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 June 30, 2016

 

¨

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 July 15, 2016, there were 529,913,365 shares of American Airlines Group Inc. common stock outstanding.

As of July 15, 2016, 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 June 30, 2016

Table of Contents

 

          Page  
PART I: FINANCIAL INFORMATION   

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.

     20   
  

Condensed Consolidated Statements of Operations

     20   
  

Condensed Consolidated Statements of Comprehensive Income

     21   
  

Condensed Consolidated Balance Sheets

     22   
  

Condensed Consolidated Statements of Cash Flows

     23   
  

Notes to the Condensed Consolidated Financial Statements

     24   

Item 2.

  

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

     34   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     55   

Item 4.

  

Controls and Procedures

     55   
PART II: OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     57   

Item 1A.

  

Risk Factors

     58   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     75   

Item 5.

  

Other Information

     75   

Item 6.

  

Exhibits

     75   

SIGNATURES

     77   

 

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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” and similar terms refer to AAG and its consolidated subsidiaries. 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). On December 30, 2015, in order to simplify AAG’s internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, AAG caused US Airways Group to be merged with and into AAG, with AAG as the surviving corporation, and, immediately thereafter, US Airways, Inc. (US Airways), a subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and is reflected in this Quarterly Report on Form 10-Q as though the transaction had occurred on December 9, 2013, the effective date of the Merger, which represents the earliest date that American and US Airways were under common control. Thus, information in this Quarterly Report on Form 10-Q regarding American’s condensed consolidated results of operations is comprised of the results of US Airways and American for all periods presented. “AMR” or “AMR Corporation” refers to AAG during the period of time prior to its acquisition of US Airways Group. References to “US Airways Group” and “US Airways” represent the entities during the period of time prior to December 30, 2015. References in this Quarterly Report on Form 10-Q to “mainline” refer to the operations of American, 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; costs of ongoing data security compliance requirements and the impact of any significant data security breach; 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 postretirement 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; 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 and noise regulation; the impact associated with climate change, including increased regulation to reduce emissions of greenhouse gases; 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

 

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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, more stringent duty time regulations, increased flight hour requirements for commercial airline pilots and other factors that have caused a shortage of pilots; the impact of possible future increases in insurance costs or reductions in available insurance coverage; the effect on our financial position and liquidity of being party to or involved in litigation; an inability to use net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards); any impairment in the amount of our goodwill and an inability to realize the full value of our intangible or long-lived assets and any material impairment charges that would be recorded as a result; price volatility of our common stock; the effects of our capital deployment program and the limitation, suspension or discontinuation of our share repurchase programs or dividend payments thereunder; delay or prevention of stockholders’ ability to change the composition of our Board of Directors and the effect this may 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; and 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.

 

5


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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 June 30,     Six Months Ended June 30,  
     2016     2015     2016     2015  

Operating revenues:

        

Mainline passenger

   $ 7,209      $ 7,655      $ 13,773      $ 14,644   

Regional passenger

     1,786        1,759        3,309        3,211   

Cargo

     174        194        336        388   

Other

     1,194        1,219        2,380        2,411   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     10,363        10,827        19,798        20,654   

Operating expenses:

        

Aircraft fuel and related taxes

     1,314        1,774        2,343        3,318   

Salaries, wages and benefits

     2,670        2,364        5,322        4,737   

Regional expenses

     1,518        1,557        2,950        3,019   

Maintenance, materials and repairs

     453        502        871        995   

Other rent and landing fees

     458        451        879        859   

Aircraft rent

     302        316        609        633   

Selling expenses

     334        350        642        686   

Depreciation and amortization

     374        340        729        676   

Special items, net

     62        144        161        447   

Other

     1,127        1,108        2,205        2,147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,612        8,906        16,711        17,517   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,751        1,921        3,087        3,137   

Nonoperating income (expense):

        

Interest income

     16        10        28        19   

Interest expense, net of capitalized interest

     (249     (223     (488     (432

Other, net

     (25     11        (17     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (258     (202     (477     (475
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,493        1,719        2,610        2,662   

Income tax provision

     543        15        960        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 950      $ 1,704      $ 1,650      $ 2,636   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic

   $ 1.69      $ 2.47      $ 2.82      $ 3.81   

Diluted

   $ 1.68      $ 2.41      $ 2.80      $ 3.70   

Weighted average shares outstanding (in thousands):

        

Basic

     563,000        688,727        584,622        692,571   

Diluted

     566,040        707,611        588,764        712,270   

Cash dividends declared per common share

   $ 0.10      $ 0.10      $ 0.20      $ 0.20   

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 June 30,     Six Months Ended June 30,  
     2016     2015     2016     2015  

Net income

   $ 950      $ 1,704      $ 1,650      $ 2,636   

Other comprehensive loss, net of tax:

        

Pension, retiree medical and other postretirement benefits

     (16     (26     (35     (52

Derivative financial instruments:

        

Reclassification into earnings

     —          (3     —          (9

Unrealized gain (loss) on investments:

        

Net change in value

     2        (1     4        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (14     (30     (31     (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 936      $ 1,674      $ 1,619      $ 2,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     June 30, 2016     December 31, 2015  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 446      $ 390   

Short-term investments

     6,672        5,864   

Restricted cash and short-term investments

     640        695   

Accounts receivable, net

     1,593        1,425   

Aircraft fuel, spare parts and supplies, net

     999        863   

Prepaid expenses and other

     834        748   
  

 

 

   

 

 

 

Total current assets

     11,184        9,985   

Operating property and equipment

    

Flight equipment

     35,553        33,185   

Ground property and equipment

     6,726        6,402   

Equipment purchase deposits

     1,136        1,067   
  

 

 

   

 

 

 

Total property and equipment, at cost

     43,415        40,654   

Less accumulated depreciation and amortization

     (13,804     (13,144
  

 

 

   

 

 

 

Total property and equipment, net

     29,611        27,510   

Other assets

    

Goodwill

     4,091        4,091   

Intangibles, net of accumulated amortization of $538 and $502, respectively

     2,213        2,249   

Deferred tax asset

     1,965        2,477   

Other assets

     1,987        2,103   
  

 

 

   

 

 

 

Total other assets

     10,256        10,920   
  

 

 

   

 

 

 

Total assets

   $ 51,051      $ 48,415   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,715      $ 2,231   

Accounts payable

     1,944        1,563   

Accrued salaries and wages

     1,327        1,205   

Air traffic liability

     4,984        3,747   

Loyalty program liability

     2,511        2,525   

Other accrued liabilities

     2,436        2,334   
  

 

 

   

 

 

 

Total current liabilities

     14,917        13,605   

Noncurrent liabilities

    

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

     21,131        18,330   

Pension and postretirement benefits

     7,426        7,450   

Deferred gains and credits, net

     590        667   

Other liabilities

     2,675        2,728   
  

 

 

   

 

 

 

Total noncurrent liabilities

     31,822        29,175   

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, $0.01 par value; 1,750,000,000 shares authorized, 537,141,492 shares issued and outstanding at June 30, 2016; 624,622,381 shares issued and outstanding at December 31, 2015

     5        6   

Additional paid-in capital

     8,351        11,591   

Accumulated other comprehensive loss

     (4,763     (4,732

Retained earnings (deficit)

     719        (1,230
  

 

 

   

 

 

 

Total stockholders’ equity

     4,312        5,635   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 51,051      $ 48,415   
  

 

 

   

 

 

 

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)

 

     Six Months Ended June 30,  
     2016     2015  

Net cash provided by operating activities

   $ 4,833      $ 4,841   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (3,063     (3,139

Purchases of short-term investments

     (3,605     (5,093

Sales of short-term investments

     2,810        3,436   

Decrease in restricted cash and short-term investments

     55        27   

Proceeds from sale of an investment

     —          52   

Proceeds from sale of property and equipment

     30        22   

Other investing activities

     2        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,771     (4,695

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (2,163     (1,107

Proceeds from issuance of long-term debt

     4,522        1,996   

Deferred financing costs

     (87     (40

Treasury stock repurchases

     (3,236     (931

Dividend payments

     (119     (140

Other financing activities

     77        34   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,006     (188
  

 

 

   

 

 

 

Net increase (decrease) in cash

     56        (42

Cash at beginning of period

     390        994   
  

 

 

   

 

 

 

Cash at end of period

   $ 446      $ 952   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 3      $ 35   

Capital lease obligations

     —          5   

Supplemental information:

    

Interest paid, net of amounts capitalized

     479        433   

Income taxes paid

     7        10   

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. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.

On December 9, 2013 (the Effective Date), AMR Merger Sub, Inc. merged with and into US Airways Group, Inc. (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 or AMR) following the Merger.

On December 30, 2015, in order to simplify our internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, AAG caused US Airways Group to be merged with and into AAG, with AAG as the surviving corporation, and, immediately thereafter, US Airways, Inc. (US Airways), a Delaware corporation and wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation. As a result of the merger of US Airways and American, US Airways transferred all of its assets, liabilities and off-balance sheet commitments to American. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost.

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 loyalty program, as well as pensions, retiree medical and other postretirement benefits.

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). Subsequently, the FASB has issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transition. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. We are currently evaluating the requirements of these standards and have not yet determined the impact on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the requirements of ASU 2016-02 and have not yet determined its impact on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation of excess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We early adopted this standard in the three months ended June 30, 2016. The adoption of this standard results in the recognition of $418 million of previously unrecognized excess tax benefits in deferred tax assets and an increase to retained earnings on the condensed consolidated balance sheet as of the beginning of the current year and the recognition of $9 million of excess tax benefits to the income tax provision for each of the three and six months ended June 30, 2016, respectively.

 

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

(Unaudited)

 

2. Special Items

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
             2016                      2015                      2016                      2015          

Mainline operating special items, net (1)

   $ 62       $ 144       $ 161       $ 447   

 

(1) 

The 2016 second quarter mainline operating special items totaled a net charge of $62 million, which principally included $112 million of merger integration expenses, offset in part by a $56 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 six month period mainline operating special items totaled a net charge of $161 million, which principally included $242 million of merger integration expenses, offset in part by a $61 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 second quarter and six month periods, merger integration expenses included costs related to information technology, alignment of labor union contracts, fleet restructuring, re-branding of aircraft, airport facilities and uniforms, professional fees, severance, as well as relocation and training.

The 2015 second quarter mainline operating special items totaled a net charge of $144 million, which principally included $224 million of merger integration expenses, offset in part by a $68 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2015 six month period mainline operating special items totaled a net charge of $447 million, which principally included $543 million of merger integration expenses, offset in part by a $73 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2015 second quarter and six month periods, merger integration expenses included costs related to alignment of labor union contracts, fleet restructuring, information technology, professional fees, severance, re-branding of aircraft, airport facilities and uniforms, relocation and training, as well as share-based compensation.

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2016      2015     2016      2015  

Regional operating special items, net

   $ 3       $ 10      $ 8       $ 18   

Nonoperating special items, net (1)

     36         (11     36         (19

Income tax special items, net

     —           7        —           16   

 

(1) 

In connection with a bond refinancing, we recorded a $36 million nonoperating special charge in the 2016 second quarter and six month periods related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

 

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

(Unaudited)

 

3. Earnings Per Common Share

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

Basic EPS:

           

Net income

   $ 950       $ 1,704       $ 1,650       $ 2,636   

Weighted-average common shares outstanding (in thousands)

     563,000         688,727         584,622         692,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 1.69       $ 2.47       $ 2.82       $ 3.81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS:

           

Net income for purposes of computing diluted EPS

   $ 950       $ 1,704       $ 1,650       $ 2,636   

Share computation for diluted EPS (in thousands):

           

Basic weighted average common shares outstanding

     563,000         688,727         584,622         692,571   

Dilutive effect of stock awards

     3,040         18,884         4,142         19,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     566,040         707,611         588,764         712,270   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 1.68       $ 2.41       $ 2.80       $ 3.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Stock options, stock appreciation rights and restricted stock unit awards because inclusion would be antidilutive

     2,601         905         1,845         453   

4. Share Repurchase Programs and Dividends

Since July 2014, our Board of Directors has approved several share repurchase programs aggregating $9.0 billion of authority of which, as of June 30, 2016, $1.2 billion remained unused under repurchase programs that expire on December 31, 2017. Share repurchases under our share repurchase programs 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. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.

During the three months ended June 30, 2016, we repurchased 50.2 million shares of AAG common stock for $1.7 billion at a weighted average cost per share of $33.55. During the six months ended June 30, 2016, we repurchased 89.5 million shares of AAG common stock for $3.2 billion at a weighted average cost per share of $36.28. Since the inception of the share repurchase programs in July 2014, we have repurchased 198.1 million shares of AAG common stock for $7.8 billion at a weighted average cost per share of $39.54.

