Back to GetFilings.com
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 September 30, 2003.
[ ]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 by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Common Stock, $1 par value- 159,347,481 shares as of October 21, 2003.
2
INDEX
AMR CORPORATION
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and nine months
ended September 30, 2003 and 2002
Condensed Consolidated Balance Sheets -- September 30, 2003 and
December 31, 2002
Condensed Consolidated Statements of Cash Flows -- Nine months
ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements -- September
30, 2003
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 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Revenues
Passenger - American Airlines $3,805 $ 3,754 $10,743 $10,985
- Regional Affiliates 399 366 1,112 1,064
Cargo 135 139 409 415
Other revenues 266 265 785 731
Total operating revenues 4,605 4,524 13,049 13,195
Expenses
Wages, salaries and benefits 1,693 2,121 5,660 6,327
Aircraft fuel 701 697 2,077 1,880
Depreciation and amortization 345 340 1,027 1,019
Other rentals and landing fees 302 313 891 908
Commissions, booking fees and
credit card expense 281 268 796 912
Maintenance, materials and
repairs 223 289 641 840
Aircraft rentals 165 210 532 650
Food service 160 189 460 539
Other operating expenses 594 710 1,863 2,063
Special charges (credits) (24) 718 77 718
U. S. government grant - (10) (358) (10)
Total operating expenses 4,440 5,845 13,666 15,846
Operating Income (Loss) 165 (1,321) (617) (2,651)
Other Income (Expense)
Interest income 20 18 41 54
Interest expense (198) (171) (580) (501)
Interest capitalized 17 23 54 67
Miscellaneous - net (3) 2 (15) (1)
(164) (128) (500) (381)
Income (Loss) Before Income Taxes
and Cumulative Effect of
Accounting Change 1 (1,449) (1,117) (3,032)
Income tax benefit - (525) - (1,038)
Income (Loss) Before Cumulative
Effect of Accounting Change 1 (924) (1,117) (1,994)
Cumulative Effect of Accounting
Change, Net of Tax Benefit - - - (988)
Net Earnings (Loss) $ 1 $ (924) $(1,117) $(2,982)
Basic and Diluted Earnings
(Loss) Per Share
Before Cumulative Effect of
Accounting Change $ 0.00 $ (5.93) $ (7.08) $(12.83)
Cumulative Effect of
Accounting Change - - - (6.36)
Net Earnings (Loss) $ 0.00 $ (5.93) $ (7.08) $(19.19)
The accompanying notes are an integral part of these financial statements.
-1-
4
AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
September 30, December 31,
2003 2002
Assets
Current Assets
Cash $ 158 $ 104
Short-term investments 2,566 1,846
Restricted cash and short-term investments 540 783
Receivables, net 885 858
Income tax receivable 51 623
Inventories, net 527 627
Other current assets 349 96
Total current assets 5,076 4,937
Equipment and Property
Flight equipment, net 15,594 15,041
Other equipment and property, net 2,407 2,450
Purchase deposits for flight equipment 362 767
18,363 18,258
Equipment and Property Under Capital Leases
Flight equipment, net 1,314 1,346
Other equipment and property, net 88 90
1,402 1,436
Route acquisition costs and airport
operating and gate lease rights, net 1,263 1,292
Other assets 3,839 4,344
$ 29,943 $30,267
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 1,075 $ 1,198
Accrued liabilities 2,273 2,560
Air traffic liability 3,046 2,614
Current maturities of long-term debt 538 713
Current obligations under capital leases 200 155
Total current liabilities 7,132 7,240
Long-term debt, less current maturities 11,933 10,888
Obligations under capital leases, less
current obligations 1,234 1,422
Postretirement benefits 2,763 2,654
Other liabilities, deferred gains and
deferred credits 7,402 7,106
Stockholders' Equity (Deficit)
Preferred stock - -
Common stock 182 182
Additional paid-in capital 2,612 2,795
Treasury stock (1,414) (1,621)
Accumulated other comprehensive loss (1,461) (1,076)
Retained earnings (deficit) (440) 677
(521) 957
$ 29,943 $30,267
The accompanying notes are an integral part of these financial statements.
-2-
5
AMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Nine Months Ended September 30,
2003 2002
Net Cash Provided (Used) by Operating Activities $ 809 $ (513)
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (491) (1,537)
Net (increase) decrease in short-term investments (720) 395
Net decrease (increase) in restricted cash and
short-term investments 243 (181)
Proceeds from sale of equipment and property 50 193
Proceeds from sale of interest in Worldspan 180 -
Compensation for costs associated with
strengthening flight deck doors 23 -
Lease prepayments through bond redemption, net
of bond reserve fund (235) -
Other 22 (91)
Net cash used by investing activities (928) (1,221)
Cash Flow from Financing Activities:
Payments on long-term debt and capital lease
obligations (596) (564)
Redemption of bonds (86) -
Proceeds from:
Issuance of long-term debt 855 2,306
Exercise of stock options - 3
Net cash provided by financing activities 173 1,745
Net increase in cash 54 11
Cash at beginning of period 104 102
Cash at end of period $ 158 $ 113
Activities Not Affecting Cash
Flight equipment acquired through seller financing $ 649 $ -
Capital lease obligations incurred $ 131 $ -
Reduction to capital lease obligations due
to lease modifications $ (127) $ -
The accompanying notes are an integral part of these financial statements.
-3-
6
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 unless otherwise disclosed, 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 its principal subsidiary American
Airlines, Inc. (American). 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,
2002 (2002 Form 10-K). Certain amounts have been reclassified to
conform with the current 2003 presentation.
The Company's Regional Affiliates include two wholly owned
subsidiaries, American Eagle Airlines, Inc. (American Eagle) and
Executive Airlines, Inc. (Executive) (collectively, AMR Eagle), and
two independent carriers, Trans States Airlines, Inc. (Trans
States) and Chautauqua Airlines, Inc. (Chautauqua). For the nine
months ended September 30, 2002, American had a capacity purchase
agreement with Chautauqua and revenue prorate agreements with AMR
Eagle and Trans States. Effective January 1, 2003, American
converted the AMR Eagle carriers from a revenue prorate agreement
to a capacity purchase agreement. This change does not have any
impact on the Company's consolidated financial statements, but has
changed the results of the Company's wholly owned subsidiaries on
an individual basis. For the nine months ended September 30, 2003,
American also had capacity purchase agreements with Trans States
and Chautauqua.
2.In February 2003, American asked its employees for approximately
$1.8 billion in annual savings through a combination of changes in
wages, benefits and work rules. The requested $1.8 billion in
savings was divided by work group as follows: $660 million -
pilots; $620 million - Transportation Workers Union represented
employees; $340 million - flight attendants; $100 million -
management and support staff; and $80 million - agents and
representatives. References in this document to American's three
major unions include: the Allied Pilots Association (the APA); the
Transportation Workers Union (the TWU); and the Association of
Professional Flight Attendants (the APFA).
In April 2003, American reached agreements with its three major
unions (the Labor Agreements) and implemented various changes in
the pay plans and benefits for non-unionized personnel, including
officers and other management (the Management Reductions). The
anticipated cost savings arising from the Labor Agreements and the
Management Reductions met the targeted annual savings of $1.8
billion.
Of the approximately $1.8 billion in estimated annual savings,
approximately $1.0 billion relate to wage and benefit reductions
and $0.8 billion relate to changes in work rules, which have
resulted in job reductions and will continue to result in
additional job reductions through June 2004. As a result of work
rule related job reductions, the Company incurred $60 million in
severance charges in 2003 (see Note 5 for additional information).
Wage reductions became effective on April 1, 2003 for officers and
May 1, 2003 for all other employees. Reductions related to
benefits and work rule changes will continue to be phased in over
time. In connection with the changes in wages, benefits and work
rules, the Company granted approximately 38 million shares of AMR
stock to American's employees (excluding officers) in the form of
stock options which will vest over a three year period with an
exercise price of $5 per share (see Note 12 for additional
information).
-4-
7
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In addition, the Company and American have reached concessionary
agreements with certain vendors, lessors, lenders (see Notes 9 and
13 for additional information) and suppliers (collectively, the
Vendors, and the agreements, the Vendor Agreements). Generally,
under the terms of these Vendor Agreements the Company or American
will receive the benefit of lower rates and charges for certain
goods and services, and more favorable rent and financing terms
with respect to certain of its aircraft. In return for these
concessions, the Company issued approximately 2.5 million shares of
AMR's common stock to Vendors.
The Company's revenue environment improved during the second and
third quarters of 2003 as reflected in improved unit revenues
(revenue per available seat mile) in May through September 2003.
Even with this improvement, however, the Company's revenues are
still depressed relative to historical levels. Moreover, the
Company's recent losses have adversely affected its financial
condition. The Company therefore needs to see a combination of
continued improvement in the revenue environment, cost reductions
and productivity improvements before it can return to sustained
profitability at acceptable levels.
To maintain sufficient liquidity as the Company implements its plan
to return to sustained profitability, the Company will need
continued access to additional funding, most likely through a
combination of financings and asset sales. In addition, the
Company's ability to return to sustained profitability will depend
on a number of risk factors, many of which are largely beyond the
Company's control. Among other things, the following factors have
had and/or may have a negative impact on the Company's business and
financial results: the uncertain financial and business
environment the Company faces; the struggling economy; high fuel
prices and the availability of fuel; the residual effects of the
war in Iraq; conflicts in the Middle East; historically low fare
levels and the general competitive environment; the ability of the
Company to implement its restructuring program and the effect of
the program on operational performance and service levels;
uncertainties with respect to the Company's international
operations; changes in its business strategy; actions by U.S. or
foreign government agencies; the possible occurrence of additional
terrorist attacks; another outbreak of SARS; the inability of the
Company to satisfy existing liquidity requirements or other
covenants in certain of its credit arrangements (see Note 13 for
additional information); and the availability of future financing.
In particular, if the revenue environment deteriorates beyond
normal seasonal trends, or the Company is unable to access the
capital markets or sell assets, it may be unable to fund its
obligations and sustain its operations.
-5-
8
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3.The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations. Under APB 25, no compensation expense is
recognized for stock option grants if the exercise price of the
Company's stock option grants is at or above the fair market value
of the underlying stock on the date of grant. The Company has
adopted the pro forma disclosure features of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), as amended by Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". The following table
illustrates the effect on net earnings (loss) and earnings (loss)
per share amounts if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee
compensation (in millions, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Net earnings (loss), as reported $ 1 $(924) $(1,117) $(2,982)
Add: Stock-based employee
compensation expense included in
reported net loss, net of tax 7 (2) 11 1
Deduct: Total stock-based
employee compensation expense
determined under fair value
based methods for all awards,
net of tax (26) (5) (60) (24)
Pro forma net loss $ (18) $(931) $(1,166) $(3,005)
Earnings (loss) per share:
Basic and diluted - as reported $ 0.00 $(5.93) $ (7.08) $(19.19)
Basic and diluted - pro forma $(0.11) $(5.98) $ (7.39) $(19.34)
4.In April 2003, the President signed the Emergency Wartime
Supplemental Appropriations Act, 2003 (the Act), which includes
aviation-related assistance provisions. The Act authorized payment
of (i) $100 million to compensate air carriers for the direct costs
associated with the strengthening of flight deck doors and locks
and (ii) $2.3 billion to reimburse air carriers for increased
security costs, which was distributed in proportion to the amounts
each carrier had paid or collected in passenger security and air
carrier security fees to the Transportation Security Administration
as of the Act's enactment (the Security Fee Reimbursement). In
addition, the Act suspended the collection of the passenger
security fee from June 1, 2003 until September 30, 2003 and
authorized the extension of war-risk insurance through August 31,
2004 (and permits further extensions until December 31, 2004). The
Act also limits the total cash compensation for the two most highly
compensated named executive officers in 2002 for certain airlines,
including the Company, during the period April 1, 2003 to April 1,
2004 to the amount of salary received by such officers, or their
successors, in 2002. A violation of this executive compensation
provision would require the carrier to repay the government for the
amount of the Security Fee Reimbursement. The Company does not
anticipate any difficulties in complying with this limitation on
executive compensation and believes the likelihood of repaying the
government for the amount of the Security Fee Reimbursement is
remote. The Company's Security Fee Reimbursement was $358 million
(net of payments to independent regional affiliates) and was
recorded as a reduction to operating expenses during the second
quarter of 2003. The Company's compensation for the direct costs
associated with strengthening flight deck doors was $23 million and
was recorded as a basis reduction to capitalized flight equipment
in the third quarter of 2003.
-6-
9
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5.During the last two years, as a result of the events of September 11,
2001 and the Company's continuing restructuring activities, the
Company has recorded a number of special charges. Special charges
(credits) for the three and nine months ended September 30, 2003 and
2002 included the following (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Employee charges $ 4 $ 57 $ 76 $ 57
Facility exit costs 1 3 50 3
Aircraft charges 39 658 19 658
Other (68) - (68) -
Total Special charges (credits) $(24) $ 718 $ 77 $ 718
Employee Charges
2003
In the first quarter of 2003, as a part of its 2002 restructuring
initiatives discussed below, the Company incurred $25 million in
severance charges which are included in Special charges in the
consolidated statement of operations.
