Form 10-Q
Table of Contents

 

 

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, 2015

 

¨

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

 

 

American Airlines Group Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-1825172
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155   (817) 963-1234
(Address of principal executive offices, including zip code)   (Registrant’s telephone number, including area code)

Commission file number 1-2691

 

 

American Airlines, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-1502798
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155   (817) 963-1234
(Address of principal executive offices, including zip code)   (Registrant’s telephone number, including area code)

 

 

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.

 

American Airlines Group Inc.

  

x  Yes

  

¨  No

American Airlines, Inc.

  

x  Yes

  

¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

American Airlines Group Inc.

  

x  Yes

  

¨  No

American Airlines, Inc.

  

x  Yes

  

¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

American Airlines Group Inc.

  

x  Large Accelerated Filer

  

¨  Accelerated Filer

  

¨  Non-accelerated Filer

  

¨  Smaller Reporting Company

American Airlines, Inc.

  

¨  Large Accelerated Filer

  

¨  Accelerated Filer

  

x  Non-accelerated Filer

  

¨  Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

American Airlines Group Inc.

  

¨  Yes

  

x  No

American Airlines, Inc.

  

¨  Yes

  

x  No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

American Airlines Group Inc.

  

x  Yes

  

¨  No

American Airlines, Inc.

  

x  Yes

  

¨  No

As of October 16, 2015, there were 630,325,539 shares of American Airlines Group Inc. common stock outstanding.

As of October 16, 2015, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.

 

 

 


Table of Contents

American Airlines Group Inc.

American Airlines, Inc.

Form 10-Q

Quarterly Period Ended September 30, 2015

Table of Contents

 

          Page  
   PART I: FINANCIAL INFORMATION      5   

Item 1A.

  

Condensed Consolidated Financial Statements of American Airlines Group Inc.

     6   
  

Condensed Consolidated Statements of Operations

     6   
  

Condensed Consolidated Statements of Comprehensive Income

     7   
  

Condensed Consolidated Balance Sheets

     8   
  

Condensed Consolidated Statements of Cash Flows

     9   
  

Notes to the Condensed Consolidated Financial Statements

     10   

Item 1B.

  

Condensed Consolidated Financial Statements of American Airlines, Inc.

     36   
  

Condensed Consolidated Statements of Operations

     36   
  

Condensed Consolidated Statements of Comprehensive Income

     37   
  

Condensed Consolidated Balance Sheets

     38   
  

Condensed Consolidated Statements of Cash Flows

     39   
  

Notes to the Condensed Consolidated Financial Statements

     40   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     81   

Item 4.

  

Controls and Procedures

     82   
  

PART II: OTHER INFORMATION

     83   

Item 1.

  

Legal Proceedings

     83   

Item 1A.

  

Risk Factors

     84   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     101   

Item 6.

  

Exhibits

     101   

SIGNATURES

     102   

 

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This combined Quarterly Report on Form 10-Q is filed by American Airlines Group Inc. (formerly named AMR Corporation) (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. As more fully described below, on December 9, 2013, a subsidiary of AMR Corporation merged with and into US Airways Group, Inc. (US Airways Group), which survived as a wholly-owned subsidiary of AAG (the Merger). “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and its acquisition of US Airways Group. References in this Quarterly Report on Form 10-Q to “mainline” refer to the operations of American and US Airways, Inc., as applicable, and exclude regional operations.

Note Concerning Forward-Looking Statements

Certain of the statements contained in this report should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “would,” “continue,” “seek,” “target,” “guidance,” “outlook,” “if current trends continue,” “optimistic,” “forecast” and other similar words. Such statements include, but are not limited to, statements about the benefits of the Merger, including future financial and operating results, our plans, objectives, expectations and intentions, and other statements that are not historical facts, such as, without limitation, statements that 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. These forward-looking statements are based on our current objectives, beliefs and expectations, and they are subject to significant risks and uncertainties that may cause actual results and financial position and timing of certain events to differ materially from the information in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described below under Part II, Item 1A. Risk Factors and the following: significant operating losses in the future; downturns in economic conditions that adversely affect our business; the impact of continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel; competitive practices in the industry, including the impact of low cost carriers, airline alliances and industry consolidation; the challenges and costs of integrating operations and realizing anticipated synergies and other benefits of the Merger; our substantial indebtedness and other obligations and the effect they could have on our business and liquidity; an inability to obtain sufficient financing or other capital to operate successfully and in accordance with our current business plan; increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates; the effect our high level of fixed obligations may have on our ability to fund general corporate requirements, obtain additional financing and respond to competitive developments and adverse economic and industry conditions; our significant pension and other post-employment benefit funding obligations; the impact of any failure to comply with the covenants contained in financing arrangements; provisions in credit card processing and other commercial agreements that may materially reduce our liquidity; the impact of union disputes, employee strikes and other labor-related disruptions; any inability to maintain labor costs at competitive levels; interruptions or disruptions in service at one or more of our hub airports; costs of ongoing data security compliance requirements and the impact of any significant data security breach; any inability to obtain and maintain adequate facilities, infrastructure and Slots to operate our flight schedule and expand or change our route network; our reliance on third-party regional operators or third-party service providers that have the ability to affect our revenue and the public’s perception about our services; any inability to effectively manage the costs, rights and functionality of third-party distribution channels on which we rely; extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages; the impact of the heavy taxation on the airline industry; changes to our business model that may not successfully increase revenues and may cause operational difficulties or decreased demand; the loss of key personnel or inability to attract and retain additional qualified personnel; the impact of conflicts overseas, terrorist attacks and ongoing security concerns; the global scope of our business and any associated economic and political instability or adverse effects of events, circumstances or government actions beyond our control, including the impact of foreign currency exchange rate fluctuations and limitations on the repatriation of cash held in foreign countries; the impact of environmental regulation; our reliance on technology and automated systems and the impact of any failure of these technologies or systems; challenges in integrating our computer, communications and other technology systems; losses and adverse publicity stemming from any accident involving any of our aircraft or the aircraft of our regional or codeshare operators; delays in scheduled aircraft deliveries, or other loss of anticipated fleet capacity, and failure of new aircraft to perform as expected; our dependence on a limited number of suppliers for aircraft, aircraft engines and parts; the impact of changing economic and other conditions beyond our control, including global events that affect travel behavior such as an outbreak of a contagious disease, and volatility and fluctuations in our results of operations due to seasonality; the effect of a higher than normal number of pilot retirements and a potential shortage of pilots; the impact of possible future increases in insurance costs or reductions in available insurance coverage; the effect of a lawsuit that was filed in connection with the Merger remains pending; an inability to use net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards); any impairment in the amount of goodwill we recorded as a result of the application of the acquisition method of accounting and an inability to realize the full value of AAG’s and American’s respective intangible or long-lived assets and any material impairment charges that would be recorded as a result; actions that American may take in connection with its integration with US Airways that may not be to its advantage on a stand-alone basis; price volatility of our common stock; the effects of our capital deployment program and the limitation, suspension or discontinuation of our share repurchase program or dividend payments thereunder; delay or prevention of stockholders’ ability to change the composition of our Board of Directors and the effect this may

 

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have on takeover attempts that some of our stockholders might consider beneficial; the effect of provisions of our Restated Certificate of Incorporation (the Certificate of Incorporation) and Amended and Restated Bylaws (the Bylaws) that limit ownership and voting of our equity interests, including our common stock; the effect of limitations in our Certificate of Incorporation on acquisitions and dispositions of our common stock designed to protect our NOL Carryforwards and certain other tax attributes, which may limit the liquidity of our common stock; other economic, business, competitive, and/or regulatory factors affecting our business, including those set forth in this Quarterly Report on Form 10-Q (especially in Part II, Item 1A. Risk Factors and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations) and in our other filings with the Securities and Exchange Commission (the SEC), and other risks and uncertainties listed from time to time in our filings with the SEC.

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A. Risk Factors and elsewhere in this report. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We do not assume any obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting such statements other than as required by law. Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or as of the dates indicated in the statements.

 

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PART I: FINANCIAL INFORMATION

This combined Quarterly Report on Form 10-Q is filed by both AAG and American and includes the condensed consolidated financial statements of each company in Item 1A and Item 1B, respectively.

 

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ITEM 1A.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except shares and per share amounts)(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Operating revenues:

    

Mainline passenger

   $ 7,654      $ 8,093      $ 22,298      $ 23,564   

Regional passenger

     1,699        1,665        4,910        4,779   

Cargo

     180        215        568        643   

Other

     1,173        1,166        3,584        3,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     10,706        11,139        31,360        32,490   

Operating expenses:

        

Aircraft fuel and related taxes

     1,593        2,829        4,912        8,370   

Salaries, wages and benefits

     2,404        2,137        7,141        6,419   

Regional expenses

     1,518        1,668        4,536        4,919   

Maintenance, materials and repairs

     456        529        1,452        1,528   

Other rent and landing fees

     432        431        1,290        1,297   

Aircraft rent

     308        306        941        937   

Selling expenses

     366        393        1,051        1,196   

Depreciation and amortization

     336        334        1,013        960   

Special items, net

     163        221        610        335   

Other

     1,131        1,031        3,278        3,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,707        9,879        26,224        29,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,999        1,260        5,136        3,389   

Nonoperating income (expense):

        

Interest income

     10        7        29        22   

Interest expense, net of capitalized interest

     (219     (210     (651     (667

Other, net

     (81     (108     (143     (99
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (290     (311     (765     (744
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,709        949        4,371        2,645   

Income tax provision

     16        7        42        360   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,693      $ 942      $ 4,329      $ 2,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 2.56      $ 1.31      $ 6.34      $ 3.17   

Diluted

   $ 2.49      $ 1.28      $ 6.17      $ 3.10   

Weighted average shares outstanding (in thousands):

        

Basic

     661,869        719,067        682,337        721,213   

Diluted

     680,739        735,196        701,760        737,100   

Cash dividends declared per common share

   $ 0.10      $ 0.10      $ 0.30      $ 0.10   

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Net income

   $ 1,693      $ 942      $ 4,329      $ 2,285   

Other comprehensive income (loss):

        

Defined benefit pension plans and retiree medical

     (26     (38     (79     (142

Derivative financial instruments:

        

Change in fair value

     —          —          —          (54

Reclassification into earnings

     —          (7     (9     5   

Unrealized loss on investments:

        

Net change in value

     (4     (2     (4     —     

Reversal of non-cash tax provision

     —          —          —          330   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (30     (47     (92     139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 1,663      $ 895      $ 4,237      $ 2,424   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     September 30, 2015     December 31, 2014  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 1,016      $ 994   

Short-term investments

     7,857        6,309   

Restricted cash and short-term investments

     710        774   

Accounts receivable, net

     1,828        1,771   

Aircraft fuel, spare parts and supplies, net

     1,010        1,004   

Prepaid expenses and other

     1,285        1,260   
  

 

 

   

 

 

 

Total current assets

     13,706        12,112   

Operating property and equipment

    

Flight equipment

     31,872        28,213   

Ground property and equipment

     6,262        5,900   

Equipment purchase deposits

     1,073        1,230   
  

 

 

   

 

 

 

Total property and equipment, at cost

     39,207        35,343   

Less accumulated depreciation and amortization

     (12,915     (12,259
  

 

 

   

 

 

 

Total property and equipment, net

     26,292        23,084   

Other assets

    

Goodwill

     4,091        4,091   

Intangibles, net of accumulated amortization of $491 and $447, respectively

     2,261        2,240   

Other assets

     2,365        2,244   
  

 

 

   

 

 

 

Total other assets

     8,717        8,575   
  

 

 

   

 

 

 

