Operations cost per ASM increased 1.1
percent to 9.25 cents. Wages, salaries and benefits increased 7.7
percent, or $104 million, primarily due to an increase in the average
number of equivalent employees, contractual wage rate and seniority
increases that are built into the Company's labor contracts and an
increase in the provision for profit sharing. The increased
headcount is due primarily to increased volumes of work at American's
maintenance bases and increases associated with American's flight
dependability initiatives. Aircraft fuel expense decreased 14.2
percent, or $67 million, due to a 15.7 percent decrease in American's
average price per gallon, including taxes, partially offset by a 2.0
percent increase in American's fuel consumption. Commissions to
agents decreased 2.1 percent, or $7 million, despite a 4.1 percent
increase in passenger revenues, due to the continued benefit from the
commission rate reduction initiated during September 1997.
Other Expense decreased 48.1 percent, or $37 million, due primarily
to a $22 million increase in capitalized interest on aircraft
purchase deposits and a decrease in interest expense of approximately
$11 million due to scheduled debt repayments.
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RESULTS OF OPERATIONS (continued)
THE SABRE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Three Months Ended
June 30,
1998 1997
Revenues $ 577 $ 449
Operating Expenses 468 354
Operating Income 109 95
Other Income 1 1
Earnings Before Income Taxes $ 110 $ 96
Average number of equivalent employees 11,300 8,400
Revenues
Revenues for The SABRE Group increased $128 million, or 28.5 percent.
Electronic travel distribution revenues increased approximately $28
million, or 9.0 percent, primarily due to growth in booking fees
resulting from an overall increase in the price per booking. In
addition, the three months ended June 30, 1998 includes approximately
$4 million of revenue from services provided to The SABRE Group's
joint venture company formed to manage travel distribution in the Asia-
Pacific region, ABACUS International Ltd. (ABACUS). Revenues from
information technology solutions increased approximately $100 million,
or 72.5 percent, primarily due to the services performed under the
information technology services agreement with US Airways and Year
2000 testing and compliance enhancements for Canadian Airlines
International Limited (Canadian) and other AMR units.
Expenses
Operating expenses increased 32.2 percent, or $114 million, due
primarily to increases in salaries, benefits and employee related
costs, depreciation and amortization expense and other operating
expenses. Salaries, benefits and employee related costs increased due
to an increase in the average number of employees necessary to support
The SABRE Group's business growth and wage and salary increases for
existing employees. The increase in depreciation and amortization
expense is primarily due to the purchase of US Airways' information
technology assets in January 1998 and normal additions. Other
operating expenses increased primarily due to equipment maintenance
costs and other software development expenses related to The SABRE
Group's Year 2000 compliance program and increased communication
costs.
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RESULTS OF OPERATIONS (continued)
MANAGEMENT SERVICES GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Three Months Ended
June 30,
1998 1997
Revenues $ 148 $ 151
Operating Expenses 136 136
Operating Income 12 15
Other Income (Expense) - -
Earnings Before Income Taxes $ 12 $ 15
Average number of equivalent employees 13,000 15,500
Revenues
Revenues for the Management Services Group decreased 2.0 percent, or
$3 million. This decrease in revenues was primarily the result of
the sale of Data Management Services in September 1997 and decreased
services provided by TeleService Resources and AMR Global Logistics.
This decrease was substantially offset by higher revenues for AMR
Combs due to higher aircraft sales and increased airline passenger,
ramp and cargo handling services provided by AMR Services.
Expenses
Operating expenses for the second quarter of 1998 remained consistent
with the same period in 1997. The decrease in expenses associated
with the sale of Data Management Services in September 1997 and
decreased services provided by TeleService Resources and AMR Global
Logistics was offset by an increase in other operating expenses
commensurate with the increase in revenues for AMR Combs and AMR
Services.
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RESULTS OF OPERATIONS (continued)
For the Six Months Ended June 30, 1998 and 1997
Summary AMR recorded net earnings for the six months ended June 30,
1998 of $699 million, or $3.91 per common share diluted. This
compares with net earnings of $454 million, or $2.45 per common share
diluted for the same period in 1997. AMR's operating income of $1.3
billion increased 36.7 percent, or $345 million, compared to $939
million for the same period in 1997.