The Company estimates that it will have reduced approximately 8,000
jobs by June 2004 in conjunction with the Management Reductions and
the Labor Agreements discussed in Note 2. This reduction in
workforce, which is in addition to the 2002 work force reductions
discussed below, will affect all work groups (pilots, flight
attendants, mechanics, fleet service clerks, agents, management and
support staff personnel), and has been and will continue to be
accomplished through various measures, including part-time work
schedules, furloughs in accordance with collective bargaining
agreements, and permanent layoffs. As a result of this reduction
in workforce, during the second quarter of 2003, the Company
recorded an employee charge of approximately $60 million, primarily
for severance related costs, which is included in Special charges.
Cash outlays for the $60 million employee charge will be incurred
over a period of up to twelve months. The Company does not expect
to incur additional severance charges related to this reduction in
workforce.
Also in conjunction with the Labor Agreements and the Management
Reductions, during the second quarter of 2003, the Company reduced
its vacation accrual by $85 million to reflect new lower pay scales
and maximum vacation caps, which was recorded as a reduction to
Special charges.
In connection with the Labor Agreements, the Company agreed to
forgive a $26 million receivable from one its three major unions.
During the second quarter of 2003, the Company recorded a $26
million special charge to write-off the receivable.
In addition, as discussed in Note 6, in the second quarter of 2003,
the Company recognized a curtailment loss of $46 million related to
its defined benefit pension plans.
The Company incurred $4 million in miscellaneous other employee
related special charges during the nine months ended September 30,
2003.
-7-
10
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2002
In August 2002, the Company announced that it would reduce an
estimated 7,000 jobs by March 2003 to realign its workforce with
planned capacity reductions, fleet simplification, and hub
restructurings. This reduction in workforce, which affected all
work groups, was accomplished through various measures, including
limited voluntary programs, leaves of absence, part-time work
schedules, furloughs in accordance with collective bargaining
agreements, and permanent layoffs. As a result of this reduction
in workforce, during the third quarter of 2002, the Company
recorded an employee charge of approximately $57 million primarily
related to voluntary programs in accordance with collective
bargaining agreements with its pilot and flight attendant work
groups.
Facility Exit Costs
In the second quarter of 2003, the Company determined that certain
excess airport space would not be used by the Company in the
future. As a result, the Company recorded a $45 million charge,
primarily related to the fair value of future lease commitments and
the write-off of certain prepaid rental amounts. Cash outlays
related to the accrual of future lease commitments will occur over
the remaining lease term, which extends through 2017.
The Company incurred $5 million in miscellaneous other facility
exit costs during the nine months ended September 30, 2003.
Aircraft Charges
2003
In the second quarter of 2003, the Company determined that certain
accruals for future lease return and other costs, initially
recorded as a component of Special charges in the consolidated
statement of operations, were no longer necessary. In the second
quarter of 2003, the Company recorded a $20 million reduction to
Special charges to finalize these accruals.
In addition, in the third quarter of 2003, the Company retired five
operating leased Boeing 757 aircraft. As a result, in the third
quarter of 2003, the Company recorded a charge of approximately $39
million related to future lease commitments and lease return
condition costs on these aircraft. Cash outlays will occur over
the remaining lease terms which extend through 2004.
2002
In the third quarter of 2002, in connection with a series of
initiatives to reduce costs, reduce capacity, simplify the
Company's aircraft fleet and enhance productivity, and related
revisions to the Company's fleet plan to accelerate the retirement
of its owned Fokker 100, Saab 340, and ATR 42 aircraft, the Company
determined that these aircraft were impaired under Statement of
Accounting Standards Board No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". As a result of this
determination, the Company recorded an asset impairment charge of
approximately $330 million reflecting the diminution in the fair
value of these aircraft and related rotables; and a charge of
approximately $40 million reflecting the write-down of certain
related inventory to realizable value and the accrual of certain
related costs.
Furthermore, the Company accelerated the retirement of nine
operating leased Boeing 767-300 aircraft to the fourth quarter of
2002, and its four operating leased Fokker 100 aircraft to 2004.
As a result, during the third quarter of 2002, the Company recorded
a charge of approximately $189 million related primarily to future
lease commitments on these aircraft past the dates they will be
removed from service, lease return costs, the write-down of excess
Boeing 767-300 related inventory and rotables to realizable value,
and the accrual of certain other costs. Cash outlays will occur
over the remaining lease terms, which extend through 2014.
-8-
11
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In addition, in the third quarter of 2002, as a result of revisions
to its fleet plan, the Company recorded a charge of approximately
$99 million related primarily to contract cancellation costs and
other costs related to discontinued aircraft modifications.
Other
As part of the Vendor Agreements discussed in Note 2, American sold
33 Fokker 100 aircraft (with a minimal net book value) in the third
quarter of 2003. American also issued a $23 million non-interest-
bearing note, payable in installments and maturing in December
2010, and entered into short-term leases on these aircraft.
Furthermore, the Company issued shares of AMR common stock as
discussed in Note 2. In exchange, approximately $130 million of
debt related to certain of the Fokker 100 aircraft was
restructured. However, the agreement contains provisions that would
require American to repay additional amounts of the original debt
if certain events occur prior to December 31, 2005, including: (i)
an event of default (which generally occurs only if a payment
default occurs), (ii) an event of loss with respect to the related
aircraft, (iii) rejection by the Company of the lease under the
provisions of Chapter 11 of the U.S. Bankruptcy Code or (iv) the
Company's filing for bankruptcy under Chapter 7 of the U.S.
Bankruptcy Code. As a result of this transaction, including the
sale of the 33 Fokker 100 aircraft, and the termination of the
Company's interest rate swap agreements related to the debt that
has been restructured, the Company recognized a gain of
approximately $68 million in the third quarter of 2003. If the
conditions described above do not occur, the Company expects to
recognize an additional gain of approximately $37 million in
December 2005.
On July 16, 2003, the Company announced that it would reduce the
size of its St. Louis hub, effective November 1, 2003. As a result
of this action, the Company expects to record additional charges in
the fourth quarter of 2003, as the reductions occur, primarily
employee severance and benefits charges and facility exit costs.
Furthermore, the Company expects to incur additional aircraft
charges in the fourth quarter of 2003 related to the retirement of
additional operating leased Boeing 757 aircraft.
Summary
The following table summarizes the components of these charges and
the remaining accruals for future lease payments, aircraft lease
return and other costs, facilities closure costs and employee
severance and benefit costs (in millions):
Aircraft Facility Employee
Charges Exit Costs Charges Other Total
Remaining accrual
at December 31, 2002 $ 209 $ 17 $ 44 $ - $ 270
Special charges 39 50 76 (68) 97
Adjustments (20) - - - (20)
Non-cash charges - (15) 22 68 75
Payments (50) (4) (109) - (163)
Remaining accrual
at September 30, 2003 $ 178 $ 48 $ 33 $ - $ 259
-9-
12
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6.In the second quarter of 2003, as a result of the Labor
Agreements and Management Reductions discussed in Note 2, the Company
remeasured its defined benefit pension plans. The significant
actuarial assumptions used for the remeasurement were the same as
those used as of December 31, 2002, except for the discount rate and
salary scale, which were lowered to 6.50 percent, and 2.78 percent
through 2008 and 3.78 thereafter, respectively. In addition,
assumptions with respect to interest rates used to discount lump sum
benefit payments available under certain plans were updated. In
conjunction with the remeasurement, the Company recorded an increase
in its minimum pension liability, primarily due to changes in discount
rates, which resulted in an additional charge to stockholders' equity
as a component of other comprehensive loss of $334 million.
Furthermore, as a result of workforce reductions related to the Labor
Agreements and Management Reductions, the Company recognized a
curtailment loss of $46 million related to its defined benefit pension
plans, in accordance with Statement of Financial Accounting Standards
No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits" (SFAS 88),
which is included in Special charges in the consolidated statement of
operations.
The following table provides a statement of funded status as of
April 22, 2003 and December 31, 2002 for the Company's defined
benefit pension plans (in millions):
April 22, December 31,
2003 2002
Funded status
Accumulated benefit obligation (ABO) $ 7,800 $ 7,344
Projected benefit obligation (PBO) 8,345 8,757
Fair value of assets 5,369 5,323
Funded status (2,976) (3,434)
Unrecognized loss 2,185 2,709
Unrecognized prior service cost 184 330
Unrecognized transition asset (4) (4)
Net amount recognized $ (611) $ (399)
7.The Company has restricted cash and short-term investments related
to projected workers' compensation obligations and various other
obligations. As of September 30, 2003, projected workers'
compensation obligations were secured by restricted cash and short-
term investments of $398 million and various other obligations were
secured by restricted cash and short-term investments of $142
million. In the first quarter of 2003, the Company redeemed $339
million of tax-exempt bonds that were backed by standby letters of
credit secured by restricted cash and short-term investments
resulting in a reduction in restricted cash and short-term
investments. Of the $339 million of tax-exempt bonds that were
redeemed, $253 million were accounted for as operating leases.
Payments to redeem these tax-exempt special facility revenue bonds
are generally considered prepaid facility rentals and reduce future
operating lease commitments. The remaining $86 million of tax-
exempt bonds that were redeemed were accounted for as debt and had
original maturities in 2014 through 2024.
As of September 30, 2003 the Company had approximately $241 million
in fuel prepayments and credit card holdback deposits classified as
Other current assets and Other assets in the condensed consolidated
balance sheet.
In June 2003, the Company sold its interest in Worldspan, a
computer reservations company, for $180 million in cash and a $39
million promissory note, resulting in a gain of $17 million which
is included in Other income (loss) in the consolidated statement of
operations.
-10-
13
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8.As of September 30, 2003, the Company had commitments to acquire
the following aircraft: six Embraer regional jets and five
Bombardier CRJ-700s in 2003; an aggregate of 74 Embraer regional
jets and six Bombardier CRJ-700s in 2004 through 2006; and an
aggregate of 47 Boeing 737-800s and nine Boeing 777-200ERs in 2006
through 2010. Future payments for all aircraft, including the
estimated amounts for price escalation, will approximate $217
million during the remainder of 2003, $755 million in 2004, $699
million in 2005 and an aggregate of approximately $2.7 billion in
2006 through 2010. The Company has pre-arranged financing or
backstop financing for all of its aircraft deliveries through June
2005.
Boeing Capital provided backstop financing for all Boeing aircraft
deliveries in 2003. In return, American granted Boeing a security
interest in certain advance payments previously made and in certain
rights under the aircraft purchase agreement between American and
Boeing.
As discussed in the notes to the consolidated financial statements
included in the Company's 2002 Form 10-K, Miami-Dade 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). 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. American's and AMR Eagle's portion of the
cleanup costs cannot be reasonably estimated due to various
factors, including the unknown extent of the remedial actions that
may be required, the proportion of the cost that will ultimately be
recovered from the responsible parties, and uncertainties regarding
the environmental agencies that will ultimately supervise the
remedial activities and the nature of that supervision. In
addition, the Company is subject to environmental issues at various
other airport and non-airport locations for which it has accrued
$85 million at September 30, 2003. Management believes, after
considering a number of factors, that the ultimate disposition of
these environmental issues is not expected to materially affect the
Company's consolidated financial position, results of operations or
cash flows. Amounts recorded for environmental issues are based on
the Company's current assessments of the ultimate outcome and,
accordingly, could increase or decrease as these assessments
change.
9.As discussed in Note 2, the Company reached concessionary
agreements with certain lessors. The Vendor Agreements with these
lessors affected the payments, lease term, and other conditions of
certain leases. As a result of these changes to the payment and
lease terms, 30 leases which were previously accounted for as
operating leases were converted to capital leases, and one lease
which was previously accounted for as a capital lease was converted
to an operating lease. The remaining leases did not change from
their original classification. The Company recorded the new
capital leases at the fair value of the respective assets being
leased. These changes did not have a significant effect on the
Company's condensed consolidated balance sheet.
In addition, certain of the Vendor Agreements provide that the
Company's obligations under the related lease revert to the
original terms if certain events occur prior to December 31, 2005,
including: (i) an event of default under the related lease (which
generally occurs only if a payment default occurs), (ii) an event
of loss with respect to the related aircraft, (iii) rejection by
the Company of the lease under the provisions of Chapter 11 of the
U.S. Bankruptcy Code or (iv) the Company's filing for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. If any one of these
events were to occur, the Company would be responsible for
approximately $17 million in additional operating lease payments
and $6 million in additional payments related to capital leases as
of September 30, 2003. This amount will increase to approximately
$119 million in operating lease payments and $111 million in
payments related to capital leases prior to the expiration of the
provision on December 31, 2005. Such amounts are being treated as
contingent rentals and will only be recognized if they become due.