Total assets

   $ 48,715      $ 43,771   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,712      $ 1,708   

Accounts payable

     1,525        1,377   

Accrued salaries and wages

     1,162        1,194   

Air traffic liability

     4,811        4,252   

Frequent flyer liability

     2,649        2,807   

Other accrued liabilities

     2,302        2,097   
  

 

 

   

 

 

 

Total current liabilities

     14,161        13,435   

Noncurrent liabilities

    

Long-term debt and capital leases, net of current maturities

     18,849        16,196   

Pension and postretirement benefits

     7,433        7,562   

Deferred gains and credits, net

     709        829   

Bankruptcy settlement obligations

     177        325   

Other liabilities

     3,624        3,403   
  

 

 

   

 

 

 

Total noncurrent liabilities

     30,792        28,315   

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, $0.01 par value; 1,750,000,000 shares authorized, 640,107,543 shares issued and outstanding at September 30, 2015; 697,474,535 shares issued and outstanding at December 31, 2014

     6        7   

Additional paid-in capital

     12,852        15,135   

Accumulated other comprehensive loss

     (4,651     (4,559

Accumulated deficit

     (4,445     (8,562
  

 

 

   

 

 

 

Total stockholders’ equity

     3,762        2,021   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 48,715      $ 43,771   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Nine Months Ended September 30,  
     2015     2014  

Net cash provided by operating activities

   $ 6,021      $ 2,276   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (4,621     (4,006

Purchases of short-term investments

     (7,717     (3,603

Sales of short-term investments

     6,167        4,993   

Decrease in restricted cash and short-term investments

     64        160   

Net proceeds from slot transaction

     —          307   

Proceeds from sale of an investment

     52        —     

Proceeds from sale of property and equipment

     23        24   
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,032     (2,125

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (1,821     (2,780

Proceeds from issuance of long-term debt

     4,463        2,407   

Deferred financing costs

     (69     (68

Sale-leaseback transactions

     43        531   

Exercise of stock options

     —          9   

Treasury stock repurchases

     (2,411     (155

Dividend payment

     (206     (72

Other financing activities

     34        15   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     33        (113
  

 

 

   

 

 

 

Net increase in cash

     22        38   

Cash at beginning of period

     994        1,140   
  

 

 

   

 

 

 

Cash at end of period

   $ 1,016      $ 1,178   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 60      $ 5,469   

Capital lease obligations

     5        479   

Supplemental information:

    

Interest paid, net of amounts capitalized

     648        640   

Income taxes paid

     22        8   

See accompanying notes to condensed consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (AAG or the Company) should be read in conjunction with the consolidated financial statements contained in AAG’s Annual Report on Form 10-K for the year ended December 31, 2014. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Principal subsidiaries include American Airlines, Inc. (American) and US Airways Group, Inc. (US Airways Group). All significant intercompany transactions have been eliminated.

On December 9, 2013 (the Effective Date), AMR Merger Sub, Inc. (Merger Sub) merged with and into US Airways Group (the Merger), with US Airways Group surviving as a wholly-owned subsidiary of AAG, a Delaware corporation (formerly known as AMR Corporation) following the Merger. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and the Effective Date of the Merger.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the frequent flyer program, pensions, retiree medical and other benefits and the deferred tax asset valuation allowance.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB issued ASU 2015-14, which deferred the effective date of this new standard to periods beginning after December 15, 2017 for public entities. Early application is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

2. Emergence from Chapter 11 and Merger with US Airways Group

Chapter 11 Reorganization

On November 29, 2011 (the Petition Date), AMR Corporation (AMR, renamed American Airlines Group Inc., upon the closing of the Merger), its principal subsidiary, American, and certain of AMR’s other direct and indirect domestic subsidiaries (collectively, the Debtors), filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order (the Confirmation Order) approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan).

On the Effective Date, the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by an Agreement and Plan of Merger (as amended, the Merger Agreement), dated as of February 13, 2013, by and among AMR, Merger Sub and US Airways Group, pursuant to which Merger Sub merged with and into US Airways Group, with US Airways Group surviving as a wholly-owned subsidiary of the Company following the Merger.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the U.S. Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.

In connection with the Chapter 11 Cases, trading in AMR’s common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and AMR’s common stock and such debt securities were delisted from the NYSE on January 30, 2012. On January 5, 2012, AMR’s common stock began trading under the symbol “AAMRQ” (CUSIP 001765106) on the OTCQB marketplace, operated by OTC Markets Group. Pursuant to the Plan, on the Effective Date (i) all existing shares of AAG’s old common stock formerly traded under the symbol “AAMRQ” were canceled and (ii) the Company was authorized to issue up to approximately 544 million shares of common stock, par value $0.01 per share, of AAG (AAG Common Stock) by operation of the Plan (excluding shares of AAG Common Stock issuable pursuant to the Merger Agreement). On the Effective Date, the AAG Common Stock was listed on the NASDAQ Global Select Market under the symbol “AAL,” and AAMRQ ceased trading on the OTCQB marketplace.

Upon emergence from Chapter 11, AAG issued approximately 53 million shares of AAG Common Stock to AMR’s old equity holders and certain of the Debtors’ employees, and issued 168 million shares of AAG Series A Convertible Preferred Stock, par value $0.01 per share (the AAG Series A Preferred Stock), which was mandatorily convertible into new AAG Common Stock during the 120-day period after the Effective Date, to certain creditors and employees of the Debtors (including shares deposited in the Disputed Claims Reserve (as defined in the Plan)). In accordance with the terms of the Plan, former holders of AMR common stock (previously traded under the symbol “AAMRQ”) received, for each share of AMR common stock, an initial distribution of approximately 0.0665 shares of the AAG Common Stock as of the Effective Date. Following the Effective Date, former holders of AMR common stock and those deemed to be treated as such in connection with the elections made pursuant to the Plan have received through December 31, 2014, additional aggregate distributions of shares of AAG Common Stock of approximately 0.6776 shares of AAG Common Stock for each share of AMR common stock previously held, and may continue to receive additional distributions. As of the Effective Date, the adjusted total Double-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.5 billion and the Allowed Single-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.5 billion.

The Disputed Claims Reserve established under the Plan initially was issued 30.4 million shares, which shares are reserved for distributions to holders of disputed Single-Dip Unsecured Claims (Single-Dip Equity Obligations) whose claims ultimately become allowed as well as to certain AMR labor groups and employees who received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and the Company repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. On July 14, 2015, approximately 0.6 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and the Company repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $2 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. As of September 30, 2015, there were approximately 25.3 million shares of AAG Common Stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to the Company but rather will be distributed to former AMR shareholders as of the Effective Date. The Company is not required to distribute additional shares above the limits contemplated by the Plan.

Several parties have filed appeals seeking reconsideration of the Confirmation Order. See Note 13 for more information.

The reconciliation process with respect to the remaining claims is expected to take considerable time. The Company’s estimate of the amounts of disputed claims that will ultimately become allowed Single-Dip Unsecured Claims are included in bankruptcy settlement obligations on the Company’s condensed consolidated balance sheet as of September 30, 2015. As these claims are resolved, or where better information becomes available and is evaluated, the Company will make adjustments to the liabilities recorded on its condensed consolidated financial statements as appropriate. Any such adjustments could be material to the Company’s financial position or results of operations in any given period.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

Merger

Pursuant to the Merger Agreement and consistent with the Plan, each share of common stock, par value $0.01 per share, of US Airways Group (the US Airways Group Common Stock) was converted into the right to receive one share of AAG Common Stock. The aggregate number of shares of AAG Common Stock issuable in the Merger to holders of US Airways Group equity instruments (including stockholders, holders of convertible notes, optionees, and holders of restricted stock units (RSUs)) represented 28% of the diluted equity ownership of AAG. The remaining 72% diluted equity ownership in AAG (up to approximately 544 million shares) was or is distributable, pursuant to the Plan, to stakeholders, labor unions, certain employees of AMR and the other Debtors, and former holders of AMR common stock (previously traded under the symbol “AAMRQ”) such that the aggregate number of shares of AAG Common Stock issuable under the Plan will not exceed 72% of the diluted equity ownership of AAG as of the time of the Merger.

Availability and Utilization of Net Operating Losses

Upon emergence from bankruptcy, the Debtors experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), which could potentially limit the ability to utilize certain tax attributes including the Debtors’ substantial net operating losses (NOLs). The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. The Debtors elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.0 billion of the federal NOLs carried over from prior taxable years (NOL Carryforwards) to be utilized without regard to the annual limitation generally imposed by Section 382.

Moreover, an ownership change subsequent to the Debtors’ emergence from bankruptcy may further limit or effectively eliminate the ability to utilize the Debtors’ NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on the Debtors’ ability to utilize the NOL Carryforwards, AAG’s Restated Certificate of Incorporation (the Certificate of Incorporation) contains transfer restrictions applicable to certain substantial shareholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, there can be no assurance that an ownership change will not occur even with these transfer restrictions. A copy of the Certificate of Incorporation was attached as Exhibit 3.1 to a Current Report on Form 8-K filed by the Company with the SEC on December 9, 2013.

3. Bankruptcy Settlement Obligations

The components of bankruptcy settlement obligations on the condensed consolidated balance sheets are as follows (in millions):

 

     September 30, 2015      December 31, 2014  

Single-Dip Equity Obligations

   $ 135       $ 248   

Labor-related deemed claim

     42         77   
  

 

 

    

 

 

 

Total

   $ 177       $ 325   
  

 

 

    

 

 

 

The amount of the remaining Single-Dip Equity Obligations at September 30, 2015 is the Company’s estimate of its obligation for disputed claims of $135 million and is calculated based on the fair value of the shares expected to be issued, measured as if the obligations were settled using the closing price of AAG Common Stock at September 30, 2015. Additional allowed claims will receive 30.7553 shares, subject to reduction for expenses of the Disputed Claims Reserve, including tax liabilities, for each $1,000 of allowed claims. For accounting purposes, the value of the shares expected to be issued is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

In exchange for employees’ contributions to the successful reorganization of the Company, including agreeing to reductions in pay and benefits, the Company agreed in the Plan to provide each employee group a deemed claim which was used to provide a distribution of a portion of the equity of the reorganized entity to those employees. Each employee group received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. The fair value based on the expected number of shares to be distributed to satisfy this deemed claim, as adjusted, was approximately $1.5 billion. As of September 30, 2015, the remaining liability to certain AMR labor groups and employees of $42 million represents the estimated fair value of the remaining shares expected to be issued in satisfaction of such obligation, measured as if the obligation was settled using the closing price of AAG Common Stock at September 30, 2015. For accounting purposes, the value of the remaining shares expected to be issued to satisfy the labor claim is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

On February 10, 2015 and July 14, 2015, approximately 0.8 million and 0.6 million shares, respectively, of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and 0.1 million shares in the aggregate were withheld or sold on account of related tax obligations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

4. Special Items

Special items, net on the condensed consolidated statements of operations are as follows (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
             2015                      2014                      2015                      2014          

Mainline operating special items, net (a)

   $ 163       $ 221       $ 610       $ 335   

 

(a) 

The 2015 third quarter mainline operating special items totaled a net charge of $163 million, which principally included $196 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, fleet restructuring, re-branding of aircraft and airport facilities, relocation and training, as well as a $38 million charge in connection with the dissolution of the Texas Aero Engine Services joint venture. These charges were offset in part by a $66 million credit related to proceeds received from a legal settlement. The 2015 nine month period mainline operating special items totaled a net charge of $610 million, which principally included $633 million of merger integration expenses as described above, a net $99 million charge related to the Company’s new pilot joint collective bargaining agreement and a $38 million charge in connection with the dissolution of the Texas Aero Engine Services joint venture. These charges were offset in part by a net $75 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations and a $66 million credit related to proceeds received from a legal settlement.

