Form 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2017

 

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.

    Yes       No  

American Airlines, Inc.

    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.

    Yes       No  

American Airlines, Inc.

    Yes       No  

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

 

American Airlines Group Inc.

    Large Accelerated Filer     Accelerated Filer     Non-accelerated Filer     Smaller Reporting Company     Emerging Growth
Company

American Airlines, Inc.

    Large Accelerated Filer     Accelerated Filer     Non-accelerated Filer     Smaller Reporting Company     Emerging Growth
Company

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

American Airlines Group Inc.

                          

American Airlines, Inc.

                          

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       No  

American Airlines, Inc.

    Yes     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.

    Yes       No  

American Airlines, Inc.

    Yes       No  

As of July 21, 2017, there were 487,009,215 shares of American Airlines Group Inc. common stock outstanding.

As of July 21, 2017, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.

 

 

 


American Airlines Group Inc.

American Airlines, Inc.

Form 10-Q

Quarterly Period Ended June 30, 2017

Table of Contents

 

          Page  
PART I: FINANCIAL INFORMATION  
Item 1A.    Condensed Consolidated Financial Statements of American Airlines Group Inc.      5  
   Condensed Consolidated Statements of Operations      5  
   Condensed Consolidated Statements of Comprehensive Income      6  
   Condensed Consolidated Balance Sheets      7  
   Condensed Consolidated Statements of Cash Flows      8  
   Notes to the Condensed Consolidated Financial Statements      9  
Item 1B.    Condensed Consolidated Financial Statements of American Airlines, Inc.      18  
   Condensed Consolidated Statements of Operations      18  
   Condensed Consolidated Statements of Comprehensive Income      19  
   Condensed Consolidated Balance Sheets      20  
   Condensed Consolidated Statements of Cash Flows      21  
   Notes to the Condensed Consolidated Financial Statements      22  
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      30  
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      53  
Item 4.    Controls and Procedures      54  
PART II: OTHER INFORMATION  
Item 1.    Legal Proceedings      55  
Item 1A.    Risk Factors      56  
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      72  
Item 6.    Exhibits      72  

SIGNATURES

     73  

 

2


This combined Quarterly Report on Form 10-Q is filed by American Airlines Group Inc. (formerly named AMR Corporation) (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and its acquisition of US Airways Group, Inc. (US Airways Group) on December 9, 2013 (the Merger). References to “US Airways Group” and “US Airways,” a subsidiary of US Airways Group, represent the entities during the period of time prior to AAG’s internal corporate restructuring on December 30, 2015. References in this Quarterly Report on Form 10-Q to “mainline” refer to the operations of American only 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 Securities Act of 1933, as amended (the Securities Act), the Securities Exchange Act of 1934, as amended (the Exchange Act), and 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 our plans, objectives, expectations, intentions, estimates and strategies for the future, and other statements that are not historical facts. 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 I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A. Risk Factors, and other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission (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.

 

3


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.

 

4


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,  
     2017     2016     2017     2016  

Operating revenues:

    

Mainline passenger

   $ 7,747     $ 7,209     $ 14,353     $ 13,773  

Regional passenger

     1,835       1,786       3,384       3,309  

Cargo

     196       174       368       336  

Other

     1,327       1,194       2,624       2,380  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     11,105       10,363       20,729       19,798  

Operating expenses:

        

Aircraft fuel and related taxes

     1,510       1,314       2,912       2,343  

Salaries, wages and benefits

     3,003       2,670       5,829       5,322  

Regional expenses

     1,620       1,518       3,194       2,950  

Maintenance, materials and repairs

     495       453       987       871  

Other rent and landing fees

     452       458       892       879  

Aircraft rent

     294       302       589       609  

Selling expenses

     376       334       694       642  

Depreciation and amortization

     418       374       822       729  

Special items, net

     202       62       320       161  

Other

     1,200       1,127       2,354       2,205  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,570       8,612       18,593       16,711  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,535       1,751       2,136       3,087  

Nonoperating income (expense):

        

Interest income

     24       16       45       28  

Interest expense, net

     (263     (249     (520     (488

Other, net

     (5     (25     (5     (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (244     (258     (480     (477
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,291       1,493       1,656       2,610  

Income tax provision

     488       543       619       960  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 803     $ 950     $ 1,037     $ 1,650  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic

   $ 1.64     $ 1.69     $ 2.08     $ 2.82  

Diluted

   $ 1.63     $ 1.68     $ 2.07     $ 2.80  

Weighted average shares outstanding (in thousands):

        

Basic

     490,818       563,000       497,360       584,622  

Diluted

     492,965       566,040       500,381       588,764  

Cash dividends declared per common share

   $ 0.10     $ 0.10     $ 0.20     $ 0.20  

See accompanying notes to condensed consolidated financial statements.

 

5


AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended June 30,   Six Months Ended June 30,
     2017   2016   2017   2016

Net income

     $ 803     $ 950     $ 1,037     $ 1,650

Other comprehensive loss, net of tax:

                

Pension, retiree medical and other postretirement benefits

       (15 )       (16 )       (29 )       (35 )

Investments

             2             4
    

 

 

     

 

 

     

 

 

     

 

 

 

Total other comprehensive loss, net of tax

       (15 )       (14 )       (29 )       (31 )
    

 

 

     

 

 

     

 

 

     

 

 

 

Total comprehensive income

     $ 788     $ 936     $ 1,008     $ 1,619
    

 

 

     

 

 

     

 

 

     

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and par value)

 

     June 30, 2017   December 31, 2016
     (Unaudited)    

ASSETS

    

Current assets

        

Cash

     $ 386     $ 322

Short-term investments

       6,500       6,037

Restricted cash and short-term investments

       554       638

Accounts receivable, net

       1,543       1,594

Aircraft fuel, spare parts and supplies, net

       1,206       1,094

Prepaid expenses and other

       827       639
    

 

 

     

 

 

 

Total current assets

       11,016       10,324

Operating property and equipment

        

Flight equipment

       39,329       37,028

Ground property and equipment

       7,580       7,116

Equipment purchase deposits

       1,212       1,209
    

 

 

     

 

 

 

Total property and equipment, at cost

       48,121       45,353

Less accumulated depreciation and amortization

       (15,128 )       (14,194 )
    

 

 

     

 

 

 

Total property and equipment, net

       32,993       31,159

Other assets

        

Goodwill

       4,091       4,091

Intangibles, net of accumulated amortization of $602 and $578, respectively

       2,224       2,173

Deferred tax asset

       905       1,498

Other assets

       2,107       2,029
    

 

 

     

 

 

 

Total other assets

       9,327       9,791
    

 

 

     

 

 

 

Total assets

     $ 53,336     $ 51,274
    

 

 

     

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities

        

Current maturities of long-term debt and capital leases

     $ 2,334     $ 1,855

Accounts payable

       1,924       1,592

Accrued salaries and wages

       1,295       1,516

Air traffic liability

       5,222       3,912

Loyalty program liability

       3,014       2,789

Other accrued liabilities

       2,323       2,208
    

 

 

     

 

 

 

Total current liabilities

       16,112       13,872

Noncurrent liabilities

        

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

       22,525       22,489

Pension and postretirement benefits

       7,500       7,842

Other liabilities

       3,484       3,286
    

 

 

     

 

 

 

Total noncurrent liabilities

       33,509       33,617

Commitments and contingencies

        

Stockholders’ equity

        

Common stock, $0.01 par value; 1,750,000,000 shares authorized, 487,661,923 shares issued and outstanding at June 30, 2017; 507,294,153 shares issued and outstanding at December 31, 2016

       5       5

Additional paid-in capital

       6,245       7,223

Accumulated other comprehensive loss

       (5,112 )       (5,083 )

Retained earnings

       2,577       1,640
    

 

 

     

 

 

 

Total stockholders’ equity

       3,715       3,785
    

 

 

     

 

 

 

Total liabilities and stockholders’ equity

     $ 53,336     $ 51,274
    

 

 

     

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

         Six Months Ended June 30,    
     2017   2016

Net cash provided by operating activities

     $ 3,938     $ 4,833

Cash flows from investing activities:

        

Capital expenditures and aircraft purchase deposits

       (3,194 )       (3,063 )

Purchases of short-term investments

       (3,829 )       (3,605 )

Sales of short-term investments

       3,373       2,810

Decrease in restricted cash and short-term investments

       84       55

Proceeds from sale of property and equipment and sale-leaseback transactions

       313       32
    

 

 

     

 

 

 

Net cash used in investing activities

       (3,253 )       (3,771 )

Cash flows from financing activities:

        

Proceeds from issuance of long-term debt

       1,625       4,522

Payments on long-term debt and capital leases

       (1,101 )       (2,163 )

Deferred financing costs

       (39 )       (87 )

Treasury stock repurchases

       (1,013 )       (3,236 )

Dividend payments

       (102 )       (119 )

Other financing activities

       9       77
    

 

 

     

 

 

 

Net cash used in financing activities

       (621 )       (1,006 )
    

 

 

     

 

 

 

Net increase in cash

       64       56

Cash at beginning of period

       322       390
    

 

 

     

 

 

 

Cash at end of period

     $ 386     $ 446
    

 

 

     

 

 

 

Non-cash investing and financing activities:

        

Settlement of bankruptcy obligations

     $     $ 3

Supplemental information:

        

Interest paid, net

       516       479

Income taxes paid

       9       7

See accompanying notes to condensed consolidated financial statements.