-11-
14
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The future minimum lease payments required under capital leases,
together with the present value of such payments, and future
minimum lease payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one
year as of September 30, 2003 were as follows (these amounts
reflect concessions as a result of the Vendor Agreements and
exclude contingent rentals):
Capital Operating
Year Ending December 31, Leases Leases
2003 (as of September 30, 2003) $ 45 $ 466
2004 321 1,086
2005 252 1,029
2006 252 963
2007 187 941
2008 and subsequent 1,329 9,272
2,386 $13,757 (1)
Less amount representing interest 952
Obligations under capital leases $1,434
(1) As of September 30, 2003, included in Accrued
liabilities and Other liabilities and deferred credits on the
accompanying condensed consolidated balance sheets is
approximately $1.4 billion relating to rent expense recorded in
advance of future operating lease payments.
The aircraft leases can generally be renewed at rates based on fair
market value at the end of the lease term for one to five years.
Some aircraft leases have purchase options at or near the end of
the lease term at fair market value, but generally not to exceed a
stated percentage of the defined lessor's cost of the aircraft or
at a predetermined fixed amount.
10.Accumulated depreciation of owned equipment and property at
September 30, 2003 and December 31, 2002 was $9.0 billion and $8.4
billion, respectively. Accumulated amortization of equipment and
property under capital leases at September 30, 2003 and December
31, 2002 was $1.1 billion and $974 million, respectively.
11.The Company has experienced significant cumulative losses and as
a result generated net operating losses available to offset future
taxes payable. As a result of the cumulative operating losses, a
valuation allowance was established against the full amount of the
Company's net deferred tax asset as of December 31, 2002. The Company
provides a valuation allowance for deferred tax assets when it is more
likely than not that some portion or all of its deferred tax assets
will not be realized. During 2003, the Company continued to record a
valuation allowance against its net deferred tax assets, which results
in no tax benefit being recorded for the pretax losses and the charge
to Accumulated other comprehensive loss resulting from the minimum
pension liability adjustment discussed in Note 6. The Company's
deferred tax asset valuation allowance increased $533 million in 2003,
to $903 million as of September 30, 2003.
-12-
15
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
12.In March 2003, the Board of Directors of AMR approved the
issuance of additional shares of AMR common stock to employees and
Vendors in connection with ongoing negotiations concerning
concessions. The maximum number of shares authorized for issuance
was 30 percent of the number of shares of the Company's common
stock outstanding on March 24, 2003 (156,359,955) or approximately
46.9 million shares. From the foregoing authorization, the Company
issued approximately 2.5 million shares to Vendors, from treasury
stock, at an average price of $4.81 on the date of grant resulting
in a re-allocation from Treasury stock to Additional paid-in
capital of $142 million. Also in March 2003, the AMR Board of
Directors adopted the 2003 Employee Stock Incentive Plan (2003
Plan) to provide equity awards to employees in connection with
wage, benefit and work rule concessions. Under the 2003 Plan, all
American employees are eligible to receive stock awards which may
include stock options, restricted stock and deferred stock. In
April 2003, the Company reached final agreements with the unions
representing American employees (the Labor Agreements, see Note 2).
In connection with the changes in wages, benefits and work rules,
the Labor Agreements provide for the issuance of up to 37.9 million
shares of AMR stock in the form of stock options. Approximately
37.9 million stock options were granted to employees (excluding
officers) at an exercise price of $5.00 per share, which is equal
to the closing price of AMR's common stock (NYSE) on April 17,
2003. These stock options will vest over a three-year period and
will expire on April 17, 2013. These options were granted to
members of the APA, the TWU, the APFA, agents, other non-management
personnel and certain management employees (excluding officers).
13.During the nine-month period ended September 30, 2003, American
and AMR Eagle borrowed approximately $852 million under various
debt agreements related to the purchase of aircraft, including
certain seller financed agreements. These debt agreements are
secured by the related aircraft and have effective interest rates
which are fixed or variable based on London Interbank Offered Rate
(LIBOR) plus a spread and mature over various periods of time
through 2019. As of September 30, 2003, the effective interest
rate on these agreements ranged up to 9.12 percent.
In addition, in July 2003, American issued $255 million of enhanced
equipment trust certificates, secured by aircraft, which bear
interest at 3.86 percent and are repayable in semi-annual
installments beginning in 2004, with a final maturity in 2010.
These obligations are insured by a third party.
In September 2003, the Company issued $300 million principal amount
of its 4.25 percent senior convertible notes due 2023 in a private
placement. Each note is convertible into AMR common stock at a
conversion rate of 57.61 shares per $1,000 principal amount of
notes (which represents an equivalent conversion price of $17.36
per share), subject to adjustment in certain circumstances. These
notes are guaranteed by American.
The notes are convertible under certain circumstances, including if
(i) the closing sale price of the Company's common stock reaches a
certain level for a specified period of time, (ii) the trading
price of the notes as a percentage of the closing sale price of the
Company's common stock falls below a certain level for a specified
period of time, (iii) the Company calls the notes for redemption,
or (iv) certain corporate transactions occur. Holders of the notes
may require the Company to repurchase all or any portion of the
notes on September 23, 2008, 2013 and 2018 at a purchase price
equal to the principal amount of the notes being purchased plus
accrued and unpaid interest to the date of purchase. The Company
may pay the purchase price in cash, common stock or a combination
of cash and common stock. After September 23, 2008, the Company
may redeem all or any portion of the notes for cash at a price
equal to the principal amount of the notes being redeemed plus
accrued and unpaid interest as of the redemption date.
-13-
16
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Also in September 2003, American transferred its two headquarters
buildings located in Fort Worth, Texas to AA Real Estate Holding
L.P., a wholly owned consolidated subsidiary of American. AA Real
Estate Holding L.P. leased the buildings back to American pursuant
to a triple-net lease, and used the buildings and the lease as
security for a loan consisting of four notes, in the aggregate
principal amount of $100.6 million, which is reflected as debt in
the condensed consolidated balance sheet of the Company. Each note
corresponds to a separate class of AA/Ft. Worth HQ Finance Trust
Lease Revenue Commercial Mortgage-Backed Pass-Through Certificates,
Series 2003 (the Certificates) issued by the AA/Ft. Worth HQ
Finance Trust, which is not a subsidiary of American, in a private
placement pursuant to Rule 144A under the Securities Act of 1933.
The Certificates and corresponding notes have an average effective
interest rate of 7.2 percent and a final maturity in 2010.
American has a fully drawn $834 million credit facility that
expires December 15, 2005. On March 31, 2003, American and certain
lenders in such facility entered into a waiver and amendment that
(i) waived, until May 15, 2003, the requirement that American
pledge additional collateral to the extent the value of the
existing collateral was insufficient under the terms of the
facility, (ii) waived American's liquidity covenant for the quarter
ended March 31, 2003, (iii) modified the financial covenants
applicable to subsequent periods, and (iv) increased the applicable
margin for advances under the facility. On May 15, 2003, American
pledged an additional 30 (non-Section 1110 eligible) aircraft
having an aggregate net book value as of April 30, 2003 of
approximately $450 million. Pursuant to the modified financial
covenants, American is required to maintain at least $1.0 billion
of liquidity, consisting of unencumbered cash and short-term
investments, for the second quarter 2003 and beyond. While the
Company was in compliance with the covenant at September 30, 2003,
if the Company is adversely affected by the risk factors discussed
in Note 2, it is uncertain whether the Company will be able to
satisfy this liquidity requirement through the expiration of the
facility at the end of 2005. Any failure to satisfy this
requirement, if not waived, would result in a default under this
facility and could trigger defaults under other debt arrangements.
In addition, as part of the modification of financial covenants,
the required ratio of EBITDAR to fixed charges under the facility
was reduced until the measurement period ending December 31, 2004,
and the next test of such cash flow coverage ratio was postponed
until March 31, 2004. The effective interest rate on the facility
as of September 30, 2003 is 4.68 percent and will be reset on March
17, 2004. At American's option, interest on the facility can be
calculated on one of several different bases. In most instances,
American would anticipate choosing a floating rate based upon
LIBOR.
As of September 30, 2003, AMR has issued guarantees covering
approximately $935 million of American's tax-exempt bond debt and
American has issued guarantees covering approximately $936 million
of AMR's unsecured debt, including the 4.25 percent senior
convertible notes discussed above. In addition, as of September
30, 2003, AMR and American have issued guarantees covering
approximately $503 million of AMR Eagle's secured debt, and AMR has
issued guarantees covering an additional $1.7 billion of AMR
Eagle's secured debt.
14.Financial Accounting Standards Board Interpretation No. 46,
"onsolidation of Variable Interest Entities"(Interpretation 46),
requires the primary beneficiary of a variable interest entity (VIE)
to include the assets, liabilities, and results of the activities of
the VIE in its consolidated financial statements, as well as
disclosure of information about the assets and liabilities, and the
nature, purpose and activities of consolidated variable interest
entities. In addition, Interpretation 46 requires disclosure of
information about the nature, purpose and activities of unconsolidated
VIEs in which the Company holds a significant variable interest. The
provisions of Interpretation 46 were effective immediately for any
interests in VIEs acquired after January 31, 2003. In October 2003,
the Financial Standards Accounting Board deferred the effective date
of Interpretation 46 to the fourth quarter of 2003 for variable
interests acquired before February 1, 2003.
-14-
17
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The Company has completed its preliminary evaluation of certain of
its interests in VIEs, including (i) special facility revenue
bonds, (ii) certain aircraft operating leases with fixed price
purchase options, (iii) American's capacity purchase agreements
with its Regional Affiliates, (iv) certain fuel consortia
arrangements, and (v) a hedge fund investment. The Company has
determined that it holds a significant variable interest in, but is
not the primary beneficiary of, certain entities established by
municipalities for the purpose of issuing special facility revenue
bonds and certain trusts that are the lessor under certain of its
aircraft operating leases (discussed below). Furthermore, the
Company has determined that it is neither the primary beneficiary
of, nor holds a significant variable interest in, any entities
related to the items listed in (iii) through (v) above. As a
result, Interpretation 46 is expected to have no impact on the
Company's statement of operations or consolidated balance sheet.
Special facility revenue bonds have been issued by certain
municipalities, or entities established by the municipalities for
the purpose of issuing the special facility revenue bonds,
primarily to purchase equipment and improve airport facilities that
are leased by American and accounted for as operating leases.
Approximately $2.1 billion of these bonds, with total future
payments of approximately $5.2 billion as of September 30, 2003,
are guaranteed by American, AMR, or both. These guarantees are not
collateralized and can only be invoked in the event American
defaults on the lease obligation. The leases do not include
residual value guarantees or fixed price purchase options. Of these
special facility revenue bonds, $1.9 billion, with total future
payments of approximately $4.7 billion, were issued by entities
established by municipalities for the purpose of issuing the bonds.
Although municipalities are not considered VIEs under
Interpretation 46, the Company believes that entities established
by municipalities for the purpose of issuing bonds do qualify as
VIEs.
American has 88 operating leases where the lessor is a variable
interest entity - a trust - and the lease contains a fixed price
purchase option which allows American to purchase the aircraft at a
predetermined price on a specified date. However, American does
not guarantee the residual value of the aircraft. As of September
30, 2003, future lease payments required under these leases totaled
$3.2 billion.
Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
(Interpretation 45), requires disclosures in interim and annual
financial statements about obligations under certain guarantees
issued by the Company. Furthermore, it requires recognition at the
beginning of a guarantee of a liability for the fair value of the
obligation undertaken in issuing the guarantee, with limited
exceptions including: 1) a parent's guarantee of a subsidiary's
debt to a third party, and 2) a subsidiary's guarantee of the debt
owed to a third party by either its parent or another subsidiary of
that parent. The disclosures required by Interpretation 45 have
been included in Notes 6, 7 and 8 to the consolidated financial
statements in the 2002 Form 10-K. The initial recognition and
initial measurement provisions are only applicable on a prospective
basis for guarantees issued or modified after December 31, 2002.
This interpretation has had no impact on the Company's consolidated
statement of operations or condensed consolidated balance sheets.
15.Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 requires the Company to
test goodwill and indefinite-lived intangible assets (for AMR,
route acquisition costs) for impairment rather than amortize them.
In 2002, the Company completed an impairment analysis for route
acquisition costs in accordance with SFAS 142. The analysis did not
result in an impairment charge. In addition, the Company completed
an impairment analysis related to its $1.4 billion of goodwill and
determined the Company's entire goodwill balance was impaired. In
arriving at this conclusion, the Company's net book value was
determined to be in excess of the Company's fair value at January
1, 2002, using AMR as the reporting unit for purposes of the fair
value determination. The Company determined its fair value as of
January 1, 2002 using various valuation methods, ultimately
utilizing market capitalization as the primary indicator of fair
value. As a result, the Company recorded a one-time, non-cash
charge, effective January 1, 2002, of $988 million ($6.36 per
share, net of a tax benefit of $363 million) to write-off all of
AMR's goodwill. This charge is nonoperational in nature and is
reflected as a cumulative effect of accounting change in the
consolidated statements of operations.