The 2014 third quarter mainline operating special items totaled a net charge of $221 million, which principally included $166 million of merger integration expenses related to information technology, alignment of labor union contracts, professional fees, severance and retention, share-based compensation, re-branding of aircraft and airport facilities, relocation and training, as well as $99 million in other special charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other spare parts asset impairments. These charges were offset in part by a net $40 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. The 2014 nine month period mainline operating special items totaled a net charge of $335 million, which principally included $530 million of merger integration expenses as described above, $99 million in other special charges, including an $81 million charge to revise prior estimates of certain aircraft residual values and other spare parts asset impairments, as well as $46 million in charges primarily relating to the buyout of certain aircraft leases. These charges were offset in part by a $309 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $35 million credit for bankruptcy related items as described above.

The following additional amounts are also included in the condensed consolidated statements of operations (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Regional operating special items, net (a)

   $ 2       $ 2       $ 20       $ 7   

Nonoperating special items, net (b)

     21         50         2         101   

Income tax special items, net (c)

     6         8         22         352   

 

(a) 

The 2015 and 2014 third quarter and nine month period regional operating special items principally related to merger integration expenses.

 

(b) 

The 2015 third quarter nonoperating special items totaled a net charge of $21 million, which was primarily due to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The 2015 nine month period nonoperating special items totaled a net charge of $2 million, which principally included $40 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing the Company’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $22 million gain associated with the sale of an investment and a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

The 2014 third quarter nonoperating special items totaled a net charge of $50 million, which was primarily due to early debt extinguishment costs related to the prepayment of American’s 7.50% senior secured notes and other indebtedness. The 2014 nine month period nonoperating special items totaled a net charge of $101 million, which primarily included $54 million of early debt extinguishment costs as described above and $33 million of non-cash interest accretion on the bankruptcy settlement obligations.

 

(c) 

The 2015 third quarter and nine month period tax special items were the result of a non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

During the 2014 third quarter, the Company recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. During the 2014 nine month period, the Company sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, the Company recorded a special non-cash tax provision of $330 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in other comprehensive income (OCI), a subset of stockholders’ equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of the Company’s fuel hedging contracts. In accordance with GAAP, the Company retained the $330 million tax provision in OCI until the last contract was settled or terminated. In addition, the 2014 nine month period included a special $22 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

5. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS) (in millions, except share and per share amounts in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Basic EPS:

           

Net income

   $ 1,693       $ 942       $ 4,329       $ 2,285   

Weighted-average common shares outstanding
(in thousands)

     661,869         719,067         682,337         721,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 2.56       $ 1.31       $ 6.34       $ 3.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS:

           

Net income

   $ 1,693       $ 942       $ 4,329       $ 2,285   

Change in fair value of conversion feature on 7.25% convertible senior notes (a)

     —           —           —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income for purposes of computing diluted EPS

   $ 1,693       $ 942       $ 4,329       $ 2,288   

Share computation for diluted earnings per share (in thousands):

           

Weighted-average shares outstanding

     661,869         719,067         682,337         721,213   

Dilutive effect of stock awards

     18,870         16,129         19,423         14,610   

Assumed conversion of convertible senior notes

     —           —           —           1,277   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     680,739         735,196         701,760         737,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 2.49       $ 1.28       $ 6.17       $ 3.10   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following were excluded from the calculation of diluted EPS (in thousands):

           

Stock options, SARs and RSUs because inclusion would be antidilutive

     1,094         248         667         288   

 

(a) 

In March 2014, the Company notified the holders of US Airways Group’s 7.25% convertible senior notes that it had elected to settle all future conversions solely in cash instead of shares of AAG Common Stock in accordance with the related indenture. Thus, the diluted shares included the weighted average impact of the 7.25% convertible senior notes only for the period from January 1, 2014 to March 12, 2014. For purposes of computing diluted earnings per share under GAAP, the Company was required to adjust the numerator by the change in fair value of the conversion feature from March 12, 2014 to May 15, 2014, which increased GAAP net income by $3 million for the nine months ended September 30, 2014.

6. Share Repurchase Program and Dividend

On January 27, 2015, the Company announced that its Board of Directors had authorized a $2.0 billion share repurchase program, which was completed in the third quarter of 2015. In July 2015, the Company announced that its Board of Directors had authorized an additional $2.0 billion share repurchase program to be completed by the end of 2016. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. The program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company’s discretion. During the three months ended September 30, 2015, the Company repurchased 38.4 million shares of AAG Common Stock for $1.6 billion at a weighted average cost per share of $40.56. During the nine months ended September 30, 2015, the Company repurchased 59.5 million shares of AAG Common Stock for $2.5 billion at a weighted average cost per share of $42.00.

        In January 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on February 9, 2015, and payable on February 23, 2015.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

In April 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on May 4, 2015, and payable on May 18, 2015.

In July 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on August 10, 2015, and payable on August 24, 2015.

The total cash payment for dividends during the three and nine months ended September 30, 2015 was $67 million and $206 million, respectively. Any future dividends that may be declared and paid from time to time under the Company’s capital deployment program will be subject to market and economic conditions, applicable legal requirements and other relevant factors. The Company’s capital deployment program does not obligate it to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at the Company’s discretion.

7. Debt

Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):

 

     September 30, 2015      December 31, 2014  

Secured

     

2013 Credit Facilities, variable interest rate of 3.25%, installments through 2020

   $ 1,867       $ 1,872   

2014 Credit Facilities, variable interest rate of 3.50%, installments through 2021

     750         750   

2013 Citicorp Credit Facility tranche B-1, variable interest rate of 3.50%, installments through 2019

     980         990   

2013 Citicorp Credit Facility tranche B-2, variable interest rate of 3.00%, installments through 2016

     588         594   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.38% to 9.75%, maturing from 2015 to 2027

     8,891         7,028   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.59% to 8.48%, maturing from 2015 to 2027

     3,747         2,952   

Special facility revenue bonds, fixed interest rates ranging from 2.00% to 8.00%, maturing from 2016 to 2035

     1,080         1,100   

AAdvantage Loan, effective rate of 8.30%

     —           433   

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2015 to 2028

     940         994   
  

 

 

    

 

 

 
     18,843         16,713   
  

 

 

    

 

 

 

Unsecured

     

5.50% senior notes, interest only payments until due in 2019

     750         750   

6.125% senior notes, interest only payments until due in 2018

     500         500   

4.625% senior notes, interest only payments until due in 2020

     500         —     
  

 

 

    

 

 

 
     1,750         1,250   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     20,593         17,963   

Less: Total unamortized debt discount

     32         59   

Less: Current maturities

     1,712         1,708   
  

 

 

    

 

 

 

Long-term debt and capital lease obligations, net of current maturities

   $ 18,849       $ 16,196   
  

 

 

    

 

 

 

2013 Credit Facilities

On May 21, 2015, American refinanced its $1.9 billion term loan facility (the $1.9 billion 2015 Term Loan Facility and, together with a $1.4 billion revolving credit facility, the 2013 Credit Facilities) to extend the maturity date to June 29, 2020 and reduce the LIBOR margin from 3.00% to 2.75%. In addition, American entered into certain amendments to reflect the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $1.9 billion 2015 Term Loan Facility may vary based on American’s credit ratings. As of September 30, 2015, as a result of American’s improved credit ratings, the LIBOR margin was 2.50%.

2014 Credit Facilities

On April 20, 2015, American refinanced its $750 million term loan facility (the $750 million 2015 Term Loan Facility and, together with a $400 million revolving credit facility, the 2014 Credit Facilities) to reduce the LIBOR margin from 3.50% to 3.00% and entered into certain amendments to reflect the release of certain existing collateral and the addition of certain new collateral, as well as the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $750 million 2015 Term Loan Facility may vary based on American’s credit ratings. As of September 30, 2015, as a result of American’s improved credit ratings, the LIBOR margin was 2.75%.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

2015-1 EETCs

In March 2015, American created two pass-through trusts which issued approximately $1.2 billion aggregate face amount of Series 2015-1 Class A and Class B EETCs (the 2015-1 EETCs) in connection with the financing of 28 aircraft owned by American (the 2015 EETC Aircraft).

As of September 30, 2015, the entire $1.2 billion of the proceeds from the sale of the 2015-1 EETCs has been used to purchase equipment notes issued by American in two series: Series A equipment notes in the amount of $948 million bearing interest at 3.375% per annum and Series B equipment notes in the amount of $266 million bearing interest at 3.70% per annum. Interest and principal payments on the equipment notes are payable semi-annually in May and November of each year, beginning in November 2015. The final payments on the Series A and Series B equipment notes will be due in May 2027 and May 2023, respectively. These equipment notes are secured by liens on the 2015 EETC Aircraft.

2015-2 EETCs

In September 2015, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2015-2 Class AA, Class A and Class B EETCs (the 2015-2 EETCs) in connection with the financing of 21 aircraft owned by American (the 2015-2 EETC Aircraft).

As of September 30, 2015, the entire $1.1 billion of the proceeds from the sale of the 2015-2 EETCs has been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the amount of $583 million bearing interest at 3.60% per annum, Series A equipment notes in the amount of $239 million bearing interest at 4.00% per annum and Series B equipment notes in the amount of $239 million bearing interest at 4.40% per annum. Interest and principal payments on the equipment notes are payable semi-annually in March and September of each year, with interest payments beginning in March 2016 and principal payments beginning in September 2016. The final payments on the Series AA and Series A equipment notes will be in September 2027 and the final payments on the Series B equipment notes will be in September 2023. These equipment notes are secured by liens on the 2015-2 EETC Aircraft.

4.625% Senior Notes

In March 2015, the Company issued $500 million aggregate principal amount of 4.625% senior notes due 2020 (the 4.625% senior notes). These notes bear interest at a rate of 4.625% per annum and are payable semi-annually in arrears on each March 1 and September 1, which began on September 1, 2015. The 4.625% senior notes mature on March 1, 2020 and are fully and unconditionally guaranteed by American, US Airways Group and US Airways, Inc. (US Airways). The 4.625% senior notes are senior unsecured obligations of the Company. The indenture for the 4.625% senior notes contains covenants and events of default generally customary for similar financings. In addition, if the Company experiences specific kinds of changes of control, the Company must offer to repurchase the 4.625% senior notes in whole or in part at a repurchase price of 101% of the aggregate principal amount plus accrued and unpaid interest, if any, to (but not including) the repurchase date. Upon the occurrence of certain events of default, the 4.625% senior notes may be accelerated and become due and payable.

AAdvantage Loan

Effective January 2, 2015, American exercised its loan repayment right with respect to the full value of the outstanding balance of the AAdvantage Loan with Citibank for $400 million. In connection with the repayment, in the first quarter of 2015, American recognized an early debt extinguishment gain of approximately $17 million.