 

8


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, 2016. 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, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. On December 30, 2015, in order to simplify AAG’s internal corporate structure, US Airways, Inc. (US Airways), a wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation.

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, valuation allowance for deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

Revenue

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. The new revenue standard applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. We will adopt the new revenue standard effective January 1, 2018. Entities have the choice to apply the new revenue standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new revenue standard at the date of initial application and not adjusting comparative information. We currently expect to adopt the new revenue standard using the full retrospective method.

We are still in the process of evaluating how the adoption of the new revenue standard will impact our condensed consolidated financial statements. We currently expect that the new revenue standard will materially impact our liability for outstanding mileage credits earned by AAdvantage loyalty program members when flying on American. We currently use the incremental cost method to account for this portion of our loyalty program liability, which values these mileage credits based on the estimated incremental cost of carrying one additional passenger. The new revenue standard will require us to change our policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater under the relative selling price approach than the value attributed to these mileage credits under the incremental cost method. The new revenue standard will also require us to reclassify certain ancillary fees to passenger revenue, which are currently included within other operating revenue.

Leases

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. Entities are required to adopt the new lease standard using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients.

 

9


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

(Unaudited)

 

We are currently evaluating how the adoption of the new lease standard will impact our condensed consolidated financial statements. Interpretations are on-going and could have a material impact on our implementation. Currently, we expect that the adoption of the new lease standard will have a material impact on our condensed consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents. ASU 2016-18 also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. This standard is not expected to have a material impact on our condensed consolidated financial statements.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an entity to present the service cost component of net benefit cost in the income statement line items where it reports compensation cost. Entities will present all other components of net benefit cost outside of operating income, if this subtotal is presented. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We will adopt this standard on January 1, 2018. The new standard will require all components of our net periodic benefit cost (income), with the exception of service cost, currently reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The adoption of this new standard will have no impact on pre-tax income or net income reported. See Note 8 for our current components of net periodic benefit cost (income).

2. Special Items, Net

Special items, net on the condensed consolidated statements of operations consisted of the following (in millions):

 

     Three Months Ended June 30,   Six Months Ended June 30,
     2017    2016   2017    2016

Merger integration expenses (1)

     $ 68        $ 97     $ 130      $ 201

Fleet restructuring expenses (2)

       48        15       111        41

Mark-to-market adjustments for bankruptcy obligations and other

       38        (56 )       20        (61)  

Labor contract expenses (3)

       45                45       

Other operating charges (credits), net

       3        6       14        (20 )
    

 

 

      

 

 

     

 

 

      

 

 

 

Mainline operating special items, net

       202        62       320        161

Regional operating special items, net (4)

       1        3       4        8

Nonoperating special items, net (5)

       2        36       7        36

 

(1) 

Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 periods also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.

 

(2) 

Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.

 

(3) 

Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.

 

(4) 

Regional operating special items, net principally related to Merger integration expenses.

 

(5) 

Nonoperating special items, net primarily consisted of debt issuance and extinguishment costs associated with term loan refinancings. Additionally, the 2016 periods included costs associated with a bond refinancing.

 

10


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,
     2017    2016    2017    2016

Basic EPS:

                   

Net income

     $ 803        $ 950        $ 1,037        $ 1,650  

Weighted average common shares outstanding (in thousands)

       490,818          563,000          497,360          584,622  
    

 

 

      

 

 

      

 

 

      

 

 

 

Basic EPS

     $ 1.64        $ 1.69        $ 2.08        $ 2.82  
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted EPS:

                   

Net income for purposes of computing diluted EPS

     $ 803        $ 950        $ 1,037        $ 1,650  

Share computation for diluted EPS (in thousands):

                   

Basic weighted average common shares outstanding

       490,818          563,000          497,360          584,622  

Dilutive effect of stock awards

       2,147          3,040          3,021          4,142  
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted weighted average common shares outstanding

       492,965          566,040          500,381          588,764  
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted EPS

     $ 1.63        $ 1.68        $ 2.07        $ 2.80  
    

 

 

      

 

 

      

 

 

      

 

 

 

Restricted stock unit awards excluded from the calculation of diluted EPS because inclusion would be antidilutive (in thousands)

       837          2,601          616          1,845  

4. Share Repurchase Programs and Dividends

Since July 2014, our Board of Directors has approved six share repurchase programs aggregating $11.0 billion of authority. As of June 30, 2017, $1.0 billion remained unused under a repurchase program that expires on December 31, 2018. 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, 2017, we repurchased 10.0 million shares of AAG common stock for $450 million at a weighted average cost per share of $45.01. During the six months ended June 30, 2017, we repurchased 21.7 million shares of AAG common stock for $962 million at a weighted average cost per share of $44.36. Since the inception of our share repurchase programs in July 2014, we have repurchased 250.0 million shares of AAG common stock for $10.0 billion at a weighted average cost per share of $39.84.

Our Board of Directors declared the following cash dividends during the first six months of 2017:

 

Period

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

First Quarter

     $ 0.10        February 13, 2017        February 27, 2017      $ 51

Second Quarter

     $ 0.10        May 16, 2017        May 30, 2017        50
                   

 

 

 

Total

                    $ 101
                   

 

 

 

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.

 

11


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, 2017    December 31, 2016

Secured

         

2013 Credit Facilities, variable interest rate of 3.22%, installments through 2020

     $ 1,825      $ 1,843

2014 Credit Facilities, variable interest rate of 3.12%, installments through 2021

       735        735

April 2016 Credit Facilities, variable interest rate of 3.72%, installments through 2023

       990        1,000

December 2016 Credit Facilities, variable interest rate of 3.66%, installments through 2023

       1,250        1,250

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, maturing from 2018 to 2029

       11,328        10,912

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.34% to 8.80%, maturing from 2017 to 2029

       5,525        5,343

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

       891        891

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2017 to 2028

       804        849
    

 

 

      

 

 

 
       23,348        22,823
    

 

 

      

 

 

 

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

       25,098        24,573

Less: Total unamortized debt discount, premium and issuance costs

       239        229

Less: Current maturities

       2,334        1,855
    

 

 

      

 

 

 

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

     $ 22,525      $ 22,489
    

 

 

      

 

 

 

The table below shows availability under revolving credit facilities, all of which were undrawn, as of June 30, 2017 (in millions):

 

2013 Revolving Facility

   $  1,400  

2014 Revolving Facility

     1,025  
  

 

 

 

Total

   $ 2,425  
  

 

 

 

The April 2016 and December 2016 Credit Facilities each provide for a revolving credit facility that may be established in the future.

2017 Aircraft Financing Activities

2017-1 EETCs

In January 2017, American created three pass-through trusts which issued approximately $983 million aggregate principal amount of Series 2017-1 Class AA, Class A and Class B EETCs (the 2017-1 EETCs) in connection with the financing of 24 aircraft delivered to American through May 2017 (the 2017-1 Aircraft).

As of June 30, 2017, all of the proceeds received from the sale of the 2017-1 EETCs have been used to purchase equipment notes issued by American in connection with the financing of new aircraft on or following the delivery thereof. Interest and principal payments on the equipment notes will be payable semi-annually in February and August of each year, with interest payments beginning in August 2017 and principal payments beginning in February 2018. The equipment notes are secured by liens on the 2017-1 Aircraft.

 

12


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

(Unaudited)

 

Certain information regarding the 2017-1 EETC equipment notes, as of June 30, 2017, is set forth in the table below.

 

     2017-1 EETCs
     Series AA   Series A   Series B

Aggregate principal issued

   $537 million   $248 million   $198 million

Fixed interest rate per annum

   3.65%   4.00%   4.95%

Maturity date

   February 2029   February 2029   February 2025

2016-3 EETCs

During the first quarter of 2017, all remaining proceeds of the Series 2016-3 Class AA and Class A (the 2016-3 EETCs), in the amount of $109 million, were used to purchase equipment notes issued by American in connection with the financing of new aircraft on or following the delivery thereof. Interest and principal payments on the equipment notes are payable semi-annually in April and October of each year, with interest payments that began in April 2017 and principal payments beginning in October 2017. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2016-3 EETCs.

Certain information regarding the 2016-3 EETC equipment notes, as of June 30, 2017, is set forth in the table below.