Our Board of Directors declared the following cash dividends during the first six months of 2016:

 

Period

   Per share      For stockholders
of record as of
     Payable on      Cash paid
(millions)
 

First Quarter

   $ 0.10         February 10, 2016         February 24, 2016       $ 61   

Second Quarter

   $ 0.10         May 4, 2016         May 18, 2016         58   
           

 

 

 

Total

            $ 119   
           

 

 

 

Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

 

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

(Unaudited)

 

5. Debt

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

 

     June 30, 2016      December 31, 2015  

Secured

     

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

   $ 1,843       $ 1,867   

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

     743         743   

2016 Credit Facilities, variable interest rate of 3.50%, installments through 2023

     1,000         —     

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

     970         980   

2013 Citicorp Credit Facility tranche B-2

     —           588   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.20% to 9.75%, maturing from 2017 to 2028

     10,076         8,693   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.85% to 8.48%, maturing from 2016 to 2028

     4,904         4,183   

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2017 to 2035

     891         1,080   

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2016 to 2028

     880         923   
  

 

 

    

 

 

 
     21,307         19,057   
  

 

 

    

 

 

 

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         500   
  

 

 

    

 

 

 
     1,750         1,750   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     23,057         20,807   

Less: Total unamortized debt discount and debt issuance costs

     211         246   

Less: Current maturities

     1,715         2,231   
  

 

 

    

 

 

 

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

   $ 21,131       $ 18,330   
  

 

 

    

 

 

 

The table below shows availability under revolving credit facilities, all of which were undrawn, as of June 30, 2016 (in millions):

 

2013 Revolving Facility

   $  1,400   

2014 Revolving Facility

     1,025   
  

 

 

 

Total

   $ 2,425   
  

 

 

 

2016 Financing Activities

2016-1 EETCs

In January 2016, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2016-1 Class AA, Class A and Class B EETCs (the 2016-1 EETCs) in connection with the financing of 22 aircraft owned by American (the 2016-1 EETC Aircraft).

All of the proceeds received from the sale of the 2016-1 EETCs have been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the principal amount of $584 million bearing interest at 3.575% per annum, Series A equipment notes in the principal amount of $262 million bearing interest at 4.10% per annum and Series B equipment notes in the principal amount of $228 million bearing interest at 5.25% per annum. Interest and principal payments on the equipment notes are payable semi-annually in January and July of each year, beginning in July 2016. The final payments on the Series AA and Series A equipment notes are due in January 2028 and the final payment on the Series B equipment notes is due in January 2024. These equipment notes are secured by liens on the 2016-1 EETC Aircraft.

2016-2 EETCs

In May 2016, American created two pass-through trusts which issued approximately $829 million aggregate face amount of Series 2016-2 Class AA and Class A EETCs (the 2016-2 EETCs) in connection with the financing of 22 aircraft owned by American or scheduled to be delivered to American in July 2016 and August 2016 (the 2016-2 EETC Aircraft). Proceeds received from the sale of the 2016-2 EETCs were deposited in escrow for the benefit of holders of the 2016-2 EETCs until such time as American issues equipment notes to the pass-through trusts, which will purchase the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on our condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

 

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

(Unaudited)

 

As of June 30, 2016, $595 million of the escrowed proceeds from the 2016-2 EETCs have been used to purchase equipment notes issued by American in two series: Series AA equipment notes in the amount of $407 million bearing interest at 3.20% per annum and Series A equipment notes in the amount of $188 million bearing interest at 3.65% per annum. Interest and principal on the equipment notes are payable semi-annually in June and December of each year, with interest payments beginning in December 2016 and principal payments beginning in June 2017. The final payments on the Series AA and Series A equipment notes are due in June 2028. These equipment notes are secured by liens on 14 of the 2016-2 EETC Aircraft. The remaining $234 million of escrowed proceeds will be used to purchase equipment notes as the remaining eight aircraft are delivered.

2016 Credit Facilities

On April 29, 2016, American and AAG entered into a Credit and Guaranty Agreement (the 2016 Credit Agreement), among American, as the borrower, AAG as parent and guarantor, and Barclays Bank PLC, as administrative agent and collateral agent. The 2016 Credit Agreement provides for a $1.0 billion term loan facility (the 2016 Term Loan Facility) and a revolving credit facility that may be established in the future (the 2016 Revolving Credit Facility, and together with the 2016 Term Loan Facility, the 2016 Credit Facilities). As of June 30, 2016, $1.0 billion was outstanding under the 2016 Term Loan Facility.

The proceeds from the 2016 Term Loan Facility were used to repay approximately $588 million in remaining principal plus accrued and unpaid interest of the 2013 Citicorp Credit Facility Tranche B-2 with the remainder of the proceeds to be used for general corporate purposes.

The 2016 Term Loan Facility matures in April 2023, unless otherwise extended by the applicable parties, and is repayable in annual installments in an amount equal to 1.00% of the original principal balance with any unpaid balance due on the maturity date of the 2016 Term Loan Facility. Voluntary prepayments may be made by American at any time, with a premium of 1.0% applicable to certain prepayments made prior to the date that is six months following April 29, 2016.

Borrowings under the 2016 Term Loan Facility bear interest at an index rate plus an applicable index margin or, at American’s option, LIBOR (subject to a floor of 0.75%) plus an applicable LIBOR margin. The applicable LIBOR margin is 2.75% for borrowings under the 2016 Term Loan Facility.

The obligations of American under the 2016 Credit Agreement are secured by a lien on aircraft spare parts owned by American. American has the ability to add or release certain types of collateral, subject to certain conditions, at its discretion. The obligations of American under the 2016 Credit Facilities are guaranteed by AAG.

American is required to periodically appraise the value of its collateral and calculate the collateral coverage ratio. If the calculated collateral coverage ratio is below 1.6 to 1.0, American may be required either to provide additional collateral (which may include cash collateral) to secure its obligations under the 2016 Credit Agreement or repay the loans under the 2016 Credit Agreement or certain other indebtedness, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional collateral or repayment, is at least 1.6 to 1.0.

The 2016 Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the 2016 Credit Facilities may be accelerated and become due and payable immediately. In addition, if a “change of control” (as defined in the 2016 Credit Agreement) occurs with respect to AAG, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the 2016 Credit Facilities and terminate the 2016 Revolving Facility. The 2016 Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the 2016 Credit Facilities) of not less than $2.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

Obligations Associated with Special Facility Revenue Bonds

In June 2016, the New York Transportation Development Corporation (NYTDC) issued approximately $844 million of special facility revenue refunding bonds (the 2016 JFK Bonds) on behalf of American. The net proceeds from the 2016 JFK Bonds generally were used to provide a portion of the funds to refinance $1.0 billion of the existing outstanding special facility revenue bonds (Prior JFK Bonds). The net proceeds from the Prior JFK Bonds partially financed the construction of a terminal used by American at John F. Kennedy International Airport (JFK) (the Terminal).

American is required to pay debt service on the 2016 JFK Bonds through payments under a loan agreement with NYTDC, and American and AAG guarantee the 2016 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.

 

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

(Unaudited)

 

The 2016 JFK Bonds, in aggregate, were priced at approximately 107% of par value. The gross proceeds from the issuance of the 2016 JFK Bonds were approximately $907 million. Of this amount, approximately $895 million was used to partially fund the redemption of the Prior JFK Bonds. The 2016 JFK Bonds bear interest at 5.0% per annum and are comprised of $212 million of serial bonds, portions of which mature annually from August 1, 2017 to August 1, 2021, and $632 million of term bonds, $278 million of which matures on August 1, 2026 and $354 million of which matures on August 1, 2031. In connection with the refinancing of the Prior JFK Bonds, American recorded a special nonoperating charge of $36 million consisting of non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

Other Aircraft Financing Transactions

In the first six months of 2016, American entered into loan agreements to borrow $1.0 billion in connection with the financing of certain aircraft. Debt incurred under these loan agreements matures in 2026 through 2028.

6. Income Taxes

At December 31, 2015, we had approximately $8.0 billion of gross net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2023 if unused. We also had approximately $4.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused.

At December 31, 2015, we had an Alternative Minimum Tax credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of our financial statements for the fourth quarter of 2015, we determined that it was more likely than not that substantially all of our deferred tax assets, which include our NOLs, would be realized. Accordingly, we reversed $3.0 billion of the valuation allowance as of December 31, 2015.

Beginning in the first six months of 2016, we recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as we utilized the NOLs described above. For purposes of taxation, substantially all of our income before income taxes is attributable to the United States.

7. Fair Value Measurements

Assets Measured at Fair Value on a Recurring Basis

We utilize the market approach to measure fair value for our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our 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 six months ended June 30, 2016.

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

 

     Fair Value Measurements as of June 30, 2016  
     Total      Level 1      Level 2      Level 3  

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

           

Money market funds

   $ 709       $ 709       $ —         $ —     

Corporate obligations

     3,234         —           3,234         —     

Bank notes/certificates of deposit/time deposits

     2,529         —           2,529         —     

Repurchase agreements

     200         —           200         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,672         709         5,963         —     

Restricted cash and short-term investments (1)

     640         640         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,312       $ 1,349       $ 5,963       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. Our short-term investments mature in one year or less except for $235 million of bank notes/certificates of deposit/time deposits and $230 million of corporate obligations.

 

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

(Unaudited)

 

There were no Level 1 to Level 2 transfers during the six months ended June 30, 2016.

Fair Value of Debt

The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our 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 our long-term debt, including current maturities, were as follows (in millions):

 

     June 30, 2016      December 31, 2015  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 22,846       $ 23,452       $ 20,561       $ 21,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and Short-term Investments

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our cash and short-term investments 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 our 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.

8. Retirement Benefits

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

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Three Months Ended June 30,

   2016     2015     2016     2015  

Service cost

   $ 1      $ 1      $ 1      $ 1   

Interest cost

     188        184        12        13   

Expected return on assets

     (187     (213     (5     (5

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     7        7        (60     (61

Unrecognized net loss (gain)

     31        28        (4     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 40      $ 8      $ (56   $ (54
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each of the 2016 and 2015 second quarters’ prior service cost does not include amortization of $1 million related to other postretirement benefits.

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Six Months Ended June 30,

   2016     2015     2016     2015  

Service cost

   $ 1      $ 1      $ 2      $ 2   

Interest cost

     375        369        24        26   

Expected return on assets

     (375     (426     (10     (10

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     14        14        (120     (121

Unrecognized net loss (gain)

     63        56        (8     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 78      $ 15      $ (112   $ (106
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each of the 2016 and 2015 six months’ prior service cost does not include amortization of $1 million related to other postretirement benefits.

Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen.

 

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(Unaudited)

 

9. Accumulated Other Comprehensive Income (Loss)

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

 

     Pension, Retiree
Medical and
Other
Postretirement

Benefits
    Unrealized
Gain (Loss) on

Investments
    Income Tax
Benefit

(Provision)
    Total  

Balance at December 31, 2015

   $ (3,842   $ (10   $ (880 )(1)    $ (4,732

Other comprehensive income (loss) before reclassifications

     (5     6        —          1   

Amounts reclassified from accumulated other comprehensive income (loss)

     (50     —          18 (2)      (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (55     6        18        (31
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (3,897   $ (4   $ (862   $ (4,763
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Relates to pension, retiree medical and other postretirement obligations that will not be recognized in net income until the obligations are fully extinguished.

(2) 

Relates to pension, retiree medical and other postretirement obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.

Reclassifications out of AOCI for the three and six months ended June 30, 2016 and 2015 are as follows (in millions):

 

    Amounts reclassified from AOCI      

AOCI Components

  Three Months Ended June 30,     Six Months Ended June 30,    

Affected line items on condensed
consolidated statement of operations

  2016     2015     2016     2015    

Amortization of pension, retiree medical and other postretirement benefits:

         

Prior service cost (benefit)

  $ (33   $ (53   $ (67   $ (106   Salaries, wages and benefits

Actuarial loss

    17        27        35        54      Salaries, wages and benefits

Derivative financial instruments:

         

Cash flow hedges

    —          (3     —          (9   Aircraft fuel and related taxes

Net unrealized change on investments:

         

Net change in value

    —          (1     —          —        Other nonoperating, net
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period, net of tax

  $ (16   $ (30   $ (32   $ (61  
 

 

 

   

 

 

   

 

 

   

 

 

   

10. Regional Expenses

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

Aircraft fuel and related taxes

   $ 279       $ 349       $ 498       $ 660   

Salaries, wages and benefits

     330         293         656         585   

Capacity purchases from third-party regional carriers

     392         417         786         818   

Maintenance, materials and repairs

     88         95         183         170   

Other rent and landing fees

     142         129         270         243   

Aircraft rent

     9         8         18         17   

Selling expenses

     88         89         166         165   

Depreciation and amortization

     72         63         140         123   

Special items, net

     3         10         8         18   

Other

     115         104         225         220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regional expenses

   $ 1,518       $ 1,557       $ 2,950       $ 3,019   
  

 

 

    

 

 

    

 

 

    

 

 

 

11. Legal Proceedings

Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States 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 approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.

 

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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. As of June 30, 2016, there were approximately 25.2 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, we are 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 us but rather will be distributed to former AMR stockholders as of the Effective Date.

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, postemployment benefits 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. Our 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.

DOJ Antitrust Civil Investigative Demand. In June 2015, we 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 us, and other airlines have announced that they have received similar requests. We are cooperating fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, we, 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 investigation and these lawsuits are in their very early stages and we intend 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 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 and plaintiffs’ request for further relief from the JPML was denied on February 4, 2016. Accordingly, the parties will continue to litigate the matter in Bankruptcy Court; a schedule for the remainder of the case has not yet been set. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, we received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating fully with the DOJ investigation.

General. In addition to the specifically identified legal proceedings, we and our 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 our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.

 

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

(Unaudited)

 

12. Subsequent Events

Co-branded Credit Card Agreements

On July 12, 2016, American, Citi, Barclaycard US and MasterCard issued a joint press release announcing entry into new agreements relating to American’s co-branded credit card program. Under the new arrangements, American will partner with two banks to provide co-branded credit cards. Citi and Barclaycard US will both issue AAdvantage co-branded credit cards commencing in January 2017. American also announced a new exclusive partnership and direct relationship with MasterCard. All new AAdvantage co-branded credit cards will be affiliated with MasterCard going forward. Consistent with our prior co-branded credit card agreements, we will account for these new agreements in accordance with ASU 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements” as disclosed in our critical accounting policies and the consolidated financial statements and accompanying notes contained in our 2015 Form 10-K.