Obligations Associated with Special Facility Revenue Bonds

In December 2014, American acquired approximately $112 million aggregate principal amount of special facility revenue bonds related to the Tulsa International Airport, when such bonds were mandatorily tendered to American. The acquisition of these bonds resulted in an $11 million reduction of debt on American’s consolidated balance sheet and a $50 million reduction of a long-term operating lease obligation included in other long-term liabilities on American’s consolidated balance sheet as of December 31, 2014. American exercised its option to remarket approximately $104 million of these bonds in May 2015. The remarketed bonds bear interest at 5.0% per annum from the date of initial issuance and delivery of the bonds on May 27, 2015, until the day preceding June 1, 2025, on which date the bonds will be subject to mandatory tender for purchase by American. In connection with the remarketing of these special facility revenue bonds, American received cash proceeds of $112 million and recognized a total obligation of $62 million. Of that total obligation, $11 million is reflected as a capital lease and $51 million is reflected in other long-term liabilities on American’s condensed consolidated balance sheet as of September 30, 2015.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

In June 2015, American exercised its right to adjust the interest rate on approximately $365 million aggregate principal amount of special facility revenue bonds related to the John F. Kennedy International Airport, which were bearing interest at 8.50% per annum. In August 2015, these bonds were purchased by American and subsequently remarketed. The remarketed bonds bear interest at 2.00% per annum from the date of initial issuance and delivery of the bonds in August 2015, until August 2016, when the bonds will be subject to mandatory tender for purchase by American. In connection with this transaction, American recorded a special nonoperating charge of $20 million related primarily to non-cash write offs of unamortized debt discount and debt issuance costs. The $365 million obligation is reflected in current maturities of long-term debt on American’s condensed consolidated balance sheet as of September 30, 2015.

Other Aircraft Financing Transactions

In the first nine months of 2015, the Company prepaid $72 million principal amount of outstanding debt secured by certain aircraft.

In the first nine months of 2015, the Company entered into loan agreements to borrow $1.3 billion in connection with the financing of certain aircraft. The notes mature in 2022 through 2027 and bear interest at a rate of LIBOR plus an applicable margin.

8. Income Taxes

At December 31, 2014, the Company had approximately $10.1 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2015. The federal NOL Carryforwards will expire beginning in 2022 if unused. These NOL Carryforwards include an unrealized tax benefit of $867 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. The Company also had approximately $4.6 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2014, which will expire in years 2015 through 2034 if unused. The Company’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. The Company experienced an ownership change in connection with its emergence from the Chapter 11 Cases, and US Airways Group experienced an ownership change in connection with the Merger. As a result of the Merger, US Airways Group is now included in the AAG consolidated federal and state income tax return. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. The Company elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.0 billion of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of the Company’s remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, the Company’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. The Company’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2014, the Company had an Alternative Minimum Tax (AMT) credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period. The Company’s net deferred tax assets, which include the NOL Carryforwards, are subject to a full valuation allowance. At December 31, 2014, the federal and state valuation allowances were $4.5 billion and $264 million, respectively. In accordance with GAAP, utilization of the NOL Carryforwards after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset the Company’s tax provision dollar for dollar.

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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered which impact the Company’s projections of future sustained profitability including risks associated with merger integration as well as other conditions which are beyond the Company’s control, such as the health of the economy, the level and volatility of fuel prices and travel demand. The Company has concluded as of September 30, 2015, that the valuation allowance was still needed on its deferred tax assets based on the weight of the factors described above. However, if for the remainder of 2015, projections for future sustained profitability continue and additional merger integration milestones are completed, the Company anticipates that it may reverse substantially all of its valuation allowance as early as the end of 2015.

For the three and nine months ended September 30, 2015, the Company recorded a special $6 million and $22 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the three and nine months ended September 30, 2015, the Company recorded $10 million and $20 million, respectively, of state and international income tax expense related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

For the three and nine months ended September 30, 2014, the Company recorded a special $8 million and $22 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the 2014 nine month period, the Company recorded a special $330 million non-cash tax provision related to the settlement of fuel hedges discussed below and $8 million of tax expense principally related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

During the second quarter of 2014, the Company sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, the Company recorded a special non-cash tax provision of $330 million in the statement of operations for the nine months ended September 30, 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholders’ equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of the Company’s fuel hedging contracts. In accordance with GAAP, the Company retained the $330 million tax provision in OCI until the last contract was settled or terminated.

9. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2015.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):

 

     Fair Value Measurements as of September 30, 2015  
     Total      Level 1      Level 2      Level 3  

Short-term investments (1), (2):

           

Money market funds

   $ 1,486       $ 1,486       $ —         $ —     

Repurchase agreements

     41         —           41         —     

Corporate obligations

     3,491         —           3,491         —     

Bank notes / certificates of deposit / time deposits

     2,839         —           2,839         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,857         1,486         6,371         —     

Restricted cash and short-term investments (1)

     710         710         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,567       $ 2,196       $ 6,371       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Unrealized gains or losses on short-term investments and restricted cash and short-term investments are recorded in accumulated other comprehensive loss at each measurement date.

(2) 

All short-term investments are classified as available-for-sale and stated at fair value. In addition, all short-term investments mature in one year or less except for $788 million of corporate obligations and $1.6 billion of bank notes/certificates of deposit/time deposits.

There were no Level 1 to Level 2 transfers during the nine months ended September 30, 2015.

Venezuela Cash and Short-term Investments

As of September 30, 2015, the Company had approximately $609 million of unrestricted cash and short-term investments held in Venezuelan bolivars. This balance is valued at 6.3 bolivars to the U.S. dollar, which is the rate that was in effect on the date the Company submitted each of its repatriation requests to the Venezuelan government. This rate is materially more favorable than the exchange rates currently prevailing for other transactions conducted outside of the Venezuelan government’s currency exchange system.

During 2014, the Company significantly reduced capacity in the Venezuelan market and is no longer accepting bolivars as payment for airline tickets. The Company is monitoring this situation closely and continues to evaluate its holdings of Venezuelan bolivars for additional foreign currency losses or other accounting adjustments, which could be material, particularly in light of the additional uncertainty posed by the recent changes to the foreign exchange regulations and the continued deterioration of economic conditions in Venezuela. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by the Company and can significantly affect the value of the Company’s assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect the Company’s business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

Fair Value of Debt

The fair value of the Company’s long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If the Company’s long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.

The carrying value and estimated fair value of the Company’s long-term debt, including current maturities, were as follows (in millions):

 

     September 30, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 20,561       $ 20,971       $ 17,904       $ 18,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. Retirement Benefits

The following tables provide the components of net periodic benefit cost (in millions):

 

     Pension Benefits     Retiree Medical and Other Benefits  

Three Months Ended September 30,

   2015     2014     2015     2014  

Service cost

   $ 1      $ 1      $ 1      $ —     

Interest cost

     184        186        13        15   

Expected return on assets

     (213     (197     (5     (5

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     7        7        (60     (55

Unrecognized net loss (gain)

     28        12        (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 7      $ 10      $ (53   $ (47
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The 2015 third quarter prior service cost does not include amortization of $1 million related to other post-employment benefits.

 

     Pension Benefits     Retiree Medical and Other Benefits  

Nine Months Ended September 30,

   2015     2014     2015     2014  

Service cost

   $ 2      $ 3      $ 3      $ 1   

Interest cost

     552        557        38        46   

Expected return on assets

     (639     (589     (15     (15

Settlements

     1        4        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     21        21        (182     (175

Unrecognized net loss (gain)

     84        35        (5     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 21      $ 31      $ (161   $ (149
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The 2015 nine month period prior service cost does not include amortization of $2 million related to other post-employment benefits.

Effective November 1, 2012, substantially all of the Company’s defined benefit pension plans were frozen.

The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, the Pension Relief Act of 2010 and the Moving Ahead for Progress in the 21st Century Act of 2012. Based on current funding assumptions, the Company has no minimum required contributions until 2019. Currently, the Company’s minimum funding obligation for its pension plans is subject to temporary favorable rules that are scheduled to expire at the end of 2017. The Company’s pension funding obligations are likely to increase materially beginning in 2019, when the Company will be required to make contributions relating to the 2018 fiscal year. The amount of these obligations will depend on the performance of the Company’s investments held in trust by the pension plans, interest rates for determining liabilities and the Company’s actuarial experience.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

11. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) (AOCI) are as follows (in millions):

 

     Pension and
Retiree
Medical

Liability
    Derivative
Financial

Instruments
    Unrealized
Gain/(Loss) on
Investments
    Income Tax
Benefit

(Expense)
    Total  

Balance at December 31, 2014

   $ (3,683   $ 9      $ (5   $ (880   $ (4,559

Other comprehensive income (loss) before reclassifications

     —          —          (5     —          (5

Amounts reclassified from accumulated other comprehensive income (loss)

     (79     (9     1        —          (87
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (79     (9     (4     —          (92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ (3,762   $ —        $ (9   $ (880   $ (4,651
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications out of AOCI for the three and nine months ended September 30, 2015 and 2014 are as follows (in millions):

 

     Amounts reclassified from AOCI      

AOCI Components

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
   

Affected line items on condensed

consolidated statement of operations

   2015     2014     2015     2014    

Amortization of pension and retiree medical liability:

          

Prior service cost

   $ (52   $ (48   $ (159   $ (154   Salaries, wages and benefits

Actuarial loss

     26        10        80        29      Salaries, wages and benefits

Derivative financial instruments:

          

Cash flow hedges

     —          (7     (9     5      Aircraft fuel and related taxes

Net unrealized change on investments:

          

Net change in value

     —          (2     1        —        Other nonoperating, net

Income tax benefit:

          

Reversal of non-cash tax provision

     —          —          —          330      Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period

   $ (26   $ (47   $ (87   $ 210     
  

 

 

   

 

 

   

 

 

   

 

 

   

12. Regional Expenses

Expenses associated with the Company’s wholly-owned regional airlines and third-party regional carriers operating under the brand names American Eagle and US Airways Express are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Aircraft fuel and related taxes

   $ 310       $ 538       $ 970       $ 1,573   

Salaries, wages and benefits

     296         283         881         850   

Capacity purchases from third-party regional carriers

     399         380         1,172         1,102   

Maintenance, materials and repairs

     78         94         241         263   

Other rent and landing fees

     126         109         354         311   

Aircraft rent

     8         9         25         26   

Selling expenses

     87         79         252         238   

Depreciation and amortization

     62         52         181         156   

Special items, net

     2         2         20         7   

Other

     150         122         440         393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regional expenses

   $ 1,518       $ 1,668       $ 4,536       $ 4,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Legal Proceedings

        Chapter 11 Cases. As previously disclosed, on the Petition Date, November 29, 2011, the Debtors filed the Chapter 11 Cases. On October 21, 2013, the Bankruptcy Court entered the Confirmation Order confirming the Plan. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger. From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date, generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the Bankruptcy Court to determine the amount, if any, of such litigation claims for purposes of treatment under the Plan.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG Common Stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed Single-Dip Unsecured Claims. The shares provided for under the Plan were determined based upon a Disputed Claims Reserve amount of claims of approximately $755 million, representing the maximum amount of additional distributions to subsequently allowed Single-Dip Unsecured Claims under the Plan. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and the Company repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. On July 14, 2015, approximately 0.6 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and the Company repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $2 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. As of September 30, 2015, there were approximately 25.3 million shares of AAG Common Stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. However, the Company is not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to the Company but rather will be distributed to former AMR shareholders as of the Effective Date. However, resolution of disputed claims could have a material effect on recoveries by holders of additional allowed Single-Dip Unsecured Claims under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.

There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, post-employee benefits (OPEB) are not vested benefits and thus may be modified or terminated without liability to American. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non-union employees, concluding that their benefits were not vested and could be terminated. The summary judgment motion was denied with respect to all other retirees. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees. The Company’s financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding. Separately, both the Association of Professional Flight Attendants and Transport Workers Union have filed grievances asserting that American was “successful” in its Chapter 11 with respect to matters related to OPEB and, accordingly, by operation of the underlying collective bargaining agreements, American’s prior contributions to certain OPEB prefunding trusts attributable to active employees should be returned to those active employees. These amounts aggregate approximately $212 million. The Company has denied both grievances and intends to defend these matters vigorously.