 

     2016-3 EETCs
     Series AA   Series A

Aggregate principal issued

   $558 million   $256 million

Fixed interest rate per annum

   3.00%   3.25%

Maturity date

   October 2028   October 2028

Equipment Loans and Other Notes Payable Issued in 2017

In the first six months of 2017, American entered into agreements under which it borrowed $533 million in connection with the financing of certain aircraft. Debt incurred under these agreements matures in 2021 through 2029.

2017 Other Financing Activities

2013 Credit Facilities

In March 2017, American and AAG entered into the Second Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated May 21, 2015 (which amended and restated the Credit and Guaranty Agreement dated June 27, 2013), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated October 26, 2015, pursuant to which we refinanced the $1.8 billion term loan facility due June 2020 established thereunder (the 2013 Term Loan Facility and, together with the $1.4 billion revolving credit facility established under such agreement, the 2013 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%. The $1.4 billion revolving credit facility under the 2013 Credit Facilities (the 2013 Revolving Facility) remains unchanged. As of June 30, 2017, approximately $1.8 billion of principal was outstanding under the 2013 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.

2014 Credit Facilities

In June 2017, American and AAG entered into the Third Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated April 20, 2015 (which amended and restated the Credit and Guaranty Agreement dated October 10, 2014), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated October 26, 2015 and the Second Amendment to Amended and Restated Credit and Guaranty Agreement dated September 22, 2016, pursuant to which we refinanced the $735 million term loan facility due October 2021 established thereunder (the 2014 Term Loan Facility and, together with the $1.025 billion revolving credit facility established under such agreement, the 2014 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%. The $1.025 billion revolving credit facility under the 2014 Credit Facilities (the 2014 Revolving Facility) remains unchanged. As of June 30, 2017, approximately $735 million of principal was outstanding under the 2014 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.

 

13


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

(Unaudited)

 

6. Income Taxes

At December 31, 2016, we had approximately $10.5 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 2017. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2016, which will expire in years 2017 through 2036 if unused.

At December 31, 2016, we had an alternative minimum tax credit carryforward of approximately $339 million available for federal income tax purposes, which is available for an indefinite period.

During the three and six months ended June 30, 2017, we recorded an income tax provision of $488 million and $619 million, respectively, which was substantially non-cash due to the utilization of the NOLs described above. 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, 2017.

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

 

     Fair Value Measurements as of June 30, 2017
     Total    Level 1    Level 2    Level 3

Short-term investments (1) (2):

                   

Money market funds

     $ 348      $ 348      $      $

Corporate obligations

       3,007               3,007       

Bank notes/certificates of deposit/time deposits

       3,095               3,095       

Repurchase agreements

       50               50       
    

 

 

      

 

 

      

 

 

      

 

 

 
       6,500        348        6,152       

Restricted cash and short-term investments (1)

       554        106        448       
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 7,054      $    454      $ 6,600      $       —
    

 

 

      

 

 

      

 

 

      

 

 

 

 

(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 $1.7 billion of bank notes/certificates of deposit/time deposits and $441 million of corporate obligations.

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, 2017    December 31, 2016
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value

Long-term debt, including current maturities

     $ 24,859      $ 25,440      $ 24,344      $ 24,983
    

 

 

      

 

 

      

 

 

      

 

 

 

 

14


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

(Unaudited)

 

8. Employee Benefit Plans

 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,

         2017                    2016              2017        2016

Service cost

     $ 1          $ 1          $          $    

Interest cost

       180            188            10             12     

Expected return on assets

       (197 )          (187 )          (5)            (5)    

Amortization of:

                           

Prior service cost (benefit)

       7            7            (59)            (60)    

Unrecognized net loss (gain)

       36            31            (6)            (4)    
    

 

 

        

 

 

        

 

 

        

 

 

   

Net periodic benefit cost (income)

     $     27          $ 40          $ (59)          $ (56)    
    

 

 

        

 

 

        

 

 

        

 

 

   
     Pension Benefits       

Retiree Medical and Other

Postretirement Benefits

   

Six Months Ended June 30,

         2017                    2016                    2017              2016

Service cost

     $ 1        $ 1        $          $    

Interest cost

       361          375          19             24     

Expected return on assets

       (394 )          (375 )          (10)            (10)    

Amortization of:

                           

Prior service cost (benefit)

       14          14          (119)            (120)    

Unrecognized net loss (gain)

       72          63          (11)            (8)    
    

 

 

        

 

 

        

 

 

        

 

 

   

Net periodic benefit cost (income)

     $ 54        $ 78        $ (119)          $ (112)    
    

 

 

        

 

 

        

 

 

        

 

 

   

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

In the second quarter of 2017, we contributed $279 million to our defined benefit pension plans, including a supplemental contribution of $254 million in addition to a $25 million minimum required cash contribution.

9. Accumulated Other Comprehensive Loss

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

 

     Pension, Retiree
Medical and
Other
Postretirement

Benefits
   Income Tax
Benefit

(Provision) (1)
   Total

Balance at December 31, 2016

     $ (4,406)             $ (677)            $ (5,083)  

Amounts reclassified from accumulated other comprehensive income (loss)

       (44)               15  (2)             (29)  
    

 

 

           

 

 

          

 

 

 

Net current-period other comprehensive income (loss)

       (44)               15              (29)  
    

 

 

           

 

 

          

 

 

 

Balance at June 30, 2017

     $     (4,450)             $       (662)            $     (5,112)  

 

(1) 

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

 

(2) 

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

 

15


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

(Unaudited)

 

Reclassifications out of AOCI for the three and six months ended June 30, 2017 and 2016 are as follows (in millions):

 

    Amounts reclassified from AOCI     

Affected line items on the
condensed consolidated

statements of operations

AOCI Components

  Three Months Ended June 30,     Six Months Ended June 30,     
  2017     2016     2017     2016     
Amortization of pension, retiree medical and other postretirement benefits:           

Prior service cost (benefit)

    $     (33)           $     (33)           $     (67)           $     (67)          Salaries, wages and benefits

Actuarial loss

            18                    17                    38                    35           Salaries, wages and benefits

Total reclassifications for the period, net of tax

    $     (15)           $     (16)           $     (29)           $     (32)         

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,  
             2017                      2016                      2017                      2016          

Aircraft fuel and related taxes

     $     329          $     279          $     648          $     498    

Salaries, wages and benefits

     360          330          705          656    

Capacity purchases from third-party regional carriers

     413          392          806          786    

Maintenance, materials and repairs

     65          88          135          183    

Other rent and landing fees

     156          142          307          270    

Aircraft rent

     9          9          17          18    

Selling expenses

     94          88          174          166    

Depreciation and amortization

     78          72          157          140    

Special items, net

     1          3          4          8    

Other

            115                 115                 241                 225    

Total regional expenses

     $  1,620          $  1,518          $  3,194          $  2,950    

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.

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 claims. As of June 30, 2017, 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.

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 have been consolidated in the Federal District Court for the District of Columbia. On October 28, 2016, the

 

16


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

(Unaudited)

 

Court denied a motion by the airline defendants to dismiss all claims in the class actions. Both the DOJ investigation and these lawsuits are in their relatively early stages and we intend to defend these matters 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, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On May 12, 2017, defendants filed a motion for summary judgment. On June 23, 2017, plaintiffs filed an opposition to defendants’ motion and cross-motion for summary judgment. 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 with regard to its 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.

12. Subsequent Event

Dividend Declaration

In July 2017, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on August 14, 2017, and payable on August 28, 2017. 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.

 

17


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,
     2017    2016    2017    2016

Operating revenues:

              

Mainline passenger

     $ 7,747         $ 7,209         $ 14,353         $ 13,773   

Regional passenger

       1,835           1,786           3,384           3,309   

Cargo

       196           174           368           336   

Other

       1,324           1,191           2,617           2,369   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total operating revenues

       11,102           10,360           20,722           19,787   

Operating expenses:

                   

Aircraft fuel and related taxes

       1,510           1,314           2,912           2,343   

Salaries, wages and benefits

       2,999           2,668           5,823           5,318   

Regional expenses

       1,629           1,510           3,199           2,947   

Maintenance, materials and repairs

       495           453           987           871   

Other rent and landing fees

       452           458           892           879   

Aircraft rent

       294           302           589           609   

Selling expenses

       376           334           694           642   

Depreciation and amortization

       418           374           822           729   

Special items, net

       202           62           320           161   

Other

       1,200           1,128           2,354           2,208   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total operating expenses

       9,575           8,603           18,592           16,707   
    

 

 

      

 

 

      

 

 

      

 

 

 

Operating income

       1,527           1,757           2,130           3,080   

Nonoperating income (expense):

                   

Interest income

       53           25           102           46   

Interest expense, net

       (246)          (228)          (488)          (445)  

Other, net

       (5)          (26)          (5)          (18)  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total nonoperating expense, net

       (198)          (229)          (391)          (417)  
    

