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, 1997.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to
Commission file number 1-8400.
AMR Corporation
(Exact name of registrant as specified in its charter)
Delaware 75-1825172
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, (817) 963-1234
including area code
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 91,171,362 as of November 6, 1997
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INDEX
AMR CORPORATION
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three months ended
September 30, 1997 and 1996; Nine months ended September 30, 1997
and 1996
Condensed Consolidated Balance Sheet -- September 30, 1997 and
December 31, 1996
Condensed Consolidated Statement of Cash Flows -- Nine months ended
September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements -- September
30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues
Airline Group:
Passenger
- American Airlines Inc. $3,713 $3,533 $10,744 $10,330
- AMR Eagle, Inc. 262 265 766 798
Cargo 169 165 507 501
Other 233 208 658 615
4,377 4,171 12,675 12,244
The SABRE Group 456 408 1,343 1,246
Management Services Group 151 158 463 466
Less: Intergroup revenues (186) (175) (547) (536)
Total operating revenues 4,798 4,562 13,934 13,420
Expenses
Wages, salaries and
benefits 1,591 1,464 4,687 4,448
Aircraft fuel 466 494 1,457 1,405
Commissions to agents 332 323 975 959
Depreciation and
amortization 311 302 933 899
Other rentals and
landing fees 228 229 673 668
Maintenance materials
and repairs 227 178 641 516
Food service 176 177 510 506
Aircraft rentals 143 146 430 472
Other operating expenses 714 661 2,081 1,972
Total operating expenses 4,188 3,974 12,387 11,845
Operating Income 610 588 1,547 1,575
Other Income (Expense)
Interest income 40 16 98 48
Interest expense (98) (117) (300) (386)
Minority interest (10) - (32) -
Miscellaneous - net - (23) (10) (28)
(68) (124) (244) (366)
Earnings Before Income Taxes 542 464 1,303 1,209
Income tax provision 219 182 526 477
Net Earnings $ 323 $ 282 $ 777 $ 732
Earnings Per Common Share
Primary $ 3.55 $ 3.06 $ 8.46 $ 8.53
Fully Diluted $ 3.55 $ 3.06 $ 8.46 $ 8.11
Number of Shares Used in
Computation
Primary 91 92 92 86
Fully Diluted 91 92 92 92
The accompanying notes are an integral part of these financial
statements.
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AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited) (In millions)
September December
30, 31,
1997 1996
(Note 1)
Assets
Current Assets
Cash $ 27 $ 68
Short-term investments 2,891 1,743
Receivables, net 1,546 1,382
Inventories, net 629 633
Deferred income taxes 403 404
Other current assets 210 240
Total current assets 5,706 4,470
Equipment and Property
Flight equipment, net 8,992 9,251
Other equipment and property, net 1,859 1,882
10,851 11,133
Equipment and Property Under Capital Leases
Flight equipment, net 1,902 2,016
Other equipment and property, net 161 156
2,063 2,172
Route acquisition costs, net 952 974
Other assets, net 1,767 1,748
$ 21,339 $ 20,497
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,178 $ 1,068
Accrued liabilities 2,163 2,055
Air traffic liability 2,295 1,889
Current maturities of long-term debt 468 424
Current obligations under capital leases 133 130
Total current liabilities 6,237 5,566
Long-term debt, less current maturities 2,499 2,752
Obligations under capital leases, less 1,670 1,790
current obligations
Deferred income taxes 829 743
Other liabilities, deferred gains, deferred
credits and postretirement benefits 4,114 3,978
Stockholders' Equity
Common stock 91 91
Additional paid-in capital 3,162 3,166
Treasury stock (452) -
Retained earnings 3,189 2,411
5,990 5,668
$ 21,399 $ 20,497
The accompanying notes are an integral part of these financial
statements.
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AMR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (In millions)
Nine Months Ended
September 30,
1997 1996
Net Cash Provided by Operating Activities $2,379 $1,988
Cash Flow from Investing Activities:
Capital expenditures (670) (389)
Net increase in short-term investments (1,148) (490)
Proceeds from sale of equipment and
property 182 232
Net cash used for investing activities (1,636) (647)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (318) (1,404)
Repurchases of common stock (592) -
Other 126 20
Net cash used for financing activities (784) (1,384)
Net decrease in cash (41) (43)
Cash at beginning of period 68 82
Cash at end of period $ 27 $ 39
Cash Payments For:
Interest $ 313 $ 395
Income taxes 322 285
The accompanying notes are an integral part of these financial
statements.