AIRLINE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Six Months Ended June 30,
1998 1997
Revenues
Passenger - American Airlines, Inc. $7,367 $7,031
- American Eagle 545 504
Cargo 332 338
Other 470 425
8,714 8,298
Expenses
Wages, salaries and benefits 2,831 2,679
Aircraft fuel 819 991
Commissions to agents 623 643
Depreciation and amortization 516 522
Maintenance, materials and repairs 452 408
Other operating expenses 2,442 2,351
Total operating expenses 7,683 7,594
Operating Income 1,031 704
Other Expense (102) (157)
Earnings Before Income Taxes $ 929 $ 547
Average number of equivalent employees 91,250 90,200
RESULTS OF OPERATIONS (continued)
OPERATING STATISTICS
Six Months Ended June 30,
1998 1997
American Airlines Jet Operations
Revenue passenger miles (millions) 53,311 52,613
Available seat miles (millions) 76,670 76,258
Cargo ton miles (millions) 1,005 1,001
Passenger load factor 69.5% 69.0%
Breakeven load factor 58.6% 61.4%
Passenger revenue yield per
passenger mile (cents) 13.82 13.36
Passenger revenue per available
seat mile (cents) 9.61 9.22
Cargo revenue yield per ton mile (cents) 32.65 33.31
Operating expenses per available seat
mile (cents) 9.30 9.27
Fuel consumption (gallons, in millions) 1,392 1,370
Fuel price per gallon (cents) 56.9 69.9
Fuel price per gallon, excluding
fuel taxes (cents) 52.0 65.0
Operating aircraft at period-end 641 644
American Eagle
Revenue passenger miles (millions) 1,323 1,254
Available seat miles (millions) 2,170 2,090
Passenger load factor 61.0 60.0
Operating aircraft at period-end 206 203
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RESULTS OF OPERATIONS (continued)
The Airline Group's revenues increased $416 million, or 5.0 percent,
during the first six months of 1998 versus the same period last year.
American's passenger revenues increased by 4.8 percent, or $336
million, primarily as a result of strong demand for air travel driven
by continual economic growth in the U.S. and Europe and a healthy
pricing environment. American's yield (the average amount one
passenger pays to fly one mile) of 13.82 cents increased by 3.4
percent compared to the same period in 1997. Domestic yields
increased 5.4 percent from the first six months of 1997.
International yields decreased 1.1 percent, reflecting a 5.3 percent
decrease in the Pacific and a 3.2 percent decrease in Latin America,
partially offset by a 1.7 percent increase in Europe. The decrease
in Pacific yields was primarily due to the weakness in Asian
economies and increased industry capacity. The decrease in Latin
America was due primarily to an increase in industry capacity in
Central and South America and a decline in economic conditions, while
the increase in European yields was partially attributable to the
cancellation of American's New York Kennedy - Zurich, New York -
Brussels and Miami - Frankfurt routes in 1997.
American's traffic or revenue passenger miles (RPMs) increased 1.3
percent to 53.3 billion miles for the six months ended June 30, 1998.
American's capacity or available seat miles (ASMs) increased 0.5
percent to 76.7 billion miles in the first six months of 1998.
American's domestic traffic increased 5.7 percent on capacity
increases of 0.2 percent and international traffic grew 2.7 percent
on capacity increases of 3.9 percent. The increase in international
traffic was driven by a 3.9 percent increase in traffic to Latin
America on capacity growth of 7.3 percent, a 5.6 percent increase in
traffic to the Pacific on growth of 11.5 percent and a 0.6 percent
increase in traffic on a capacity decrease of 1.1 percent in Europe.
American's yield and traffic were both negatively impacted in 1997 by
the effects of the pilot contract negotiations throughout the first
three months of 1997. During the first six months of 1998,
American's yield and traffic were adversely impacted by the
imposition of the transportation tax for the entire period compared
to slightly less than four months during the same period in 1997.
The Airline Group's other revenues increased $45 million, or 10.6
percent, primarily as a result of an increase in aircraft maintenance
work performed by American for other airlines and increased
administrative and employee travel service charges and service
contracts.