-15-
18
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
16.The Company includes changes in minimum pension liabilities,
changes in the fair value of certain derivative financial
instruments that qualify for hedge accounting and unrealized gains
and losses on available-for-sale securities in comprehensive loss.
For the three months ended September 30, 2003 and 2002,
comprehensive loss was $(22) million and $(897) million,
respectively. In addition, for the nine months ended September 30,
2003 and 2002, comprehensive loss was $(1,502) million and $(2,881)
million, respectively. The difference between net loss and
comprehensive loss is due primarily to the adjustment to the
Company's minimum pension liability, as discussed in Note 6, and
the accounting for the Company's derivative financial instruments
under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as
amended (SFAS 133).
American enters into jet fuel, heating oil and crude swap and
option contracts to dampen the volatility in jet fuel prices.
Beginning in March 2003, the Company revised its hedging strategy
and, in June 2003, terminated substantially all of its contracts
with maturities beyond March 2004. During the second quarter of
2003, the termination of these contracts resulted in the collection
of approximately $41 million in settlement of the contracts. The
gain on these contracts will continue to be deferred in Accumulated
other comprehensive loss until the time the original underlying jet
fuel hedged is used. Commencing in October 2003, the Company began
to enter into new fuel hedging contracts with maturities beyond
March 2004 for a portion of its future fuel requirements.
At September 30, 2003, American had fuel hedging agreements with
broker-dealers on approximately 466 million gallons of fuel
products. The fair value of the Company's fuel hedging agreements
at September 30, 2003, representing the amount the Company would
receive to terminate the agreements, totaled $62 million, compared
to $212 million at December 31, 2002, and is included in Other
current assets.
-16-
19
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
17.The following table sets forth the computations of basic and
diluted earnings (loss) per share before cumulative effect of
accounting change (in millions, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Numerator:
Net income (loss) before cumulative
effect of accounting change -
numerator for basic and diluted
earnings (loss) per share $ 1 $(924) $(1,117) $(1,994)
Denominator:
Denominator for basic earnings
(loss) per share before
cumulative effect of accounting
change - weighted-average shares 159 156 158 155
Effect of dilutive securities:
Employee options and shares 45 - - -
Assumed treasury shares purchased (23) - - -
Dilutive potential common shares 22 - - -
Denominator for diluted earnings
(loss) per share before
cumulative effect of accounting
change - adjusted weighted-
average shares 181 156 158 155
Basic and diluted earnings (loss)
per share before cumulative
effect of accounting change $ .00 $(5.93) $(7.08) $(12.83)
For the nine months ended September 30, 2003 approximately ten
million potential dilutive shares were not added to the
denominator, because inclusion of such shares would be
antidilutive, as compared to approximately two million and five
million shares, respectively, for the three and nine months ended
September 30, 2002. In addition, for the three and nine months
ended September 30, 2003, approximately 17 million shares issuable
upon conversion of the Company's 4.25 percent convertible notes
discussed in Note 13 were not added to the denominator because the
inclusion of such shares would be antidilutive.
-17-
20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2003 and 2002
Summary AMR Corporation's (AMR or the Company) net earnings during
the third quarter of 2003 were $1 million, or $0.00 per share, as
compared to a net loss of $924 million, or $5.93 per share for the
same period in 2002. AMR's operating earnings of $165 million
increased $1.5 billion compared to the same period in 2002. The
Company's third quarter 2003 results include net special credits of
$24 million. Comparatively, the Company's third quarter 2002 results
include $718 million in special charges related to the initiatives
announced in August 2002 to reduce its costs, reduce capacity,
simplify its aircraft fleet and enhance productivity. See Note 5 to
the condensed consolidated financial statements for additional
information. AMR's principal subsidiary is American Airlines, Inc.
(American).
The Company's third quarter 2003 revenues increased slightly year-over-
year while capacity decreased, resulting in some unit revenue
(passenger revenue per available seat mile) improvement. Overall, the
Company's revenues increased approximately $81 million, or 1.8
percent, to $4.6 billion in the third quarter of 2003 from the same
period last year. However, even with recent improvements, the
Company's revenues are still depressed relative to historical levels.
American's passenger revenues increased by 1.4 percent, or $51
million, in the third quarter of 2003 as compared to the same period
in 2002. American's third quarter domestic passenger revenue per
available seat mile (RASM) increased 11.6 percent, to 8.69 cents, on a
capacity decrease of 8.9 percent, to 30.0 billion available seat miles
(ASMs). International RASM increased to 9.19 cents, or 0.4 percent,
on a capacity increase of 0.4 percent. The increase in international
RASM was due to a 0.9 percent increase in Pacific and Latin American
RASM, offset by a 0.2 percent decrease in European RASM. The increase
in international capacity was driven by a 2.5 percent increase in
European ASMs, offset by a 7.4 percent and 0.2 percent reduction in
Pacific and Latin American ASMs, respectively.
The Company's Regional Affiliates include two wholly owned
subsidiaries, American Eagle Airlines, Inc. (American Eagle) and
Executive Airlines, Inc. (Executive) (collectively, AMR Eagle), and
two independent carriers, Trans States Airlines, Inc. (Trans States)
and Chautauqua Airlines, Inc. (Chautauqua). In 2002, American had a
capacity purchase agreement with Chautauqua, and revenue prorate
agreements with AMR Eagle and Trans States. In 2003, American has
capacity purchase agreements with all three carriers. Regional
Affiliates' traffic increased 24.4 percent while capacity increased
20.5 percent, to approximately 2.2 billion ASMs.
The Company's operating expenses decreased 24.0 percent, or $1.4
billion. Wages, salaries and benefits decreased 20.2 percent, or $428
million, primarily due to the Labor Agreements and Management
Reductions discussed in Note 2 to the condensed consolidated financial
statements. Maintenance, materials and repairs decreased 22.8
percent, or $66 million, due primarily to a decrease in airframe and
engine volumes at the Company's maintenance bases resulting from a
variety of factors, including the retirement of aircraft, the timing
of sending engines to repair vendors and a decrease in the number of
flights. The Company expects maintenance, materials and repairs costs
to increase as aircraft utilization increases and the benefit from
retiring aircraft subsides. Aircraft rentals decreased $45 million,
or 21.4 percent, due primarily to concessionary agreements with
certain lessors and the removal of leased aircraft from service in
prior periods. Food service decreased 15.3 percent, or $29 million,
due primarily to a decrease in the number of departures and passengers
boarded and simplification of catering services. Other operating
expenses decreased 16.3 percent, or $116 million, due to decreases in
data processing expenses, travel and incidental costs, insurance
costs, contract maintenance work that American performs for other
airlines, advertising and promotion costs and security costs. Special
charges (credits) for the third quarter of 2003 include (i) a $68
million gain resulting from a transaction involving 33 of the
Company's Fokker 100 aircraft and related debt and (ii) $39 million
related to aircraft charges. Comparatively, Special charges for the
third quarter of 2002 included approximately (i) $658 million related
to aircraft charges and (ii) $57 million in employee charges. See Note
5 to the condensed consolidated financial statements for additional
information regarding Special charges (credits). U.S. government
grant includes a $10 million benefit recognized for the reimbursement
from the U.S. government under the Air Transportation Safety and
System Stabilization Act in 2002.
-18-
21
Other income (expense), historically a net expense, increased $36
million due to the following: Interest expense increased $27 million,
or 15.8 percent, resulting primarily from the increase in the
Company's long-term debt.
The Company has experienced significant cumulative losses and as a
result generated net operating losses available to offset future taxes
payable. As a result of the cumulative operating losses, a valuation
allowance was established against the full amount of the Company's net
deferred tax asset as of December 31, 2002. The Company provides a
valuation allowance for deferred tax assets when it is more likely
than not that some portion or all of its deferred tax assets will not
be realized. During 2003, the Company continued to record a valuation
allowance against its net deferred tax assets, which results in no tax
benefit being recorded for the pretax losses or tax provision being
recorded for pretax earnings. The Company's deferred tax asset
valuation allowance remained at $903 million as of September 30, 2003.
OPERATING STATISTICS
Three Months Ended September 30,
2003 2002
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 32,718 33,080
Available seat miles (millions) 43,021 45,920
Cargo ton miles (millions) 485 498
Passenger load factor 76.0% 72.0%
Passenger revenue yield per passenger mile cents) 11.63 11.35
Passenger revenue per available seat mile (cents) 8.84 8.18
Cargo revenue yield per ton mile (cents) 27.68 27.58
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 9.43 11.70
Fuel consumption (gallons, in millions) 772 839
Fuel price per gallon (cents) 85.0 78.0
Operating aircraft at period-end 799 826
Regional Affiliates
Revenue passenger miles (millions) 1,463 1,176
Available seat miles (millions) 2,190 1,817
Passenger load factor 66.8% 64.7%
(*) The Company believes that excluding costs related to Regional
Affiliates provides a measure which is more comparable to
American's historical operating expenses per ASM. Following is
a reconciliation of total operating expenses to operating
expenses excluding Regional Affiliates (in millions, except as
noted):
Three Months Ended September 30,
2003 2002
American Airlines, Inc.
Total operating expenses (GAAP) $4,500 $5,409
Less:Operating expenses incurred
related to Regional Affiliates 441 33
Operating expenses excluding expenses
incurred related to Regional Affiliates $4,059 $5,376
American mainline jet operations
available seat miles 43,021 45,920
Operating expenses per available seat
mile, excluding Regional Affiliates (cents) 9.43 11.70
Note 1:Certain amounts have been reclassified to conform with the
2003 presentation.
Note 2:American Airlines, Inc. 2003 operating expenses include
expenses incurred related to capacity purchase agreements with
Regional Affiliates - American Eagle, Executive, Trans States
and Chautauqua, whereas 2002 operating expenses include
expenses incurred related to a capacity purchase agreement with
Regional Affiliate - Chautauqua.
-19-
22
Operating aircraft at September 30, 2003, included:
American Airlines Aircraft AMR Eagle Aircraft
Airbus A300-600R 34 ATR 42 15
Boeing 737-800 77 Bombardier CRJ-700 14
Boeing 757-200 146 Embraer 135 39
Boeing 767-200 9 Embraer 140 59
Boeing 767-200 Extended Range 20 Embraer 145 46
Boeing 767-300 Extended Range 58 Super ATR 42
Boeing 777-200 Extended Range 45 Saab 340B 26
Fokker 100 48 Saab 340B Plus 25
McDonnell Douglas MD-80 362 Total 266
Total 799
The average aircraft age for American's aircraft is 11.2 years and AMR
Eagle's aircraft is 6.1 years.
Of the operating aircraft listed above, one Airbus A300-600R, eight
Boeing 767-200s, five Boeing 767-200 ERs and 25 McDonnell Douglas MD-
80 aircraft were in temporary storage as of September 30, 2003.
In addition, the following owned and leased aircraft were not operated
by the Company as of September 30, 2003: five operating leased Boeing
757-200s, three operating leased McDonnell Douglas DC-9s, three
operating leased McDonnell Douglas MD-80s, 18 owned Fokker 100s, ten
owned Embraer 145s and 38 capital leased and five owned Saab 340Bs.
In 2003, AMR Eagle agreed to sell 19 ATR 42 aircraft to Federal
Express, Inc., with deliveries beginning in June 2003 and ending in
December 2004 and American agreed to sell 14 Fokker 100 aircraft to a
buyer, with deliveries beginning in September 2003 and ending in
August 2004. As of September 30, 2003, four ATR 42 and two Fokker 100
aircraft have been delivered.
For the Nine Months Ended September 30, 2003 and 2002
Summary The Company's net loss for the nine months ended September 30,
2003 was $1.1 billion, or $7.08 per share, as compared to a net loss
of $3.0 billion, or $19.19 per share for the same period in 2002. The
Company's 2003 results include (i) $358 million in security cost
reimbursements received under the Emergency Wartime Supplemental
Appropriations Act, 2003 (the Act) (see Note 4 to the condensed
consolidated financial statements for additional information) and $77
million in special charges. The Company's 2002 results include (i) a
one-time, non-cash charge to record the cumulative effect of a change
in accounting, effective January 1, 2002, of $988 million, or $6.36
per share, to write-off all of AMR's goodwill upon the adoption of
Statement of Financial Accounting Standards Board No. 142 "Goodwill
and Other Intangible Assets" (see Note 15 to the condensed
consolidated financial statements) and (ii) $718 million in special
charges related to the initiatives announced in August 2002 to reduce
its costs, reduce capacity, simplify its aircraft fleet and enhance
productivity. See Note 5 to the condensed consolidated financial
statements for additional information. AMR's operating loss of $617
million decreased $2.0 billion compared to the same period in 2002.