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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. The balance sheet at December 31, 1996 has been
derived from the audited financial statements at that date. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the AMR Corporation (AMR or the
Company) Annual Report on Form 10-K for the year ended December 31,
1996.
2.Accumulated depreciation of owned equipment and property at
September 30, 1997 and December 31, 1996, was $6.6 billion and $6.1
billion, respectively. Accumulated amortization of equipment and
property under capital leases at September 30, 1997 and December
31, 1996, was $1.1 billion and $971 million, respectively.
3.As discussed in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, the Miami International Airport Authority
is currently remediating various environmental conditions at Miami
International Airport (Airport) and funding the remediation costs
through landing fee revenues. Future costs of the remediation
effort may be borne by carriers operating at the Airport, including
American Airlines, Inc. (American), through increased landing fees.
The ultimate resolution of this matter is not expected to have a
significant impact on the financial position or liquidity of AMR.
4.On May 5, 1997, the members of the Allied Pilots Association
ratified a new labor agreement that was reached with American in
March 1997. The new contract becomes amendable August 31, 2001.
Among other provisions, the agreement granted pilots options to buy
5.75 million shares of AMR stock at $83.375, $10 less than the
average fair market value of the stock on the date of grant, May 5,
1997. The options are immediately exercisable. To offset the
potential dilution from the exercise of these options, and as
previously announced, the Company intends to repurchase in the open
market or in private transactions up to 5.75 million shares of its
common stock. As of September 30, the Company had completed this
stock repurchase.
5.On October 31, 1997, American signed a previously announced
aircraft acquisition agreement with Boeing. The contract includes
firm orders for 75 Boeing 737-800s, 12 Boeing 757-200s, 11 Boeing
777-200IGWs and eight Boeing 767-300ERs, with deliveries commencing
in 1998 and continuing through 2004. In addition to the firm
orders, American obtained "purchase rights" for additional
aircraft. Subject to the availability of delivery positions, some
of which are guaranteed, American has the right to acquire, at
specified prices, new standard and wide-bodied aircraft with prior
notice ranging from 15 to 18 months.
In April 1997, the Company announced that AMR Eagle will acquire 12
new ATR 72 (Super ATR) aircraft, with deliveries beginning in July
1997 and continuing through May 1998. Three ATR aircraft were
delivered in the third quarter of 1997. In June 1997, the Company
announced that AMR Eagle will acquire 67 regional jets. This
includes a firm order for 42 Embraer EMB-145 aircraft, with
deliveries beginning in February 1998 and continuing through
November 1999, and a firm order for 25 Bombardier CRJ-700 aircraft,
with deliveries beginning in the first quarter of 2001 and
continuing through the second quarter of 2003.
Payments for the firm-order aircraft noted above will approximate
$875 million in 1997, $1.5 billion in 1998, $2.2 billion in 1999,
and $2.2 billion in 2000 and thereafter.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.On July 16, 1997, the Company announced that its board of directors
had authorized management to repurchase up to an additional $500
million of its outstanding common stock in the open market or in
private transactions from time to time over a 24-month period. A
total of 276,575 shares had been repurchased as of September 30,
1997.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 1997 and 1996
Summary AMR recorded net earnings for the three months ended
September 30, 1997, of $323 million, or $3.55 per common share. This
compares to net earnings of $282 million, or $3.06 per common share
for the third quarter of 1996. AMR's operating income of $610
million increased slightly compared to $588 million for the same
period in 1996.
AMR's operations fall within three major lines of business - the
Airline Group, which includes American Airlines, Inc.'s Passenger and
Cargo Divisions and AMR Eagle, Inc.; The SABRE Group, which includes
AMR's information technology and consulting businesses; and the
Management Services Group, which includes AMR's airline management,
aviation services, and investment service activities.
The following sections provide a discussion of AMR's results by
reporting segment, which are described in AMR's Annual Report on Form
10-K for the year ended December 31, 1996. The minority interest in
the earnings of consolidated subsidiaries of $10 million and $32
million for the three and nine months ended September 30, 1997, has
not been allocated to a reporting segment.