The Airline Group's operating expenses increased 1.2 percent, or $89
million. American's Jet Operations cost per ASM increased by 0.3
percent to 9.30 cents. Wages, salaries and benefits increased $152
million, or 5.7 percent, primarily due to an increase in the average
number of equivalent employees, contractual wage rate and seniority
increases that are built into the Company's labor contracts and an
increase in the provision for profit sharing. The increased
headcount is due primarily to increased volumes of work at American's
maintenance bases and increases associated with American's flight
dependability initiatives. Aircraft fuel expense decreased 17.4
percent, or $172 million, due to an 18.6 percent decrease in
American's average price per gallon, including taxes, partially
offset by a 1.6 percent increase in American's fuel consumption.
Commissions to agents decreased 3.1 percent, or $20 million, despite
a 4.8 percent increase in passenger revenues, due to the continued
benefit from the commission rate reduction initiated during September
1997. Maintenance, materials and repairs expense increased $44
million, or 10.8 percent, due primarily to higher volumes for both
airframe and engine maintenance at American's maintenance bases as a
result of the maturing of its fleet. Other operating expenses
increased by $91 million, or 3.9 percent, primarily related to
spending on the Company's Year 2000 compliance program and higher
costs, such as credit card fees, resulting from higher passenger
revenues.
Other Expense decreased 35.0 percent, or $55 million, due primarily
to a $38 million increase in capitalized interest on aircraft
purchase deposits and a decrease in interest expense of approximately
$19 million due to scheduled debt repayments.
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RESULTS OF OPERATIONS (continued)
THE SABRE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Six months Ended June 30,
1998 1997
Revenues $1,131 $ 889
Operating Expenses 907 686
Operating Income 224 203
Other Income 3 2
Earnings Before Income Taxes $ 227 $ 205
Average number of equivalent employees 11,000 8,300
Revenues
Revenues for The SABRE Group increased $242 million, or 27.2 percent.
Electronic travel distribution revenues increased approximately $64
million, or 10.3 percent, primarily due to growth in booking fees
resulting from an overall increase in the price per booking. In
addition, the six months ended June 30, 1998 includes approximately
$16 million of revenue from services provided to ABACUS. Revenues
from information technology solutions increased approximately $178
million, or 65.6 percent, primarily due to the services performed
under the information technology services agreement with US Airways
and Year 2000 testing and compliance enhancements for Canadian and
other AMR units.
Expenses
Operating expenses increased 32.2 percent, or $221 million, due
primarily to increases in salaries, benefits and employee related
costs, subscriber incentive expenses, depreciation and amortization
expense and other operating expenses. Salaries, benefits and employee
related costs increased due to an increase in the average number of
employees necessary to support The SABRE Group's business growth and
wage and salary increases for existing employees. Subscriber
incentive expenses increased in order to maintain and expand The SABRE
Group's travel agency subscriber base. The increase in depreciation
and amortization expense is primarily due to the purchase of US
Airways' information technology assets in January 1998 and normal
additions. Other operating expenses increased primarily due to
equipment maintenance costs and other software development expenses
related to The SABRE Group's Year 2000 compliance program, software
development expenses related to ABACUS and increased communication
costs.
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RESULTS OF OPERATIONS (continued)
MANAGEMENT SERVICES GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Six Months Ended June
30,
1998 1997
Revenues $ 308 $ 312
Operating Expenses 279 280
Operating Income 29 32
Other Income (Expense) 1 (1)
Earnings Before Income Taxes $ 30 $ 31
Average number of equivalent employees 12,950 15,500
Revenues
Revenues for the Management Services Group decreased 1.3 percent, or
$4 million. This decrease in revenues was primarily the result of
the sale of Data Management Services in September 1997 and decreased
services provided by TeleService Resources and AMR Global Logistics.
This decrease was substantially offset by higher revenues for AMR
Combs due to higher aircraft sales and increased airline passenger,
ramp and cargo handling services provided by AMR Services.