-20-
23
The Company's 2003 revenues decreased year-over-year, but at a slower
rate than its capacity. The Company's revenues through April continued
to be negatively impacted by the economic slowdown, the war in Iraq
and the outbreak of SARS. These trends however, began to reverse in
May and continued to show improvement through September, and while
capacity decreased year-over-year, the Company showed some unit
revenue improvement. Overall, the Company's revenues decreased
approximately $146 million, or 1.1 percent, to $13.0 billion in 2003
from the same period in 2002. American's passenger revenues decreased
by 2.2 percent, or $242 million, in 2003 from the same period in 2002.
American's domestic revenue per available seat mile (RASM) for the
nine months ended September 30, however, increased 4.1 percent, to
8.64 cents, on a capacity decrease of 6.9 percent, to 87.7 billion
available seat miles (ASMs). International RASM decreased to 8.75
cents, or 1.1 percent, on a capacity increase of 1.2 percent. The
decrease in international RASM was due to a 14.5 percent and 0.2
percent decrease in Pacific and Latin American RASM slightly offset by
a 0.7 percent increase in European RASM. The increase in
international capacity was driven by a 7.1 percent and 2.9 percent
increase in Pacific and European ASMs, respectively, slightly offset
by a 1.2 percent reduction in Latin American ASMs.
In 2002, American had a capacity purchase agreement with Chautauqua,
and revenue prorate agreements with AMR Eagle and Trans States. In
2003, American has capacity purchase agreements with all three
carriers. Regional Affiliates' traffic increased 19.0 percent in 2003
while capacity increased 18.6 percent, to approximately 6.3 billion
ASMs.
Other revenues increased 7.4 percent, or $54 million, due primarily to
increases in ticket change fees coupled with changes to the Company's
change fee arrangements with travel agencies, increases in airfreight
service fees due primarily to fuel surcharges, increases in AAdvantage
fees and increases in employee travel service charges, somewhat offset
by decreases in contract maintenance work that American performs for
other airlines.
The Company's operating expenses decreased 13.8 percent, or $2.2
billion. Wages, salaries and benefits decreased 10.5 percent, or $667
million, primarily due to the Labor Agreements and Management
Reductions discussed in Note 2 to the condensed consolidated financial
statements. Aircraft fuel expense increased 10.5 percent, or $197
million, due primarily to an 18.3 percent increase in American's
average price per gallon of fuel but was somewhat offset by a 7.0
percent decrease in American's fuel consumption. Commissions, booking
fees and credit card expense decreased 12.7 percent, or $116 million,
due primarily to the benefit from the changes in the commission
structure implemented in March 2002 and a 1.6 percent decrease in
passenger revenues. Maintenance, materials and repairs decreased 23.7
percent, or $199 million, due primarily to a decrease in airframe and
engine volumes at the Company's maintenance bases resulting from a
variety of factors, including the retirement of aircraft, the timing
of sending engines to repair vendors and a decrease in the number of
flights; and the receipt of certain vendor credits. The Company
expects maintenance, materials and repairs costs to increase as
aircraft utilization increases and the benefit from retiring aircraft
subsides. Aircraft rentals decreased $118 million, or 18.2 percent,
due primarily to concessionary agreements with certain lessors and the
removal of leased aircraft from service in prior periods. Food
service decreased 14.7 percent, or $79 million, due primarily to a
decrease in the number of departures and passengers boarded and
simplification of catering services. Other operating expenses
decreased 9.7 percent or $200 million due to decreases in data
processing expenses, travel and incidental costs, insurance costs,
contract maintenance work that American performs for other airlines,
advertising and promotion costs and security costs. Special charges
for the nine months ended September 30 include (i) a $68 million gain
resulting from a transaction involving 33 of the Company's Fokker 100
aircraft and related debt, (ii) $76 million in employee charges, (iii)
$50 million in facility exit costs and (iv) $39 million related to
aircraft charges offset by a $20 million aircraft related credit to
finalize prior accruals. Comparatively, Special charges in 2002
included approximately (i) $658 million related to aircraft charges
and (ii) $57 million in employee charges. See Note 5 to the condensed
consolidated financial statements for additional information regarding
Special charges. U.S. government grant includes a $358 million benefit
recognized for the reimbursement of security service fees from the
U.S. government under the Act in 2003 and a $10 million benefit
recognized for the reimbursement from the U.S. government under the
Air Transportation Safety and System Stabilization Act in 2002.
Other income (expense), historically a net expense, increased $119
million due to the following: Interest income decreased 24.1 percent,
or $13 million, due primarily to lower short-term investment balances
and a decrease in interest rates. Interest expense increased $79
million, or 15.8 percent, resulting primarily from the increase in the
Company's long-term debt. Miscellaneous-net decreased $14 million,
primarily due to the write-down of certain investments held by the
Company during the first quarter of 2003.
-21-
24
As discussed above, due to the Company's cumulative operating losses,
a valuation allowance was established against the full amount of the
Company's net deferred tax asset as of December 31, 2002. During 2003,
the Company continued to record a valuation allowance against its net
deferred tax assets, which results in no tax benefit being recorded
for the pretax losses and the charge to Accumulated other
comprehensive loss resulting from the minimum pension liability
adjustment discussed in Note 6 to the condensed consolidated financial
statements. The Company's deferred tax asset valuation allowance
increased $533 million in 2003, to $903 million as of September 30,
2003.
The effective tax rate for the nine months ended September 30, 2002
was impacted by a $57 million charge resulting from a provision in
Congress' economic stimulus package that changed the period for
carrybacks of net operating losses (NOLs).
OPERATING STATISTICS
Nine Months Ended September 30,
2003 2002
American Airlines, Inc. Mainline Jet Operations
Revenue passenger miles (millions) 90,736 92,276
Available seat miles (millions) 123,861 129,968
Cargo ton miles (millions) 1,468 1,478
Passenger load factor 73.3% 71.0%
Passenger revenue yield per passenger mile (cents) 11.84 11.90
Passenger revenue per available seat mile (cents) 8.67 8.45
Cargo revenue yield per ton mile (cents) 27.86 27.82
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) (*) 10.12 11.27
Fuel consumption (gallons, in millions) 2,224 2,392
Fuel price per gallon (cents) 87.3 73.8
Regional Affiliates
Revenue passenger miles (millions) 4,017 3,375
Available seat miles (millions) 6,286 5,301
Passenger load factor 63.9% 63.7%
(*) The Company believes that excluding costs related to Regional
Affiliates provides a measure which is more comparable to
American's historical operating expenses per ASM. Following is
a reconciliation of total operating expenses to operating
expenses excluding Regional Affiliates (in millions, except as
noted):
Nine Months Ended September 30,
2003 2002
American Airlines, Inc.
Total operating expenses (GAAP) $13,843 $14,736
Less: Operating expenses incurred
related to Regional Affiliates 1,306 92
Operating expenses excluding expenses
incurred related to Regional Affiliates $12,537 $14,644
American mainline jet operations
available seat miles 123,861 129,968
Operating expenses per available seat mile,
excluding Regional Affiliates (cents) 10.12 11.27
Note 1: Certain amounts have been reclassified to conform with the
2003 presentation.
Note 2: American Airlines, Inc. 2003 operating expenses include
expenses incurred related to capacity purchase agreements with
Regional Affiliates - American Eagle, Executive, Trans States
and Chautauqua, whereas 2002 operating expenses include
expenses incurred related to a capacity purchase agreement with
Regional Affiliate - Chautauqua.
-22-
25
LIQUIDITY AND CAPITAL RESOURCES
In February 2003, American asked its employees for approximately $1.8
billion in annual savings through a combination of changes in wages,
benefits and work rules. The requested $1.8 billion in savings was
divided by work group as follows: $660 million - pilots; $620 million
- - Transportation Workers Union represented employees; $340 million -
flight attendants; $100 million - management and support staff; and
$80 million - agents and representatives. References in this document
to American's three major unions include: the Allied Pilots
Association (the APA); the Transportation Workers Union (the TWU); and
the Association of Professional Flight Attendants (the APFA).
In April 2003, American reached agreements with its three major unions
(the Labor Agreements) and implemented various changes in the pay
plans and benefits for non-unionized personnel, including officers and
other management (the Management Reductions). The anticipated cost
savings arising from the Labor Agreements and the Management
Reductions met the targeted annual savings of $1.8 billion.
Of the approximately $1.8 billion in estimated annual savings,
approximately $1.0 billion relate to wage and benefit reductions and
$0.8 billion relate to changes in work rules, which have resulted in
job reductions and will continue to result in additional job
reductions through June 2004. As a result of work rule related job
reductions, the Company incurred $60 million in severance charges in
2003 (see Note 5 to the condensed consolidated financial statements
for additional information). Wage reductions became effective on
April 1, 2003 for officers and May 1, 2003 for all other employees.
Reductions related to benefits and work rule changes will continue to
be phased in over time. In connection with the changes in wages,
benefits and work rules, the Company granted approximately 38 million
shares of AMR stock to American's employees (excluding officers) in
the form of stock options which will vest over a three year period
with an exercise price of $5 per share (see Note 12 to the condensed
consolidated financial statements for additional information).
In addition, the Company and American have reached concessionary
agreements with certain vendors, lessors, lenders and suppliers
(collectively, the Vendors, and the agreements, the Vendor
Agreements). Generally, under the terms of these Vendor Agreements
the Company or American will receive the benefit of lower rates and
charges for certain goods and services, and more favorable rent and
financing terms with respect to certain of its aircraft. In return for
these concessions, the Company issued approximately 2.5 million shares
of AMR's common stock to Vendors. As of September 30, 2003, the
annual cost savings from the Vendors are estimated to be over $200
million.
The Company's revenue environment improved during the second and third
quarters of 2003 as reflected in improved unit revenues (revenue per
available seat mile) in May through September 2003. Even with this
improvement, however, the Company's revenues are still depressed
relative to historical levels. Moreover, the Company's recent losses
have adversely affected its financial condition. The Company therefore
needs to see a combination of continued improvement in the revenue
environment, cost reductions and productivity improvements before it
can return to sustained profitability at acceptable levels.
To maintain sufficient liquidity as the Company implements its plan to
return to sustained profitability, the Company will need continued
access to additional funding, most likely through a combination of
financings and asset sales. In addition, the Company's ability to
return to sustained profitability will depend on a number of risk
factors, many of which are largely beyond the Company's control.
Among other things, the following factors have had and/or may have a
negative impact on the Company's business and financial results: the
uncertain financial and business environment the Company faces; the
struggling economy; high fuel prices and the availability of fuel; the
residual effects of the war in Iraq; conflicts in the Middle East;
historically low fare levels and the general competitive environment;
the ability of the Company to implement its restructuring program and
the effect of the program on operational performance and service
levels; uncertainties with respect to the Company's international
operations; changes in its business strategy; actions by U.S. or
foreign government agencies; the possible occurrence of additional
terrorist attacks; another outbreak of SARS; the inability of the
Company to satisfy existing liquidity requirements or other covenants
in certain of its credit arrangements; and the availability of future
financing. In particular, if the revenue environment deteriorates
beyond normal seasonal trends, or the Company is unable to access the
capital markets or sell assets, it may be unable to fund its
obligations and sustain its operations.
-23-
26
During 2001 and 2002, the Company raised approximately $8.3 billion of
funding to finance capital commitments and to fund operating losses.
The Company expects that it will need to continue to raise capital
until such time as the Company has achieved acceptable levels of
sustained profitability over a significant period of time. The Company
had approximately $2.7 billion in unrestricted cash and short-term
investments as of September 30, 2003. The Company's possible future
financing sources include: (i) a limited amount of additional secured
aircraft debt (virtually all of the Company's Section 1110-eligible
aircraft are encumbered), (ii) securitization of future operating
receipts, (iii) debt secured by other assets, (iv) sale-leaseback
transactions of owned aircraft, (v) the potential sale of certain non-
core assets, (vi) unsecured debt and (vii) equity. However, the
availability and level of these financing sources cannot be assured,
particularly in light of the fact that the Company has fewer
unencumbered assets available than it had in the past. To the extent
that the Company's revenues deteriorate beyond normal seasonal trends
or it is unable to access capital markets and raise additional
capital, the Company may be unable to fund its obligations and sustain
its operations.
The Company reported in its Annual Report on Form 10-K for the year
ended December 31, 2002 that it was actively pursuing a possible sale
of AMR Investment Services, Inc. The Company has decided not to pursue
a sale at this time.
In September 2003, the Company reached an agreement to sell its
interest in Hotwire (Hotwire.com), a discount travel website company,
pending regulatory approval. The Company expects to receive
regulatory approval in the fourth quarter of 2003. If the sale
becomes final, the Company expects to receive approximately $80
million in proceeds, the majority of which would be recognized as a
gain.