AIRLINE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Three Months Ended
September 30,
1997 1996
Revenues
Passenger - American Airlines, Inc. $3,713 $3,533
- AMR Eagle, Inc. 262 265
Cargo 169 165
Other 233 208
4,377 4,171
Expenses
Wages, salaries and benefits 1,380 1,271
Aircraft fuel 466 494
Commissions to agents 332 323
Depreciation and amortization 259 258
Other operating expenses 1,431 1,345
Total operating expenses 3,868 3,691
Operating Income 509 480
Other Income (Expense) (66) (109)
Earnings Before Income Taxes $ 443 $ 371
Average number of equivalent employees 91,900 89,300
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RESULTS OF OPERATIONS (continued)
OPERATING STATISTICS
Three Months Ended
September 30,
1997 1996
American Airlines Jet Operations
Revenue passenger miles (millions) 28,500 27,808
Available seat miles (millions) 39,378 39,134
Cargo ton miles (millions) 506 486
Passenger load factor 72.4% 71.1%
Breakeven load factor 61.2% 60.1%
Passenger revenue yield
per passenger mile (cents) 13.03 12.71
Passenger revenue per available
seat mile (cents) 9.43 9.03
Cargo revenue yield per ton mile (cents) 32.05 33.50
Operating expenses per available
seat mile (cents) 9.14 8.72
Fuel consumption (gallons, in millions) 712 707
Fuel price per gallon (cents) 63.5 67.4
Fuel price per gallon, excluding
fuel tax (cents) 58.5 62.3
Operating aircraft at period-end 642 640
AMR Eagle, Inc.
Revenue passenger miles (millions) 670 651
Available seat miles (millions) 1,070 1,111
Passenger load factor 62.6% 58.6%
Operating aircraft at period-end 196 208
Operating aircraft at September 30, 1997, included:
Jet Aircraft: Regional Aircraft:
Airbus A300-600R 35 ATR 42 46
Boeing 727-200 79 Super ATR 34
Boeing 757-200 90 Saab 340B 90
Boeing 767-200 8 Saab 340B Plus 25
Boeing 767-200 Extended 22 Shorts 360 1
Range
Boeing 767-300 Extended 41 Total 196
Range
Fokker 100 75
McDonnell Douglas DC-10-10 13
McDonnell Douglas DC-10-30 5
McDonnell Douglas MD-11 14
McDonnell Douglas MD-80 260
Total 642
87.7% of the jet aircraft fleet is Stage III, a classification of
aircraft meeting noise standards as promulgated by the Federal
Aviation Administration.
Average aircraft age is 9.8 years for jet aircraft and 5.3 years for
regional aircraft.
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RESULTS OF OPERATIONS (continued)
The Airline Group's revenues increased $206 million or 4.9 percent in
the third quarter of 1997 versus the same period last year.
American's passenger revenues increased by 5.1 percent, $180 million,
primarily as a result of strong demand for air travel driven by
continual economic growth in the U.S. and abroad. American's yield
(the average amount one passenger pays to fly one mile) of
13.03 cents increased by 2.5 percent compared to the same period
in 1996. Domestic yields increased 1.2 percent from the third
quarter of 1996. International yields increased 5.4 percent,
primarily due to a 5.3 percent increase in Latin America and a 6.1
percent increase in Europe.
American's traffic or revenue passenger miles (RPMs) increased 2.5
percent to 28.5 billion miles for the quarter ended September 30,
1997. American's capacity or available seat miles (ASMs) increased
0.6 percent to 39.4 billion miles in the third quarter of 1997.
American's domestic traffic increased 2.6 percent on capacity
increases of 1.0 percent and international traffic grew 2.1 percent
despite capacity decreases of 0.3 percent. The increase in
international traffic was driven by a 5.8 percent increase in traffic
to Latin America on capacity growth of 5.1 percent and a 2.7 percent
increase in traffic to the Pacific, partially offset by a 1.6
decrease in traffic to Europe on a capacity decrease of 7.0 percent,
primarily due to the cancellation of the Miami-Frankfurt and New York
Kennedy-Zurich routes.