Expenses
Operating expenses decreased 0.4 percent, or $1 million, primarily
due to a decrease in expenses associated with the sale of Data
Management Services in September 1997 and decreased services provided
by TeleService Resources and AMR Global Logistics. This decrease was
substantially offset by an increase in other operating expenses
commensurate with the increase in revenues for AMR Combs and AMR
Services.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the six month period
ended June 30, 1998 was $1.3 billion, an increase of $259 million
over the same period in 1997. This increase resulted primarily from
increased net earnings and an increase in the air traffic liability
due to higher advanced sales. Capital expenditures for the first six
months of 1998 were $1.2 billion, and included the purchase deposits
on new aircraft orders, the acquisition of three Boeing 767-300ERs,
eight Embraer EMB-145s and five ATR 72 aircraft and purchases of
computer-related equipment. These capital expenditures were financed
primarily with internally generated cash, except for the Embraer
aircraft acquisitions which were funded through secured financing.
During the first six months of 1998, The SABRE Group invested
approximately $140 million for a 35 percent interest in ABACUS.
Proceeds from the sale of equipment and property of $179 million for
the first six months of 1998 include proceeds received upon the
delivery of two of American's McDonnell Douglas MD-11 aircraft to
Federal Express Corporation in accordance with the 1995 agreement
between the two parties and other aircraft equipment sales.
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LIQUIDITY AND CAPITAL RESOURCES (continued)
During 1998, the Company exercised its purchase rights to acquire
25 Boeing 737-800s and 23 Boeing 777-200IGWs. As of August 14, 1998,
the Company had commitments to acquire the following aircraft: 100
Boeing 737-800s, 34 Boeing 777-200IGWs, 11 Boeing 757-200s, four
Boeing 767-300ERs, 32 Embraer EMB-145s and 25 Bombardier CRJ-700s.
Deliveries of these aircraft will occur during the remainder of 1998
and will continue through 2004. Payments for these aircraft will
approximate $850 million during the remainder of 1998, $2.6 billion
in 1999, $1.9 billion in 2000 and an aggregate of approximately $2.3
billion in 2001 through 2004. The exercise of these aircraft
purchase rights will allow the Company to continue the retirement of
its Boeing 727-200 and McDonnell Douglas DC-10 fleets, which the
Company anticipates to be complete by 2004, as well as to provide for
modest growth. While the
Company expects to fund the majority of its capital expenditures from
the Company's existing cash balance and internally generated cash,
some new financing may be raised depending upon capital market
conditions and the Company's evolving view of its long-term needs.
During the six months ended June 30, 1998, a total of approximately
4.8 million shares were purchased by the Company at a total cost of
approximately $333 million. As of June 30, 1998, the Company had
completed the $500 million stock repurchase program initiated in 1997.
On July 15, 1998, the Company's board of directors authorized
management to repurchase up to an additional $500 million of the
Company's outstanding common stock. Share repurchases may be made
from time to time, depending on market conditions, and may be
discontinued at any time.
In 1997, The SABRE Group's Board of Directors authorized, subject
to certain business and market conditions, the repurchase of up to
1.5 million shares of The SABRE Group's Class A Common Stock. During
the six months ended June 30, 1998, a total of approximately one
million shares were purchased by The SABRE Group at a total cost of
approximately $33 million.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 compliance program designed
to ensure that the Company's computer systems and applications and
its embedded operating systems will function properly beyond 1999.
Such program includes both systems and applications operated by the
Company's businesses as well as software licensed to or operated for
third parties by The SABRE Group. Substantially all of the Company's
core systems are either completed or in the final testing phases of
the Year 2000 project. The Company expects its Year 2000 project to
be substantially completed in the first quarter of 1999 and believes
that it has allocated adequate resources to meet this goal. However,
there can be no assurance that the systems of other parties (e.g.,
Federal Aviation Administration, Department of Transportation,
airport authorities, data providers) upon which the Company's
businesses also rely will be Year 2000 compliant on a timely basis.
The Company's business, financial condition, or results of operations
could be materially adversely affected by the failure of its systems
and applications, those licensed to or operated for third parties, or
those operated by other parties to properly operate or manage dates
beyond 1999. The Company is currently evaluating responses from and
addressing issues with significant vendors to determine the extent to
which the Company's systems are vulnerable to those third parties
which fail to remedy their own Year 2000 issues. The Company is
developing contingency plans designed to enable it to continue
operations, even in the event of certain third party failures, to the
extent that such operations can be conducted safely.