 

 

      

 

 

      

 

 

      

 

 

 

Income before income taxes

       1,329           1,528           1,739           2,663   

Income tax provision

       502           556           650           980   
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income

     $ 827         $ 972         $ 1,089         $ 1,683   
    

 

 

      

 

 

      

 

 

      

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

18


AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2017    2016    2017    2016

Net income

     $ 827         $ 972         $ 1,089         $ 1,683   

Other comprehensive loss, net of tax:

                   

Pension, retiree medical and other postretirement benefits

       (15)          (16)          (29)          (35)  

Investments

       —                    —            
    

 

 

      

 

 

      

 

 

      

 

 

 

Total other comprehensive loss, net of tax

       (15)          (14)          (29)          (31)  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total comprehensive income

     $ 812           958         $ 1,060           1,652   
    

 

 

      

 

 

      

 

 

      

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

19


AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and par value)

 

     June 30, 2017     December 31, 2016
     (Unaudited)     

ASSETS

         

Current assets

         

Cash

     $ 368         $ 310   

Short-term investments

       6,498           6,034   

Restricted cash and short-term investments

       554           638   

Accounts receivable, net

       1,549           1,599   

Receivables from related parties, net

       8,029           6,810   

Aircraft fuel, spare parts and supplies, net

       1,146           1,032   

Prepaid expenses and other

       817           633   
    

 

 

      

 

 

 

Total current assets

       18,961           17,056   

Operating property and equipment

         

Flight equipment

       38,992           36,671   

Ground property and equipment

       7,362           6,910   

Equipment purchase deposits

       1,212           1,209   
    

 

 

      

 

 

 

Total property and equipment, at cost

       47,566           44,790   

Less accumulated depreciation and amortization

       (14,842)          (13,909)  
    

 

 

      

 

 

 

Total property and equipment, net

       32,724           30,881   

Other assets

         

Goodwill

       4,091           4,091   

Intangibles, net of accumulated amortization of $602 and $578, respectively

       2,224           2,173   

Deferred tax asset

       1,287           1,912   

Other assets

       2,040           1,979   
    

 

 

      

 

 

 

Total other assets

       9,642           10,155   
    

 

 

      

 

 

 

Total assets

     $ 61,327         $ 58,092   
    

 

 

      

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

         

Current liabilities

         

Current maturities of long-term debt and capital leases

     $ 1,837         $ 1,859   

Accounts payable

       1,880           1,546   

Accrued salaries and wages

       1,243           1,460   

Air traffic liability

       5,222           3,912   

Loyalty program liability

       3,014           2,789   

Other accrued liabilities

       2,234           2,106   
    

 

 

      

 

 

 

Total current liabilities

       15,430           13,672   

Noncurrent liabilities

         

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

       21,252           20,718   

Pension and postretirement benefits

       7,458           7,800   

Other liabilities

       3,446           3,253   
    

 

 

      

 

 

 

Total noncurrent liabilities

       32,156           31,771   

Commitments and contingencies

         

Stockholder’s equity

         

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

       —           —   

Additional paid-in capital

       16,655           16,624   

Accumulated other comprehensive loss

       (5,211)          (5,182)  

Retained earnings

       2,297           1,207   
    

 

 

      

 

 

 

Total stockholder’s equity

       13,741           12,649   
    

 

 

      

 

 

 

Total liabilities and stockholder’s equity

     $ 61,327         $ 58,092   
    

 

 

      

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

20


AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Six Months Ended June 30,  
     2017     2016  

Net cash provided by operating activities

   $ 2,787     $ 1,449  

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (3,163     (3,027

Purchases of short-term investments

     (3,829     (3,605

Sales of short-term investments

     3,373       2,810  

Decrease in restricted cash and short-term investments

     84       55  

Proceeds from sale of property and equipment and sale-leaseback transactions

     312       30  
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,223     (3,737

Cash flows from financing activities:

    

Proceeds from issuance of long-term debt

     1,625       4,522  

Payments on long-term debt and capital leases

     (1,101     (2,163

Deferred financing costs

     (39     (87

Other financing activities

     9       77  
  

 

 

   

 

 

 

Net cash provided by financing activities

     494       2,349  
  

 

 

   

 

 

 

Net increase in cash

     58       61  

Cash at beginning of period

     310       364  
  

 

 

   

 

 

 

Cash at end of period

   $ 368     $ 425  
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $     $ 3  

Supplemental information:

    

Interest paid, net

     468       431  

Income taxes paid

     9       5  

See accompanying notes to condensed consolidated financial statements.

 

21


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, 2016. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. On December 30, 2015, in order to simplify AAG’s internal corporate structure, US Airways, Inc. (US Airways), a wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation.

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, valuation allowance for deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

Revenue

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. The new revenue standard applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. American will adopt the new revenue standard effective January 1, 2018. Entities have the choice to apply the new revenue standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new revenue standard at the date of initial application and not adjusting comparative information. American currently expects to adopt the new revenue standard using the full retrospective method.

American is still in the process of evaluating how the adoption of the new revenue standard will impact its condensed consolidated financial statements. American currently expects that the new revenue standard will materially impact its liability for outstanding mileage credits earned by AAdvantage loyalty program members when flying on American. American currently uses the incremental cost method to account for this portion of its loyalty program liability, which values these mileage credits based on the estimated incremental cost of carrying one additional passenger. The new revenue standard will require American to change its policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater under the relative selling price approach than the value attributed to these mileage credits under the incremental cost method. The new revenue standard will also require American to reclassify certain ancillary fees to passenger revenue, which are currently included within other operating revenue.

Leases

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. Entities are required to adopt the new lease standard using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients.

 

22


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

(Unaudited)

 

American is currently evaluating how the adoption of the new lease standard will impact its condensed consolidated financial statements. Interpretations are on-going and could have a material impact on American’s implementation. Currently, American expects that the adoption of the new lease standard will have a material impact on its condensed consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents. ASU 2016-18 also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. This standard is not expected to have a material impact on American’s condensed consolidated financial statements.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an entity to present the service cost component of net benefit cost in the income statement line items where it reports compensation cost. Entities will present all other components of net benefit cost outside of operating income, if this subtotal is presented. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. American will adopt this standard on January 1, 2018. The new standard will require all components of American’s net periodic benefit cost (income), with the exception of service cost, currently reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The adoption of this new standard will have no impact on pre-tax income or net income reported. See Note 6 for American’s current components of net periodic benefit cost (income).

2. Special Items, Net

Special items, net on the condensed consolidated statements of operations consisted of the following (in millions):

 

         Three Months Ended June 30,              Six Months Ended June 30,      
     2017      2016      2017      2016  

Merger integration expenses (1)

      $ 68            $ 97            $ 130            $ 201     

Fleet restructuring expenses (2)

        48              15              111              41     

Mark-to-market adjustments for bankruptcy obligations and other

        38              (56)              20              (61)     

Labor contract expenses (3)

        45                           45                  

Other operating charges (credits), net

        3              6              14              (20)     
     

 

 

          

 

 

          

 

 

          

 

 

    

Mainline operating special items, net

        202              62              320              161     

Regional operating special items, net (4)

        1              3              4              8     

Nonoperating special items, net (5)

        2              36              7              36     

 

(1) 

Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 periods also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.

 

(2) 

Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.

 

(3) 

Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.

 

(4) 

Regional operating special items, net principally related to Merger integration expenses.

 

23


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

(Unaudited)

 

(5) 

Nonoperating special items, net primarily consisted of debt issuance and extinguishment costs associated with term loan refinancings. Additionally, the 2016 periods included costs associated with a bond refinancing.

3. Debt

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

 

       June 30, 2017        December 31, 2016  

Secured

                 

2013 Credit Facilities, variable interest rate of 3.22%, installments through 2020

      $ 1,825            $ 1,843     

2014 Credit Facilities, variable interest rate of 3.12%, installments through 2021

        735              735     

April 2016 Credit Facilities, variable interest rate of 3.72%, installments through 2023

        990              1,000     

December 2016 Credit Facilities, variable interest rate of 3.66%, installments through 2023

        1,250              1,250     

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, maturing from 2018 to 2029

        11,328              10,912     

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.34% to 8.80%, maturing from 2017 to 2029

        5,525              5,343     

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

        862              862     

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2017 to 2028

        803              848     
     

 

 

          

 

 

    

Total long-term debt and capital lease obligations

        23,318              22,793     

Less: Total unamortized debt discount, premium and issuance costs

        229              216     

Less: Current maturities

        1,837              1,859     
     

 

 

          

 

 

    

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

      $ 21,252            $ 20,718     
     

 

 

          

 

 

    

The table below shows availability under revolving credit facilities, all of which were undrawn, as of June 30, 2017 (in millions):

 

2013 Revolving Facility

   $   1,400  

2014 Revolving Facility

     1,025  
  

 

 

 

Total

   $ 2,425  
  

 

 

 

The April 2016 and December 2016 Credit Facilities each provide for a revolving credit facility that may be established in the future.