DOJ Antitrust Civil Investigative Demand. In June 2015, the Company received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from the Company, and other airlines have announced that they have received similar requests. The Company intends to cooperate fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, the Company, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were the subject of multiple motions to consolidate them in a single forum, and they have now been consolidated in the Federal District Court for the District of Columbia. Both the DOJ process and these lawsuits are in their very early stages and the Company intends to defend the lawsuits vigorously.

Private Party Antitrust Action. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint named as defendants US Airways Group and US Airways, and alleged that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint included an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

defendants, and on October 2, 2013, dismissed the initial California action. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 19, 2015, after three previous largely unsuccessful attempts to amend their complaint, plaintiffs filed a fourth motion for leave to file an amended and supplemental complaint to add a claim for damages and demand for jury trial, as well as claims similar to those in the putative class action lawsuits regarding air passenger capacity. Thereafter, plaintiffs filed a request with the Judicial Panel on Multidistrict Litigation (JPML) to consolidate the Fjord matter with the putative class action lawsuits. The JPML denied that request on October 15, 2015. Plaintiffs have indicated that they will seek further relief from the JPML. The Company believes this lawsuit is without merit and intends to vigorously defend against the allegations.

General. The Company and its subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within the control of the Company. Therefore, although the Company will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on the Company are uncertain.

14. Financial Information for Subsidiary Guarantors and Non-guarantor Subsidiaries

There are various cross-guarantees among the Company, American, US Airways Group and US Airways with respect to publicly held debt securities. In connection with the Merger, the Company and American entered into a second supplemental indenture under which they jointly and severally guaranteed the payment obligations of US Airways Group under the 6.125% senior notes. In addition, on March 31, 2014, the Company, US Airways Group and US Airways entered into amended and restated guarantees of the payment obligations of US Airways under the equipment notes relating to each of its Series 2010-1, 2011-1, 2012-1, 2012-2 and 2013-1 Pass Through Certificates the result of which was to add AAG as a guarantor of such equipment notes on a joint and several basis with US Airways Group.

In connection with the issuance of these guarantees, in accordance with Rule 3-10 of Regulation S-X and Rule 12h-5 under the Securities Exchange Act of 1934, as amended, US Airways Group and US Airways discontinued filing separate periodic and current reports with the SEC. As a result, in accordance with Rule 3-10, the Company is providing the following condensed consolidating financial information for the periods after Merger close for American Airlines Group (Parent Company Only), American, US Airways Group Parent, US Airways and all other non-guarantor subsidiaries, together with the consolidating adjustments necessary to present the Company’s results on a consolidated basis.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Three Months Ended September 30, 2015  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Operating revenues:

             

Mainline passenger

  $ —        $ 4,927      $ —        $ 2,727      $ —        $ —        $ 7,654   

Regional passenger

    —          858        —          841        —          —          1,699   

Cargo

    —          150        —          30        —          —          180   

Other

    —          847        —          353        625        (652     1,173   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          6,782        —          3,951        625        (652     10,706   

Operating expenses:

             

Aircraft fuel and related taxes

    —          1,065        —          528        —          —          1,593   

Salaries, wages and benefits

    —          1,563        —          839        193        (191     2,404   

Regional expenses

    —          803        —          738        —          (23     1,518   

Maintenance, materials and repairs

    —          261        —          195        78        (78     456   

Other rent and landing fees

    —          286        —          146        11        (11     432   

Aircraft rent

    —          225        —          83        40        (40     308   

Selling expenses

    —          256        —          110        —          —          366   

Depreciation and amortization

    —          245        —          92        10        (11     336   

Special items, net

    —          77        —          86        —          —          163   

Other

    1        790        —          343        295        (298     1,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1        5,571        —          3,160        627        (652     8,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (1     1,211        —          791        (2     —          1,999   

Nonoperating income (expense):

             

Interest income

    1        10        —          3        3        (7     10   

Interest expense, net

    (17     (133     (9     (64     (3     7        (219

Equity in earnings of subsidiaries

    1,710        —          465        —          —          (2,175     —     

Other, net

    —          (83     —          2        —          —          (81
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    1,694        (206     456        (59     —          (2,175     (290
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,693        1,005        456        732        (2     (2,175     1,709   

Income tax provision

    —          9        —          278        —          (271     16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,693      $ 996      $ 456      $ 454      $ (2   $ (1,904   $ 1,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)(Unaudited)

 

    Three Months Ended September 30, 2015  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Net income (loss)

  $ 1,693      $ 996      $ 456      $ 454      $ (2   $ (1,904   $ 1,693   

Other comprehensive income (loss):

             

Defined benefit pension plans and retiree medical

    —          (26     —          —          —          —          (26

Unrealized loss on investments:

             

Net change in value

    —          (3     —          (1     —          —          (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

    —          (29     —          (1     —          —          (30
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  $ 1,693      $ 967      $ 456      $ 453      $ (2   $ (1,904   $ 1,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Nine Months Ended September 30, 2015  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Operating revenues:

             

Mainline passenger

  $ —        $ 14,565      $ —        $ 7,733      $ —        $ —        $ 22,298   

Regional passenger

    —          2,399        —          2,511        —          —          4,910   

Cargo

    —          472        —          96        —          —          568   

Other

    —          2,533        —          1,114        2,112        (2,175     3,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          19,969        —          11,454        2,112        (2,175     31,360   

Operating expenses:

             

Aircraft fuel and related taxes

    —          3,332        —          1,580        —          —          4,912   

Salaries, wages and benefits

    —          4,684        —          2,450        584        (577     7,141   

Regional expenses

    —          2,318        —          2,296        —          (78     4,536   

Maintenance, materials and repairs

    —          868        —          584        239        (239     1,452   

Other rent and landing fees

    —          825        —          465        32        (32     1,290   

Aircraft rent

    —          676        —          265        108        (108     941   

Selling expenses

    —          688        —          363        —          —          1,051   

Depreciation and amortization

    —          728        —          285        33        (33     1,013   

Special items, net

    —          350        —          260        4        (4     610   

Other

    2        2,323        —          958        1,099        (1,104     3,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2        16,792        —          9,506        2,099        (2,175     26,224   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (2     3,177        —          1,948        13        —          5,136   

Nonoperating income (expense):

             

Interest income

    2        26        1        10        6        (16     29   

Interest expense, net

    (47     (396     (27     (191     (6     16        (651

Equity in earnings of subsidiaries

    4,354        —          1,135        —          —          (5,489     —     

Other, net

    22        (162     —          (4     1        —          (143
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    4,331        (532     1,109        (185     1        (5,489     (765
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    4,329        2,645        1,109        1,763        14        (5,489     4,371   

Income tax provision

    —          28        —          656        8        (650     42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 4,329      $ 2,617      $ 1,109      $ 1,107      $ 6      $ (4,839   $ 4,329   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

    Nine Months Ended September 30, 2015  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Net income

  $ 4,329      $ 2,617      $ 1,109      $ 1,107      $ 6      $ (4,839   $ 4,329   

Other comprehensive income (loss):

             

Defined benefit pension plans and retiree medical

    —          (76     —          (3     —          —          (79

Derivative financial instruments:

             

Reclassification into earnings

    —          (9     —          —          —          —          (9

Unrealized gain on investments:

             

Net change in value

    —          (4     —          —          —          —          (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

    —          (89     —          (3     —          —          (92
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

  $ 4,329      $ 2,528      $ 1,109      $ 1,104      $ 6      $ (4,839   $ 4,237   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Three Months Ended September 30, 2014  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Operating revenues:

             

Mainline passenger

  $ —        $ 5,321      $ —        $ 2,772      $ —        $ —        $ 8,093   

Regional passenger

    —          748        —          917        —          —          1,665   

Cargo

    —          175        —          40        —          —          215   

Other

    —          811        —          385        898        (928     1,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          7,055        —          4,114        898        (928     11,139   

Operating expenses:

             

Aircraft fuel and related taxes

    —          1,894        —          935        —          —          2,829   

Salaries, wages and benefits

    —          1,412        —          723        193        (191     2,137   

Regional expenses

    —          790        —          886        —          (8     1,668   

Maintenance, materials and repairs

    —          353        —          176        93        (93     529   

Other rent and landing fees

    —          279        —          152        8        (8     431   

Aircraft rent

    —          211        —          95        24        (24     306   

Selling expenses

    —          278        —          115        —          —          393   

Depreciation and amortization

    —          230        —          105        10        (11     334   

Special items, net

    —          164        —          57        —          —          221   

Other

    —          746        —          304        574        (593     1,031   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    —          6,357        —          3,548        902        (928     9,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          698        —          566        (4     —          1,260   

Nonoperating income (expense):

             

Interest income

    2        5        1        5        —          (6     7   

Interest expense, net

    —          (136     (11     (68     (1     6        (210

Equity in earnings of subsidiaries

    940        —          476        —          —          (1,416     —     

Other, net

    —          (97     —          (12     1        —          (108
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    942        (228     466        (75     —          (1,416     (311
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    942        470        466        491        (4     (1,416     949   

Income tax provision

    —          5        —          2        7        (7     7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 942      $ 465      $ 466      $ 489      $ (11   $ (1,409   $ 942   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)(Unaudited)

 

    Three Months Ended September 30, 2014  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Net income (loss)

  $ 942      $ 465      $ 466      $ 489      $ (11   $ (1,409   $ 942   

Other comprehensive loss:

             

Defined benefit pension plans and retiree medical

    —          (37     —          (1     —          —          (38

Derivative financial instruments:

             

Reclassification into earnings

    —          (7     —          —          —          —          (7

Unrealized loss on investments:

             

Net change in value

    —          (2     —          —          —          —          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

    —          (46     —          (1     —          —          (47
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  $ 942      $ 419      $ 466      $ 488      $ (11   $ (1,409   $ 895   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Nine Months Ended September 30, 2014  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Operating revenues:

             

Mainline passenger

  $ —        $ 15,579      $ —        $ 7,985      $ —        $ —        $ 23,564   

Regional passenger

    —          2,202        —          2,577        —          —          4,779   

Cargo

    —          521        —          122        —          —          643   

Other

    —          2,374        —          1,211        2,386        (2,467     3,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          20,676        —          11,895        2,386        (2,467     32,490   

Operating expenses:

             

Aircraft fuel and related taxes

    —          5,662        —          2,708        —          —          8,370   

Salaries, wages and benefits

    —          4,251        —          2,162        584        (578     6,419   

Regional expenses

    —          2,352        —          2,581        —          (14     4,919   

Maintenance, materials and repairs

    —          1,031        —          497        258        (258     1,528   

Other rent and landing fees

    —          853        —          444        23        (23     1,297   

Aircraft rent

    —          641        —          300        67        (71     937   

Selling expenses

    —          844        —          352        —          —          1,196   

Depreciation and amortization

    —          664        —          301        30        (35     960   

Special items, net

    22        127        —          186        3        (3     335   

Other

    5        2,258        1        930        1,430        (1,484     3,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27        18,683        1        10,461        2,395        (2,466     29,101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (27     1,993        (1     1,434        (9     (1     3,389   

Nonoperating income (expense):

             

Interest income

    7        18        2        8        1        (14     22   

Interest expense, net

    (4     (443     (31     (201     (2     14        (667

Equity in earnings of subsidiaries

    2,309        —          1,188        —          —          (3,497     —     

Other, net

    —          (85     (53     (16     2        53        (99
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    2,312        (510     1,106        (209     1        (3,444     (744
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    2,285        1,483        1,105        1,225        (8     (3,445     2,645   

Income tax provision

    —          351        —          4        14        (9     360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 2,285      $ 1,132      $ 1,105      $ 1,221      $ (22   $ (3,436   $ 2,285   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)(Unaudited)

 

    Nine Months Ended September 30, 2014  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group

(Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Net income (loss)