In July 2003, American issued $255 million of enhanced equipment trust
certificates, secured by aircraft, which bear interest at 3.86 percent
and are repayable in semi-annual installments beginning in 2004, with
a final maturity in 2010. These obligations are insured by a third
party.
In September 2003, the Company issued $300 million principal amount of
its 4.25 percent senior convertible notes due 2023 in a private
placement. Each note is convertible into AMR common stock at a
conversion rate of 57.61 shares per $1,000 principal amount of notes
(which represents an equivalent conversion price of $17.36 per share),
subject to adjustment in certain circumstances. These notes are
guaranteed by American.
The notes are convertible under certain circumstances, including if
(i) the closing sale price of the Company's common stock reaches a
certain level for a specified period of time, (ii) the trading price
of the notes as a percentage of the closing sale price of the
Company's common stock falls below a certain level for a specified
period of time, (iii) the Company calls the notes for redemption, or
(iv) certain corporate transactions occur. Holders of the notes may
require the Company to repurchase all or any portion of the notes on
September 23, 2008, 2013 and 2018 at a purchase price equal to the
principal amount of the notes being purchased plus accrued and unpaid
interest to the date of purchase. The Company may pay the purchase
price in cash, common stock or a combination of cash and common stock.
After September 23, 2008, the Company may redeem all or any portion of
the notes for cash at a price equal to the principal amount of the
notes being redeemed plus accrued and unpaid interest as of the
redemption date.
Also in September 2003, American transferred its two headquarters
buildings located in Fort Worth, Texas to AA Real Estate Holding L.P.,
a wholly owned consolidated subsidiary of American. AA Real Estate
Holding L.P. leased the buildings back to American pursuant to a
triple-net lease, and used the buildings and the lease as security for
a loan consisting of four notes, in the aggregate principal amount of
$100.6 million, which is reflected as debt in the condensed
consolidated balance sheet of the Company. Each note corresponds to a
separate class of AA/Ft. Worth HQ Finance Trust Lease Revenue
Commercial Mortgage-Backed Pass-Through Certificates, Series 2003 (the
Certificates) issued by the AA/Ft. Worth HQ Finance Trust, which is
not a subsidiary of American, in a private placement pursuant to Rule
144A under the Securities Act of 1933. The Certificates and
corresponding notes have an average effective interest rate of 7.2
percent and a final maturity in 2010.
During the nine-month period ended September 30, 2003, American and
AMR Eagle borrowed approximately $852 million under various debt
agreements related to the purchase of aircraft, including certain
seller financed agreements. These debt agreements are secured by the
related aircraft and have effective interest rates which are fixed or
variable based on London Interbank Offered Rate (LIBOR) plus a spread
and mature over various periods of time through 2019. As of September
30, 2003, the effective interest rate on these agreements ranged up to
9.12 percent.
-24-
27
The Company's significant indebtedness could have important
consequences, such as (i) limiting the Company's ability to obtain
additional financing for working capital, capital expenditures,
acquisitions and general purposes, (ii) requiring the Company to
dedicate a substantial portion of its cash flow from operations to
payments on its indebtedness, (iii) making the Company more vulnerable
to economic downturns, limiting its ability to withstand competitive
pressures and reducing its flexibility in responding to changing
business and economic conditions, and (iv) limiting the Company's
flexibility in planning for, or reacting to, changes in its business
and the industry in which it operates.
AMR and American's credit ratings are significantly below investment
grade. In February 2003, Moody's downgraded the senior implied rating
for AMR, the senior unsecured ratings of both AMR and American and the
ratings of most of American's secured debt. Also in February 2003,
Standard & Poor's lowered its long-term corporate credit ratings for
both AMR and American, lowered the senior secured and unsecured debt
ratings of AMR, and lowered the secured debt rating of American.
American's short-term rating was withdrawn. Ratings on most of
American's non-enhanced equipment trust certificates were also
lowered. In March 2003, Standard & Poor's further lowered its long-
term corporate credit ratings for both AMR and American, lowered the
senior secured and unsecured debt ratings of AMR, and lowered the
secured debt rating of American. Ratings on most of American's non-
enhanced equipment trust certificates were also lowered. These
previous reductions have increased the Company's borrowing costs. On
June 9, 2003, Moody's affirmed the ratings of AMR and American,
removed the ratings from review for possible downgrade, and gave the
ratings a negative outlook. On June 20, 2003, Standard & Poor's
raised its ratings of AMR and American and removed the ratings from
CreditWatch. On September 4, 2003, Standard & Poor's lowered its
credit ratings on some of American's enhanced equipment trust
certificates as part of an industry wide downgrade of selected
aircraft-backed debt collateralized wholly or partially by Boeing or
McDonnell Douglas aircraft introduced into service during the 1980s,
including Boeing 757-200 and McDonnell Douglas MD-80 aircraft. On
October 22, 2003, Standard & Poor's revised the outlook on its long-
term ratings on AMR and American to stable. Additional significant
reductions in AMR's or American's credit ratings would further
increase its borrowing or other costs and further restrict the
availability of future financing.
In March 2003, Standard & Poor's removed AMR's common stock from the
S&P 500 index.
American has a fully drawn $834 million credit facility that expires
December 15, 2005. On March 31, 2003, American and certain lenders in
such facility entered into a waiver and amendment that (i) waived,
until May 15, 2003, the requirement that American pledge additional
collateral to the extent the value of the existing collateral was
insufficient under the terms of the facility, (ii) waived American's
liquidity covenant for the quarter ended March 31, 2003, (iii)
modified the financial covenants applicable to subsequent periods, and
(iv) increased the applicable margin for advances under the facility.
On May 15, 2003, American pledged an additional 30 (non-Section 1110
eligible) aircraft having an aggregate net book value as of April 30,
2003 of approximately $450 million. Pursuant to the modified
financial covenants, American is required to maintain at least $1.0
billion of liquidity, consisting of unencumbered cash and short-term
investments, for the second quarter 2003 and beyond. While the
Company was in compliance with the covenant at September 30, 2003, if
the Company is adversely affected by the risk factors discussed in
Note 2 to the condensed consolidated financial statements or elsewhere
in this Report, it is uncertain whether the Company will be able to
satisfy this liquidity requirement through the expiration of the
facility at the end of 2005. Any failure to satisfy this requirement,
if not waived, would result in a default under this facility and could
trigger defaults under other debt arrangements.
In addition, as part of the modification of financial covenants, the
required ratio of EBITDAR to fixed charges under the facility was
reduced until the measurement period ending December 31, 2004, and the
next test of such cash flow coverage ratio was postponed until March
31, 2004. The effective interest rate on the facility as of September
30, 2003 is 4.68 percent and will be reset on March 17, 2004. At
American's option, interest on the facility can be calculated on one
of several different bases. In most instances, American would
anticipate choosing a floating rate based upon LIBOR.
-25-
28
In April 2003, the President signed the Emergency Wartime Supplemental
Appropriations Act, 2003 (the Act), which includes aviation-related
assistance provisions. The Act authorized payment of (i) $100 million
to compensate air carriers for the direct costs associated with the
strengthening of flight deck doors and locks and (ii) $2.3 billion to
reimburse air carriers for increased security costs, which was
distributed in proportion to the amounts each carrier had paid or
collected in passenger security and air carrier security fees to the
Transportation Security Administration as of the Act's enactment (the
Security Fee Reimbursement). In addition, the Act suspended the
collection of the passenger security fee from June 1, 2003 until
September 30, 2003 and authorized the extension of war-risk insurance
through August 31, 2004 (and permits further extensions until December
31, 2004). The Act also limits the total cash compensation for the
two most highly compensated named executive officers in 2002 for
certain airlines, including the Company, during the period April 1,
2003 to April 1, 2004 to the amount of salary received by such
officers, or their successors, in 2002. A violation of this executive
compensation provision would require the carrier to repay the
government for the amount of the Security Fee Reimbursement. The
Company does not anticipate any difficulties in complying with this
limitation on executive compensation and believes the likelihood of
repaying the government for the amount of the Security Fee
Reimbursement is remote. The Company's Security Fee Reimbursement was
$358 million (net of payments to independent regional affiliates) and
was recorded as a reduction to operating expenses during the second
quarter of 2003. The Company's compensation for the direct costs
associated with strengthening flight deck doors was $23 million and
was recorded as a basis reduction to capitalized flight equipment in
the third quarter of 2003.
The Company has restricted cash and short-term investments related to
projected workers' compensation obligations and various other
obligations of $540 million as of September 30, 2003. In the first
quarter of 2003, the Company redeemed $339 million of tax-exempt bonds
that were backed by standby letters of credit secured by restricted
cash and short-term investments resulting in a reduction in restricted
cash and short-term investments. Of the $339 million of tax-exempt
bonds that were redeemed, $253 million were accounted for as operating
leases. Payments to redeem these tax-exempt special facility revenue
bonds are generally considered prepaid facility rentals and reduce
future operating lease commitments. The remaining $86 million of tax-
exempt bonds that were redeemed were accounted for as debt and had
original maturities in 2014 through 2024.
As of September 30, 2003, the Company has approximately $241 million
in fuel prepayments and credit card holdback deposits classified as
Other current assets and Other assets in the condensed consolidated
balance sheet.
As discussed in Note 9 to the condensed consolidated financial
statements, the Company reached concessionary agreements with certain
lessors. The Vendor Agreements with these lessors affected the
payments, lease term, and other conditions of certain leases. As a
result of these changes to the payment and lease terms, 30 leases
which were previously accounted for as operating leases were
converted to capital leases, and one lease which was previously
accounted for as a capital lease was converted to an operating lease.
The remaining leases did not change from their original
classification. The Company recorded the new capital leases at the
fair value of the respective assets being leased. These changes did
not have a significant effect on the Company's condensed consolidated
balance sheet.
In addition, certain of the Vendor Agreements provide that the
Company's obligations under the related lease revert to the original
terms if certain events occur prior to December 31, 2005, including:
(i) an event of default under the related lease (which generally
occurs only if a payment default occurs), (ii) an event of loss with
respect to the related aircraft, (iii) rejection by the Company of
the lease under the provisions of Chapter 11 of the U.S. Bankruptcy
Code or (iv) the Company's filing for bankruptcy under Chapter 7 of
the U.S. Bankruptcy Code. If any one of these events were to occur,
the Company would be responsible for approximately $17 million in
additional operating lease payments and $6 million in additional
payments related to capital leases as of September 30, 2003. This
amount will increase to approximately $119 million in operating lease
payments and $111 million in payments related to capital leases prior
to the expiration of the provision on December 31, 2005. Such
amounts are being treated as contingent rentals and will only be
recognized if they become due.
-26-
29
As part of the Vendor Agreements discussed in Note 2 to the condensed
consolidated financial statements, American sold 33 Fokker 100
aircraft (with a minimal net book value) in the third quarter of 2003.
American also issued a $23 million non-interest-bearing note, payable
in installments and maturing in December 2010, and entered into short-
term leases on these aircraft. Furthermore, the Company issued shares
of AMR common stock as discussed in Note 2 to the condensed
consolidated financial statements. In exchange, approximately $130
million of debt related to certain of the Fokker 100 aircraft was
restructured. However, the agreement contains provisions that would
require American to repay additional amounts of the original debt if
certain events occur prior to December 31, 2005, including: (i) an
event of default (which generally occurs only if a payment default
occurs), (ii) an event of loss with respect to the related aircraft,
(iii) rejection by the Company of the lease under the provisions of
Chapter 11 of the U.S. Bankruptcy Code or (iv) the Company's filing
for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. As a
result of this transaction, including the sale of the 33 Fokker 100
aircraft, and the termination of the Company's interest rate swap
agreements related to the debt that has been restructured, the Company
recognized a gain of approximately $68 million in the third quarter of
2003. If the conditions described above do not occur, the Company
expects to recognize an additional gain of approximately $37 million
in December 2005.
Net cash provided by operating activities in the nine-month period
ended September 30, 2003 was $809 million, an increase of $1.3 billion
over the same period in 2002. Included in net cash provided by
operating activities the first nine months of 2003 was the receipt of
a $572 million federal tax refund and the receipt of $358 million from
the government under the Act. Included in net cash used by operating
activities for the first nine months of 2002 was approximately $658
million received by the Company as a result of the utilization of its
2001 NOLs. Capital expenditures for the first nine months of 2003 were
$1.1 billion, $649 million of which was seller financed, and included
the acquisition of nine Boeing 767-300ERs, two Boeing 777-200 ERs, 16
Embraer 140s and six Bombardier CRJ-700 aircraft.
In June 2003, the Company sold its interest in Worldspan, a computer
reservations company, for $180 million in cash and a $39 million
promissory note, resulting in a gain of $17 million which is included
in Other income (loss) in the consolidated statement of operations.