2017 Aircraft Financing Activities

2017-1 EETCs

In January 2017, American created three pass-through trusts which issued approximately $983 million aggregate principal amount of Series 2017-1 Class AA, Class A and Class B EETCs (the 2017-1 EETCs) in connection with the financing of 24 aircraft delivered to American through May 2017 (the 2017-1 Aircraft).

As of June 30, 2017, all of the proceeds received from the sale of the 2017-1 EETCs have been used to purchase equipment notes issued by American in connection with the financing of new aircraft on or following the delivery thereof. Interest and principal payments on the equipment notes will be payable semi-annually in February and August of each year, with interest payments beginning in August 2017 and principal payments beginning in February 2018. The equipment notes are secured by liens on the 2017-1 Aircraft.

 

24


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

(Unaudited)

 

Certain information regarding the 2017-1 EETC equipment notes, as of June 30, 2017, is set forth in the table below.

 

     2017-1 EETCs
     Series AA   Series A   Series B

Aggregate principal issued

   $537 million   $248 million   $198 million

Fixed interest rate per annum

   3.65%   4.00%   4.95%

Maturity date

           February 2029                   February 2029                   February 2025        

2016-3 EETCs

During the first quarter of 2017, all remaining proceeds of the Series 2016-3 Class AA and Class A (the 2016-3 EETCs), in the amount of $109 million, were used to purchase equipment notes issued by American in connection with the financing of new aircraft on or following the delivery thereof. Interest and principal payments on the equipment notes are payable semi-annually in April and October of each year, with interest payments that began in April 2017 and principal payments beginning in October 2017. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2016-3 EETCs.

Certain information regarding the 2016-3 EETC equipment notes, as of June 30, 2017, is set forth in the table below.

 

     2016-3 EETCs
     Series AA   Series A

Aggregate principal issued

   $558 million   $256 million

Fixed interest rate per annum

   3.00%   3.25%

Maturity date

           October 2028                   October 2028        

Equipment Loans and Other Notes Payable Issued in 2017

In the first six months of 2017, American entered into agreements under which it borrowed $533 million in connection with the financing of certain aircraft. Debt incurred under these agreements matures in 2021 through 2029.

2017 Other Financing Activities

2013 Credit Facilities

In March 2017, American and AAG entered into the Second Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated May 21, 2015 (which amended and restated the Credit and Guaranty Agreement dated June 27, 2013), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated October 26, 2015, pursuant to which American refinanced the $1.8 billion term loan facility due June 2020 established thereunder (the 2013 Term Loan Facility and, together with the $1.4 billion revolving credit facility established under such agreement, the 2013 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%. The $1.4 billion revolving credit facility under the 2013 Credit Facilities (the 2013 Revolving Facility) remains unchanged. As of June 30, 2017, approximately $1.8 billion of principal was outstanding under the 2013 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.

2014 Credit Facilities

In June 2017, American and AAG entered into the Third Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated April 20, 2015 (which amended and restated the Credit and Guaranty Agreement dated October 10, 2014), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated October 26, 2015 and the Second Amendment to Amended and Restated Credit and Guaranty Agreement dated September 22, 2016, pursuant to which American refinanced the $735 million term loan facility due October 2021 established thereunder (the 2014 Term Loan Facility and, together with the $1.025 billion revolving credit facility established under such agreement, the 2014 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%. The $1.025 billion revolving credit facility under the 2014 Credit Facilities (the 2014 Revolving Facility) remains unchanged. As of June 30, 2017, approximately $735 million of principal was outstanding under the 2014 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.

 

25


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

(Unaudited)

 

4. Income Taxes

At December 31, 2016, American had approximately $11.3 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 2017. 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 $10.5 billion, substantially all of which is expected to be available for use in 2017. The federal NOL Carryforwards will expire beginning in 2022 if unused. American also had approximately $3.4 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2016, which will expire in years 2017 through 2034 if unused.

At December 31, 2016, American had an alternative minimum tax credit carryforward of approximately $452 million available for federal income tax purposes, which is available for an indefinite period.

During the three and six months ended June 30, 2017, American recorded an income tax provision of $502 million and $650 million, respectively, which was substantially non-cash due to the utilization of the NOLs described above. 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, 2017.

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

 

     Fair Value Measurements as of June 30, 2017  
     Total      Level 1      Level 2      Level 3  

Short-term investments (1) (2):

                                   

Money market funds

      $ 347            $ 347            $            $     

Corporate obligations

        3,007                           3,007                  

Bank notes/certificates of deposit/time deposits

        3,094                           3,094                  

Repurchase agreements

        50                           50                  
     

 

 

          

 

 

          

 

 

          

 

 

    
        6,498              347              6,151                  

Restricted cash and short-term investments (1)

        554              106              448                  
     

 

 

          

 

 

          

 

 

          

 

 

    

Total

      $     7,052            $      453            $     6,599            $         —     
     

 

 

          

 

 

          

 

 

          

 

 

    

 

(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. American’s short-term investments mature in one year or less except for $1.7 billion of bank notes/certificates of deposit/time deposits and $441 million of corporate obligations.

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, 2017      December 31, 2016  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

      $  23,089            $  23,582            $  22,577            $  23,181     
     

 

 

          

 

 

          

 

 

          

 

 

    

 

26


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

(Unaudited)

 

6. Employee Benefit Plans

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,

   2017      2016      2017      2016  

Service cost

      $ —             $ —             $            $     

Interest cost

        180               187               10               12      

Expected return on assets

        (196)              (187)              (5)              (5)     

Amortization of:

                                   

Prior service cost (benefit)

                                  (59)              (60)     

Unrecognized net loss (gain)

        36               31               (6)              (4)     
     

 

 

          

 

 

          

 

 

          

 

 

    

Net periodic benefit cost (income)

      $         27             $         38            $         (59)            $         (56)     
     

 

 

          

 

 

          

 

 

          

 

 

    
     Pension Benefits      Retiree Medical and Other
Postretirement Benefits
 

Six Months Ended June 30,

   2017      2016      2017      2016  

Service cost

      $            $            $            $     

Interest cost

        359               373               19               24      

Expected return on assets

        (393)              (373)              (10)              (10)     

Amortization of:

                                   

Prior service cost (benefit)

        14               14               (119)              (120)     

Unrecognized net loss (gain)

        72               63               (11)              (8)     
     

 

 

          

 

 

          

 

 

          

 

 

    

Net periodic benefit cost (income)

      $ 53             $ 78            $ (119)            $ (112)     
     

 

 

          

 

 

          

 

 

          

 

 

    

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

In the second quarter of 2017, American contributed $279 million to its defined benefit pension plans, including a supplemental contribution of $254 million in addition to a $25 million minimum required cash contribution.

7. Accumulated Other Comprehensive Loss

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

 

     Pension, Retiree
Medical and
Other
Postretirement

Benefits
   Income Tax
Benefit

(Provision) (1)
  Total

Balance at December 31, 2016

     $ (4,394)      $ (788)     $ (5,182)

Amounts reclassified from accumulated other comprehensive income (loss)

       (44)        15   (2)       (29)
    

 

 

      

 

 

     

 

 

 

Net current-period other comprehensive income (loss)

       (44)        15        (29)
    

 

 

      

 

 

     

 

 

 

Balance at June 30, 2017

     $   (4,438)      $     (773)     $   (5,211)
    

 

 

      

 

 

     

 

 

 

 

(1) 

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

 

(2) 

Relates to pension, retiree medical and other postretirement benefits 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, 2017 and 2016 are as follows (in millions):

 

     Amounts reclassified from AOCI    Affected line items on the
     Three Months Ended June 30,    Six Months Ended June 30,    condensed consolidated

AOCI Components

   2017    2016    2017    2016    statements of operations

Amortization of pension, retiree medical and other postretirement benefits:

                        

Prior service cost (benefit)

     $ (33)      $ (33)      $ (67)      $ (67)        Salaries, wages and benefits

Actuarial loss

       18         17         38         35         Salaries, wages and benefits
    

 

 

      

 

 

      

 

 

      

 

 

      

Total reclassifications for the period, net of tax

     $ (15)      $ (16)      $ (29)      $ (32)     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

27


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

(Unaudited)

 

8. Regional Expenses

Expenses associated with American’s 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,  
     2017    2016    2017    2016

Aircraft fuel and related taxes

     $ 329      $ 279      $ 648      $ 498

Salaries, wages and benefits

       86        83        161        167

Capacity purchases from third-party regional carriers

       827        799        1,628        1,613

Maintenance, materials and repairs

       2        1        3        2

Other rent and landing fees

       150        122        296        231

Aircraft rent

       7        7        14        14

Selling expenses

       94        88        174        166

Depreciation and amortization

       65        58        128        112

Special items, net

       1        3        4        8

Other

       68        70        143        136
    

 

 

      

 

 

      

 

 

      

 

 

 

Total regional expenses

     $ 1,629      $ 1,510      $ 3,199      $ 2,947
    

 

 

      

 

 

      

 

 

      

 

 

 

9. Transactions with Related Parties

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

 

       June 30, 2017      December 31, 2016

AAG (1)

     $ 10,191      $ 8,981 

AAG’s wholly-owned subsidiaries (2)

       (2,162)        (2,171)
    

 

 

      

 

 

 

Total

     $ 8,029       $ 6,810 
    

 

 

      

 

 

 

 

(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 and dividend 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 claims. As of June 30, 2017, 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 American but rather will be distributed to former AMR stockholders.