  $ 2,285      $ 1,132      $ 1,105      $ 1,221      $ (22   $ (3,436   $ 2,285   

Other comprehensive income (loss):

             

Defined benefit pension plans and retiree medical

    —          (139     —          (3     —          —          (142

Derivative financial instruments:

             

Change in fair value

    (2     (52     —          —          —          —          (54

Reclassification into earnings

    —          5        —          —          —          —          5   

Unrealized loss on investments:

             

Net change in value

    2        (2     —          —          —          —          —     

Reversal of non-cash tax provision

    2        328        —          —          —          —          330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

    2        140        —          (3     —          —          139   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  $ 2,287      $ 1,272      $ 1,105      $ 1,218      $ (22   $ (3,436   $ 2,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)(Unaudited)

 

    September 30, 2015  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

ASSETS

             

Current assets

             

Cash

  $ 1      $ 806      $ 19      $ 181      $ 9      $ —        $ 1,016   

Short-term investments

    —          5,405        —          2,449        3        —          7,857   

Restricted cash and short-term investments

    —          657        —          53        —          —          710   

Accounts receivable, net

    —          1,490        —          336        14        (12     1,828   

Receivables from related parties, net

    65        —          —          1,024        112        (1,201     —     

Aircraft fuel, spare parts and supplies, net

    —          632        —          320        58        —          1,010   

Prepaid expenses and other

    82        795        —          367        41        —          1,285   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    148        9,785        19        4,730        237        (1,213     13,706   

Operating property and equipment

    —          19,200        —          6,813        279        —          26,292   

Other assets

             

Investments in subsidiaries

    5,143        —          8,080        —          —          (13,223     —     

Goodwill

    —          —          —          4,090        —          1        4,091   

Intangibles, net of accumulated amortization

    —          871        —          1,390        —          —          2,261   

Other assets

    27        1,826        —          489        55        (32     2,365   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

    5,170        2,697        8,080        5,969        55        (13,254     8,717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 5,318      $ 31,682      $ 8,099      $ 17,512      $ 571      $ (14,467   $ 48,715   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

             

Current liabilities

             

Current maturities of long-term debt and capital leases

  $ —        $ 1,212      $ —        $ 500      $ —        $ —        $ 1,712   

Accounts payable

    —          1,269        —          213        45        (2     1,525   

Payables to related parties, net

    —          565        511        —          125        (1,201     —     

Air traffic liability

    —          4,373        —          438        —          —          4,811   

Frequent flyer liability

    —          2,649        —          —          —          —          2,649   

Other accrued liabilities

    186        2,043        11        1,114        109        1        3,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    186        12,111        522        2,265        279        (1,202     14,161   

Noncurrent liabilities

             

Long-term debt and capital leases, net of current maturities

    1,257        12,040        525        5,062        —          (35     18,849   

Pension and postretirement benefits

    —          7,270        —          123        40        —          7,433   

Bankruptcy settlement obligations

    —          177        —          —          —          —          177   

Other liabilities

    113        2,927        —          2,057        49        (813     4,333   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

    1,370        22,414        525        7,242        89        (848     30,792   

Stockholders’ equity (deficit)

             

Common stock

    6        —          —          —          —          —          6   

Additional paid-in capital

    12,852        10,833        4,779        5,618        199        (21,429     12,852   

Accumulated other comprehensive loss

    (4,651     (4,734     (19     (12     (12     4,777        (4,651

Retained earnings (deficit)

    (4,445     (8,942     2,292        2,399        16        4,235        (4,445
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    3,762        (2,843     7,052        8,005        203        (12,417     3,762   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

  $ 5,318      $ 31,682      $ 8,099      $ 17,512      $ 571      $ (14,467   $ 48,715   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)(Unaudited)

 

    December 31, 2014  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

ASSETS

             

Current assets

             

Cash

  $ 1      $ 785      $ 2      $ 199      $ 7      $ —        $ 994   

Short-term investments

    —          3,290        —          3,016        3        —          6,309   

Restricted cash and short-term investments

    —          650        —          124        —          —          774   

Accounts receivable, net

    —          1,445        —          324        15        (13     1,771   

Receivables from related parties, net

    1,893        —          157        933        526        (3,509     —     

Aircraft fuel, spare parts and supplies, net

    —          625        —          294        85        —          1,004   

Prepaid expenses and other

    —          462        —          912        41        (155     1,260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,894        7,257        159        5,802        677        (3,677     12,112   

Operating property and equipment

    —          16,299        —          6,506        279        —          23,084   

Other assets

             

Investments in subsidiaries

    847        —          6,870        —          —          (7,717     —     

Goodwill

    —          —          —          4,090        —          1        4,091   

Intangibles, net of accumulated amortization

    —          815        —          1,425        —          —          2,240   

Other assets

    53        1,921        —          267        38        (35     2,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

    900        2,736        6,870        5,782        38        (7,751     8,575   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,794      $ 26,292      $ 7,029      $ 18,090      $ 994      $ (11,428   $ 43,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

             

Current liabilities

             

Current maturities of long-term debt and capital leases

  $ —        $ 1,230      $ —        $ 477      $ 1      $ —        $ 1,708   

Accounts payable

    —          1,029        —          287        61        —          1,377   

Payables to related parties, net

    —          2,563        634        73        239        (3,509     —     

Air traffic liability

    —          2,989        —          1,263        —          —          4,252   

Frequent flyer liability

    —          1,823        —          984        —          —          2,807   

Other accrued liabilities

    14        1,886        3        1,253        138        (3     3,291   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    14        11,520        637        4,337        439        (3,512     13,435   

Noncurrent liabilities

             

Long-term debt and capital leases, net of current maturities

    758        10,004        524        4,945        —          (35     16,196   

Pension and postretirement benefits

    —          7,400        —          122        40        —          7,562   

Mandatorily convertible preferred stock and other bankruptcy settlement obligations

    —          325        —          —          —          —          325   

Other liabilities

    1        2,615        —          1,861        317        (562     4,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

    759        20,344        524        6,928        357        (597     28,315   

Stockholders’ equity (deficit)

             

Common stock

    7        —          —          —          —          —          7   

Additional paid-in capital

    15,135        10,632        4,703        5,542        199        (21,076     15,135   

Accumulated other comprehensive loss

    (4,559     (4,645     (16     (8     (12     4,681        (4,559

Retained earnings (deficit)

    (8,562     (11,559     1,181        1,291        11        9,076        (8,562
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    2,021        (5,572     5,868        6,825        198        (7,319     2,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

  $ 2,794      $ 26,292      $ 7,029      $ 18,090      $ 994      $ (11,428   $ 43,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)(Unaudited)

 

    Nine Months Ended September 30, 2015  
    American
Airlines Group
(Parent
Company

Only)
    American     US
Airways
Group (Parent
Company

Only)
    US
Airways
    Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Net cash provided by operating activities

  $ 2,073      $ 4,093      $ 17      $ (216   $ 54      $ —        $ 6,021   

Cash flows from investing activities:

             

Capital expenditures and aircraft purchase deposits

    —          (3,962     —          (602     (57     —          (4,621

Purchases of short-term investments

    (1     (5,061     —          (2,655     —          —          (7,717

Sales of short-term investments

    —          2,944        —          3,223        —          —          6,167   

Decrease in restricted cash and short-term investments

    —          (7     —          71        —          —          64   

Proceeds from sale of an investment

    52        —          —          —          —          —          52   

Proceeds from sale of property and equipment

    —          18        —          —          5        —          23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    51        (6,068     —          37        (52     —          (6,032

Cash flows from financing activities:

             

Payments on long-term debt and capital leases

    —          (1,544     —          (277     —          —          (1,821

Proceeds from issuance of long-term debt

    500        3,554        —          409        —          —          4,463   

Deferred financing costs

    (7     (57     —          (5     —          —          (69

Sale-leaseback transactions

    —          43        —          —          —          —          43   

Treasury stock repurchases

    (2,411     —          —          —          —          —          (2,411

Dividend payment

    (206     —          —          —          —          —          (206

Other financing activities

    —          —          —          34        —          —          34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (2,124     1,996        —          161        —          —          33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    —          21        17        (18     2        —          22   

Cash at beginning of period

    1        785        2        199        7        —          994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

  $ 1      $ 806      $ 19      $ 181      $ 9      $ —        $ 1,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)(Unaudited)

 

    Nine Months Ended September 30, 2014  
    American
Airlines Group
(Parent
Company

Only)
    American     US Airways
Group (Parent
Company

Only)
    US Airways     Non-Guarantor
Subsidiaries
    Eliminations and
Reclassifications
    American
Airlines

Group Inc.
Consolidated
 

Net cash provided by (used in) operating activities

  $ (523   $ 2,034      $ —        $ 730      $ 35      $ —        $ 2,276   

Cash flows from investing activities:

             

Capital expenditures and aircraft purchase deposits

    —          (2,746     —          (1,027     (35     (198     (4,006

Purchases of short-term investments

    —          (2,526     —          (1,076     (1     —          (3,603

Sales of short-term investments

    —          3,889        —          1,104        —          —          4,993   

Decrease in restricted cash and short-term investments

    —          50        —          110        —          —          160   

Net proceeds from slot transaction

    —          299        —          8        —          —          307   

Funds transferred to affiliates

    —          (198     —          —          —          198        —     

Proceeds from sale of property and equipment

    —          5        —          19        —          —          24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          (1,227     —          (862     (36     —          (2,125

Cash flows from financing activities:

             

Payments on long-term debt and capital leases

    —          (2,201     —          (403     —          (176     (2,780

Proceeds from issuance of long-term debt

    750        1,098        —          559        —          —          2,407   

Deferred financing costs

    (10     (56     —          (2     —          —          (68

Sale-leaseback transactions

    —          531        —          —          —          —          531   

Exercise of stock options

    9        —          —          —          —          —          9   

Treasury stock repurchases

    (155     —          —          —          —          —          (155

Dividend payment

    (72     —          —          —          —          —          (72

Funds transferred to affiliates, net

    —          —          —          (176     —          176        —     

Other financing activities

    —          —          —          15        —          —          15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    522        (628     —          (7     —          —          (113
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    (1     179        —          (139     (1     —          38   

Cash at beginning of period

    1        829        1        303        6        —          1,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

  $ —        $ 1,008      $ 1      $ 164      $ 5      $ —        $ 1,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

 

15. Subsequent Events

Share Repurchase Program and Dividend Declaration

In October 2015, the Company announced that its Board of Directors had authorized a new $2.0 billion share repurchase program to be completed by the end of 2016. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. The program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company’s discretion.

Also in October 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on November 5, 2015, and payable on November 19, 2015. Any future dividends that may be declared and paid from time to time under the Company’s capital deployment program will be subject to market and economic conditions, applicable legal requirements and other relevant factors. The Company’s capital deployment program does not obligate it to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at the Company’s discretion.