The Airline Group's operating expenses increased 4.8 percent, $177
million. American's Jet Operations cost per ASM increased 4.8
percent to 9.14 cents. Wages, salaries and benefits increased 8.6
percent, $109 million, primarily due to an increase in the average
number of equivalent employees and contractual wage rate and seniority
increases that are built into the Company's labor contracts.Aircraft
fuel expense decreased 5.7 percent, $28 million, as the result of a
5.8 percent decrease in American's average price per gallon,
including taxes. Other operating expenses increased by $86 million,
primarily as a result of a $48 million increase in maintenance
materials and repairs expense due to additional aircraft check lines
added at American's maintenance bases as a result of the maturing of
its fleet.
Other Income (Expense) decreased 39.4 percent or $43 million.
Interest expense decreased $19 million primarily due to the
retirement of debt prior to scheduled maturity. Interest income
increased approximately $7 million due primarily to higher investment
balances. Other income (expense) in the third quarter of 1996 also
included a $21 million provision for a cash payment representing
American's share of a multi-carrier travel agency class action
litigation settlement.
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RESULTS OF OPERATIONS (continued)
THE SABRE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Three Months Ended
September 30,
1997 1996
Revenues $ 456 $ 408
Operating Expenses 368 319
Operating Income 88 89
Other Income (Expense) 4 (15)
Earnings Before Income Taxes $ 92 $ 74
Average number of equivalent employees 8,600 7,800
Revenues
Revenues for The SABRE Group increased 11.8 percent, $48 million,
primarily due to growth in booking fees. The growth in booking fees
was due to an overall increase in the price per booking and to an
increase in booking volumes, primarily in Europe and Latin America,
partly offset by a decline in domestic U.S. booking volumes.
Revenues from technology solution services provided by The SABRE Group
to its unaffiliated customers increased approximately $13 million due to
an increase in software development, consulting and software license
fee revenues.
Expenses
Operating expenses increased 15.4 percent, $49 million, due primarily
to an increase in salaries, benefits and employee related costs, and
subscriber incentive expenses. Salaries, benefits and employee
related costs increased due to an increase in the average number of
equivalent employees necessary to support The SABRE Group's revenue
growth and to annual salary increases. Employee related costs also
increased due to increased travel expenses. Subscriber incentive
expenses increased in order to maintain and grow The SABRE Group's
travel agency subscriber base.
Other Income (Expense)
Other income (expense) increased $19 million, 73.3 percent. Interest
expense decreased $9 million due to a lower principal balance
outstanding on the subordinated debenture payable to AMR. Interest
income increased approximately $7 million due to higher investment
balances.
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RESULTS OF OPERATIONS (continued)
MANAGEMENT SERVICES GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Three Months Ended
September 30,
1997 1996
Revenues $ 151 $ 158
Operating Expenses 138 139
Operating Income 13 19
Other Income (Expense) 4 -
Earnings Before Income Taxes $ 17 $ 19
Average number of equivalent employees 15,600 14,700
Revenues
Revenues for the Management Services Group decreased 4.4 percent, or
$7 million. The decrease was primarily the result of lower revenues
for AMR Combs due to the March 1997 sale of its aircraft parts
division, decreased telemarketing services provided by TeleService
Resources, and a reduction in fees for services provided by Airline
Management Services to Canadian Airlines International Limited. This
decrease was partially offset by higher revenues for AMR Distribution
Systems and AMR Airline Services as a result of increased airline
passenger, ramp and cargo handling services.
Expenses
Operating expenses decreased 0.7 percent, $1 million, primarily due
to a decrease in expenses associated with the AMR Combs aircraft
parts division sold in March 1997 and decreased telemarketing
services related to its TeleService Resource division. This decrease
was substantially offset by an increase in wages, salaries and
benefits resulting from an increase in the average number of
equivalent employees.
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RESULTS OF OPERATIONS (continued)
For the Nine Months Ended September 30, 1997 and 1996
Summary AMR recorded net earnings for the nine months ended September
30, 1997, of $777 million, or $8.46 per common share. This compares
with net earnings of $732 million, or $8.53 per common share ($8.11
fully diluted) for the same period in 1996. AMR's operating income
decreased 1.8 percent or $28 million.