The Company expects to incur significant internal staff costs, as
well as consulting and other expenses, related to infrastructure and
facilities enhancements necessary to prepare its systems for the Year
2000. The Company's total estimated cost of the Year 2000 compliance
program is approximately $215 million to $250 million, of which
approximately $130 million was incurred as of June 30, 1998. The
Company expects to incur most of the remaining expenses during the
remainder of 1998. A significant portion of these costs are not likely
to be incremental costs to the Company, but rather will represent the
redeployment of existing information technology resources.
Maintenance or modification costs associated with making existing
computer systems Year 2000 compliant are expensed as incurred and are
funded through cash from operations.
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YEAR 2000 COMPLIANCE (continued)
The expected costs and completion dates for the Year 2000 project
are forward-looking statements based on management's best estimates,
which were derived utilizing numerous assumptions of future events
including the continued availability of resources, third party
modification plans and other factors. Actual results could differ
materially from these estimates as a result of factors such as the
availability and cost of trained personnel, the ability to locate and
correct all relevant computer codes and similar uncertainties.
NEW EUROPEAN CURRENCY
In January 1999, certain European countries are scheduled to
introduce a new currency unit called the "euro". The Company has
implemented a project intended to ensure that software systems
operated by the Company's businesses as well as software licensed to
or operated for third parties by The SABRE Group are designed to
properly handle the euro. The Company expects its euro project to be
substantially completed by the fourth quarter of 1998 and believes
that it has allocated adequate resources to meet this goal. The
Company estimates that the introduction of the euro, including the
total cost for the euro project, will not have a material effect on
the Company's business, financial condition, or results of
operations. Costs associated with the euro project will be expensed
as incurred and will be funded through cash from operations.
Statements related to the Company's euro project are forward-looking
statements that are based on management's best estimates. Actual
results could differ materially from these estimates.
DALLAS LOVE FIELD
In 1968, as part of an agreement between the cities of Fort Worth and
Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond
ordinance was enacted by both cities (the Bond Ordinance). The Bond
Ordinance required both cities to direct all scheduled interstate
passenger operations to DFW and was an integral part of the bonds
issued for the construction and operation of DFW. In 1979, as part of
a settlement to resolve litigation with Southwest Airlines, the cities
agreed to expand the scope of operations allowed under the Bond
Ordinance at Dallas' Love Field. This settlement was codified by
Congress and became known as the Wright Amendment. The Wright
Amendment limited interstate operations at Love Field to the four
states contiguous to Texas (New Mexico, Oklahoma, Arkansas and
Louisiana) and prohibited through ticketing to any destination outside
that perimeter. In 1997, without the consent of either city, Congress
amended the Wright Amendment by (i) adding three states (Kansas,
Mississippi and Alabama) to the perimeter and (ii) removing all
federal restrictions on large aircraft configured with 56 seats or
less (the 1997 Amendment). In October 1997, the City of Fort Worth
filed suit in state district court against the City of Dallas and
others seeking to enforce the Bond Ordinance. Fort Worth contends
that the 1997 Amendment does not preclude the City of Dallas from
exercising its proprietary rights to restrict traffic at Love Field in
a manner consistent with the Bond Ordinance and, moreover, that it has
an obligation to do so. American has joined in this litigation.
Thereafter, Dallas filed a separate declaratory judgment action in
federal district court seeking to have the court declare that, as a
matter of law, the 1997 Amendment precludes Dallas from exercising any
restrictions on operations at Love Field. Further, in May 1998,
Continental Airlines and Continental Express filed a lawsuit in
federal court seeking a judicial declaration that the Bond Ordinance
cannot be enforced to prevent them from operating flights from Love
Field to Cleveland using regional jets. As a result of the foregoing,
the future of interstate flight operations at Love Field and
American's DFW hub is uncertain. To the extent that operations at
Love Field to new interstate destinations increase, American may be
compelled for competitive reasons to divert resources from DFW to Love
Field. A substantial diversion of resources could adversely impact
American's business.