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

 

28


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

(Unaudited)

 

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, 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 have been consolidated in the Federal District Court for the District of Columbia. On October 28, 2016, the Court denied a motion by the airline defendants to dismiss all claims in the class actions. Both the DOJ investigation and these lawsuits are in their relatively early stages and American intends to defend these matters 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, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On May 12, 2017, defendants filed a motion for summary judgment. On June 23, 2017, plaintiffs filed an opposition to defendants’ motion and cross-motion for summary judgment. 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 with regard to its 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.

 

29


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, 2016 (the 2016 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 2016 Form 10-K.

Background

Together with our wholly-owned regional airline subsidiaries and third-party regional carriers operating as American Eagle, American operates an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries. We have hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. In the second quarter of 2017, approximately 52 million passengers boarded our mainline and regional flights.

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation, to building the best employee relations in the industry and to providing returns for our stockholders. In January 2017, we were named the 2017 Airline of the Year by Air Transport World, which cited the integration work related to the Merger, our operational and customer service improvements and the investments we are making in our product.

Financial Overview

The U.S. Airline Industry

The second quarter of 2017 marked the return to year-over-year unit revenue growth for the U.S. airline industry. Improving yields were primarily driven by strong demand in domestic markets. International markets, particularly Latin America, also contributed to positive unit revenue trends. These revenue improvements were offset in part by higher fuel prices. Jet fuel prices tend to follow the price of Brent crude oil. On average, the price of Brent crude oil per barrel was approximately 9% higher in the second quarter of 2017 as compared to the 2016 period. The average daily spot price for Brent crude oil during the second quarter of 2017 was $50 per barrel as compared to an average daily spot price of $46 per barrel during the second quarter of 2016. On a daily basis, Brent crude oil prices fluctuated during the quarter between a high of $55 per barrel to a low of $44 per barrel, and closed the quarter on June 30, 2017 at $47 per barrel.

See Part II, Item 1A. Risk Factors – “Downturns in economic conditions could adversely affect our business” and “Our business is very dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”

 

30


AAG’s Second Quarter 2017 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,        Increase
  (Decrease)  
   Percent
Increase
  (Decrease)  
     2017    2016      
     (In millions, except percentage changes)

Mainline and regional passenger revenues

     $ 9,582      $ 8,995      $ 587         6.5 

Other operating revenues

       1,327        1,194        133         11.1 

Total operating revenues

       11,105        10,363        742         7.2 

Mainline and regional aircraft fuel and related taxes

       1,839        1,593        246         15.4 

Salaries, wages and benefits

       3,003        2,670        333         12.5 

Total operating expenses

       9,570        8,612        958         11.1 

Operating income

       1,535        1,751        (216)        (12.3)

Pre-tax income

       1,291        1,493        (202)        (13.5)

Income tax provision

       488        543        (55)        (10.1)

Net income

       803        950        (147)        (15.5)

Pre-tax income

     $ 1,291      $ 1,493      $ (202)        (13.5)

Adjusted for: Total pre-tax special items (1)

       205        101        104         nm 
    

 

 

      

 

 

      

 

 

      

Pre-tax income excluding special items

     $ 1,496      $ 1,594      $ (98)        (6.1)
    

 

 

      

 

 

      

 

 

      

 

(1) 

See below “Reconciliation of GAAP to Non-GAAP Financial Measures” and Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for details on the components of special items.

Pre-Tax Income and Net Income

We realized net income of $803 million in the second quarter of 2017 as compared to net income of $950 million in the second quarter of 2016. Pre-tax income was $1.3 billion and $1.5 billion in the second quarters of 2017 and 2016, respectively. Excluding the effects of pre-tax net special items, we recognized pre-tax income of $1.5 billion in the second quarter of 2017 as compared to $1.6 billion in the second quarter of 2016. The quarter-over-quarter declines in our pre-tax income on both a GAAP basis and excluding pre-tax net special items were principally driven by higher salaries, wages and benefits and higher fuel costs. Salaries, wages and benefits costs were higher due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016. These increases were offset in part by higher revenues.

Revenue

In the second quarter of 2017, we reported total operating revenues of $11.1 billion, an increase of $742 million, or 7.2%, as compared to the 2016 period. Mainline and regional passenger revenues were $9.6 billion, an increase of $587 million, or 6.5%, as compared to the 2016 period. The increase in mainline and regional passenger revenues was driven by a 4.3% period-over-period increase in consolidated passenger yields. Domestic consolidated yields increased 6.4% and international yields rose 1.3%, due principally to improved revenue performance in Central/South American and Caribbean regions. The second quarter of 2017 marks our third consecutive quarter of period-over-period increasing yields.

Additionally, other revenues increased $133 million primarily due to revenues associated with our loyalty program, principally new co-branded credit card agreements that became effective in the third quarter of 2016. Our mainline and regional total revenue per available seat mile (TRASM) was 15.48 cents in the second quarter of 2017, a 5.7% increase as compared to 14.65 cents in the second quarter of 2016.

Fuel

Our mainline and regional fuel expense totaled $1.8 billion in the second quarter of 2017, which was $246 million, or 15.4%, higher as compared to the 2016 period. This increase was driven by a 14.7% increase in the average price per gallon of fuel to $1.63 in the second quarter of 2017 from $1.42 in the 2016 period.

 

31


As of June 30, 2017, 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.

Other Costs

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 2017 second quarter mainline cost per available seat mile (CASM) was 12.51 cents, an increase of 10.6%, from 11.32 cents in 2016. The increase was primarily driven by higher salaries, wages and benefits due to the contract pay rate increases described above and higher fuel costs.

Our 2017 second quarter mainline CASM excluding special items and fuel was 9.82 cents, an increase of 7.6%, as compared to the 2016 period, which was also driven by higher salaries, wages and benefits as described above.

For a reconciliation of mainline CASM excluding special items and fuel, see below “Reconciliation of GAAP to Non-GAAP Financial Measures.”

Liquidity and Stockholder Returns

As of June 30, 2017, we had approximately $9.3 billion in total available liquidity, consisting of $6.9 billion in unrestricted cash and investments and $2.4 billion in undrawn revolving credit facilities. We also had restricted cash of $554 million.

During the second quarter of 2017, we returned $500 million to our stockholders, including quarterly dividend payments of $50 million and the repurchase of $450 million of common stock, or 10.0 million shares. Since our capital return program commenced in mid-2014, we have returned more than $10.7 billion to stockholders, including $748 million in quarterly dividend payments and $10.0 billion in share repurchases, or 250.0 million shares. In July 2017, our Board of Directors declared a $0.10 per share dividend for stockholders of record on August 14, 2017, and payable on August 28, 2017.

We continue to take advantage of historically low interest rates to finance new aircraft deliveries under our fleet renewal program. During the second quarter of 2017, we issued an aggregate principal amount of $348 million in Enhanced Equipment Trust Certificate (EETC) equipment notes at an average fixed interest rate of 4.00%, as well as $378 million in other equipment notes, which primarily bear interest at variable rates based on LIBOR plus a margin, averaging 2.82% at June 30, 2017. We also raised $267 million in proceeds from aircraft sale-leaseback transactions. Additionally, we repriced a $735 million term loan facility. See Note 5 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on our debt obligations.

As a result of the foregoing factors, we currently have a higher debt level and fewer unencumbered assets than our peers. Accordingly, we believe it is important to retain liquidity levels higher than our network peers given our overall leverage as well as to protect against an adverse economic shock. Our current plan is to maintain minimum total available liquidity of $7.0 billion. We were well above that minimum level at June 30, 2017.

Reconciliation of GAAP to Non-GAAP Financial Measures

We sometimes use financial measures that are derived from the condensed consolidated financial statements but that are not presented in accordance with GAAP to understand and evaluate our current operating performance and to allow for period-to-period comparisons. We believe these non-GAAP financial measures may also provide useful information to investors and others. These non-GAAP measures may not be comparable to similarly titled non-GAAP measures of other companies, and should be considered in addition to and not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with GAAP. We are providing a reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis.