2016-2 Class B EETCs

In July 2016, American created one additional pass-through trust which issued approximately $227 million aggregate face amount of 2016-2 Class B EETCs (the 2016-2 Class B EETCs) in connection with the financing of the 2016-2 EETC Aircraft. A portion of the proceeds received from the sale of the 2016-2 Class B EETCs were used on the date of issuance of the 2016-2 Class B EETCs to acquire Series B equipment notes issued by American to the pass-through trust and the balance of such proceeds are being held in escrow for the benefit of the holders of the 2016-2 Class B EETCs until such time as American issues additional Series B equipment notes to the pass-through trust, which will purchase the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on our condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

Series B equipment notes bear interest at 4.375% per annum. Interest and principal on the equipment notes will be payable semi-annually in June and December of each year, with interest payments beginning in December 2016 and principal payments beginning in June 2017. The final payments on the Series B equipment notes are due in June 2024.

Dividend Declaration

In July 2016, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on August 5, 2016, and payable on August 19, 2016. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

 

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

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2016     2015     2016     2015  

Operating revenues:

    

Mainline passenger

   $ 7,209      $ 7,655      $ 13,773      $ 14,644   

Regional passenger

     1,786        1,759        3,309        3,211   

Cargo

     174        194        336        388   

Other

     1,281        1,241        2,529        2,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     10,450        10,849        19,947        20,691   

Operating expenses:

        

Aircraft fuel and related taxes

     1,314        1,774        2,343        3,318   

Salaries, wages and benefits

     2,668        2,361        5,318        4,732   

Regional expenses

     1,600        1,580        3,107        3,074   

Maintenance, materials and repairs

     453        502        871        995   

Other rent and landing fees

     458        451        879        859   

Aircraft rent

     302        316        609        633   

Selling expenses

     334        350        642        686   

Depreciation and amortization

     374        340        729        676   

Special items, net

     62        144        161        447   

Other

     1,128        1,110        2,208        2,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,693        8,928        16,867        17,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,757        1,921        3,080        3,123   

Nonoperating income (expense):

        

Interest income

     25        13        46        23   

Interest expense, net of capitalized interest

     (228     (200     (445     (390

Other, net

     (26     (11     (18     (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (229     (198     (417     (452
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,528        1,723        2,663        2,671   

Income tax provision

     556        14        980        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 972      $ 1,709      $ 1,683      $ 2,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30,     Six Months Ended June 30,  
     2016     2015     2016     2015  

Net income

   $ 972      $ 1,709      $ 1,683      $ 2,647   

Other comprehensive loss, net of tax:

        

Pension, retiree medical and other postretirement benefits

     (16     (26     (35     (52

Derivative financial instruments:

        

Reclassification into earnings

     —          (3     —          (9

Unrealized gain (loss) on investments:

        

Net change in value

     2        (1     4        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (14     (30     (31     (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 958      $ 1,679      $ 1,652      $ 2,586   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     June 30, 2016     December 31, 2015  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 425      $ 364   

Short-term investments

     6,669        5,862   

Restricted cash and short-term investments

     640        695   

Accounts receivable, net

     1,590        1,420   

Receivables from related parties, net

     5,386        1,981   

Aircraft fuel, spare parts and supplies, net

     928        796   

Prepaid expenses and other

     827        740   
  

 

 

   

 

 

 

Total current assets

     16,465        11,858   

Operating property and equipment

    

Flight equipment

     35,191        32,838   

Ground property and equipment

     6,542        6,224   

Equipment purchase deposits

     1,136        1,067   
  

 

 

   

 

 

 

Total property and equipment, at cost

     42,869        40,129   

Less accumulated depreciation and amortization

     (13,539     (12,893
  

 

 

   

 

 

 

Total property and equipment, net

     29,330        27,236   

Other assets

    

Goodwill

     4,091        4,091   

Intangibles, net of accumulated amortization of $538 and $502, respectively

     2,213        2,249   

Deferred tax asset

     2,398        2,932   

Other assets

     1,939        2,073   
  

 

 

   

 

 

 

Total other assets

     10,641        11,345   
  

 

 

   

 

 

 

Total assets

   $ 56,436      $ 50,439   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,718      $ 2,234   

Accounts payable

     1,900        1,517   

Accrued salaries and wages

     1,275        1,156   

Air traffic liability

     4,984        3,747   

Loyalty program liability

     2,512        2,525   

Other accrued liabilities

     2,253        2,198   
  

 

 

   

 

 

 

Total current liabilities

     14,642        13,377   

Noncurrent liabilities

    

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

     19,364        16,592   

Pension and postretirement benefits

     7,385        7,410   

Deferred gains and credits, net

     590        667   

Other liabilities

     2,640        2,695   
  

 

 

   

 

 

 

Total noncurrent liabilities

     29,979        27,364   

Commitments and contingencies

    

Stockholder’s equity

    

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

     —          —     

Additional paid-in capital

     16,568        16,521   

Accumulated other comprehensive loss

     (4,862     (4,831

Retained earnings (deficit)

     109        (1,992
  

 

 

   

 

 

 

Total stockholder’s equity

     11,815        9,698   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 56,436      $ 50,439   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Six Months Ended June 30,  
     2016     2015  

Net cash provided by operating activities

   $ 1,449      $ 4,275   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (3,027     (3,104

Purchases of short-term investments

     (3,605     (5,093

Sales of short-term investments

     2,810        3,436   

Decrease in restricted cash and short-term investments

     55        27   

Proceeds from sale of property and equipment

     28        18   

Other investing activities

     2        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,737     (4,716

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (2,163     (1,107

Proceeds from issuance of long-term debt

     4,522        1,496   

Deferred financing costs

     (87     (33

Other financing activities

     77        34   
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,349        390   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     61        (51

Cash at beginning of period

     364        984   
  

 

 

   

 

 

 

Cash at end of period

   $ 425      $ 933   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 3      $ 35   

Capital lease obligations

     —          5   

Supplemental information:

    

Interest paid, net of amounts capitalized

     431        417   

Income taxes paid

     5        5   

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, 2015. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

On December 9, 2013 (the Effective Date), AMR Merger Sub, Inc. merged with and into US Airways Group, Inc. (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 or AMR) following the Merger.

On December 30, 2015, in order to simplify AAG’s internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, AAG caused US Airways Group to be merged with and into AAG, with AAG as the surviving corporation, and, immediately thereafter, US Airways, Inc. (US Airways), a Delaware corporation and wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation. As a result of the merger of US Airways and American, US Airways transferred all of its assets and liabilities, including obligations with respect to certain pass through trusts and the leases of related aircraft and engines, as well as its off-balance sheet commitments, to American. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and is reflected in American’s condensed consolidated financial statements as though the transaction had occurred on December 9, 2013, when a subsidiary of AMR merged with and into US Airways Group, which represents the earliest date that American and US Airways were under common control. Thus, all periods presented in Part I, Item 1B of this Quarterly Report on Form 10-Q are comprised of the condensed consolidated financial data of American and US Airways. This transaction was accounted for in a manner similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity and no other assets or liabilities are recognized.

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 loyalty program, as well as pensions, retiree medical and other postretirement benefits.

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). Subsequently, the FASB has issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transition. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. American is currently evaluating the requirements of these standards and has not yet determined the impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. American is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on its condensed consolidated financial statements.

 

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

(Unaudited)

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation of excess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. American early adopted this standard in the three months ended June 30, 2016. The adoption of this standard results in the recognition of $418 million of previously unrecognized excess tax benefits in deferred tax assets and an increase to retained earnings on the condensed consolidated balance sheet as of the beginning of the current year and the recognition of $9 million of excess tax benefits to the income tax provision for each of the three and six months ended June 30, 2016, respectively.

2. Special Items

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

Mainline operating special items, net (1)

   $ 62       $ 144       $ 161       $ 447   

 

(1) 

The 2016 second quarter mainline operating special items totaled a net charge of $62 million, which principally included $112 million of merger integration expenses, offset in part by a $56 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 six month period mainline operating special items totaled a net charge of $161 million, which principally included $242 million of merger integration expenses, offset in part by a $61 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 second quarter and six month periods, merger integration expenses included costs related to information technology, alignment of labor union contracts, fleet restructuring, re-branding of aircraft, airport facilities and uniforms, professional fees, severance, as well as relocation and training.

The 2015 second quarter mainline operating special items totaled a net charge of $144 million, which principally included $224 million of merger integration expenses, offset in part by a $68 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2015 six month period mainline operating special items totaled a net charge of $447 million, which principally included $543 million of merger integration expenses, offset in part by a $73 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2015 second quarter and six month periods, merger integration expenses included costs related to alignment of labor union contracts, fleet restructuring, information technology, professional fees, severance, re-branding of aircraft, airport facilities and uniforms, relocation and training, as well as share-based compensation.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

Regional operating special items, net

   $ 3       $ 5       $ 8       $ 9   

Nonoperating special items, net (1)

     36         11         36         3   

Income tax special items, net

     —           7         —           16   

 

(1) 

In connection with a bond refinancing, American recorded a $36 million nonoperating special charge in the 2016 second quarter and six month periods related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

 

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

(Unaudited)

 

3. Debt

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

 

     June 30, 2016      December 31, 2015  

Secured

     

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

   $ 1,843       $ 1,867   

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

     743         743   

2016 Credit Facilities, variable interest rate of 3.50%, installments through 2023

     1,000         —     

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

     970         980   

2013 Citicorp Credit Facility tranche B-2

     —           588   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.20% to 9.75%, maturing from 2017 to 2028

     10,076         8,693   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.85% to 8.48%, maturing from 2016 to 2028

     4,904         4,183   

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 5.50%, maturing from 2017 to 2035

     862         1,051   

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2016 to 2028

     879         922   
  

 

 

    

 

 

 
     21,277         19,027   
  

 

 

    

 

 

 

Unsecured

     

Affiliate unsecured obligations

     —           27   
  

 

 

    

 

 

 
     —           27   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     21,277         19,054   

Less: Total unamortized debt discount and debt issuance costs

     195         228   

Less: Current maturities

     1,718         2,234   
  

 

 

    

 

 

 

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

   $ 19,364       $ 16,592   
  

 

 

    

 

 

 

The table below shows availability under revolving credit facilities, all of which were undrawn, as of June 30, 2016 (in millions):

 

2013 Revolving Facility

   $ 1,400   

2014 Revolving Facility

     1,025   
  

 

 

 

Total

   $ 2,425   
  

 

 

 

2016 Financing Activities

2016-1 EETCs

In January 2016, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2016-1 Class AA, Class A and Class B EETCs (the 2016-1 EETCs) in connection with the financing of 22 aircraft owned by American (the 2016-1 EETC Aircraft).

All of the proceeds received from the sale of the 2016-1 EETCs have been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the principal amount of $584 million bearing interest at 3.575% per annum, Series A equipment notes in the principal amount of $262 million bearing interest at 4.10% per annum and Series B equipment notes in the principal amount of $228 million bearing interest at 5.25% per annum. Interest and principal payments on the equipment notes are payable semi-annually in January and July of each year, beginning in July 2016. The final payments on the Series AA and Series A equipment notes are due in January 2028 and the final payment on the Series B equipment notes is due in January 2024. These equipment notes are secured by liens on the 2016-1 EETC Aircraft.

2016-2 EETCs

In May 2016, American created two pass-through trusts which issued approximately $829 million aggregate face amount of Series 2016-2 Class AA and Class A EETCs (the 2016-2 EETCs) in connection with the financing of 22 aircraft owned by American or scheduled to be delivered to American in July 2016 and August 2016 (the 2016-2 EETC Aircraft). Proceeds received from the sale of the 2016-2 EETCs were deposited in escrow for the benefit of holders of the 2016-2 EETCs until such time as American issues equipment notes to the pass-through trusts, which will purchase the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

 

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

(Unaudited)

 

As of June 30, 2016, $595 million of the escrowed proceeds from the 2016-2 EETCs have been used to purchase equipment notes issued by American in two series: Series AA equipment notes in the amount of $407 million bearing interest at 3.20% per annum and Series A equipment notes in the amount of $188 million bearing interest at 3.65% per annum. Interest and principal on the equipment notes are payable semi-annually in June and December of each year, with interest payments beginning in December 2016 and principal payments beginning in June 2017. The final payments on the Series AA and Series A equipment notes are due in June 2028. These equipment notes are secured by liens on 14 of the 2016-2 EETC Aircraft. The remaining $234 million of escrowed proceeds will be used to purchase equipment notes as the remaining eight aircraft are delivered.

2016 Credit Facilities

On April 29, 2016, American and AAG entered into a Credit and Guaranty Agreement (the 2016 Credit Agreement), among American, as the borrower, AAG as parent and guarantor, and Barclays Bank PLC, as administrative agent and collateral agent. The 2016 Credit Agreement provides for a $1.0 billion term loan facility (the 2016 Term Loan Facility) and a revolving credit facility that may be established in the future (the 2016 Revolving Credit Facility, and together with the 2016 Term Loan Facility, the 2016 Credit Facilities). As of June 30, 2016, $1.0 billion was outstanding under the 2016 Term Loan Facility.