AIRLINE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Nine Months Ended
September 30,
1997 1996
Revenues
Passenger - American Airlines, Inc. $10,744 $10,330
- AMR Eagle, Inc. 766 798
Cargo 507 501
Other 658 615
12,675 12,244
Expenses
Wages, salaries and benefits 4,059 3,878
Aircraft fuel 1,457 1,405
Commissions to agents 975 959
Depreciation and amortization 781 757
Other operating expenses 4,190 4,019
Total operating expenses 11,462 11,018
Operating Income 1,213 1,226
Other Income (Expense) (223) (348)
Earnings Before Income Taxes $ 990 $ 878
Average number of equivalent employees 90,800 89,000
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RESULTS OF OPERATIONS (continued)
OPERATING STATISTICS
Nine Months Ended
September 30,
1997 1996
American Airlines Jet Operations
Revenue passenger miles (millions) 81,113 79,119
Available seat miles (millions) 115,636 115,128
Cargo ton miles (millions) 1,507 1,504
Passenger load factor 70.1% 68.7%
Breakeven load factor 61.3% 59.5%
Passenger revenue yield per
passenger mile (cents) 13.25 13.06
Passenger revenue per available
seat mile (cents) 9.29 8.97
Cargo revenue yield per ton mile (cents) 33.22 32.83
Operating expenses per available
seat mile (cents) 9.23 8.84
Fuel consumption (gallons, in millions) 2,082 2,057
Fuel price per gallon (cents) 67.7 65.8
Fuel price per gallon, excluding fuel tax 62.8 60.9
(cents)
Operating aircraft at period-end 642 640
AMR Eagle, Inc.
Revenue passenger miles (millions) 1,924 1,962
Available seat miles (millions) 3,160 3,350
Passenger load factor 60.9% 58.6%
Operating aircraft at period-end 196 208
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RESULTS OF OPERATIONS (continued)
The Airline Group's revenues increased $431 million or 3.5 percent
during the first nine months of 1997 versus the same period last
year. American's passenger revenues increased by 4.0 percent, $414
million. American's yield (the average amount one passenger pays to
fly one mile) of 13.25 cents increased by 1.5 percent compared to the
same period in 1996. Domestic yields increased 0.2 percent from the
first nine months of 1996. International yields increased 4.2
percent, reflecting a 4.7 percent increase in Latin America and a 3.4
percent increase in Europe.
American's traffic or revenue passenger miles (RPMs) increased 2.5
percent to 81.1 billion miles for the nine months ended September 30,
1997. American's capacity or available seat miles (ASMs) increased
0.4 percent to 115.6 billion miles in the first nine months of 1997.
American's domestic traffic increased 2.4 percent on capacity
increases of 0.7 percent and international traffic grew 2.9 percent
on capacity decreases of 0.2 percent. The overall increase in
international traffic was driven by a 7.1 percent increase in traffic
to Latin America on capacity growth of 3.8 percent, partially offset
by a 4.9 percent decrease in Pacific traffic on a capacity decrease
of 3.8 percent.
The Airline Group's operating expenses increased 4.0 percent, $444
million. American's Jet Operations cost per ASM increased by 4.4
percent to 9.23 cents. Wages, salaries and benefits increased $181
million, 4.7 percent, primarily due to an increase in the average
number of equivalent employees and contractual wage rate and seniority
increases that are built into the Company's labor contracts. Aircraft
fuel expense increased 3.7 percent, $52 million, due to a 2.9 percent
increase in American's average price per gallon, including taxes,
and a 1.2 percent increase in American's fuel consumption. Other
operating expenses increased by $171 million, primarily as a result
of a $123 million increase in maintenance materials and repairs expense
due to additional aircraft check lines added at American's maintenance
bases as a result of the maturing of its fleet.
Other Income (Expense) decreased 35.9 percent or $125 million.
Interest expense decreased $90 million primarily due to the
retirement of debt prior to scheduled maturity and the conversion to
common stock in May 1996 of $1.02 billion in convertible subordinated
debentures. Interest income increased approximately $27 million
primarily due to higher investment balances. Other income (expense)
in the third quarter of 1996 also included a $21 million provision
for a cash payment representing American's share of a multi-carrier
travel agency class action litigation settlement.