The table below presents the reconciliation of pre-tax income (GAAP measure) to pre-tax income excluding special items (non-GAAP measure). Management uses this non-GAAP financial measure to evaluate our current operating performance and to allow for period-to-period comparisons. As special items may vary from period-to-period in nature and

 

32


amount, the adjustment to exclude special items allows management an additional tool to better understand our core operating performance.

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2017    2016    2017    2016

Reconciliation of Pre-Tax Income Excluding Special Items:

                   

Pre-tax income

     $ 1,291      $ 1,493      $ 1,656      $ 2,610

Pre-tax special items (1):

                   

Operating special items, net

       203        65        324        169

Nonoperating special items, net

       2        36        7        36
    

 

 

      

 

 

      

 

 

      

 

 

 

Total pre-tax special items

       205        101        331        205
    

 

 

      

 

 

      

 

 

      

 

 

 

Pre-tax income excluding special items

     $ 1,496      $ 1,594      $ 1,987      $ 2,815
    

 

 

      

 

 

      

 

 

      

 

 

 

Additionally, the table below presents the reconciliation of mainline operating costs (GAAP measure) to mainline operating costs excluding special items and fuel (non-GAAP measure). Management uses mainline operating costs excluding special items and fuel to evaluate our current operating performance and for period-to-period comparisons. The price of fuel, over which we have no control, impacts the comparability of period-to-period financial performance. The adjustment to exclude aircraft fuel and special items allows management an additional tool to better understand and analyze our non-fuel costs and core operating performance. Amounts may not recalculate due to rounding.

 

       Three Months Ended June 30,        Six Months Ended June 30,  
     2017    2016    2017    2016
Reconciliation of Mainline CASM Excluding Special Items and Fuel:                    

(In millions)

                   

Total operating expenses

     $ 9,570       $ 8,612       $ 18,593       $ 16,711 

Less regional expenses:

                   

Fuel and related taxes

       (329)        (279)        (648)        (498)

Other

       (1,291)        (1,239)        (2,546)        (2,452)
    

 

 

      

 

 

      

 

 

      

 

 

 

Total mainline operating expenses

       7,950         7,094         15,399         13,761 

Adjusted for: Special items, net (1)

       (202)        (62)        (320)        (161)

Adjusted for: Aircraft fuel and related taxes

       (1,510)        (1,314)        (2,912)        (2,343)
    

 

 

      

 

 

      

 

 

      

 

 

 

Mainline operating expenses excluding special items and fuel

     $ 6,238       $ 5,718       $ 12,167       $ 11,257 
    

 

 

      

 

 

      

 

 

      

 

 

 

(In millions)

                   

Available Seat Miles (ASM)

       63,520         62,670         120,083         120,234 

(In cents)

                   

Mainline CASM

       12.51         11.32         12.82         11.45 

Adjusted for: Special items, net per ASM

       (0.32)        (0.10)        (0.27)        (0.13)

Adjusted for: Aircraft fuel and related taxes per ASM

       (2.38)        (2.10)        (2.42)        (1.95)
    

 

 

      

 

 

      

 

 

      

 

 

 

Mainline CASM excluding special items and fuel

       9.82         9.12         10.13         9.36 
    

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) 

See Note 2 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on special items.

 

33


AAG’s Results of Operations

Operating Statistics

The table below sets forth selected mainline and regional operating data for the three and six months ended June 30, 2017 and 2016.

 

     Three Months Ended June 30,    Increase
(Decrease)
   Six Months Ended June 30,    Increase
(Decrease)
     2017    2016       2017    2016   

Mainline

                             

Revenue passenger miles (millions) (a)

       53,177            51,927            2.4  %            98,388            98,147            0.2   %    

Available seat miles (millions) (b)

       63,520            62,670            1.4  %            120,083            120,234            (0.1)  %    

Passenger load factor (percent) (c)

       83.7            82.9            0.8  pts          81.9            81.6            0.3   pts  

Yield (cents) (d)

       14.57            13.88            4.9  %            14.59            14.03            4.0   %    

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

       12.20            11.50            6.0  %            11.95            11.46            4.3   %    

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

       12.51            11.32            10.6  %            12.82            11.45            12.0   %    

Aircraft at end of period

       956            947            1.0  %            956            947            1.0   %    

Fuel consumption (gallons in millions)

       934            931            0.4  %            1,766            1,786            (1.1)  %    

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

       1.62            1.41            14.5  %            1.65            1.31            25.7   %    

Full-time equivalent employees at end of period

       106,100            103,100            2.9  %            106,100            103,100            2.9   %    

Total Mainline and Regional

                             

Revenue passenger miles (millions) (a)

       59,564            58,336            2.1  %            110,548            110,106            0.4   %    

Available seat miles (millions) (b)

       71,743            70,751            1.4  %            136,083            135,815            0.2   %    

Passenger load factor (percent) (c)

       83.0            82.5            0.5  pts          81.2            81.1            0.1   pts  

Yield (cents) (d)

       16.09            15.42            4.3  %            16.04            15.51            3.4   %    

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

       13.36            12.71            5.0  %            13.03            12.58            3.6   %    

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

       15.48            14.65            5.7  %            15.23            14.58            4.5   %    

Aircraft at end of period

       1,583            1,547            2.3  %            1,583            1,547            2.3   %    

Fuel consumption (gallons in millions)

       1,129            1,122            0.6  %            2,143            2,155            (0.6)  %    

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

       1.63            1.42            14.7  %            1.66            1.32            26.0   %    

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

       128,300            123,500            3.9  %            128,300            123,500            3.9   %    

 

(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.

 

(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)

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

 

(h)

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

 

34


Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

We realized pre-tax income of $1.3 billion and $1.5 billion in the second quarters of 2017 and 2016, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $1.5 billion and $1.6 billion in the second quarters of 2017 and 2016, respectively.

Our second quarter 2017 pre-tax results on both a GAAP basis and excluding pre-tax net special items were principally driven by higher salaries, wages and benefits and higher fuel costs, which were offset in part by higher revenues.

Operating Revenues

 

     Three Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Mainline passenger

     $     7,747      $     7,209      $ 538        7.5

Regional passenger

       1,835        1,786        49        2.8

Cargo

       196        174        22        13.1

Other

       1,327        1,194        133        11.1
    

 

 

      

 

 

      

 

 

      

Total operating revenues

     $ 11,105      $ 10,363      $ 742        7.2
    

 

 

      

 

 

      

 

 

      

This table presents our total passenger revenues and the period-over-period change in certain operating statistics:

 

          Increase (Decrease)
vs. Three Months Ended June 30, 2016
     Three Months Ended
June 30, 2017
   Passenger
Revenue
  RPMs   ASMs   Load
Factor
   Passenger
Yield
  PRASM
     (In millions)                          

Mainline passenger

     $ 7,747        7.5 %       2.4 %       1.4 %       0.8 pts        4.9 %       6.0 %

Regional passenger

       1,835        2.8 %       (0.3 )%       1.7 %       (1.6)pts          3.1 %       1.0 %
    

 

 

                           

Total passenger revenues

     $ 9,582        6.5 %       2.1 %       1.4 %       0.5 pts        4.3 %       5.0 %
    

 

 

                           

Total passenger revenues increased $587 million, or 6.5%, in the second quarter of 2017 from the 2016 period primarily driven by a 4.3% period-over-period increase in consolidated passenger yields. Domestic consolidated yields increased 6.4% and international yields rose 1.3%, due principally to improved revenue performance in Central/South American and Caribbean regions.

Cargo revenue increased $22 million, or 13.1%, in the second quarter of 2017 from the 2016 period primarily driven by an increase in freight volume.

Other revenue primarily includes revenue associated with our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $133 million, or 11.1%, in the second quarter of 2017 from the 2016 period primarily driven by an increase in loyalty program revenue. In the second quarters of 2017 and 2016, other revenue associated with our loyalty program was $581 million and $461 million, respectively, of which $549 million and $430 million, respectively, related to the marketing component of mileage sales and other marketing related payments. This period-over-period increase was primarily due to revenues associated with our new co-branded credit card agreements that became effective in the third quarter of 2016.

Total operating revenues in the second quarter of 2017 increased $742 million, or 7.2%, from the 2016 period driven principally by a 6.5% increase in total passenger revenues as described above. Our mainline and regional TRASM was 15.48 cents in the second quarter of 2017, a 5.7% increase as compared to 14.65 cents in the 2016 period.

 

35


Mainline Operating Expenses

 

     Three Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $ 1,510      $ 1,314      $ 196       14.9

Salaries, wages and benefits

       3,003        2,670        333       12.5

Maintenance, materials and repairs

       495        453        42       9.4

Other rent and landing fees

       452        458        (6 )       (1.2 )

Aircraft rent

       294        302        (8 )       (2.8 )

Selling expenses

       376        334        42       12.5

Depreciation and amortization

       418        374        44       11.5

Special items, net

       202        62        140       nm

Other

       1,200        1,127        73       6.5
    

 

 

      

 

 

      

 

 

     

Total mainline operating expenses

     $ 7,950      $ 7,094      $ 856       12.1
    

 

 

      

 

 

      

 

 

     

Mainline operating expenses increased $856 million, or 12.1%, in the second quarter of 2017 from the 2016 period. The increase in operating expenses was primarily driven by higher salaries, wages and benefits as well as higher fuel costs. See detailed explanations below relating to changes in mainline CASM.