As of September 30, 2003, the Company had commitments to acquire the
following aircraft: six Embraer regional jets and five Bombardier CRJ-
700s in 2003; an aggregate of 74 Embraer regional jets and six
Bombardier CRJ-700s in 2004 through 2006; and an aggregate of 47
Boeing 737-800s and nine Boeing 777-200ERs in 2006 through 2010.
Future payments for all aircraft, including the estimated amounts for
price escalation, will approximate $217 million during the remainder
of 2003, $755 million in 2004, $699 million in 2005 and an aggregate
of approximately $2.7 billion in 2006 through 2010. The Company has
pre-arranged financing or backstop financing for all of its aircraft
deliveries through June 2005.
Boeing Capital provided backstop financing for all Boeing aircraft
deliveries in 2003. In return, American granted Boeing a security
interest in certain advance payments previously made and in certain
rights under the aircraft purchase agreement between American and
Boeing.
On July 16, 2003, the Company announced that it would reduce the size
of its St. Louis hub, effective November 1, 2003. As a result of this
action, the Company expects to record additional charges in the fourth
quarter of 2003, as the reductions occur, primarily employee severance
and benefits charges and facility exit costs. Furthermore, the Company
expects to incur additional aircraft charges in the fourth quarter of
2003 related to the retirement of additional operating leased Boeing
757 aircraft.
-27-
30
Special facility revenue bonds have been issued by certain
municipalities, or entities established by the municipalities for the
purpose of issuing the special facility revenue bonds, primarily to
purchase equipment and improve airport facilities that are leased by
American and accounted for as operating leases. Approximately $2.1
billion of these bonds (with total future payments of approximately
$5.2 billion as of September 30, 2003) are guaranteed by American,
AMR, or both. Approximately $730 million of these special facility
revenue bonds contain mandatory tender provisions that require
American to repurchase the bonds at various times through 2008.
Although American has the right to remarket the bonds there can be no
assurance that these bonds will be successfully remarketed. Any
payments to redeem or purchase bonds that are not remarketed would
generally be considered prepaid facility rentals and would reduce
future operating lease commitments. Special facility revenue bonds
with a principal balance of $198 million have mandatory tender
provisions that will be triggered in November 2003. The Company
anticipates that these bonds will not be remarketed at this time, but
may be remarketed or refunded if market conditions become more
favorable.
The following table summarizes the Company's obligations and
commitments as of September 30, 2003, to be paid in 2003 through 2007
(in millions):
Nature of commitment 2003(6) 2004 2005 2006 2007
Operating lease payments for
aircraft and facility
obligations (1) $466 $1,086 $1,029 $963 $941
Firm aircraft commitments (2) 217 755 699 698 730
Fee per block hour commitments (3) 41 164 166 167 168
Long-term debt (4) 154 594 1,379 1,155 1,102
Capital lease obligations 45 321 252 252 187
Other commitments (5) - 158 158 158 158
Total obligations and commitments $923 $3,078 $3,683 $3,393 $3,286
(1) Certain special facility revenue bonds issued by municipalities -
which are supported by operating leases executed by American - are
guaranteed by AMR and American.
(2) Substantially all of the 2003 and 2004 commitment is supported by
committed financing.
(3) Includes expected payments based on projected volumes
rather than minimum required payments.
(4) Excludes related interest amounts.
(5) Includes noncancelable commitments to purchase goods or services,
primarily information technology support. Other commitments for the
remainder of 2003 are not significant.
(6) Amounts are as of September 30, 2003.
In addition to the commitments summarized above, the Company is
required to make contributions to its defined benefit pension plans.
These contributions are required under the minimum funding
requirements of the Employee Retirement Pension Plan Income Security
Act (ERISA). The Company's 2003 minimum required contributions to its
defined benefit pension plans were approximately $186 million (all of
which had been contributed by September 15, 2003) and the Company's
estimated 2004 minimum required contributions to its defined benefit
pension plans are between $550 and $650 million. In addition, in 2003,
the Company has contributed $145 million to its defined contribution
pension plans. Due to uncertainties regarding significant assumptions
involved in estimating future required contributions to its defined
benefit pension plans, such as pension plan benefit levels, interest
rate levels and the amount and timing of asset returns, the Company is
not able to reasonably estimate the amount of future required
contributions to its defined benefit pension plans beyond 2004.
However, based on the current regulatory environment and market
conditions, the Company expects that its 2005 minimum required
contributions to its defined benefit pension plans will significantly
exceed its 2004 minimum required contributions.
-28-
31
OTHER INFORMATION
A provision in the scope clause of American's prior contract with the
Allied Pilots Associations (APA) limited the number of available seat
miles (ASMs) and block hours that could be flown under American's
marketing code (AA) by American's regional carrier partners when
American pilots are on furlough (the so-called ASM cap). To ensure
that American remained in compliance with the ASM cap, American and
AMR Eagle took several steps in 2002 to reduce the number of ASMs
flown by American's wholly-owned commuter air carriers. As one of
those measures, AMR Eagle signed a letter of intent to sell Executive
Airlines, its San Juan-based subsidiary.
Another provision in the prior APA contract limited to 67 the total
number of regional jets with more than 44 seats that could be flown
under the AA code by American's regional carrier partners. As AMR
Eagle continued to accept previously-ordered Bombardier and Embraer
regional jets this cap would have been reached in early 2003. To
ensure that American remained in compliance with the 67-aircraft cap,
AMR Eagle reached an agreement to dispose of 14 Embraer ERJ-145
aircraft from its fleet. Trans States Airlines, an AmericanConnection
carrier, agreed to acquire these aircraft. Under the prior contract
between AA and the APA, Trans States would have had to operate these
aircraft under its AX code, rather than the AA* code, at its St. Louis
hub.
The Labor Agreement with the APA (one of the Labor Agreements),
ratified in April 2003, modified the provisions in the APA contract
described in the immediately preceding two paragraphs to give the
Company more flexibility with its American Eagle operations. The
limitations on the use of regional jets were substantially reduced and
are now tied to 110 percent of the size of American's narrowbody
aircraft fleet. As a consequence of these modifications, it is no
longer necessary to use Trans States' AX marketing code on flights
operated by Trans States as AmericanConnection, and AMR Eagle has
discontinued its plans to sell Executive Airlines. In addition, AMR
Eagle has revised its agreement to dispose of 14 Embraer ERJ-145
aircraft to include ten rather than 14 aircraft.
The Company carries insurance for public liability, passenger
liability, property damage and all-risk coverage for damage to its
aircraft. As a result of the September 11, 2001 events, aviation
insurers have significantly reduced the amount of insurance coverage
available to commercial air carriers for liability to persons other
than employees or passengers for claims resulting from acts of
terrorism, war or similar events (war-risk coverage). At the same
time, they have significantly increased the premiums for such coverage
as well as for aviation insurance in general. The U.S. government has
provided commercial war-risk insurance for U.S. based airlines until
December 10, 2003 covering losses to employees, passengers, third
parties and aircraft. The Company believes this insurance coverage
will be extended beyond December 10, 2003 because the Act provides for
the insurance to remain in place until August 31, 2004, and the
Department of Transportation has stated its intent to do so. In
addition, the Secretary of Transportation may extend the policy until
December 31, 2004, at his discretion. However, there is no assurance
that it will be extended. In the event the commercial insurance
carriers further reduce the amount of insurance coverage available to
the Company or significantly increase the cost of aviation insurance,
or if the Government fails to renew the war-risk insurance that it
provides, the Company's operations and/or financial position and
results of operations would be materially adversely affected.
-29-
32
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," "believes," 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, expectations as to future financing
needs, overall economic conditions and plans and objectives for
future operations, the impact on the Company of the events of
September 11, 2001 and of its results of operations for the past two
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 risk 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: the uncertain financial and business environment
the Company faces; the struggling economy; high fuel prices and the
availability of fuel; the residual effects of the war in Iraq;
conflicts in the Middle East; historically low fare levels and the
general competitive environment; the ability of the Company to
implement its restructuring program and the effect of the program on
operational performance and service levels; uncertainties with
respect to the Company's international operations; changes in its
business strategy; actions by U.S. or foreign government agencies;
the possible occurrence of additional terrorist attacks; another
outbreak of SARS; the inability of the Company to satisfy existing
liquidity requirements or other covenants in certain of its credit
agreements; and the availability of future financing. Additional
information concerning these and other factors is contained in the
Company's Securities and Exchange Commission filings, including but
not limited to the Form 10-K for the year ended December 31, 2002 and
the Form 10-Qs for the quarters ended March 31, 2003 and June 30,
2003.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Sensitive Instruments and Positions
Except as discussed below, there have been no material changes in
market risk from the information provided in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk of the Company's 2002 Form
10-K.
The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analysis presented does
not consider the effects that such adverse changes may have on overall
economic activity, nor does it consider additional actions management
may take to mitigate the Company's exposure to such changes. Actual
results may differ.
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 swap and
option contracts. As of September 30, 2003, the Company had hedged
approximately 28 percent of its expected fuel needs for the remainder
of 2003, approximately 20 percent of its expected first quarter 2004
fuel needs and an insignificant percentage of its expected fuel needs
beyond the first quarter of 2004, compared to approximately 32
percent of its estimated 2003 fuel requirements, 15 percent of its
estimated 2004 fuel requirements, and approximately four percent of
its estimated 2005 fuel requirements hedged at December 31, 2002.
Beginning in March 2003, the Company revised its hedging strategy
and, in June 2003, terminated substantially all of its contracts with
maturities beyond March 2004. Commencing in October 2003, the Company
began to enter into new fuel hedging contracts with maturities beyond
March 2004 for a portion of its future fuel requirements. The
Company's reduced credit rating has limited its ability to enter into
certain types of fuel hedge contracts. A further deterioration of
its credit rating or liquidity position may negatively affect the
Company's ability to hedge fuel in the future. For additional
information see Note 16 to the condensed consolidated financial
statements.
-30-
33
Item 4. Controls and Procedures
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 design and operation of the Company's disclosure
controls as of September 30, 2003. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the
Company's disclosure controls and procedures were effective. There
have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls.
-31-
34
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1999, a class action lawsuit was filed, and in November
1999 an amended complaint was filed, against AMR Corporation, American
Airlines, Inc., AMR Eagle Holding Corporation, Airlines Reporting
Corporation, and the Sabre Group Holdings, Inc. in the United States
District Court for the Central District of California, Western
Division (Westways World Travel, Inc. v. AMR Corp., et al.). The
lawsuit alleges that requiring travel agencies to pay debit memos to
American for violations of American's fare rules (by customers of the
agencies): (1) breaches the Agent Reporting Agreement between American
and AMR Eagle and the plaintiffs; (2) constitutes unjust enrichment;
and (3) violates the Racketeer Influenced and Corrupt Organizations
Act of 1970 (RICO). The certified class includes 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 seek to enjoin American from enforcing the pricing
rules in question and to recover the amounts paid for debit memos,
plus treble damages, attorneys' fees, and costs. The Company intends
to vigorously defend the lawsuit. Although the Company believes that
the litigation is without merit, a final adverse court decision could
impose restrictions on the Company's relationships with travel
agencies which could have an adverse impact on the Company.
On May 13, 1999, the United States (through the Antitrust Division of
the Department of Justice) sued AMR Corporation, American Airlines,
Inc., and AMR Eagle Holding Corporation in federal court in Wichita,
Kansas (United States v. AMR Corporation, et al, No. 99-1180-JTM,
United States District Court for the District of Kansas). The lawsuit
alleges that American unlawfully monopolized or attempted to
monopolize airline passenger service to and from Dallas/Fort Worth
International Airport (DFW) by increasing service when new competitors
began flying to DFW, and by matching these new competitors' fares.
The Department of Justice seeks to enjoin American from engaging in
the alleged improper conduct and to impose restraints on American to
remedy the alleged effects of its past conduct. On April 27, 2001,
the U.S. District Court for the District of Kansas granted American's
motion for summary judgment. On June 26, 2001, the U.S. Department of
Justice appealed the granting of American's motion for summary
judgment (United States v. AMR Corporation, et al, No. 01-3203, United
States District Court of Appeals for the Tenth Circuit), and on
September 23, 2002, the parties presented oral arguments to the 10th
Circuit Court of Appeals, which affirmed the summary judgment on July
3, 2003. The U.S Department of Justice has indicated that it does not
intend to appeal the decision of the 10th Circuit Court of Appeals.
Between May 14, 1999 and June 7, 1999, seven class action lawsuits
were filed against AMR Corporation, American Airlines, Inc., and AMR
Eagle Holding Corporation in the United States District Court in
Wichita, Kansas seeking treble damages under federal and state
antitrust laws, as well as injunctive relief and attorneys' fees (King
v. AMR Corp., et al.; Smith v. AMR Corp., et al.; Team Electric v. AMR
Corp., et al.; Warren v. AMR Corp., et al.; Whittier v. AMR Corp., et
al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp., et al.).
Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by increasing service when new competitors began flying
to DFW, and by matching these new competitors' fares. Two of the
suits (Smith and Wright) also allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by offering discounted fares to corporate purchasers, by
offering a frequent flyer program, by imposing certain conditions on
the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several
classes of consumers, the broadest of which is all persons who
purchased tickets for air travel on American into or out of DFW from
1995 to the present. On November 10, 1999, the District Court stayed
all of these actions pending developments in the case brought by the
Department of Justice (see above description). To date no class has
been certified. The Company intends to defend these lawsuits
vigorously. One or more final adverse court decisions imposing
restrictions on the Company's ability to respond to competitors or
awarding substantial money damages would have an adverse impact on the
Company.
-32-
35
On May 17, 2002, the named plaintiffs in Hall, et al. v. United
Airlines, et al., pending in the United States District Court for the
Eastern District of North Carolina, filed an amended complaint
alleging that between 1995 and the present, American and over 15 other
defendant airlines conspired to reduce commissions paid to U.S.-based
travel agents in violation of Section 1 of the Sherman Act. The court
granted class action certification to the plaintiff on September 17,
2002, defining the plaintiff class as all travel agents in the United
States, Puerto Rico, and the United States Virgin Islands, who, at any
time from October 1, 1997 to the present, issued tickets,
miscellaneous change orders, or prepaid ticket advices for travel on
any of the defendant airlines. The case is stayed as to US Airways
and United Air Lines, since they filed for bankruptcy. American is
vigorously defending the lawsuit. Defendant carriers filed a motion
for summary judgment on December 10, 2002. Trial is set to begin on
February 2, 2004. A final adverse court decision awarding substantial
money damages or placing restrictions on the Company's commission
policies or practices would have an adverse impact on the Company.
Between April 3, 2003 and June 5, 2003 three lawsuits were filed by
travel agents who have opted out of the Hall class action (above) to
pursue their claims individually against American Airlines, Inc.,
other airline defendants, and in one case against certain airline
defendants and Orbitz LLC. (Tam Travel et. al., v. Delta Air Lines
et. al., in the United States District Court for the Northern District
of California - San Francisco (51 individual agencies), Paula Fausky
d/b/a Timeless Travel v. American Airlines, et. al, in the United
States District Court for the Northern District of Ohio Eastern
Division (29 agencies) and Swope Travel et al. v. Orbitz et. al. in
the United States District Court for the Eastern District of Texas
Beaumont Division (6 agencies)). Collectively, these lawsuits seek
damages and injunctive relief alleging that the certain airline
defendants and Orbitz LLC: (i) conspired to prevent travel agents from
acting as effective competitors in the distribution of airline tickets
to passengers in violation of Section 1 of the Sherman Act; (ii)
conspired to monopolize the distribution of common carrier air travel
between airports in the United States in violation of Section 2 of the
Sherman Act; and that (iii) between 1995 and the present, the airline
defendants conspired to reduce commissions paid to U.S.-based travel
agents in violation of Section 1 of the Sherman Act. American is
vigorously defending these lawsuits. A final adverse court decision
awarding substantial money damages or placing restrictions on the
Company's distribution practices would have an adverse impact on the
Company.
On April 26, 2002, six travel agencies filed Albany Travel Co., et al.
v. Orbitz, LLC, et al., in the United States District Court for the
Central District of California against American, United Air Lines,
Delta Air Lines, and Orbitz, LLC, alleging that American and the other
defendants: (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; and
(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. The named plaintiffs seek to certify a nationwide
class of travel agents, but no class has yet been certified. American
is vigorously defending the lawsuit. On November 25, 2002, the
District Court stayed this case pending a judgment in Hall et. al. v.
United Airlines, et. al. (see above description). A final adverse
court decision awarding substantial money damages or placing
restrictions on the Company's distribution practices would have an
adverse impact on the Company.
On April 25, 2002, a Quebec travel agency filed a motion seeking a
declaratory judgment of the Superior Court in Montreal, Canada
(Voyages Montambault (1989) Inc. v. International Air Transport
Association, et al.), that American and the other airline defendants
owe a "fair and reasonable commission" to the agency, and that
American and the other airline defendants breached alleged contracts
with the agency by adopting policies of not paying base commissions.
The motion was subsequently amended to add 40 additional travel
agencies as petitioners. The current defendants are the International
Air Transport Association, the Air Transport Association of Canada,
Air Canada, American, America West Airlines, Delta Air Lines, Grupo
TACA, Northwest Airlines/KLM Airlines, United Airlines, and
Continental Airlines. American is vigorously defending the lawsuit.
Although the Company believes that the litigation is without merit, a
final adverse court decision granting declaratory relief could expose
the Company to claims for substantial money damages or force the
Company to pay agency commissions, either of which would have an
adverse impact on the Company.
-33-
36
On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air
Canada, et. al., pending in the Federal Court of Canada, Trial
Division, Montreal, filed a statement of claim alleging that between
1995 and the present, American, the other defendant airlines, and the
International Air Transport Association conspired to reduce
commissions paid to Canada-based travel agents in violation of Section
45 of the Competition Act of Canada. The named plaintiffs seek to
certify a nationwide class of travel agents. Plaintiffs have filed a
motion for class certification, but that motion has not yet been
decided. American is vigorously defending the lawsuit. A final
adverse court decision awarding substantial money damages or placing
restrictions on the Company's commission policies would have an
adverse impact on the Company.
On August 14, 2002, a class action lawsuit was filed against American
Airlines, Inc. in the United States District Court for the Central
District of California, Western Division (All World Professional
Travel Services, Inc. v. American Airlines, Inc.). The lawsuit
alleges that requiring travel agencies to pay debit memos for
refunding tickets after September 11, 2001: (1) breaches the Agent
Reporting Agreement between American and plaintiff; (2) constitutes
unjust enrichment; and (3) violates the Racketeer Influenced and
Corrupt Organizations Act of 1970 (RICO). The as yet uncertified
class includes all travel agencies who have or will be required to pay
moneys to American for an "administrative service charge," "penalty
fee," or other fee for processing refunds on behalf of passengers who
were unable to use their tickets in the days immediately following the
resumption of air carrier service after the tragedies on September 11,
2001. The plaintiff seeks to enjoin American from collecting the
debit memos and to recover the amounts paid for the debit memos, plus
treble damages, attorneys' fees, and costs. The Company intends to
vigorously defend the lawsuit. Although the Company believes that the
litigation is without merit, a final adverse court decision could
impose restrictions on the Company's relationships with travel
agencies which could have an adverse impact on the Company.
On August 19, 2002, a class action lawsuit was filed, and on May 7,
2003 an amended complaint was filed in the United States District
Court for the Southern District of New York (Power Travel
International, Inc. v. American Airlines, Inc., et al.) against
American, Continental Airlines, Delta Air Lines, United Airlines, and
Northwest Airlines, alleging that American and the other defendants
breached their contracts with the agency and were unjustly enriched
when these carriers at various times reduced their base commissions to
zero. The as yet uncertified class includes all travel agencies
accredited by the Airlines Reporting Corporation "whose base
commissions on airline tickets were unilaterally reduced to zero by"
the defendants. The case is stayed as to United Air Lines, since it
filed for bankruptcy. American is vigorously defending the lawsuit.
Although the Company believes that the litigation is without merit, a
final adverse court decision awarding substantial money damages or
forcing the Company to pay agency commissions would have an adverse
impact on the Company.
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 Airlines,
Inc. and AMR Eagle have been named as potentially responsible parties
(PRPs) for the contamination at MIA. During the second quarter of
2001, the County filed a lawsuit against 17 defendants, including
American Airlines, Inc., in an attempt to recover its past and future
cleanup costs (Miami-Dade County, Florida v. Advance Cargo Services,
Inc., et al. in the Florida Circuit Court). 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. American's
and AMR Eagle's portion of the cleanup costs cannot be reasonably
estimated due to various factors, including the unknown extent of the
remedial actions that may be required, the proportion of the cost that
will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will
ultimately supervise the remedial activities and the nature of that
supervision. The Company is vigorously defending the lawsuit.
-34-
37
PART II
Item 2. Changes in Securities and Use of Proceeds
On September 23, 2003, the Company sold $300 million principal amount
of its 4.25% Senior Convertible Notes due 2023 to Citigroup Global
Markets, Inc. for $292.5 million (net of initial purchaser's discounts
of $7.5 million). The notes were issued in a private placement under
the exemption from registration set forth in section 4(2) of the
Securities Act of 1933. Citigroup informed the Company that the notes
were resold to "qualified institutional buyers", as defined in Rule
144A under the Securities Act, in transactions exempt from
registration in accordance with Rule 144A.
Each note is convertible into AMR common stock at a conversion rate of
57.61 shares per $1,000 principal amount of notes (which represents an
equivalent conversion price of $17.36 per share), subject to
adjustment in certain circumstances. These notes are guaranteed by
American. The Company expects to use the proceeds of the sale for
working capital and general corporate purposes.
The notes are convertible under certain circumstances, including if
(i) the closing sale price of the Company's common stock reaches a
certain level for a specified period of time, (ii) the trading price
of the notes as a percentage of the closing sale price of the
Company's common stock falls below a certain level for a specified
period of time, (iii) the Company calls the notes for redemption, or
(iv) certain corporate transactions occur. Holders of the notes may
require the Company to repurchase all or any portion of the notes on
September 23, 2008, 2013 and 2018 at a purchase price equal to the
principal amount of the notes being purchased plus accrued and unpaid
interest to the date of purchase. The Company may pay the purchase
price in cash, common stock or a combination of cash and common stock.
After September 23, 2008, the Company may redeem all or any portion of
the notes for cash at a price equal to the principal amount of the
notes being redeemed plus accrued and unpaid interest as of the
redemption date.
Item 4. Submission of Matters to a Vote of Security Holders
The owners of 133,307,282 shares of common stock, or 85 percent of
shares outstanding, were represented at the annual meeting of
stockholders on May 21, 2003 at the American Airlines Training &
Conference Center, Flagship Auditorium, 4501 Highway 360 South, Fort
Worth, Texas.
Elected as directors of the Corporation, each receiving a minimum of
121,000,000 votes were:
Gerard J. Arpey Ann McLaughlin Korologos
John W. Bachmann Michael A. Miles
David L. Boren Philip J. Purcell
Edward A. Brennan Joe M. Rodgers
Armando M. Codina Judith Rodin, Ph.D.
Earl G. Graves Roger T. Staubach
Stockholders ratified the appointment of Ernst & Young LLP as
independent auditors for the Corporation for 2003. The vote was
130,625,037 in favor, 2,471,054 against and 211,191 abstaining.
A stockholder proposal to recommend that the Company affirm its
political non-partisanship - submitted by Mrs. Evelyn Y. Davis - was
defeated. The vote was 3,276,672 in favor, 48,695,235 against,
3,996,780 abstaining, and 77,338,595 not voting.
A stockholder proposal to recommend that the Company annually submit
to a shareholder vote any poison pill adopted since the previous
annual meeting - submitted by Mr. John Chevedden - was approved. The
vote was 29,464,351 in favor, 25,991,408 against, 512,928 abstaining
and 77,338,595 not voting.
-35-
38
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
3.1 Amendments to the AMR Corporation Certificate of Incorporation.
3.2 Bylaws of AMR Corporation, amended as of April 24, 2003.
10.1 Current form of Stock Option Agreement under the 1998 Long-Term
Incentive Plan, as amended.
12 Computation of ratio of earnings to fixed charges for the three
and nine months ended September 30, 2003 and 2002.
13.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
13.2 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).
Form 8-Ks filed under Item 5 - Other Events
On July 3, 2003, AMR filed an amended report on Form 8-K to provide
additional information regarding the unit cost expectations provided
in its June 25, 2003 report on Form 8-K.
On August 1, 2003, AMR filed a report on Form 8-K to provide unit
revenue expectations for July, capacity estimates for the remainder of
2003 and 2004 and highlights of an agreement with Sabre covering
American Airlines' participation in Sabre's Direct Connect
Availability program.
On September 18, 2003, AMR filed a report on Form 8-K relating to a
press release issued by AMR to announce the pricing of a private
placement to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933 of $300 million principal amount of
4.25 percent senior convertible notes due 2023.
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure
On July 11, 2003, AMR furnished a report on Form 8-K to announce
AMR's intent to host a conference call on July 16, 2003 with the
financial community relating to its second quarter 2003 results.
On September 29, 2003, AMR furnished a report on Form 8-K to
announce AMR's intent to host a conference call on October 22, 2003
with the financial community relating to its third quarter 2003
results.
Form 8-Ks filed under Item 12 - Disclosure of Results of Operations
and Financial Condition
On July 16, 2003, AMR filed a report on Form 8-K to furnish a press
release issued by AMR to announce its second quarter 2003 results.
-36-
39
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMR CORPORATION
Date: October 24, 2003 BY: /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and Chief
Financial Officer
-37-