 

35


Table of Contents
ITEM 1B.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Operating revenues:

    

Mainline passenger

   $ 4,927      $ 5,321      $ 14,565      $ 15,579   

Regional passenger

     858        748        2,399        2,202   

Cargo

     150        175        472        521   

Other

     847        811        2,533        2,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     6,782        7,055        19,969        20,676   

Operating expenses:

        

Aircraft fuel and related taxes

     1,065        1,894        3,332        5,662   

Salaries, wages and benefits

     1,563        1,412        4,684        4,251   

Regional expenses

     803        790        2,318        2,352   

Maintenance, materials and repairs

     261        353        868        1,031   

Other rent and landing fees

     286        279        825        853   

Aircraft rent

     225        211        676        641   

Selling expenses

     256        278        688        844   

Depreciation and amortization

     245        230        728        664   

Special items, net

     77        164        350        127   

Other

     790        746        2,323        2,258   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,571        6,357        16,792        18,683   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,211        698        3,177        1,993   

Nonoperating income (expense):

        

Interest income

     10        5        26        18   

Interest expense, net of capitalized interest

     (133     (136     (396     (443

Other, net

     (83     (97     (162     (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (206     (228     (532     (510
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,005        470        2,645        1,483   

Income tax provision

     9        5        28        351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 996      $ 465      $ 2,617      $ 1,132   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Net income

   $ 996      $ 465      $ 2,617      $ 1,132   

Other comprehensive income (loss):

        

Defined benefit pension plans and retiree medical

     (26     (37     (76     (139

Derivative financial instruments:

        

Change in fair value

     —          —          —          (52

Reclassification into earnings

     —          (7     (9     5   

Unrealized loss on investments:

        

Net change in value

     (3     (2     (4     (2

Reversal of non-cash tax provision

     —          —          —          328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (29     (46     (89     140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 967      $ 419      $ 2,528      $ 1,272   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     September 30, 2015     December 31, 2014  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 806      $ 785   

Short-term investments

     5,405        3,290   

Restricted cash and short-term investments

     657        650   

Accounts receivable, net

     1,490        1,445   

Aircraft fuel, spare parts and supplies, net

     632        625   

Prepaid expenses and other

     795        462   
  

 

 

   

 

 

 

Total current assets

     9,785        7,257   

Operating property and equipment

    

Flight equipment

     24,687        21,646   

Ground property and equipment

     5,549        5,217   

Equipment purchase deposits

     1,050        1,128   
  

 

 

   

 

 

 

Total property and equipment, at cost

     31,286        27,991   

Less accumulated depreciation and amortization

     (12,086     (11,692
  

 

 

   

 

 

 

Total property and equipment, net

     19,200        16,299   

Other assets

    

Intangibles, net of accumulated amortization of $385 and $376, respectively

     871        815   

Other assets

     1,826        1,921   
  

 

 

   

 

 

 

Total other assets

     2,697        2,736   
  

 

 

   

 

 

 

Total assets

   $ 31,682      $ 26,292   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,212      $ 1,230   

Accounts payable

     1,269        1,029   

Accrued salaries and wages

     707        650   

Air traffic liability

     4,373        2,989   

Frequent flyer liability

     2,649        1,823   

Payables to related parties, net

     565        2,563   

Other accrued liabilities

     1,336        1,236   
  

 

 

   

 

 

 

Total current liabilities

     12,111        11,520   

Noncurrent liabilities

    

Long-term debt and capital leases, net of current maturities

     12,040        10,004   

Pension and postretirement benefits

     7,270        7,400   

Deferred gains and credits, net

     263        271   

Bankruptcy settlement obligations

     177        325   

Other liabilities

     2,664        2,344   
  

 

 

   

 

 

 

Total noncurrent liabilities

     22,414        20,344   

Commitments and contingencies

    

Stockholder’s deficit

    

Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding

     —          —     

Additional paid-in capital

     10,833        10,632   

Accumulated other comprehensive loss

     (4,734     (4,645

Accumulated deficit

     (8,942     (11,559
  

 

 

   

 

 

 

Total stockholder’s deficit

     (2,843     (5,572
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 31,682      $ 26,292   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Nine Months Ended September 30,  
     2015     2014  

Net cash provided by operating activities

   $ 4,093      $ 2,034   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (3,962     (2,746

Purchases of short-term investments

     (5,061     (2,526

Sales of short-term investments

     2,944        3,889   

Decrease in restricted cash and short-term investments

     (7     50   

Net proceeds from slot transaction

     —          299   

Funds transferred to affiliates, net

     —          (198

Proceeds from sale of property and equipment

     18        5   
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,068     (1,227

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (1,544     (2,201

Proceeds from issuance of long-term debt

     3,554        1,098   

Deferred financing costs

     (57     (56

Sale-leaseback transactions

     43        531   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,996        (628
  

 

 

   

 

 

 

Net increase in cash

     21        179   

Cash at beginning of period

     785        829   
  

 

 

   

 

 

 

Cash at end of period

   $ 806      $ 1,008   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 60      $ 5,105   

Capital lease obligations

     —          479   

Supplemental information:

    

Interest paid, net of amounts capitalized

     479        466   

Income taxes paid

     6        3   

See accompanying notes to condensed consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines, Inc. (American) should be read in conjunction with the consolidated financial statements contained in American’s Annual Report on Form 10-K for the year ended December 31, 2014. American is a wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, the frequent flyer program, pensions, retiree medical and other benefits and the deferred tax asset valuation allowance.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB issued ASU 2015-14, which deferred the effective date of this new standard to periods beginning after December 15, 2017 for public entities. Early application is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. American is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on American’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 is not expected to have a material impact on American’s condensed consolidated financial statements.

2. Emergence from Chapter 11

Chapter 11 Reorganization

On November 29, 2011 (the Petition Date), AMR Corporation (AMR, renamed American Airlines Group Inc., upon the closing of the Merger), its principal subsidiary, American, and certain of AMR’s other direct and indirect domestic subsidiaries (collectively, the Debtors), filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order (the Confirmation Order) approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan).

On December 9, 2013 (the Effective Date), the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by an Agreement and Plan of Merger (as amended, the Merger Agreement), dated as of February 13, 2013, by and among AMR, AMR Merger Sub, Inc. (Merger Sub) and US Airways Group, Inc. (US Airways Group), pursuant to which Merger Sub merged with and into US Airways Group (the Merger), with US Airways Group surviving as a wholly-owned subsidiary of AAG following the Merger.

From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the U.S. Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

 

In connection with the Chapter 11 Cases, trading in AMR’s common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and AMR’s common stock and such debt securities were delisted from the NYSE on January 30, 2012. On January 5, 2012, AMR’s common stock began trading under the symbol “AAMRQ” (CUSIP 001765106) on the OTCQB marketplace, operated by OTC Markets Group. Pursuant to the Plan, on the Effective Date (i) all existing shares of AAG’s old common stock formerly traded under the symbol “AAMRQ” were canceled and (ii) AAG was authorized to issue up to approximately 544 million shares of common stock, par value $0.01 per share, of AAG (AAG Common Stock) by operation of the Plan (excluding shares of AAG Common Stock issuable pursuant to the Merger Agreement). On the Effective Date, the AAG Common Stock was listed on the NASDAQ Global Select Market under the symbol “AAL,” and AAMRQ ceased trading on the OTCQB marketplace.

Upon emergence from Chapter 11, AAG issued approximately 53 million shares of AAG Common Stock to AMR’s old equity holders and certain of the Debtors’ employees, and issued 168 million shares of AAG Series A Convertible Preferred Stock, par value $0.01 per share (the AAG Series A Preferred Stock), which was mandatorily convertible into new AAG Common Stock during the 120-day period after the Effective Date, to certain creditors and employees of the Debtors (including shares deposited in the Disputed Claims Reserve (as defined in the Plan)). In accordance with the terms of the Plan, former holders of AMR common stock (previously traded under the symbol “AAMRQ”) received, for each share of AMR common stock, an initial distribution of approximately 0.0665 shares of the AAG Common Stock as of the Effective Date. Following the Effective Date, former holders of AMR common stock and those deemed to be treated as such in connection with the elections made pursuant to the Plan have received through December 31, 2014, additional aggregate distributions of shares of AAG Common Stock of approximately 0.6776 shares of AAG Common Stock for each share of AMR common stock previously held, and may continue to receive additional distributions. As of the Effective Date, the adjusted total Double-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.5 billion and the Allowed Single-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.5 billion.

The Disputed Claims Reserve established under the Plan initially was issued 30.4 million shares, which shares are reserved for distributions to holders of disputed Single-Dip Unsecured Claims (Single-Dip Equity Obligations) whose claims ultimately become allowed as well as to certain AMR labor groups and employees who received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and American repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. On July 14, 2015, approximately 0.6 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and American repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $2 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. As of September 30, 2015, there were approximately 25.3 million shares of AAG Common Stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to AAG but rather will be distributed to former AMR shareholders as of the Effective Date. American is not required to distribute additional shares above the limits contemplated by the Plan.

Several parties have filed appeals seeking reconsideration of the Confirmation Order. See Note 12 for more information.

The reconciliation process with respect to the remaining claims is expected to take considerable time. American’s estimate of the amounts of disputed claims that will ultimately become allowed Single-Dip Unsecured Claims are included in bankruptcy settlement obligations on American’s condensed consolidated balance sheet as of September 30, 2015. As these claims are resolved, or where better information becomes available and is evaluated, American will make adjustments to the liabilities recorded on its condensed consolidated financial statements as appropriate. Any such adjustments could be material to American’s financial position or results of operations in any given period.

Availability and Utilization of Net Operating Losses

Upon emergence from bankruptcy, American experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), which could potentially limit the ability to utilize certain tax attributes including American’s substantial net operating losses (NOLs). The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. American elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.5 billion of the federal NOLs carried over from prior taxable years (NOL Carryforwards) to be utilized without regard to the annual limitation generally imposed by Section 382.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

 

Moreover, an ownership change subsequent to American’s emergence from bankruptcy may further limit or effectively eliminate the ability to utilize American’s NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on American’s ability to utilize the NOL Carryforwards, AAG’s Restated Certificate of Incorporation (the Certificate of Incorporation) contains transfer restrictions applicable to certain substantial shareholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, there can be no assurance that an ownership change will not occur even with these transfer restrictions. A copy of the Certificate of Incorporation was attached as Exhibit 3.1 to a Current Report on Form 8-K filed by AAG with the SEC on December 9, 2013.

3. Bankruptcy Settlement Obligations

The components of bankruptcy settlement obligations on the condensed consolidated balance sheets are as follows (in millions):

 

     September 30, 2015      December 31, 2014  

Single-Dip Equity Obligations

   $ 135       $ 248   

Labor-related deemed claim

     42         77   
  

 

 

    

 

 

 

Total

   $ 177       $ 325   
  

 

 

    

 

 

 

The amount of the remaining Single-Dip Equity Obligations at September 30, 2015 is American’s estimate of its obligation for disputed claims of $135 million and is calculated based on the fair value of the shares expected to be issued, measured as if the obligations were settled using the closing price of AAG Common Stock at September 30, 2015. Additional allowed claims will receive 30.7553 shares, subject to reduction for expenses of the Disputed Claims Reserve, including tax liabilities, for each $1,000 of allowed claims. For accounting purposes, the value of the shares expected to be issued is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

In exchange for employees’ contributions to the successful reorganization of AAG, including agreeing to reductions in pay and benefits, AAG and American agreed in the Plan to provide each employee group a deemed claim which was used to provide a distribution of a portion of the equity of the reorganized entity to those employees. Each employee group received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. The fair value based on the expected number of shares to be distributed to satisfy this deemed claim, as adjusted, was approximately $1.5 billion. As of September 30, 2015, the remaining liability to certain AMR labor groups and employees of $42 million represents the estimated fair value of the remaining shares expected to be issued in satisfaction of such obligation, measured as if the obligation was settled using the closing price of AAG Common Stock at September 30, 2015. For accounting purposes, the value of the remaining shares expected to be issued to satisfy the labor claim is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

On February 10, 2015 and July 14, 2015, approximately 0.8 million and 0.6 million shares, respectively, of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and 0.1 million shares in the aggregate were withheld or sold on account of related tax obligations.