The proceeds from the 2016 Term Loan Facility were used to repay approximately $588 million in remaining principal plus accrued and unpaid interest of the 2013 Citicorp Credit Facility Tranche B-2 with the remainder of the proceeds to be used for general corporate purposes.

The 2016 Term Loan Facility matures in April 2023, unless otherwise extended by the applicable parties, and is repayable in annual installments in an amount equal to 1.00% of the original principal balance with any unpaid balance due on the maturity date of the 2016 Term Loan Facility. Voluntary prepayments may be made by American at any time, with a premium of 1.0% applicable to certain prepayments made prior to the date that is six months following April 29, 2016.

Borrowings under the 2016 Term Loan Facility bear interest at an index rate plus an applicable index margin or, at American’s option, LIBOR (subject to a floor of 0.75%) plus an applicable LIBOR margin. The applicable LIBOR margin is 2.75% for borrowings under the 2016 Term Loan Facility.

The obligations of American under the 2016 Credit Agreement are secured by a lien on aircraft spare parts owned by American. American has the ability to add or release certain types of collateral, subject to certain conditions, at its discretion. The obligations of American under the 2016 Credit Facilities are guaranteed by AAG.

American is required to periodically appraise the value of its collateral and calculate the collateral coverage ratio. If the calculated collateral coverage ratio is below 1.6 to 1.0, American may be required either to provide additional collateral (which may include cash collateral) to secure its obligations under the 2016 Credit Agreement or repay the loans under the 2016 Credit Agreement or certain other indebtedness, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional collateral or repayment, is at least 1.6 to 1.0.

The 2016 Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the 2016 Credit Facilities may be accelerated and become due and payable immediately. In addition, if a “change of control” (as defined in the 2016 Credit Agreement) occurs with respect to AAG, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the 2016 Credit Facilities and terminate the 2016 Revolving Facility. The 2016 Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the 2016 Credit Facilities) of not less than $2.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

Obligations Associated with Special Facility Revenue Bonds

In June 2016, the New York Transportation Development Corporation (NYTDC) issued approximately $844 million of special facility revenue refunding bonds (the 2016 JFK Bonds) on behalf of American. The net proceeds from the 2016 JFK Bonds generally were used to provide a portion of the funds to refinance $1.0 billion of the existing outstanding special facility revenue bonds (Prior JFK Bonds). The net proceeds from the Prior JFK Bonds partially financed the construction of a terminal used by American at John F. Kennedy International Airport (JFK) (the Terminal).

American is required to pay debt service on the 2016 JFK Bonds through payments under a loan agreement with NYTDC, and American and AAG guarantee the 2016 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.

 

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

(Unaudited)

 

The 2016 JFK Bonds, in aggregate, were priced at approximately 107% of par value. The gross proceeds from the issuance of the 2016 JFK Bonds were approximately $907 million. Of this amount, approximately $895 million was used to partially fund the redemption of the Prior JFK Bonds. The 2016 JFK Bonds bear interest at 5.0% per annum and are comprised of $212 million of serial bonds, portions of which mature annually from August 1, 2017 to August 1, 2021, and $632 million of term bonds, $278 million of which matures on August 1, 2026 and $354 million of which matures on August 1, 2031. In connection with the refinancing of the Prior JFK Bonds, American recorded a special nonoperating charge of $36 million consisting of non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

Other Aircraft Financing Transactions

In the first six months of 2016, American entered into loan agreements to borrow $1.0 billion in connection with the financing of certain aircraft. Debt incurred under these loan agreements matures in 2026 through 2028.

4. Income Taxes

At December 31, 2015, American had approximately $8.8 billion of gross net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $8.0 billion, substantially all of which is expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2023 if unused. American also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused.

At December 31, 2015, American had an Alternative Minimum Tax credit carryforward of approximately $458 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of American’s financial statements for the fourth quarter of 2015, management determined that it was more likely than not that substantially all of its deferred tax assets, which include its NOLs, would be realized. Accordingly, American reversed $3.5 billion of the valuation allowance as of December 31, 2015.

Beginning in the first six months of 2016, American recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as American utilized the NOLs described above. For purposes of taxation, substantially all of American’s income before income taxes is attributable to the United States.

5. Fair Value Measurements

Assets Measured at Fair Value on a Recurring Basis

American utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. 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 six months ended June 30, 2016.

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

 

     Fair Value Measurements as of June 30, 2016  
     Total      Level 1      Level 2      Level 3  

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

           

Money market funds

   $ 707       $ 707       $ —         $ —     

Corporate obligations

     3,234         —           3,234         —     

Bank notes/certificates of deposit/time deposits

     2,528         —           2,528         —     

Repurchase agreements

     200         —           200         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,669         707         5,962         —     

Restricted cash and short-term investments (1)

     640         640         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,309       $ 1,347       $ 5,962       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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

(Unaudited)

 

(2) 

All short-term investments are classified as available-for-sale and stated at fair value. American’s short-term investments mature in one year or less except for $235 million of bank notes/certificates of deposit/time deposits and $230 million of corporate obligations.

There were no Level 1 to Level 2 transfers during the six months ended June 30, 2016.

Fair Value of Debt

The fair value of American’s long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If American’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 American’s long-term debt, including current maturities, were as follows (in millions):

 

     June 30, 2016      December 31, 2015  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 21,082       $ 21,683       $ 18,826       $ 19,378   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and Short-term Investments

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by American and can significantly affect the value of American’s cash and short-term investments 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 American’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.

6. Retirement Benefits

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

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Three Months Ended June 30,

   2016     2015     2016     2015  

Service cost

   $ —        $ —        $ 1      $ 1   

Interest cost

     187        184        12        13   

Expected return on assets

     (187     (212     (5     (5

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     7        7        (60     (61

Unrecognized net loss (gain)

     31        28        (4     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 38      $ 8      $ (56   $ (54
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each of the 2016 and 2015 second quarters’ prior service cost does not include amortization of $1 million related to other postretirement benefits.

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Six Months Ended June 30,

   2016     2015     2016     2015  

Service cost

   $ 1      $ 1      $ 2      $ 2   

Interest cost

     373        367        24        26   

Expected return on assets

     (373     (424     (10     (10

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     14        14        (120     (121

Unrecognized net loss (gain)

     63        56        (8     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 78      $ 15      $ (112   $ (106
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each of the 2016 and 2015 six months’ prior service cost does not include amortization of $1 million related to other postretirement benefits.

 

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

(Unaudited)

 

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

7. Accumulated Other Comprehensive Income (Loss)

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

 

     Pension, Retiree
Medical and
Other
Postretirement
Benefits
    Unrealized
Gain (Loss) on
Investments
    Income Tax
Benefit
(Provision)
    Total  

Balance at December 31, 2015

   $ (3,831   $ (9   $ (991 )(1)    $ (4,831

Other comprehensive income (loss) before reclassifications

     (5     6        —          1   

Amounts reclassified from accumulated other comprehensive income (loss)

     (50     —          18 (2)      (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (55     6        18        (31
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (3,886   $ (3   $ (973   $ (4,862
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Relates to pension, retiree medical and other postretirement obligations that will not be recognized in net income until the obligations are fully extinguished.

(2) 

Relates to pension, retiree medical and other postretirement obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.

Reclassifications out of AOCI for the three and six months ended June 30, 2016 and 2015 are as follows (in millions):

 

     Amounts reclassified from AOCI      

AOCI Components

   Three Months Ended
June 30,
    Six Months Ended
June 30,
   

Affected line items on condensed

consolidated statement of operations

   2016     2015     2016     2015    

Amortization of pension, retiree medical and other postretirement benefits:

          

Prior service cost (benefit)

   $ (33   $ (53   $ (67   $ (106   Salaries, wages and benefits

Actuarial loss

     17        27        35        54      Salaries, wages and benefits

Derivative financial instruments:

          

Cash flow hedges

     —          (3     —          (9   Aircraft fuel and related taxes

Net unrealized change on investments:

          

Net change in value

     —          (1     —          —        Other nonoperating, net
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period, net of tax

   $ (16   $ (30   $ (32   $ (61  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

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

(Unaudited)

 

8. Regional Expenses

Expenses associated with regional carriers operating under the brand name American Eagle are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

Aircraft fuel and related taxes

   $ 279       $ 349       $ 498       $ 660   

Salaries, wages and benefits

     83         69         167         136   

Capacity purchases from third-party regional carriers

     889         828         1,773         1,631   

Maintenance, materials and repairs

     1         1         2         1   

Other rent and landing fees

     122         112         231         210   

Aircraft rent

     7         7         14         14   

Selling expenses

     88         89         166         166   

Depreciation and amortization

     58         49         112         95   

Special items, net

     3         5         8         9   

Other

     70         71         136         152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regional expenses

   $ 1,600       $ 1,580       $ 3,107       $ 3,074   
  

 

 

    

 

 

    

 

 

    

 

 

 

9. Transactions with Related Parties

The following represents the net receivables (payables) to related parties (in millions):

 

     June 30, 2016     December 31, 2015  

AAG (1)

   $ 8,002      $ 4,489   

AAG’s wholly-owned subsidiaries (2)

     (2,616     (2,508
  

 

 

   

 

 

 

Total

   $ 5,386      $ 1,981   
  

 

 

   

 

 

 

 

(1) 

The increase in American’s net related party receivable from AAG is primarily due to American providing the cash funding for AAG’s share repurchase programs.

(2) 

The net payable to AAG’s wholly-owned subsidiaries consists primarily of amounts due under regional capacity purchase agreements with AAG’s wholly-owned regional airlines operating under the brand name of American Eagle.

10. Legal Proceedings

Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States 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 approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.

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. As of June 30, 2016, there were approximately 25.2 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, American 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 AAG but rather will be distributed to former AMR stockholders as of the Effective Date.

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, postemployment benefits 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. American’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.

 

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

(Unaudited)

 

DOJ Antitrust Civil Investigative Demand. In June 2015, American 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 American, and other airlines have announced that they have received similar requests. American is cooperating fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, American, 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 investigation and these lawsuits are in their very early stages and American 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 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 and plaintiffs’ request for further relief from the JPML was denied on February 4, 2016. Accordingly, the parties will continue to litigate the matter in Bankruptcy Court; a schedule for the remainder of the case has not yet been set. American believes this lawsuit is without merit and intends to vigorously defend against the allegations.

DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed American of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, American received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. American is cooperating fully with the DOJ investigation.

General. In addition to the specifically identified legal proceedings, American 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 American’s control. Therefore, although American 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 American are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.

11. Subsequent Events

Co-branded Credit Card Agreements

On July 12, 2016, American, Citi, Barclaycard US and MasterCard issued a joint press release announcing entry into new agreements relating to American’s co-branded credit card program. Under the new arrangements, American will partner with two banks to provide co-branded credit cards. Citi and Barclaycard US will both issue AAdvantage co-branded credit cards commencing in January 2017. American also announced a new exclusive partnership and direct relationship with MasterCard. All new AAdvantage co-branded credit cards will be affiliated with MasterCard going forward. Consistent with American’s prior co-branded credit card agreements, American will account for these new agreements in accordance with ASU 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements” as disclosed in American’s critical accounting policies and the consolidated financial statements and accompanying notes contained in American’s 2015 Form 10-K.

2016-2 Class B EETCs

In July 2016, American created one additional pass-through trust which issued approximately $227 million aggregate face amount of 2016-2 Class B EETCs (the 2016-2 Class B EETCs) in connection with the financing of the 2016-2 EETC Aircraft. A portion of the proceeds received from the sale of the 2016-2 Class B EETCs were used on the date of issuance of the 2016-2 Class B EETCs to acquire Series B equipment notes issued by American to the pass-through trust and the balance of such proceeds are being held in escrow for the benefit of the holders of the 2016-2 Class B EETCs until such time as American issues additional Series B equipment notes to the pass-through trust, which will purchase the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

 

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

(Unaudited)

 

Series B equipment notes bear interest at 4.375% per annum. Interest and principal on the equipment notes will be payable semi-annually in June and December of each year, with interest payments beginning in December 2016 and principal payments beginning in June 2017. The final payments on the Series B equipment notes are due in June 2024.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of AAG’s and American’s Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of AAG and American, but rather updates disclosures made in the 2015 Form 10-K.

Background

American Airlines and American Eagle offer an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries. American has hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. American is a founding member of the oneworld alliance, whose members serve more than 1,000 destinations with about 14,250 daily flights to over 150 countries. In the second quarter of 2016, approximately 52 million passengers boarded our mainline and regional flights. As of June 30, 2016, we operated 947 mainline aircraft and were supported by our regional airline subsidiaries and third-party regional carriers, which operated an additional 600 regional aircraft.

The U.S. Airline Industry

In the second quarter of 2016, the U.S. airline industry continued to benefit from lower fuel prices. However, the reductions in fuel costs were offset in part by another quarter of year-over-year declines in revenue driven by reduced yields. Domestic markets continued to be impacted by competitive capacity growth. They did, however, perform better than international markets, which also have been impacted by competitive capacity growth as well as continued global macroeconomic softness and foreign currency weakness.

Jet fuel prices closely follow the price of Brent crude oil. On average, the price of Brent crude oil per barrel was approximately 26% lower in the second quarter of 2016 as compared to 2015. The average daily spot price for Brent crude oil during the second quarter of 2016 was $46 per barrel as compared to an average daily spot price of $62 per barrel during the second quarter of 2015. Fuel prices were however 35% higher when compared to the first quarter of 2016 when the average daily spot price was $34 per barrel. On a daily basis, Brent crude oil prices fluctuated during the second quarter between a high of $51 per barrel to a low of $36 per barrel, and closed the quarter on June 30, 2016 at $48 per barrel.