Recently, American announced its intent to initiate limited
intrastate service to Austin from Love Field and has commenced
implementation of a business plan to start such service on August 31,
1998.
19
OTHER INFORMATION
Several items of legislation have been introduced in Congress that
would, if enacted; (i) authorize the withdrawal of slots from major
carriers -- including American -- at key airports for redistribution
to new entrants and smaller carriers and/or (ii) provide financial
assistance, in the form of guarantees and/or subsidized loans, to
smaller carriers for aircraft purchases. In addition, the Department
of Justice is investigating competition at major hub airports, and in
April 1998, the Department of Transportation (DOT) issued proposed
pricing and capacity rules that would severely limit major carriers'
ability to compete with new entrant carriers. The outcomes of the
proposed legislation, the investigations and the proposed DOT
guidelines are unknown. However, to the extent that (i) slots are
taken from American at key airports, (ii) restrictions are imposed
upon American's ability to respond to a competitor, or (iii)
competitors have a financial advantage in the purchase of aircraft
because of federal assistance, American's business may be adversely
impacted.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131), effective for
fiscal years beginning after December 15, 1997. SFAS 131 supersedes
SFAS 14, "Financial Reporting for Segments of a Business Enterprise,"
and requires that a public company report annual and interim
financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting
practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Because this statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption
will have no impact on the Company's financial condition or results
of operations.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which is required to be adopted in years
beginning after June 15, 1999. SFAS 133 permits early adoption as of
the beginning of any fiscal quarter after its issuance. SFAS 133
will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
The Company is currently evaluating the impact of SFAS 133;
however, based on current market conditions, SFAS 133 is not
expected to have a material impact on the Company's financial
condition or 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 report, the words
"expects," "plans," "anticipates," and similar expressions are
intended to identify forward-looking statements. 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 actual results to differ materially from our 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: risks related to
the Company's Year 2000 and Euro currency compliance programs and
government regulations, including restrictions on competitive
practices (e.g., new regulations which would curtail an airlines
ability to respond to a competitor). Additional information
concerning these and other factors is contained in the Company's
Securities and Exchange Commission filings, included but not limited
to the Form 10-K/A No. 1 for the year ended December 31, 1997.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In January 1985, American announced a new fare category, the "Ultimate
SuperSaver," a discount, advance purchase fare that carried a 25
percent penalty upon cancellation. On December 30, 1985, a class
action lawsuit was filed in Circuit Court, Cook County, Illinois
entitled Johnson vs. American Airlines, Inc. The Johnson plaintiff
alleges that the 10 percent federal excise transportation tax should
have been excluded from the "fare" upon which the 25 percent penalty
was assessed. Summary judgment was granted in favor of American but
subsequently reversed and vacated by the Illinois Appellate Court. In
August 1997, the Court denied the plaintiffs' motion for class
certification. American is vigorously defending the lawsuit.
In connection with its frequent flyer program, American was sued in
two cases (Wolens et al v. American Airlines, Inc. and Tucker v.
American Airlines, Inc.) seeking class action certification that were
consolidated and are currently pending in the Circuit Court of Cook
County, Illinois. The litigation arises from certain changes made to
American's AAdvantage frequent flyer program in May 1988 which limited
the number of seats available to participants traveling on certain
awards and established blackout dates during which no AAdvantage seats
would be available for certain awards. In the consolidated action,
the plaintiffs allege that these changes breached American's contract
with AAdvantage members, seek money damages for the alleged breach and
attorney's fees and seek to represent all persons who joined the
AAdvantage program before May 1988 and accrued mileage credits before
the seat limitations were introduced. The complaint originally
asserted several state law claims, however only the plaintiffs' breach
of contract claim remains after the U. S. Supreme Court ruled that
federal law preempted the other claims. Although the case has been
pending for numerous years, it still is in its preliminary stages.
The court has not ruled as to whether the case should be certified as
a class action. American is vigorously defending the lawsuit.