4. Special Items

Special items, net on the condensed consolidated statements of operations are as follows (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Mainline operating special items, net (a)

   $ 77       $ 164       $ 350       $ 127   

 

(a) 

The 2015 third quarter mainline operating special items totaled a net charge of $77 million, which principally included $115 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, fleet restructuring, re-branding of aircraft and airport facilities, relocation and training, as well as a $38 million charge in connection with the dissolution of the Texas Aero Engine Services joint venture. These charges were offset in part by a $66 million credit related to proceeds received from a legal settlement. The 2015 nine month period mainline operating special items totaled a net charge of $350 million, which principally included $400 million of merger integration expenses as described above, a net $64 million charge related to American’s new pilot joint collective bargaining agreement and a $38 million charge in connection with the dissolution of the Texas Aero Engine Services joint venture. These charges were offset in part by a net $75 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations and a $66 million credit related to proceeds received from a legal settlement.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

 

The 2014 third quarter mainline operating special items totaled a net charge of $164 million, which principally included $103 million of merger integration expenses related to information technology, alignment of labor union contracts, professional fees, severance and retention, share-based compensation, re-branding of aircraft and airport facilities, relocation and training, as well as $99 million in other special charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other spare parts asset impairments. These charges were offset in part by a net $40 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. The 2014 nine month period mainline operating special items totaled a net charge of $127 million, which principally included $337 million of merger integration expenses as described above, $99 million in other special charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other spare parts asset impairments, as well as $35 million in charges primarily relating to the buyout of certain aircraft leases. These charges were offset in part by a $305 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $57 million credit for bankruptcy related items as described above.

The following additional amounts are also included in the condensed consolidated statements of operations (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Regional operating special items, net (a)

   $ 1       $ 2       $ 4       $ 4   

Nonoperating special items, net (b)

     21         48         24         89   

Income tax special items, net (c)

     6         7         20         349   

 

(a) 

The 2015 and 2014 third quarter and nine month period regional operating special items principally related to merger integration expenses.

(b) 

The 2015 third quarter nonoperating special items totaled a net charge of $21 million, which was primarily due to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The 2015 nine month period nonoperating special items totaled a net charge of $24 million, which principally included $41 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

The 2014 third quarter nonoperating special items totaled a net charge of $48 million, which was primarily due to early debt extinguishment costs related to the prepayment of American’s 7.50% senior secured notes and other indebtedness. The 2014 nine month period nonoperating special items totaled a net charge of $89 million, which primarily included $46 million of early debt extinguishment costs as described above and $29 million of non-cash interest accretion on the bankruptcy settlement obligations.

 

(c) 

The 2015 third quarter and nine month period tax special items were the result of a non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

During the 2014 third quarter, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. During the 2014 nine month period, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in other comprehensive income (OCI), a subset of stockholder’s equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American’s fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated. In addition, the 2014 nine month period included a special $21 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

 

5. Debt

Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):

 

     September 30, 2015      December 31, 2014  

Secured

     

2013 Credit Facilities, variable interest rate of 3.25%, installments through 2020

   $ 1,867       $ 1,872   

2014 Credit Facilities, variable interest rate of 3.50%, installments through 2021

     750         750   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.38% to 7.00%, maturing from 2017 to 2027

     6,283         4,271   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.63% to 8.10%, maturing from 2015 to 2027

     2,355         1,860   

Special facility revenue bonds, fixed interest rates ranging from 2.00% to 8.00%, maturing from 2016 to 2035

     1,051         1,071   

AAdvantage Loan, effective rate of 8.30%

     —           433   

Other secured obligations, fixed interest rates ranging from 4.19% to 12.24%, maturing from 2015 to 2028

     935         992   
  

 

 

    

 

 

 
     13,241         11,249   
  

 

 

    

 

 

 

Unsecured

     

Affiliate unsecured obligations

     27         27   
  

 

 

    

 

 

 
     27         27   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     13,268         11,276   

Less: Total unamortized debt discount

     16         42   

Less: Current maturities

     1,212         1,230   
  

 

 

    

 

 

 

Long-term debt and capital lease obligations, net of current maturities

   $ 12,040       $ 10,004   
  

 

 

    

 

 

 

2013 Credit Facilities

On May 21, 2015, American refinanced its $1.9 billion term loan facility (the $1.9 billion 2015 Term Loan Facility and, together with a $1.4 billion revolving credit facility, the 2013 Credit Facilities) to extend the maturity date to June 29, 2020 and reduce the LIBOR margin from 3.00% to 2.75%. In addition, American entered into certain amendments to reflect the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $1.9 billion 2015 Term Loan Facility may vary based on American’s credit ratings. As of September 30, 2015, as a result of American’s improved credit ratings, the LIBOR margin was 2.50%.

2014 Credit Facilities

On April 20, 2015, American refinanced its $750 million term loan facility (the $750 million 2015 Term Loan Facility and, together with a $400 million revolving credit facility, the 2014 Credit Facilities) to reduce the LIBOR margin from 3.50% to 3.00% and entered into certain amendments to reflect the release of certain existing collateral and the addition of certain new collateral, as well as the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $750 million 2015 Term Loan Facility may vary based on American’s credit ratings. As of September 30, 2015, as a result of American’s improved credit ratings, the LIBOR margin was 2.75%.

2015-1 EETCs

In March 2015, American created two pass-through trusts which issued approximately $1.2 billion aggregate face amount of Series 2015-1 Class A and Class B EETCs (the 2015-1 EETCs) in connection with the financing of 28 aircraft owned by American (the 2015 EETC Aircraft).

As of September 30, 2015, the entire $1.2 billion of the proceeds from the sale of the 2015-1 EETCs has been used to purchase equipment notes issued by American in two series: Series A equipment notes in the amount of $948 million bearing interest at 3.375% per annum and Series B equipment notes in the amount of $266 million bearing interest at 3.70% per annum. Interest and principal payments on the equipment notes are payable semi-annually in May and November of each year, beginning in November 2015. The final payments on the Series A and Series B equipment notes will be due in May 2027 and May 2023, respectively. These equipment notes are secured by liens on the 2015 EETC Aircraft.

 

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2015-2 EETCs

In September 2015, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2015-2 Class AA, Class A and Class B EETCs (the 2015-2 EETCs) in connection with the financing of 21 aircraft owned by American (the 2015-2 EETC Aircraft).

As of September 30, 2015, the entire $1.1 billion of the proceeds from the sale of the 2015-2 EETCs has been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the amount of $583 million bearing interest at 3.60% per annum, Series A equipment notes in the amount of $239 million bearing interest at 4.00% per annum and Series B equipment notes in the amount of $239 million bearing interest at 4.40% per annum. Interest and principal payments on the equipment notes are payable semi-annually in March and September of each year, with interest payments beginning in March 2016 and principal payments beginning in September 2016. The final payments on the Series AA and Series A equipment notes will be in September 2027 and the final payments on the Series B equipment notes will be in September 2023. These equipment notes are secured by liens on the 2015-2 EETC Aircraft.

AAdvantage Loan

Effective January 2, 2015, American exercised its loan repayment right with respect to the full value of the outstanding balance of the AAdvantage Loan with Citibank for $400 million. In connection with the repayment, in the first quarter of 2015, American recognized an early debt extinguishment gain of approximately $17 million.

Obligations Associated with Special Facility Revenue Bonds

In December 2014, American acquired approximately $112 million aggregate principal amount of special facility revenue bonds related to the Tulsa International Airport, when such bonds were mandatorily tendered to American. The acquisition of these bonds resulted in an $11 million reduction of debt on American’s consolidated balance sheet and a $50 million reduction of a long-term operating lease obligation included in other long-term liabilities on American’s consolidated balance sheet as of December 31, 2014. American exercised its option to remarket approximately $104 million of these bonds in May 2015. The remarketed bonds bear interest at 5.0% per annum from the date of initial issuance and delivery of the bonds on May 27, 2015, until the day preceding June 1, 2025, on which date the bonds will be subject to mandatory tender for purchase by American. In connection with the remarketing of these special facility revenue bonds, American received cash proceeds of $112 million and recognized a total obligation of $62 million. Of that total obligation, $11 million is reflected as a capital lease and $51 million is reflected in other long-term liabilities on American’s condensed consolidated balance sheet as of September 30, 2015.

In June 2015, American exercised its right to adjust the interest rate on approximately $365 million aggregate principal amount of special facility revenue bonds related to the John F. Kennedy International Airport, which were bearing interest at 8.50% per annum. In August 2015, these bonds were purchased by American and subsequently remarketed. The remarketed bonds bear interest at 2.00% per annum from the date of initial issuance and delivery of the bonds in August 2015, until August 2016, when the bonds will be subject to mandatory tender for purchase by American. In connection with this transaction, American recorded a special nonoperating charge of $20 million related primarily to non-cash write offs of unamortized debt discount and debt issuance costs. The $365 million obligation is reflected in current maturities of long-term debt on American’s condensed consolidated balance sheet as of September 30, 2015.

Other Aircraft Financing Transactions

In the first nine months of 2015, American prepaid $72 million principal amount of outstanding debt secured by certain aircraft.

In the first nine months of 2015, American entered into loan agreements to borrow $902 million in connection with the financing of certain aircraft. The notes mature in 2023 through 2027 and bear interest at a rate of LIBOR plus an applicable margin.

6. Income Taxes

At December 31, 2014, American had approximately $10.3 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2015. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal and state NOL Carryforwards available in those returns is $10.1 billion and $4.6 billion, respectively, substantially all of which is expected to be available for use in 2015. The federal NOL Carryforwards will expire beginning in 2022 if unused. These NOL Carryforwards include an unrealized tax benefit of $712 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. American also had approximately $3.9 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2014, which will expire in years 2015 through 2034 if unused. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has

 

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occurred. American experienced an ownership change in connection with its emergence from the Chapter 11 Cases. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. American elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.5 billion of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL Carryforwards arising after the ownership change is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2014, American had an Alternative Minimum Tax (AMT) credit carryforward of approximately $435 million available for federal income tax purposes, which is available for an indefinite period. American’s net deferred tax assets, which include the NOL Carryforwards, are subject to a full valuation allowance. At December 31, 2014, the federal and state valuation allowances were $5.1 billion and $208 million, respectively. In accordance with GAAP, utilization of the NOL Carryforwards after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset American’s tax provision dollar for dollar.

American 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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered which impact American’s projections of future sustained profitability including risks associated with merger integration as well as other conditions which are beyond American’s control, such as the health of the economy, the level and volatility of fuel prices and travel demand. American has concluded as of September 30, 2015, that the valuation allowance was still needed on its deferred tax assets based on the weight of the factors described above. However, if for the remainder of 2015, projections for future sustained profitability continue and additional merger integration milestones are completed, American anticipates that it may reverse substantially all of its valuation allowance as early as the end of 2015.

For the three and nine months ended September 30, 2015, American recorded a special $6 million and $20 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the three and nine months ended September 30, 2015, American recorded $3 million and $8 million, respectively, of state and international income tax expense related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

For the three and nine months ended September 30, 2014, American recorded a special $7 million and $21 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition for the 2014 nine month period, American recorded a special $328 million non-cash tax provision related to the settlement of fuel hedges discussed below and $3 million of tax expense principally related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

During the second quarter of 2014, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the statement of operations for the nine months ended September 30, 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholder’s equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American’s fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated.

7. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

American utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. American’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2015.

 

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Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):

 

     Fair Value Measurements as of September 30, 2015  
     Total      Level 1      Level 2      Level 3  

Short-term investments (1), (2):

           

Money market funds

   $ 1,419       $ 1,419       $ —         $ —     

Repurchase agreements

     41         —           41         —     

Corporate obligations

     1,977         —           1,977         —     

Bank notes / certificates of deposit / time deposits

     1,968         —           1,968         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,405         1,419         3,986         —     

Restricted cash and short-term investments (1)

     657         657         —           —     
  

 

 

    

 

 

    

 

 

    </