While jet fuel prices have declined quarter-over-quarter as described above, uncertainty exists regarding the economic conditions driving these declines. See Part II, Item 1A. Risk Factors – “Downturns in economic conditions adversely affect our business” and “Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”

 

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American Airlines Group

Second Quarter 2016 Results

The selected financial data presented below is derived from AAG’s unaudited condensed consolidated financial statements included in Part I, Item 1A of this report and should be read in conjunction with those financial statements and the related notes thereto.

 

     Three Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016      2015    
     (In millions, except percentage changes)  

Mainline and regional passenger revenues

   $ 8,995       $ 9,414        (4.4

Total operating revenues

     10,363         10,827        (4.3

Mainline and regional aircraft fuel and related taxes

     1,593         2,123        (24.9

Total operating expenses

     8,612         8,906        (3.3

Operating income

     1,751         1,921        (8.8

Pre-tax income

     1,493         1,719        (13.2

Income tax provision

     543         15        nm   

Net income

     950         1,704        (44.3

Pre-tax income

   $ 1,493       $ 1,719        (13.2

Pre-tax special items:

       

Operating special charges, net (1)

     65         154        (58.3

Nonoperating special items, net

     36         (11     nm   
  

 

 

    

 

 

   

Total pre-tax special items

     101         143        (29.6
  

 

 

    

 

 

   

Pre-tax income excluding special items

   $ 1,594       $ 1,862        (14.4
  

 

 

    

 

 

   

 

(1) 

Our 2016 and 2015 second quarter results were impacted by net operating special charges of $65 million and $154 million, respectively, consisting principally of mainline and regional merger integration expenses, which were offset in part by net credits related to fair value adjustments for remaining bankruptcy settlement obligations. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “AAG’s Results of Operations” of this report for more information on net special items.

Pre-Tax Income and Net Income

We realized pre-tax income of $1.5 billion and $1.7 billion in the second quarters of 2016 and 2015, respectively. Excluding the effects of net special charges, we recognized pre-tax income of $1.6 billion and $1.9 billion in the second quarters of 2016 and 2015, respectively. Our 2016 second quarter results on both a GAAP basis and excluding net special charges benefited from the decline in fuel prices as a result of not hedging our fuel consumption. This benefit however, was offset by a decline in revenues driven by reduced yields and higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016.

As of December 31, 2015, we had approximately $8.0 billion of federal net operating losses (NOLs) and $4.0 billion of state NOLs, substantially all of which are expected to be available in 2016 to reduce future federal and state taxable income. As of December 31, 2015, we reversed the valuation allowance on our deferred tax assets, which include our NOLs. As a result, we began to record a provision for income taxes in 2016. The provision is substantially non-cash due to the utilization of NOLs. For periods prior to 2016, we recognized only a nominal tax provision for certain states and international jurisdictions where NOLs were limited or not available to be used. Accordingly, as illustrated above, amounts reported in the second quarter of 2016 for income tax provision and net income are not comparable to the second quarter of 2015. Therefore, we are discussing pre-tax income and pre-tax income excluding special items in order to provide a more meaningful period-over-period comparison. The exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to financial measures presented by other airlines. Management uses pre-tax income excluding special items to evaluate our financial performance.

Revenue

In the second quarter of 2016, we reported operating revenues of $10.4 billion. Mainline and regional passenger revenues were $9.0 billion, a decrease of $419 million, or 4.4%, as compared to the 2015 period. The decline in revenues was driven by a 5.3% decrease in yield as compared to the second quarter of 2015 primarily due to competitive capacity growth, continued global macroeconomic softness and foreign currency weakness. Our mainline and regional passenger revenue per available seat mile (PRASM) was 12.71 cents in the second quarter of 2016, a 6.3% decrease as compared to 13.57 cents in the 2015 period.

 

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Fuel

Mainline and regional fuel expense totaled $1.6 billion in the second quarter of 2016, which was $530 million, or 24.9%, lower as compared to the second quarter of 2015. This decrease was driven by a 25.2% decrease in the average price per gallon of fuel to $1.42 in the second quarter of 2016 from $1.90 in the 2015 period.

As of June 30, 2016, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors.

Cost per Available Seat Mile (CASM)

We remain committed to actively managing our cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our 2016 second quarter mainline CASM was 11.32 cents, a decrease of 4.6% as compared to the 2015 period. The decrease was primarily driven by lower fuel costs offset in part by higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016.

Our second quarter mainline CASM excluding special items and fuel was 9.12 cents, an increase of 4.0% as compared to the 2015 period. The increase was primarily due to higher salaries, wages and benefits as described above.

The following table details our mainline CASM for the three months ended June 30, 2016 and 2015:

 

     Three Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In cents, except percentage changes)  

Mainline CASM excluding special items and fuel:

      

Total mainline CASM

     11.32        11.87        (4.6

Special items, net

     (0.10     (0.23     (57.9

Aircraft fuel and related taxes

     (2.10     (2.86     (26.8
  

 

 

   

 

 

   

Mainline CASM, excluding special items and fuel (1)

     9.12        8.77        4.0   
  

 

 

   

 

 

   

 

(1) 

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

Customer Service

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation. The table below summarizes the operating statistics we reported to the U.S. Department of Transportation (DOT) for our mainline operations for the second quarter of 2016 and 2015. We are working to continue to improve these metrics by making investments in our operations in the form of the hiring of additional personnel and expenditures for new equipment and technology. Our second quarter 2016 on-time performance was negatively impacted by severe weather in several of our hub locations.

 

     2016      2015      Better (Worse)  
     April      May      June(e)      April      May      June      April     May     June  

On-time performance (a)

     83.5         80.7         72.4         80.2         80.9         77.2         3.3  pts      (0.2 )pts      (4.8 )pts 

Completion factor (b)

     99.1         99.4         99.0         99.3         98.6         98.9         (0.2 )pts      0.8  pts      0.1  pts 

Mishandled baggage (c)

     2.89         3.08         3.83         3.65         3.86         4.33         20.8  %      20.2  %      11.5  % 

Customer complaints (d)

     2.13         1.99         2.60         2.75         2.72         2.90         22.5  %      26.8  %      10.3  % 

 

(a) 

Percentage of reported flight operations arriving less than 15 minutes after the scheduled arrival time.

(b) 

Percentage of scheduled flight operations completed.

(c) 

Rate of mishandled baggage reports per 1,000 passengers.

(d) 

Rate of customer complaints filed with the DOT per 100,000 enplanements.

 

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(e) 

June 2016 operating statistics are preliminary as the DOT has not issued its June 2016 Air Travel Consumer report as of the date of this filing.

Liquidity Position

As of June 30, 2016, we had approximately $9.5 billion in total available liquidity, consisting of unrestricted cash and short-term investments of $7.1 billion and $2.4 billion in undrawn revolver capacity. We also had restricted cash of $640 million.

In the first six months of 2016, we utilized cash generated from operations to invest in our airline. As part of our fleet renewal program, we took delivery of 29 new mainline aircraft while retiring 28 aircraft. We also added 27 new regional aircraft to our fleet. Additionally, we returned $3.4 billion to our stockholders through the payment of $119 million in quarterly dividends and the repurchase of $3.2 billion of common stock, or 89.5 million shares. These cash outflows were offset in part by proceeds from financing transactions, which were principally aircraft mortgage related and included $1.7 billion in issuances of enhanced equipment trust certificates (EETCs). Additionally, we entered into a new term loan which generated net proceeds of approximately $400 million.

As described above, we ended the quarter with $9.5 billion in available liquidity (including available lines of credit), which remains well in excess of the $6.5 billion minimum liquidity we seek to maintain for the foreseeable future. We believe it is important to retain liquidity levels higher than our network peers given our overall leverage and the fact that we have not yet completed our fleet renewal program.

See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Commitments” for further discussion of our contractual commitments.

AAG’s Results of Operations

We realized pre-tax income of $1.5 billion and $1.7 billion in the second quarters of 2016 and 2015, respectively. Excluding the effects of net special charges, we recognized pre-tax income of $1.6 billion and $1.9 billion in the second quarters of 2016 and 2015, respectively.

We realized pre-tax income of $2.6 billion and $2.7 billion in the first six months of 2016 and 2015, respectively. Excluding the effects of net special charges, we recognized pre-tax income of $2.8 billion and $3.1 billion in the first six months of 2016 and 2015, respectively.

Our 2016 second quarter and first six months results on both a GAAP basis and excluding net special charges benefited from the decline in fuel prices as a result of not hedging our fuel consumption; however, this benefit was offset by a decline in revenues driven by reduced yields as well as higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016.

The table below details our pre-tax and net income excluding special items (in millions):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2016     2015     2016     2015  

Pre-tax income

   $ 1,493      $ 1,719      $ 2,610      $ 2,662   

Pre-tax special items:

        

Mainline operating special charges, net (1)

     62        144        161        447   

Regional operating special charges, net

     3        10        8        18   

Nonoperating special charges (credits), net (2)

     36        (11     36        (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pre-tax special items

     101        143        205        446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income excluding special items

     1,594        1,862        2,815        3,108   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 950      $ 1,704      $ 1,650      $ 2,636   

Total special items:

        

Total pre-tax special items

     101        143        205        446   

Income tax special charges, net

     —          7        —          16   

Net tax effect of special items

     (50     —          (89     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total special items

     51        150        116        462   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding special items

   $ 1,001      $ 1,854      $ 1,766      $ 3,098   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The 2016 second quarter mainline operating special items totaled a net charge of $62 million, which principally included $112 million of merger integration expenses, offset in part by a $56 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 six month period mainline operating special items totaled a net charge of $161 million, which principally included $242 million of merger integration expenses, offset in part by a $61 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement

 

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obligations. For the 2016 second quarter and six month periods, merger integration expenses included costs related to information technology, alignment of labor union contracts, fleet restructuring, re-branding of aircraft, airport facilities and uniforms, professional fees, severance, as well as relocation and training.

The 2015 second quarter mainline operating special items totaled a net charge of $144 million, which principally included $224 million of merger integration expenses, offset in part by a $68 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2015 six month period mainline operating special items totaled a net charge of $447 million, which principally included $543 million of merger integration expenses, offset in part by a $73 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2015 second quarter and six month periods, merger integration expenses included costs related to alignment of labor union contracts, fleet restructuring, information technology, professional fees, severance, re-branding of aircraft, airport facilities and uniforms, relocation and training, as well as share-based compensation.

 

(2) 

In connection with a bond refinancing, we recorded a $36 million nonoperating special charge in the 2016 second quarter and six month periods related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

Income Taxes

At December 31, 2015, we had approximately $8.0 billion of gross NOLs carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2023 if unused. We also had approximately $4.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Internal Revenue Code of 1986 (Section 382) where an “ownership change” has occurred. We experienced an ownership change in connection with our emergence from bankruptcy in 2013. 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. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $6.6 billion of unlimited NOL remaining at December 31, 2015) of our federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of our remaining federal NOL Carryforwards are subject to limitation under Section 382; however, our 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. Our ability to utilize any new NOL Carryforwards arising after the 2013 ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2015, we had an Alternative Minimum Tax credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of our financial statements for the fourth quarter of 2015, we determined that it was more likely than not that substantially all of our deferred tax assets, which include our NOLs, would be realized. Accordingly, we reversed $3.0 billion of the valuation allowance as of December 31, 2015.

Beginning in the first six months of 2016, we recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as we utilized the NOLs described above. For purposes of taxation, substantially all of our income before income taxes is attributable to the United States.

 

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Operating Statistics

The table below sets forth selected mainline and regional operating data for the three and six months ended June 30, 2016 and 2015.