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RESULTS OF OPERATIONS (continued)
THE SABRE GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Nine Months Ended
September 30,
1997 1996
Revenues $1,343 $1,246
Operating Expenses 1,054 960
Operating Income 289 286
Other Income (Expense) 8 (17)
Earnings Before Income Taxes $ 297 $ 269
Average number of equivalent employees 8,400 7,900
Revenues
Revenues for The SABRE Group increased 7.8 percent, $97 million,
primarily due to growth in booking fees. The growth in booking fees
was due to an overall increase in the price per booking and to an
increase in booking volumes, primarily in Europe and Latin America.
Revenues from technology solution services provided by The SABRE Group
to its unaffiliated customers increased approximately $21 million due
to an increase in software development, consulting and software license
fee revenues.
Expenses
Operating expenses increased 9.8 percent, $94 million, due primarily
to an increase in salaries, benefits and employee related costs, and
subscriber incentive expenses. Salaries, benefits and employee
related costs increased due to an increase in the average number of
equivalent employees necessary to support The SABRE Group's revenue
growth and to annual salary increases. Employee related costs also
increased due to increased travel expenses. Subscriber incentive
expenses increased in order to maintain and grow The SABRE Group's
travel agency subscriber base.
Other Income (Expense)
Other income (expense) increased $25 million primarily due to an
increase in interest income on higher investment balances and an
increase in income from joint ventures in which The SABRE Group owns
an interest accounted for under the equity method.
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RESULTS OF OPERATIONS (continued)
MANAGEMENT SERVICES GROUP
FINANCIAL HIGHLIGHTS
(Unaudited) (Dollars in millions)
Nine Months Ended
September 30,
1997 1996
Revenues $ 463 $ 466
Operating Expenses 418 403
Operating Income 45 63
Other Income (Expense) 3 (1)
Earnings Before Income Taxes $ 48 $ 62
Average number of equivalent employees 15,500 14,300
Revenues
Revenues for the Management Services Group decreased 0.6 percent, or
$3 million. The decrease was primarily the result of lower revenues
for AMR Combs due to the March 1997 sale of its aircraft parts
division and a reduction in fees for services provided by Airline
Management Services to Canadian Airlines International Limited. This
decrease was partially offset by higher revenues for AMR Distribution
Systems and AMR Airline Services as a result of increased airline
passenger, ramp and cargo handling services.
Expenses
Operating expenses increased 3.7 percent, $15 million, due primarily
to an increase in wages, salaries and benefits resulting from an
increase in the average number of equivalent employees.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the nine month period
ended September 30, 1997, was $2.4 billion, an increase of $391
million over the same period in 1996. Capital expenditures for the
first nine months of 1997 were $670 million, and included purchase
deposits on new aircraft orders of $231 million, computer related
equipment of $165 million, and the acquisition of three ATR aircraft.
These capital expenditures were financed with internally generated
cash. Proceeds from the sale of equipment and property of $182
million for the first nine months of 1997 include proceeds received
upon the delivery of two of American's McDonnell Douglas MD-11
aircraft to Federal Express Corporation in accordance with the 1995
agreement between the two parties.
During 1997, the Company has signed or announced firm orders to
acquire the following aircraft: 75 Boeing 737-800s, 12 Boeing 757-
200s, 11 Boeing 777-IGWs, eight Boeing 767-300ERs, 42 Embraer EMB-
145s, 25 Bombardier CJR-700s, and 12 ATR 72s. Deliveries of these
aircraft commenced during the third quarter of 1997 and will continue
through 2004. Payments for these aircraft will approximate $875
million in 1997, $1.5 billion in 1998, $2.2 billion in 1999, and $2.2
billion in 2000 and thereafter. The Company will determine the
method of financing these aircraft acquisitions near their respective
delivery date; however, deliveries in 1997 and 1998 are currently
expected to be financed with internally generated funds as well as
external financing.
-15-
18
LIQUIDITY AND CAPITAL RESOURCES (continued)
As of September 30, 1997, the Company had completed its previously
announced plans to repurchase 5.75 million shares to offset the
potential dilution from the exercise of options granted to pilots.
Through September 30, approximately 1.1 million shares had been
reissued upon the exercise of stock options, resulting in proceeds of
approximately $95 million to the Company.