Gutterman et al. v. American Airlines, Inc. is also pending in the
Circuit Court of Cook County, Illinois, arising from an announced
increase in AAdvantage mileage credits required for free travel. In
December 1993, American announced that the number of miles required to
claim a certain travel award under American's AAdvantage frequent
flyer program would be increased effective February 1, 1995, giving
rise to the Gutterman litigation filed on that same date. The
Gutterman plaintiffs claim that the announced increase in award
mileage level violated the terms and conditions of the agreement
between American and AAdvantage members. On June 23, 1998, the Court
certified the case as a class action although to date no notice has
been sent to the class. The class consists of all members who earned
miles between January 1, 1992 (the date the change was announced) and
February 1, 1995 (the date the change was made). On July 13, 1998,
the Court denied American's motion for summary judgment as to the
claims brought by plaintiff Steven Gutterman. On July 30, 1998, the
plaintiffs filed a motion for summary judgment as to liability.
American is vigorously defending the lawsuit.
A federal grand jury is investigating whether American handled
hazardous materials and processed courier shipments, cargo and excess
baggage in accordance with applicable laws and regulations. In
connection with this investigation, federal agents executed a search
warrant at American's Miami facilities on October 22, 1997. In
addition, American was served with a subpoena calling for the
production of documents relating to the handling of courier shipments,
cargo, excess baggage and hazardous materials. American has produced
documents responsive to the subpoena and intends to cooperate fully
with the government's investigation.
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21
PART II
Item 4. Submission of Matters to a Vote of Security Holders (*)
The owners of 74,978,665 shares of common stock, or 82 percent of
shares outstanding, were represented at the annual meeting of
stockholders on May 20, 1998 at The Worthington Hotel, 200 Main
Street, Fort Worth, Texas.
Elected as directors of the Corporation, each receiving a minimum of
73,103,948 votes were:
David L. Boren Dee J. Kelly
Edward A. Brennan Ann D. McLaughlin
Donald J. Carty Charles H. Pistor, Jr.
Armando M. Codina Joe M. Rodgers
Charles T. Fisher, III Judith Rodin
Earl G. Graves Maurice Segall
Stockholders ratified the appointment of Ernst & Young LLP as
independent auditors for the Corporation for 1998. The vote was
74,941,290 in favor; 17,724 against; and 19,651 abstaining.
Stockholders approved an amendment to the Certificate of
Incorporation of the Corporation increasing the number of authorized
shares of common stock of the Corporation. The vote was 50,872,087
in favor; 24,073,517 against; and 33,061 abstaining.
Stockholders approved the 1998 Long Term Incentive Plan of the
Corporation. The vote was 40,333,217 in favor; 28,976,118 against;
107,065 abstaining; and 5,562,265 non-voting.
* The share information contained in this section have not been
restated to give effect to the two-for-one stock split on June 9,
1998.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
3.1 Amended Certificate of Incorporation
of AMR, effective May 26, 1998
10.1 American Airlines, Inc. Supplemental
Executive Retirement Program,
as amended April 1998
27.1 Financial Data Schedule as of June 30,
1998.
27.2 Restated Financial Data Schedule as of
June 30, 1997.
On April 15, 1998, AMR filed a report on Form 8-K relative to two
press releases issued by the Company. The first press release was to
report the Company's first quarter 1998 earnings and to announce a
proposed two-for-one stock split in the form of a stock dividend.
The second press release was issued to announce that Robert L.
Crandall, Chairman, President and CEO of the Company and Chairman and
CEO of American Airlines, Inc. would retire from his affiliations
with the Company after the AMR annual meeting on May 20, 1998.
On May 20, 1998, AMR filed a report on Form 8-K relative to a press
release issued to report the approval by the Company's shareholders
of an amendment to the Company's Certificate of Incorporation that
increased the number of authorized shares of common stock.
On July 15, 1998, AMR filed a report on Form 8-K relative to a press
release issued to report the Company's second quarter 1998 earnings
and to announce that the Company's board of directors authorized
management to repurchase additional shares of the Company's
outstanding common stock.
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22
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMR CORPORATION
Date: August 14, 1998 BY: /s/ Gerard J. Arpey
Gerard J. Arpey
Senior Vice President and Chief
Financial Officer