 

     Three Months Ended
June 30,
           Six Months Ended
June 30,
        
     2016      2015      Increase
(Decrease)
    2016      2015      Increase
(Decrease)
 

Mainline

                

Revenue passenger miles (millions) (a)

     51,927         51,632         0.6     98,147         96,481         1.7

Available seat miles (millions) (b)

     62,670         61,920         1.2     120,234         117,773         2.1

Passenger load factor (percent) (c)

     82.9         83.4         (0.5 )pts      81.6         81.9         (0.3 )pts 

Yield (cents) (d)

     13.88         14.83         (6.4 )%      14.03         15.18         (7.5 )% 

Passenger revenue per available seat mile (cents) (e)

     11.50         12.36         (7.0 )%      11.46         12.43         (7.9 )% 

Operating cost per available seat mile (cents) (f)

     11.32         11.87         (4.6 )%      11.45         12.31         (7.0 )% 

Passenger enplanements (thousands) (g)

     37,699         37,823         (0.3 )%      72,246         71,774         0.7

Departures (thousands)

     283         285         (0.8 )%      555         555         —  

Aircraft at end of period

     947         963         (1.7 )%      947         963         (1.7 )% 

Block hours (thousands) (h)

     901         903         (0.2 )%      1,746         1,736         0.6

Average stage length (miles) (i)

     1,241         1,236         0.4     1,223         1,216         0.6

Fuel consumption (gallons in millions)

     931         936         (0.5 )%      1,786         1,781         0.2

Average aircraft fuel price including related taxes (dollars per gallon)

     1.41         1.90         (25.5 )%      1.31         1.86         (29.6 )% 

Full-time equivalent employees at end of period

     103,100         100,700         2.4     103,100         100,700         2.4

Regional (j)

                

Revenue passenger miles (millions) (a)

     6,409         6,189         3.5     11,959         11,530         3.7

Available seat miles (millions) (b)

     8,081         7,481         8.0     15,581         14,417         8.1

Passenger load factor (percent) (c)

     79.3         82.7         (3.4 )pts      76.8         80.0         (3.2 )pts 

Yield (cents) (d)

     27.87         28.42         (1.9 )%      27.67         27.85         (0.6 )% 

Passenger revenue per available seat mile (cents) (e)

     22.10         23.51         (6.0 )%      21.24         22.27         (4.6 )% 

Operating cost per available seat mile (cents) (f)

     18.78         20.82         (9.8 )%      18.94         20.94         (9.6 )% 

Passenger enplanements (thousands) (g)

     14,252         14,377         (0.9 )%      26,620         26,619         —  

Aircraft at end of period

     600         578         3.8     600         578         3.8

Fuel consumption (gallons in millions)

     191         182         4.9     369         350         5.4

Average aircraft fuel price including related taxes (dollars per gallon)

     1.46         1.91         (23.7 )%      1.35         1.89         (28.4 )% 

Full-time equivalent employees at end of period (k)

     20,400         19,700         3.6     20,400         19,700         3.6

Total Mainline and Regional

                

Revenue passenger miles (millions) (a)

     58,336         57,821         0.9     110,106         108,011         1.9

Available seat miles (millions) (b)

     70,751         69,401         1.9     135,815         132,190         2.7

Cargo ton miles (millions) (l)

     610         594         2.6     1,153         1,148         0.5

Passenger load factor (percent) (c)

     82.5         83.3         (0.8 )pts      81.1         81.7         (0.6 )pts 

Yield (cents) (d)

     15.42         16.28         (5.3 )%      15.51         16.53         (6.1 )% 

Passenger revenue per available seat mile (cents) (e)

     12.71         13.57         (6.3 )%      12.58         13.51         (6.9 )% 

Total revenue per available seat mile (cents) (m)

     14.65         15.60         (6.1 )%      14.58         15.62         (6.7 )% 

Cargo yield per ton mile (cents) (n)

     28.48         32.62         (12.7 )%      29.09         33.83         (14.0 )% 

Passenger enplanements (thousands) (g)

     51,951         52,200         (0.5 )%      98,866         98,393         0.5

Aircraft at end of period

     1,547         1,541         0.4     1,547         1,541         0.4

Fuel consumption (gallons in millions)

     1,122         1,118         0.4     2,155         2,131         1.1

Average aircraft fuel price including related taxes (dollars per gallon)

     1.42         1.90         (25.2 )%      1.32         1.87         (29.3 )% 

Full-time equivalent employees at end of period

     123,500         120,400         2.6     123,500         120,400         2.6

 

(a)

Revenue passenger mile (RPM) – A basic measure of sales volume. One RPM represents one passenger flown one mile.

(b)

Available seat mile (ASM) – A basic measure of production. One ASM represents one seat flown one mile.

(c)

Passenger load factor – The percentage of available seats that are filled with revenue passengers.

(d)

Yield – A measure of airline revenue derived by dividing passenger revenue by RPMs.

 

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(e)

Passenger revenue per available seat mile (PRASM) – Passenger revenues divided by ASMs.

(f)

Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs.

(g)

Passenger enplanements – The number of passengers on board an aircraft, including local, connecting and through passengers.

(h)

Block hours – The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.

(i)

Average stage length – The average of the distances flown on each segment of every route.

(j)

Regional statistics include our subsidiaries, Envoy Aviation Group Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), and operating statistics from our capacity purchase agreements with Air Wisconsin Airlines Corporation, ExpressJet Airlines, Inc., Mesa Airlines, Inc., Republic Airline Inc., SkyWest Airlines, Inc., Compass Airlines, LLC and Trans States Airlines, Inc.

(k) 

Regional full-time equivalent employees only include our wholly-owned regional airline subsidiaries, Envoy, Piedmont and PSA.

(l) 

Cargo ton miles – A basic measure of cargo transportation. One cargo ton mile represents one ton of cargo transported one mile.

(m)

Total revenue per available seat mile (RASM) – Total revenues divided by total mainline and regional ASMs.

(n) 

Cargo yield per ton mile – Cargo revenues divided by total mainline and regional cargo ton miles.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Operating Revenues

 

     Three Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 7,209       $ 7,655         (5.8

Regional passenger

     1,786         1,759         1.6   

Cargo

     174         194         (10.4

Other

     1,194         1,219         (2.1
  

 

 

    

 

 

    

Total operating revenues

   $ 10,363       $ 10,827         (4.3
  

 

 

    

 

 

    

Total operating revenues in the second quarter of 2016 decreased $464 million, or 4.3%, from the 2015 period driven by a decrease in yield primarily due to competitive capacity growth, continued global macroeconomic softness and foreign currency weakness. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $7.2 billion in the second quarter of 2016 as compared to $7.7 billion in the 2015 period. Mainline RPM’s increased 0.6% as mainline capacity, as measured by ASMs, increased 1.2%, resulting in a 0.5 point decrease in load factor to 82.9%. Mainline passenger yield decreased 6.4% to 13.88 cents in the second quarter of 2016 from 14.83 cents in the 2015 period. Mainline PRASM decreased 7.0% to 11.50 cents in the second quarter of 2016 from 12.36 cents in the 2015 period.

 

   

Regional passenger revenues were $1.8 billion in each of the second quarters of 2016 and 2015. Regional RPM’s increased 3.5% as regional capacity, as measured by ASMs, increased 8.0%, resulting in a 3.4 point decrease in load factor to 79.3%. Regional passenger yield decreased 1.9% to 27.87 cents in the second quarter of 2016 from 28.42 cents in the 2015 period. Regional PRASM decreased 6.0% to 22.10 cents in the second quarter of 2016 from 23.51 cents in the 2015 period.

 

   

Cargo revenue decreased $20 million, or 10.4%, in the second quarter of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

 

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Table of Contents

Operating Expenses

 

     Three Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 1,314       $ 1,774         (25.9

Salaries, wages and benefits

     2,670         2,364         13.0   

Maintenance, materials and repairs

     453         502         (9.7

Other rent and landing fees

     458         451         1.5   

Aircraft rent

     302         316         (4.3

Selling expenses

     334         350         (4.7

Depreciation and amortization

     374         340         10.1   

Special items, net

     62         144         (57.3

Other

     1,127         1,108         1.7   
  

 

 

    

 

 

    

Total mainline operating expenses

     7,094         7,349         (3.5

Regional expenses:

        

Fuel

     279         349         (20.0

Other

     1,239         1,208         2.5   
  

 

 

    

 

 

    

Total regional operating expenses

     1,518         1,557         (2.5
  

 

 

    

 

 

    

Total operating expenses

   $ 8,612       $ 8,906         (3.3
  

 

 

    

 

 

    

Total operating expenses were $8.6 billion in the second quarter of 2016, a decrease of $294 million, or 3.3%, from the 2015 period. The decrease in operating expenses was primarily driven by lower fuel costs offset in part by higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. See detailed explanations below relating to the other changes in operating costs.

Mainline CASM

Our mainline CASM decreased 0.55 cents, or 4.6%, from 11.87 cents in the second quarter of 2015 to 11.32 cents in the second quarter of 2016. Excluding special items and fuel, our mainline CASM increased 0.35 cents, or 4.0%, from 8.77 cents in the second quarter of 2015 to 9.12 cents in the second quarter of 2016, while mainline capacity increased 1.2%.

The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the three months ended June 30, 2016 and 2015:

 

     Three Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In cents, except percentage changes)  

Mainline CASM:

      

Aircraft fuel and related taxes

     2.10        2.86        (26.8

Salaries, wages and benefits

     4.26        3.82        11.6   

Maintenance, materials and repairs

     0.72        0.81        (10.8

Other rent and landing fees

     0.73        0.73        0.3   

Aircraft rent

     0.48        0.51        (5.5

Selling expenses

     0.53        0.57        (5.8

Depreciation and amortization

     0.60        0.55        8.8   

Special items, net

     0.10        0.23        (57.9

Other

     1.80        1.79        0.5   
  

 

 

   

 

 

   

Total mainline CASM

     11.32        11.87        (4.6

Special items, net

     (0.10     (0.23     (57.9

Aircraft fuel and related taxes

     (2.10     (2.86     (26.8
  

 

 

   

 

 

   

Mainline CASM, excluding special items and fuel (1)

     9.12        8.77        4.0   
  

 

 

   

 

 

   

 

(1) 

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Significant changes in the components of mainline operating expense per ASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 26.8% primarily due to a 25.5% decrease in the average price per gallon of fuel to $1.41 in the second quarter of 2016 from $1.90 in the 2015 period.

 

   

Salaries, wages and benefits per ASM increased 11.6% primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the second quarter of 2016, we accrued $98 million for this profit sharing program.

 

   

Maintenance, materials and repairs per ASM decreased 10.8% and was primarily driven by fewer engine overhauls due to the timing of maintenance cycles in the second quarter of 2016 as compared to the 2015 period.

 

   

Depreciation and amortization per ASM increased 8.8% primarily due to new purchased aircraft deliveries since the end of the second quarter of 2015 in connection with our fleet renewal program.

Regional Operating Expenses

Total regional expenses decreased $39 million, or 2.5%, in the second quarter of 2016 to $1.5 billion from $1.6 billion in the 2015 period. The period-over-period decrease was primarily due to a $70 million decrease in fuel costs. The average price per gallon of fuel decreased 23.7% to $1.46 in the second quarter of 2016 from $1.91 in the 2015 period, on a 4.9% increase in consumption. See Note 10 to AAG’s condensed consolidated financial statements in Part I, Item 1A for more detail on regional operating expenses.

Nonoperating Income (Expense)

 

     Three Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 16      $ 10        58.8   

Interest expense, net of capitalized interest

     (249     (223     11.5   

Other, net

     (25     11        nm   
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (258   $ (202     28.0   
  

 

 

   

 

 

   

Our short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $26 million in the second quarter of 2016 as compared to the 2015 period primarily due to issuances of $5.3 billion in aircraft related financings since the end of the second quarter of 2015.

Other nonoperating expense, net in the second quarter of 2016 included $36 million in special charges related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees in connection with a bond refinancing, offset in part by $17 million of foreign currency gains. The foreign currency gains were driven primarily by the weakening of the U.S. dollar relative to other currencies, principally the Brazilian real, which appreciated 13% during the second quarter of 2016.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Operating Revenues

 

     Six Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 13,773       $ 14,644         (5.9

Regional passenger

     3,309         3,211         3.1   

Cargo

     336         388         (13.6

Other

     2,380         2,411         (1.3
  

 

 

    

 

 

    

Total operating revenues

   $ 19,798       $ 20,654         (4.1
  

 

 

    

 

 

    

 

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Total operating revenues in the first six months of 2016 decreased $856 million, or 4.1%, from the 2015 period driven by a decrease in yield primarily due to competitive capacity growth, continued global macroeconomic softness and foreign currency weakness. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $13.8 billion in the first six months of 2016 as compared to $14.6 billion in the 2015 period. Mainline RPM’s increased 1.7% as mainline capacity, as measured by ASMs, increased 2.1%, resulting in a 0.3 point decrease in load factor to 81.6%. Mainline passenger yield decreased 7.5% to 14.03 cents in the first six months of 2016 from 15.18 cents in the 2015 period. Mainline PRASM decreased 7.9% to 11.46 cents in the first six months of 2016 from 12.43 cents in the 2015 period.

 

   

Regional passenger revenues were $3.3 billion in the first six months of 2016 as compared to $3.2 billion in the 2015 period. Regional RPM’s increased 3.7% as regional capacity, as measured by ASMs, increased 8.1%, resulting in a 3.2 point decrease in load factor to 76.8%. Regional passenger yield decreased 0.6% to 27.67 cents in the first six months of 2016 from 27.85 cents in the 2015 period. Regional PRASM decreased 4.6% to 21.24 cents in the first six months of 2016 from 22.27 cents in the 2015 period.

 

   

Cargo revenue decreased $52 million, or 13.6%, in the first six months of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

Operating Expenses

 

     Six Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 2,343       $ 3,318         (29.4

Salaries, wages and benefits

     5,322         4,737         12.4   

Maintenance, materials and repairs

     871         995         (12.5

Other rent and landing fees

     879         859         2.4   

Aircraft rent

     609         633         (3.8

Selling expenses

     642         686         (6.4

Depreciation and amortization

     729         676         7.8   

Special items, net

     161         447         (64.1

Other

     2,205         2,147         2.7   
  

 

 

    

 

 

    

Total mainline operating expenses

     13,761         14,498         (5.1

Regional expenses:

        

Fuel

     498         660         (24.5

Other

     2,452         2,359         3.9   
  

 

 

    

 

 

    

Total regional operating expenses

     2,950         3,019         (2.3
  

 

 

    

 

 

    

Total operating expenses

   $ 16,711       $ 17,517         (4.6
  

 

 

    

 

 

    

Total operating expenses were $16.7 billion in the first six months of 2016, a decrease of $806 million, or 4.6%, from the 2015 period. The decrease in operating expenses was primarily driven by lower aircraft fuel costs, offset in part by higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. See detailed explanations below relating to changes in operating costs per ASM.

Mainline CASM

Our mainline CASM decreased 0.86 cents, or 7.0%, from 12.31 cents in the first six months of 2015 to 11.45 cents in the first six months of 2016. Excluding special items and aircraft fuel and related taxes, our mainline CASM increased 0.25 cents, or 2.7%, from 9.11 cents in the first six months of 2015 to 9.36 cents in the first six months of 2016, while mainline capacity increased 2.1%.