On July 16, 1997, the Company announced that its board of directors
had authorized management to repurchase up to an additional $500
million of its outstanding common stock in the open market or in
private transactions from time to time over a 24-month period. A
total of 276,575 shares had been repurchased as of September 30. The
Company expects to spend approximately $470 million to repurchase the
remainder of the outstanding shares.
AIRLINE TRANSPORTATION TAXES
The Federal airline passenger excise tax, which was reimposed in the
first quarter of 1997, expired on September 30, 1997. A replacement
tax mechanism took effect on October 1, 1997. Over a five year
period on a sliding scale, the airline ticket tax will be reduced
from ten percent to 7.5 percent and a $3 per passenger segment fee
will be phased in. Additionally, the fee for international arrivals
and departures was increased from $6 per departure to $12 for each
arrival and departure and a 7.5 percent tax was added on the purchase
of frequent flyer miles. The ultimate impact of the new taxes on AMR
cannot be determined at this time.
TRAVEL AGENCY COMMISSION
During the third quarter of 1997, the Company implemented changes to its
travel agency commission payment plan, which lowered the base commission
paid to travel agents from 10 percent to 8 percent on all tickets
purchased in the U.S and Canada for both domestic and international
travel. The ultimate impact of the new travel agency commission structure
on AMR cannot be determined at this time.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 compliance program designed
to ensure that the Company's computer systems and applications will
function properly beyond 1999. Such program includes both
systems and applications operated by the Company's businesses as well
as software licensed to or operated for third parties by The SABRE
Group. The Company believes that it has allocated adequate resources
for this purpose and expects its Year 2000 date conversion program to
be completed on a timely basis. However, there can be no assurance
that the systems of other parties upon which the Company's businesses
also rely will be converted on a timely basis. The Company's
business, financial condition, or results of operations could be
materially adversely affected by the failure of its systems and
applications, those licensed to or operated for third parties, or
those operated by other parties to properly operate or manage dates
beyond 1999.
The Company expects to incur significant internal staff costs, as
well as consulting and other expenses, related to infrastructure and
facilities enhancements necessary to prepare its system for the Year
2000. However, a portion of these costs will not be incremental
costs to the Company, but rather will represent the redeployment
of existing information technology resources. The Company cannot
presently determine the amount of such costs that will be incremental.
Maintenance or modification costs associated with making existing computer
systems Year 2000 compliant will be expensed as incurred.
-16-
19
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128), which the Company
will be required to initially adopt in the fourth quarter of 1997.
At that time, the Company will be also required to restate all prior
periods in accordance with SFAS 128. The Company anticipates that
the adoption of SFAS 128 will not have a significant impact on its
reporting of earnings per share for 1997 or prior years.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS 131),
effective for years beginning after December 15, 1997. SFAS No. 131
supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and requires that a public company report annual
and interim financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from
current accounting practice. Operating segments, as defined, are
components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Because this statement addresses how
supplemental financial information is disclosed in annual and interim
reports, the adoption will have no impact on the Company's financial
statements, but may affect the disclosure of segment information.
-17-
20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In January 1985, American announced a new fare category, the "Ultimate
SuperSaver," a discount, advance purchase fare that carried a 25
percent penalty upon cancellation. On December 30, 1985, a class
action lawsuit was filed in Circuit Court, Cook County, Illinois
entitled Johnson vs. American Airlines, Inc. The Johnson plaintiffs
allege that the 10 percent federal excise transportation tax should
have been excluded from the "fare" upon which the 25 percent penalty
was assessed. Summary judgment was granted in favor of American but
subsequently reversed and vacated by the Illinois Appellate Court. In
August 1997, the Court denied the plaintiff's motion for class
certification. American is vigorously defending the lawsuit.