 

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The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the six months ended June 30, 2016 and 2015:

 

     Six Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In cents, except percentage changes)  

Mainline CASM:

      

Aircraft fuel and related taxes

     1.95        2.82        (30.8

Salaries, wages and benefits

     4.43        4.02        10.1   

Maintenance, materials and repairs

     0.72        0.85        (14.3

Other rent and landing fees

     0.73        0.73        0.3   

Aircraft rent

     0.51        0.54        (5.8

Selling expenses

     0.53        0.58        (8.3

Depreciation and amortization

     0.61        0.57        5.6   

Special items, net

     0.13        0.38        (64.8

Other

     1.83        1.82        0.6   
  

 

 

   

 

 

   

Total mainline CASM

     11.45        12.31        (7.0

Special items, net

     (0.13     (0.38     (64.8

Aircraft fuel and related taxes

     (1.95     (2.82     (30.8
  

 

 

   

 

 

   

Mainline CASM, excluding special items and fuel (1)

     9.36        9.11        2.7   
  

 

 

   

 

 

   

 

(1) 

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

Significant changes in the components of mainline operating expense per ASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 30.8% primarily due to a 29.6% decrease in the average price per gallon of fuel to $1.31 in the first six months of 2016 from an average price per gallon of $1.86 in the 2015 period.

 

   

Salaries, wages and benefits per ASM increased 10.1% primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the first six months of 2016, we accrued $171 million for this profit sharing program.

 

   

Maintenance, materials and repairs per ASM decreased 14.3% and was primarily driven by fewer engine overhauls due to the timing of maintenance cycles in the first six months of 2016 as compared to the 2015 period.

 

   

Selling expenses per ASM decreased 8.3% primarily due to lower revenues in the first six months of 2016, resulting in lower commissions and credit card fees.

 

   

Depreciation and amortization per ASM increased 5.6% primarily due to new purchased aircraft deliveries since the end of the second quarter of 2015 in connection with our fleet renewal program.

Regional Operating Expenses

Total regional expenses decreased $69 million, or 2.3%, in the first six months of 2016 from the 2015 period. The period-over-period decrease was primarily due to a $162 million decrease in fuel costs, offset in part by a $93 million increase in other regional operating expenses. The average price per gallon of fuel decreased 28.4% to $1.35 in the first six months of 2016 from $1.89 in the 2015 period, on a 5.4% increase in consumption. The increase in other regional operating expenses was principally due to increased regional capacity. See Note 10 to AAG’s condensed consolidated financial statements in Part I, Item 1A for more detail on regional operating expenses.

 

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Table of Contents

Nonoperating Income (Expense)

 

     Six Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 28      $ 19        47.1   

Interest expense, net of capitalized interest

     (488     (432     12.7   

Other, net

     (17     (62     (71.7
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (477   $ (475     0.2   
  

 

 

   

 

 

   

Our short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $56 million in the first six months of 2016 as compared to the 2015 period primarily due to issuances of $5.3 billion in aircraft related financings since the end of the second quarter of 2015.

Other nonoperating expense, net in the first six months of 2016 included $36 million in special charges related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees in connection with a bond refinancing, offset in part by $27 million of foreign currency gains. The foreign currency gains were driven primarily by the weakening of the U.S. dollar relative to other currencies, principally the Brazilian real, which appreciated 20% in the first six months of 2016.

Other nonoperating expense, net in the first six months of 2015 included $82 million of foreign currency losses. The foreign currency losses during the first six months of 2015 were driven primarily by the strengthening of the U.S. dollar relative to other currencies, principally in Latin American and European markets, including a 14% decrease in the value of the Brazilian real, an 8% decrease in the value of the Euro and a 6% decrease in the value of the Canadian dollar.

American’s Results of Operations

On December 30, 2015, in order to simplify AAG’s internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, US Airways merged with and into American, with American as the surviving corporation. As a result of the merger of US Airways and American, US Airways transferred all of its assets, liabilities and off-balance sheet commitments to American. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost. As a result, American’s condensed consolidated financial statements as well as this management’s discussion and analysis of financial condition and results of operations in this Quarterly Report on Form 10-Q (unless otherwise indicated) are presented as though the transaction had occurred on December 9, 2013, when a subsidiary of AMR merged with and into US Airways Group, which represents the earliest date that American and US Airways were under common control. Thus, all periods presented below in American’s Results of Operations are comprised of the financial data of American and US Airways.

American realized pre-tax income of $1.5 billion and $1.7 billion in the second quarters of 2016 and 2015, respectively. Excluding the effects of net special charges, American recognized pre-tax income of $1.6 billion and $1.9 billion in the second quarters of 2016 and 2015, respectively.

American realized pre-tax income of $2.7 billion in each of the first six months of 2016 and 2015, respectively. Excluding the effects of net special charges, American recognized pre-tax income of $2.9 billion and $3.1 billion in the first six months of 2016 and 2015, respectively.

American’s 2016 second quarter and first six months results on both a GAAP basis and excluding net special charges benefited from the decline in fuel prices as a result of not hedging its fuel consumption; however, this benefit was offset by a decline in revenues driven by reduced yields as well as higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016.

 

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The table below details American’s pre-tax and net income excluding special items (in millions):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016     2015      2016     2015  

Pre-tax income

   $ 1,528      $ 1,723       $ 2,663      $ 2,671   

Pre-tax special items:

         

Mainline operating special charges, net (1)

     62        144         161        447   

Regional operating special charges, net

     3        5         8        9   

Nonoperating special charges, net (2)

     36        11         36        3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total pre-tax special items

     101        160         205        459   
  

 

 

   

 

 

    

 

 

   

 

 

 

Pre-tax income excluding special items

     1,629        1,883         2,868        3,130   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 972      $ 1,709       $ 1,683      $ 2,647   

Total special items:

         

Total pre-tax special items

     101        160         205        459   

Income tax special charges, net

     —          7         —          16   

Net tax effect of special items

     (50     —           (89     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total special items

     51        167         116        475   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income excluding special items

   $ 1,023      $ 1,876       $ 1,799      $ 3,122   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

The 2016 second quarter mainline operating special items totaled a net charge of $62 million, which principally included $112 million of merger integration expenses, offset in part by a $56 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 six month period mainline operating special items totaled a net charge of $161 million, which principally included $242 million of merger integration expenses, offset in part by a $61 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 second quarter and six month periods, merger integration expenses included costs related to information technology, alignment of labor union contracts, fleet restructuring, re-branding of aircraft, airport facilities and uniforms, professional fees, severance, as well as relocation and training.

The 2015 second quarter mainline operating special items totaled a net charge of $144 million, which principally included $224 million of merger integration expenses, offset in part by a $68 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2015 six month period mainline operating special items totaled a net charge of $447 million, which principally included $543 million of merger integration expenses, offset in part by a $73 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2015 second quarter and six month periods, merger integration expenses included costs related to alignment of labor union contracts, fleet restructuring, information technology, professional fees, severance, re-branding of aircraft, airport facilities and uniforms, relocation and training, as well as share-based compensation.

 

(2) 

In connection with a bond refinancing, American recorded a $36 million nonoperating special charge in the 2016 second quarter and six month periods related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

Income Taxes

At December 31, 2015, American had approximately $8.8 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $8.0 billion, substantially all of which is expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2023 if unused. American also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 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 occurred. American experienced an ownership change in connection with its emergence from bankruptcy in 2013. 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 permitted approximately $9.5 billion (with $7.3 billion of unlimited NOL remaining at December 31, 2015) of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of American’s remaining federal NOL Carryforwards are subject to limitation under Section 382; however, American’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. American’s ability to utilize any new NOL Carryforwards arising after the 2013 ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

 

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Table of Contents

At December 31, 2015, American had an Alternative Minimum Tax credit carryforward of approximately $458 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of American’s financial statements for the fourth quarter of 2015, management determined that it was more likely than not that substantially all of its deferred tax assets, which include its NOLs, would be realized. Accordingly, American reversed $3.5 billion of the valuation allowance as of December 31, 2015.

Beginning in the first six months of 2016, American recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as American utilized the NOLs described above. For purposes of taxation, substantially all of American’s income before income taxes is attributable to the United States.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Operating Revenues

 

     Three Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 7,209       $ 7,655         (5.8

Regional passenger

     1,786         1,759         1.6   

Cargo

     174         194         (10.4

Other

     1,281         1,241         3.2   
  

 

 

    

 

 

    

Total operating revenues

   $ 10,450       $ 10,849         (3.7
  

 

 

    

 

 

    

Total operating revenues in the second quarter of 2016 decreased $399 million, or 3.7%, from the 2015 period driven by a decrease in yield primarily due to competitive capacity growth, continued global macroeconomic softness and foreign currency weakness. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues decreased $446 million, or 5.8%, in the second quarter of 2016 from the 2015 period due to a decrease in yield, offset in part by higher ASMs.

 

   

Regional passenger revenues increased $27 million, or 1.6%, in the second quarter of 2016 from the 2015 period due to higher ASMs, offset in part by a decrease in yield.

 

   

Cargo revenue decreased $20 million, or 10.4%, in the second quarter of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

Operating Expenses

 

     Three Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 1,314       $ 1,774         (25.9

Salaries, wages and benefits

     2,668         2,361         13.0   

Maintenance, materials and repairs

     453         502         (9.7

Other rent and landing fees

     458         451         1.5   

Aircraft rent

     302         316         (4.3

Selling expenses

     334         350         (4.7

Depreciation and amortization

     374         340         10.1   

Special items, net

     62         144         (57.3

Other

     1,128         1,110         1.6   
  

 

 

    

 

 

    

Total mainline operating expenses

     7,093         7,348         (3.5

Regional expenses:

        

Fuel

     279         349         (20.0

Other

     1,321         1,231         7.3   
  

 

 

    

 

 

    

Total regional operating expenses

     1,600         1,580         1.3   
  

 

 

    

 

 

    

Total operating expenses

   $ 8,693       $ 8,928         (2.6
  

 

 

    

 

 

    

 

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Total operating expenses in the second quarter of 2016 decreased $235 million, or 2.6%, from the 2015 period. Significant changes in the components of mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes decreased $460 million, or 25.9%, in the second quarter of 2016 from the 2015 period primarily due to a decrease in the average price per gallon of fuel.

 

   

Salaries, wages and benefits increased $307 million, or 13.0%, in the second quarter of 2016 from the 2015 period primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the second quarter of 2016, American accrued $98 million for this profit sharing program.

 

   

Maintenance, materials and repairs decreased $49 million, or 9.7%, and was primarily driven by fewer engine overhauls due to the timing of maintenance cycles in the second quarter of 2016 as compared to the 2015 period.

 

   

Depreciation and amortization increased $34 million, or 10.1%, primarily due to new purchased aircraft deliveries since the end of the second quarter of 2015 in connection with our fleet renewal program.

Regional Operating Expenses

Total regional expenses increased $20 million, or 1.3%, in the second quarter of 2016 from the 2015 period. The period-over-period increase was primarily due to a $90 million increase in other regional operating expenses principally due to increased flying under capacity purchase agreements, offset in part by a $70 million decrease in fuel costs due to a decrease in the average price per gallon of fuel. See Note 8 to American’s condensed consolidated financial statements in Part I, Item 1B for more detail on regional operating expenses.

Nonoperating Income (Expense)

 

     Three Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 25      $ 13        92.3   

Interest expense, net of capitalized interest

     (228     (200     14.0   

Other, net

     (26     (11     nm   
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (229   $ (198     15.7   
  

 

 

   

 

 

   

American’s short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $28 million in the second quarter of 2016 as compared to the 2015 period primarily due to issuances of $5.3 billion in aircraft related financings since the end of the second quarter of 2015.

Other nonoperating expense, net in the second quarter of 2016 included $36 million in special charges related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees in connection with a bond refinancing, offset in part by $17 million of foreign currency gains. The foreign currency gains were driven primarily by the weakening of the U.S. dollar relative to other currencies, principally the Brazilian real, which appreciated 13% during the second quarter of 2016.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Operating Revenues

 

     Six Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 13,773       $ 14,644         (5.9

Regional passenger

     3,309         3,211         3.1   

Cargo

     336         388         (13.6

Other

     2,529         2,448         3.3   
  

 

 

    

 

 

    

Total operating revenues

   $ 19,947       $ 20,691         (3.6
  

 

 

    

 

 

    

Total operating revenues in the first six months of 2016 decreased $744 million, or 3.6%, from the 2015 period driven by a decrease in yield primarily due to competitive capacity growth, continued global macroeconomic softness and foreign currency weakness. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues decreased $871 million, or 5.9%, in the first six months of 2016 from the 2015 period due to a decrease in yield, offset in part by higher ASMs.

 

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Regional passenger revenues increased $98 million, or 3.1%, in the first six months of 2016 from the 2015 period due to higher ASMs, offset in part by a decrease in yield.