In connection with its frequent flyer program, American was sued in
two cases (Wolens et al v. American Airlines, Inc., No. 88 CH 7554,
and Tucker v. American Airlines, Inc., No. 89CH199) seeking class
action certification that were consolidated and are currently pending
in the Circuit Court of Cook County, Illinois. The litigation arises
from certain changes made to American's AAdvantage frequent flyer
program in May 1988 which limited the number of seats available to
participants traveling on certain awards and established blackout
dates during which no AAdvantage seats would be available for certain
awards. In the consolidated action, the plaintiffs allege that these
changes breached American's contract with AAdvantage members, seek
money damages for the alleged breach and attorney's fees and seek to
represent all persons who joined the AAdvantage program before May
1988 and accrued mileage credits before the seat limitations were
introduced. The complaint originally asserted several state law
claims, however only the plaintiffs' breach of contract claim remains
after the U. S. Supreme Court ruled that federal law preempted the
other claims. Although the case has been pending for numerous years,
it still is in its preliminary stages. The court has not ruled as to
whether the case should be certified as a class action. American is
vigorously defending the lawsuit.
Another frequent flyer case, Gutterman et al. v. American Airlines,
Inc., is also pending in the Circuit Court of Cook County, Illinois,
arising from an announced increase in AAdvantage mileage credits
required for free travel. In December 1993, American announced that
the number of miles required to claim a certain travel award under
American's AAdvantage frequent flyer program would be increased
effective February 1, 1995, giving rise to the Gutterman litigation
filed on that same date. The Gutterman plaintiffs claim that the
announced increase in award mileage level violated the terms and
conditions of the agreement between American and AAdvantage members.
The plaintiffs seek class certification of this action, although the
court has yet to rule on the issue. To date, only limited discovery
has been undertaken. American is vigorously defending the lawsuit.
On October 22, 1997, federal agents executed a search warrant at American
Airlines Miami facilities. American has learned that a federal grand
jury is investigating whether American handled hazardous materials and
processed courier shipments, cargo and excess baggage in accordance with
applicable laws and regulations. In connection with this investigation,
American has been served with a subpoena calling for the production of
documents relating to the handling of courier shipments, cargo, excess
baggage and hazardous materials. American is in the process of producing
documents responsive to the subpoena and intends to cooperate fully with
the government's investigation.
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21
PART II
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
11 Computation of earnings per share.
27 Financial Data Schedule.
On July 16, 1997, AMR filed a report on Form 8-K relative to a press
release issued to report the Company's second quarter 1997 earnings
and to announce that the Company's board of directors authorized
management to repurchase additional shares of its outstanding common
stock.
-19-
22
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMR CORPORATION
Date: November 14, 1997 BY: /s/ Gerard J. Arpey
Gerard J. Arpey
Senior Vice President and Chief
Financial Officer
-20-
23
EXHIBIT 11
AMR CORPORATION
Computation of Earnings Per Share
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary:
Earnings applicable to $ 323 $ 282 $ 777 $ 732
common shares
Average shares outstanding 88 91 90 85
Add shares issued upon
assumed conversion of
dilutive options, stock
appreciation rights and
warrants and shares
assumed issued for
deferred stock granted 9 3 6 3
Less assumed treasury
shares purchased (6) (2) (4) (2)
Total primary shares 91 92 92 86
Primary earnings per share $ 3.55 $ 3.06 $ 8.46 $ 8.53
Fully diluted:
Earnings applicable to
common shares 323 282 777 732
Adjustments:
Add interest upon
assumed conversion
of 6.125% convertible
subordinated debentures,
net of tax - - - 14 (a)
Add dividends upon assumed
conversion of convertible
preferred stock - - - 1 (a)
Earnings, as adjusted $ 323 $ 282 $ 777 $ 747
Average shares outstanding 88 91 90 85
Add shares issued upon:
Assumed conversion of
6.125% convertible
subordinated debentures - - - 5
Assumed conversion of
preferred stock - - - 1
Assumed conversion of
dilutive options,
stock appreciation
rights and warrants
and shares assumed
issued for deferred
stock granted 9 3 6 3
Less assumed treasury
hares purchased (6) (2) (4) (2)
Total fully diluted shares 91 92 92 92
Fully diluted earnings
per share $ 3.55 $ 3.06 $ 8.46 $ 8.11
-21-
(a) Through date of actual conversion.
5
1,000,000
9-MOS
DEC-31-1997
SEP-30-1997
27
2,891
1,567
21
629
5,706
20,611
7,697
21,339
6,237
4,169
0
0
91
5,899
21,339
0
13,934
0
12,387
0
0
300
1,303
526
777
0
0
0
777
8.46
8.46