 

   

Cargo revenue decreased $52 million, or 13.6%, in the first six months of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

Operating Expenses

 

     Six Months Ended
June 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 2,343       $ 3,318         (29.4

Salaries, wages and benefits

     5,318         4,732         12.4   

Maintenance, materials and repairs

     871         995         (12.5

Other rent and landing fees

     879         859         2.4   

Aircraft rent

     609         633         (3.8

Selling expenses

     642         686         (6.4

Depreciation and amortization

     729         676         7.8   

Special items, net

     161         447         (64.1

Other

     2,208         2,148         2.8   
  

 

 

    

 

 

    

Total mainline operating expenses

     13,760         14,494         (5.1

Regional expenses:

        

Fuel

     498         660         (24.5

Other

     2,609         2,414         8.1   
  

 

 

    

 

 

    

Total regional operating expenses

     3,107         3,074         1.1   
  

 

 

    

 

 

    

Total operating expenses

   $ 16,867       $ 17,568         (4.0
  

 

 

    

 

 

    

Total operating expenses in the first six months of 2016 decreased $701 million, or 4.0%, from the 2015 period. Significant changes in the components of mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes decreased $975 million, or 29.4%, in the first six months of 2016 from the 2015 period primarily due to a decrease in the average price per gallon of fuel.

 

   

Salaries, wages and benefits increased $586 million, or 12.4%, in the first six months of 2016 from the 2015 period primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the first six months of 2016, American accrued $171 million for this profit sharing program.

 

   

Maintenance, materials and repairs decreased $124 million, or 12.5%, and was primarily driven by fewer engine overhauls due to the timing of maintenance cycles in the first six months of 2016 as compared to the 2015 period.

 

   

Selling expenses decreased $44 million, or 6.4%, in the first six months of 2016 from the 2015 period primarily due to lower revenues in the first six months of 2016, resulting in lower commissions and credit card fees.

 

   

Depreciation and amortization increased $53 million, or 7.8%, primarily due to new purchased aircraft deliveries since the end of the second quarter of 2015 in connection with our fleet renewal program.

Regional Operating Expenses

Total regional expenses increased $33 million, or 1.1%, in the first six months of 2016 from the 2015 period. The period-over-period increase was primarily due to a $195 million increase in other regional operating expenses principally due to increased flying under capacity purchase agreements, offset in part by a $162 million decrease in fuel costs due to a decrease in the average price per gallon of fuel. See Note 8 to American’s condensed consolidated financial statements in Part I, Item 1B for more detail on regional operating expenses.

 

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Nonoperating Income (Expense)

 

     Six Months Ended
June 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 46      $ 23        100.0   

Interest expense, net of capitalized interest

     (445     (390     14.1   

Other, net

     (18     (85     (78.8
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (417   $ (452     (7.7
  

 

 

   

 

 

   

American’s short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $55 million in the first six months of 2016 as compared to the 2015 period primarily due to issuances of $5.3 billion in aircraft related financings since the end of the second quarter of 2015.

Other nonoperating expense, net in the first six months of 2016 included $36 million in special charges related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees in connection with a bond refinancing, offset in part by $27 million of foreign currency gains. The foreign currency gains were driven primarily by the weakening of the U.S. dollar relative to other currencies, principally the Brazilian real, which appreciated 20% in the first six months of 2016.

Other nonoperating expense, net in the first six months of 2015 included $82 million of foreign currency losses. The foreign currency losses during the first six months of 2015 were driven primarily by the strengthening of the U.S. dollar relative to other currencies, principally in Latin American and European markets, including a 14% decrease in the value of the Brazilian real, an 8% decrease in the value of the Euro and a 6% decrease in the value of the Canadian dollar.

Liquidity and Capital Resources

Cash, Short-Term Investments and Restricted Cash

As of June 30, 2016, AAG had approximately $9.5 billion in total available liquidity and $640 million in restricted cash. Additional detail of our available liquidity is provided in the table below (in millions):

 

     AAG      American  
     June 30, 2016      December 31, 2015      June 30, 2016      December 31, 2015  

Cash

   $ 446       $ 390       $ 425       $ 364   

Short-term investments.

     6,672         5,864         6,669         5,862   

Undrawn revolver capacity

     2,425         2,425         2,425         2,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available liquidity

   $ 9,543       $ 8,679       $ 9,519       $ 8,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our cash and short-term investments 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 our 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.

Share Repurchase Programs

Since July 2014, our Board of Directors has approved several share repurchase programs aggregating $9.0 billion of authority of which, as of June 30, 2016, $1.2 billion remained unused under repurchase programs that expire on December 31, 2017. Share repurchases under our share repurchase programs 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. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.

During the three months ended June 30, 2016, we repurchased 50.2 million shares of AAG common stock for $1.7 billion at a weighted average cost per share of $33.55. During the six months ended June 30, 2016, we repurchased 89.5 million shares of AAG common stock for $3.2 billion at a weighted average cost per share of $36.28. Since the inception of the share repurchase programs in July 2014, we have repurchased 198.1 million shares of AAG common stock for $7.8 billion at a weighted average cost per share of $39.54.

 

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Cash Dividends Paid

Our Board of Directors declared the following cash dividends during the first six months of 2016:

 

Period

   Per share      For stockholders
of record as of
     Payable on      Cash paid
(millions)
 

First Quarter

   $ 0.10         February 10, 2016         February 24, 2016       $ 61   

Second Quarter

   $ 0.10         May 4, 2016         May 18, 2016         58   
           

 

 

 

Total

            $ 119   
           

 

 

 

In July 2016, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on August 5, 2016 and payable on August 19, 2016.

Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

Sources and Uses of Cash

AAG and American

Operating Activities

AAG’s net cash provided by operating activities was $4.8 billion for each of the first six months of 2016 and 2015, respectively. AAG’s operating cash flows were relatively flat as compared to the 2015 period, driven by lower fuel costs that were substantially offset by lower revenues and higher salaries, wages and benefits.

American’s net cash provided by operating activities was $1.4 billion and $4.3 billion for the first six months of 2016 and 2015, respectively, a period-over-period decrease of $2.8 billion. The decline in operating cash flows was primarily due to American’s increased cash funding of AAG’s share repurchases and dividend payments in the 2016 period. In addition, American received the proceeds of the $500 million senior notes issued by AAG during the first quarter of 2015, which also contributed to the period-over-period decline in operating cash flows.

Investing Activities

AAG’s net cash used in investing activities was $3.8 billion and $4.7 billion for the first six months of 2016 and 2015, respectively. American’s net cash used in investing activities was $3.7 billion and $4.7 billion for the first six months of 2016 and 2015, respectively.

AAG and American’s principal investing activities in the 2016 period included expenditures of $3.1 billion and $3.0 billion, respectively, for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 15 Bombardier CRJ900 aircraft, 13 Airbus A321 aircraft, 12 Embraer 175 aircraft, 10 Boeing 737-800 aircraft, four Boeing 787 aircraft and two Boeing 777 aircraft, as well as $795 million in net purchases of short-term investments.

AAG and American’s principal investing activities in the 2015 period each included expenditures of $3.1 billion for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 16 Airbus A321 aircraft, 14 Bombardier CRJ900 aircraft, 10 Boeing 737-800 aircraft, seven Airbus A319 aircraft, six Boeing 787 aircraft, six Embraer 175 aircraft and one Boeing 777 aircraft, as well as $1.7 billion in net purchases of short-term investments.

Financing Activities

AAG’s net cash used in financing activities was $1.0 billion and $188 million for the first six months of 2016 and 2015, respectively. American’s net cash provided by financing activities was $2.3 billion and $390 million for the first six months of 2016 and 2015, respectively.

AAG and American’s principal financing activities in the 2016 period each included proceeds of $4.5 billion from the issuance of debt, primarily including the $1.7 billion issuance of EETCs by American, $1.0 billion provided under the 2016 Term Loan Facility, the $844 million issuance of special facility revenue refunding bonds related to JFK and an additional $1.0 billion borrowed in connection with the financing of certain aircraft. These cash inflows were offset in part by debt repayments of $2.2 billion by AAG and American, primarily including the repayment of approximately $588 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B-2 and the refunding of approximately $1.0 billion of special facility revenue bonds related to JFK. In addition, AAG had cash outflows of $3.2 billion in share repurchases and $119 million in dividend payments.

 

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AAG and American’s principal financing activities in the 2015 period included proceeds from the issuance of debt of $2.0 billion and $1.5 billion, respectively, primarily including the $1.0 billion issuance of EETCs by American and the $500 million issuance of 4.625% senior notes by AAG. These cash inflows were offset in part by debt repayments of $1.1 billion by AAG and American, including the $400 million repayment of American’s AAdvantage loan with Citibank. In addition, AAG had cash outflows of $931 million in share repurchases and $140 million in dividend payments.

Commitments

Significant Indebtedness

As of June 30, 2016, AAG and American had $23.1 billion and $21.3 billion, respectively, in long-term debt and capital leases (including current maturities of $1.7 billion each). There have been no material changes in our significant indebtedness as discussed in our 2015 Form 10-K, except for our new 2016 Credit Facilities, the repayment of the 2013 Citicorp Credit Facility Tranche B-2, the refinancing of certain special facility revenue bonds related to JFK, and new aircraft related indebtedness. See Note 5 to AAG’s condensed consolidated financial statements in Part I, Item 1A and Note 3 to American’s condensed consolidated financial statements in Part I, Item 1B for all indebtedness as of June 30, 2016, as well as 2016 financing activities.

Collateral Related Covenants

Certain of our debt financing agreements contain loan to value ratio covenants and require us to annually appraise the related collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, we are required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part. We were in compliance with the collateral coverage tests for the 2013 Credit Facilities, 2013 Citicorp Credit Facility, the 2014 Credit Facilities and the 2016 Credit Facilities as of the most recent measurement dates.

Credit Ratings

The following table details our credit ratings as of June 30, 2016:

 

     S&P
Local Issuer
Credit Rating
   Fitch
Issuer Default
Credit Rating
   Moody’s
Corporate
Family Rating

AAG

   BB-    BB-    Ba3

American

   BB-    BB-    *

 

*

The credit agency does not rate this category for the respective entity.

A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness. See Part II, Item 1A. Risk Factors – “Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, results of operations and financial condition” for additional discussion.

 

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Aircraft and Engine Purchase Commitments

As of June 30, 2016, we have definitive purchase agreements with Airbus, Boeing and other manufacturers for the acquisition of the following mainline and regional aircraft:

 

     Remainder
of 2016
     2017      2018      2019      2020      2021 and
Thereafter
     Total  
Airbus                     

A320 Family

     12         20         —           —           —           —           32   

A320neo Family

     —           —           —           25         25         50         100   

A350 XWB (1)

     —           —           2         5         5         10         22   
Boeing                     

737-800

     10         20         —           —           —           —           30   

737 MAX Family

     —           4         16         20         20         40         100   

787 Family

     4         13         8         —           —           —           25   
Bombardier                     

CRJ900 (2)

     3         —           —           —           —           —           3   
Embraer                     

ERJ175 (2)

     12         12         —           —           —           —           24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     41         69         26         50         50         100         336   

 

(1) 

American and Airbus S.A.S. (Airbus) are parties to an Amended and Restated Airbus A350 XWB Purchase Agreement, dated as of October 2, 2007 (the Purchase Agreement) pursuant to which American agreed to acquire 22 A350 XWB aircraft (the A350s) from Airbus. On July 18, 2016, American and Airbus entered into an amendment to the Purchase Agreement (the Amendment), the principal purpose of which was to revise the delivery schedule of the A350s, and such revised delivery schedule is reflected in the table above. Prior to the effectiveness of the Amendment, the delivery schedule for the A350s was four in 2017, 10 in 2018, six in 2019 and two in 2020. The future payments schedule below reflects the Amendment.

(2) 

These aircraft may be operated by wholly-owned subsidiaries or leased to third-party regional carriers which would operate the aircraft under capacity purchase arrangements.

We also have agreements for 49 spare engines to be delivered in 2016 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of June 30, 2016 are expected to be as follows (in millions):

 

     Remainder
of 2016
     2017      2018      2019      2020      2021 and
Thereafter
     Total  

Payments for the above aircraft commitments and certain engines (1)

   $ 1,931       $ 4,062       $ 2,199       $ 3,127       $ 3,146       $ 5,544       $ 20,009   

 

(1) 

These amounts are net of purchase deposits currently held by the manufacturers and include all commitments for regional aircraft. American has granted a security interest in its purchase deposits with Boeing. Our purchase deposits held by all manufacturers totaled $1.1 billion as of June 30, 2016.

As of June 30, 2016, we did not have financing commitments for the following aircraft currently on order and scheduled to be delivered through 2017: eight Airbus A320 family aircraft in 2016 and 20 Airbus A320 family aircraft in 2017, four Boeing 787 family aircraft in 2016 and 13 Boeing 787 family aircraft in 2017, seven Boeing 737-800 aircraft in 2016 and five Boeing 737-800 aircraft in 2017 and four Boeing 737 MAX family aircraft in 2017. In addition, we do not have financing commitments in place for substantially all aircraft currently on order and scheduled to be delivered in 2018 and beyond. See Part II, Item 1A. Risk Factors – “We will need to obtain sufficient financing or other capital to operate successfully.”

Labor Agreements

In March 2016, we reached a tentative agreement with the Transport Workers Union (TWU) for a new five-year joint collective bargaining agreement applicable to dispatchers and operational specialists, which was ratified by TWU membership in April 2016 and provides immediate and significant pay increases.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation

 

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under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.

There have been no material changes in our off-balance sheet arrangements as discussed in our 2015 Form 10-K.

AAG Contractual Obligations

The following table provides details of our future cash contractual obligations as of June 30, 2016:

 

     Payments Due by Period  
     Remainder
of 2016
     2017      2018      2019      2020      2021 and
Thereafter
     Total  

American

                    

Debt and capital lease obligations (1), (3)

   $ 688       $ 1,792       $ 1,830 &nbs