Mainline CASM

We sometimes use financial measures that are derived from the condensed consolidated financial statements but that are not presented in accordance with GAAP to understand and evaluate our current operating performance to allow for period-to-period comparisons. We believe these non-GAAP financial measures may also provide useful information to investors and others. These non-GAAP measures may not be comparable to similarly titled non-GAAP measures of other companies, and should be considered in addition to and not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with GAAP. We are providing a reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis.

The table below presents the reconciliation of mainline operating expenses (GAAP measure) to mainline operating costs excluding special items and fuel (non-GAAP measure). Management uses mainline operating costs excluding special items and fuel to evaluate our current operating performance and for period-to-period comparisons. The price of fuel, over which we have no control, impacts the comparability of period-to-period financial performance. The adjustment to exclude aircraft fuel and special items allows management an additional tool to better understand and analyze our non-fuel costs and core operating performance.

The major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the three months ended June 30, 2017 and 2016 are as follows (amounts may not recalculate due to rounding):

 

     Three Months Ended
June 30,
  Percent
Increase
(Decrease)
     2017   2016  
     (In cents, except percentage changes)

Mainline CASM:

            

Aircraft fuel and related taxes

       2.38       2.10       13.4

Salaries, wages and benefits

       4.73       4.26       11.0

Maintenance, materials and repairs

       0.78       0.72       7.9

Other rent and landing fees

       0.71       0.73       (2.5 )

Aircraft rent

       0.46       0.48       (4.1 )

Selling expenses

       0.59       0.53       11.0

Depreciation and amortization

       0.66       0.60       10.0

Special items, net

       0.32       0.10       nm

Other

       1.89       1.80       5.0
    

 

 

     

 

 

     

Total mainline CASM

       12.51       11.32       10.6

Special items, net

       (0.32 )       (0.10 )       nm

Aircraft fuel and related taxes

       (2.38 )       (2.10 )       13.4
    

 

 

     

 

 

     

Mainline CASM, excluding special items and fuel

       9.82       9.12       7.6
    

 

 

     

 

 

     

 

36


Significant changes in the components of mainline CASM are as follows:

 

   

Aircraft fuel and related taxes per ASM increased 13.4% primarily due to a 14.5% increase in the average price per gallon of fuel to $1.62 in the second quarter of 2017 from $1.41 in the 2016 period.

 

   

Salaries, wages and benefits per ASM increased 11.0% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016.

 

   

Maintenance, materials and repairs per ASM increased 7.9% as compared to the 2016 period primarily due to a contract change impacting the timing of maintenance expenses incurred. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown. Previously this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed.

 

   

Selling expenses per ASM increased 11.0% primarily due to higher revenues in the second quarter of 2017 as compared to the 2016 period, resulting in higher commissions.

 

   

Depreciation and amortization per ASM increased 10.0% primarily due to aircraft purchased in connection with our fleet renewal program.

 

   

Other operating expenses per ASM increased 5.0% primarily due to expenses associated with improving our product offerings, customer experience and operational reliability.

Operating Special Items, Net

 

         Three Months Ended June 30,    
     2017    2016
     (In millions)

Merger integration expenses (1)

     $ 68      $ 97

Fleet restructuring expenses (2)

       48        15

Mark-to-market adjustments for bankruptcy obligations and other

       38        (56 )

Labor contract expenses (3)

       45       

Other operating charges, net

       3        6
    

 

 

      

 

 

 

Total mainline operating special items, net

       202        62

Regional operating special items, net (4)

       1        3
    

 

 

      

 

 

 

Total operating special items, net

     $ 203      $ 65
    

 

 

      

 

 

 

 

(1) 

Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.

 

(2) 

Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.

 

(3) 

Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.

 

(4) 

Regional operating special items, net principally related to Merger integration expenses.

 

37


Regional Operating Expenses

 

     Three Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $       329      $       279      $ 50        18.0

Other

       1,291        1,239        52        4.3
    

 

 

      

 

 

      

 

 

      

Total regional operating expenses

     $ 1,620      $ 1,518      $ 102        6.8
    

 

 

      

 

 

      

 

 

      

Regional operating expenses increased $102 million, or 6.8%, in the second quarter of 2017 from the 2016 period. The period-over-period increase was primarily due to a $50 million, or 18.0%, increase in fuel costs and a $52 million, or 4.3%, increase in other regional operating expenses. The average price per gallon of fuel increased 15.9% to $1.69 in the second quarter of 2017 from $1.46 in the 2016 period, on a 1.8% increase in consumption. The increase in other regional operating expenses was primarily driven by a 1.7% increase in capacity, principally from our wholly-owned regional carriers. See Note 10 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on regional expenses.

Nonoperating Results

 

     Three Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Interest income

     $       24       $       16       $       8       52.7

Interest expense, net

       (263)          (249)          (14 )       5.8

Other, net

       (5)          (25)          20       (80.6 )
    

 

 

      

 

 

      

 

 

     

Total nonoperating expense, net

     $ (244)        $ (258)        $ 14       (5.5 )
    

 

 

      

 

 

      

 

 

     

Our short-term investments in each period consisted of highly liquid investments that provided relatively nominal returns. Interest income increased $8 million, or 52.7%, principally due to an increase in interest rates, which drove more than a 50 basis point increase in average yields in the second quarter of 2017 as compared to the 2016 period.

Interest expense, net increased $14 million in the second quarter of 2017 as compared to the 2016 period primarily due to higher outstanding debt as a result of aircraft financings associated with our fleet renewal program.

Other nonoperating expense, net in the 2016 period primarily included $36 million of net special charges consisting of debt issuance and extinguishment costs associated with a bond refinancing, offset in part by $17 million of foreign currency gains.

Income Taxes

In the second quarter 2017, we recorded an income tax provision of $488 million, which was substantially non-cash due to utilization of our net operating losses (NOLs). Substantially all of our income before income taxes is attributable to the United States. At December 31, 2016, we had approximately $10.5 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.

See Note 6 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on income taxes.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

We realized pre-tax income of $1.7 billion and $2.6 billion in the first six months of 2017 and 2016, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $2.0 billion and $2.8 billion in the first six months of 2017 and 2016, respectively.

Our pre-tax results on both a GAAP basis and excluding pre-tax net special items for the first six months of 2017 were principally driven by higher fuel costs as well as higher salaries, wages and benefits, which were offset in part by higher revenues.

 

38


Operating Revenues

 

     Six Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Mainline passenger

     $     14,353      $     13,773      $     580        4.2

Regional passenger

       3,384        3,309        75        2.3

Cargo

       368        336        32        9.8

Other

       2,624        2,380        244        10.2
    

 

 

      

 

 

      

 

 

      

Total operating revenues

     $ 20,729      $ 19,798      $ 931        4.7
    

 

 

      

 

 

      

 

 

      

This table presents our total passenger revenues and the period-over-period change in certain operating statistics:

 

          Increase (Decrease)
vs. Six Months Ended June 30, 2016
     Six Months Ended
June 30, 2017
   Passenger
Revenue
   RPMs    ASMs    Load
Factor
   Passenger
Yield
  PRASM
     (In millions)                             

Mainline passenger

     $     14,353        4.2%          0.2%          (0.1)%          0.3 pts        4.0 %       4.3 %

Regional passenger

       3,384        2.3%          1.7%          2.7%           (0.8)pts          0.6 %       (0.4 )%
    

 

 

                              

Total passenger revenues

     $ 17,737        3.8%          0.4%          0.2%           0.1 pts        3.4 %       3.6 %
    

 

 

                              

Total passenger revenues increased $655 million, or 3.8%, in the first six months of 2017 from the 2016 period primarily driven by a 3.4% period-over-period increase in consolidated passenger yields. Domestic consolidated yields increased 4.8% and international yields rose 0.9%, due principally to improved revenue performance in Central/South American and Caribbean regions.

Cargo revenue increased $32 million, or 9.8%, in the first six months of 2017 from the 2016 period primarily driven by an increase in freight volume.

Other revenue primarily includes revenue associated with our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $244 million, or 10.2%, in the first six months of 2017 from the 2016 period primarily driven by an increase in loyalty program revenue. In the first six months of 2017 and 2016, other revenue associated with our loyalty program was $1.2 billion and $952 million, respectively, of which $1.1 billion and $856 million, respectively, related to the marketing component of mileage sales and other marketing related payments. This period-over-period increase was primarily due to revenues associated with our new co-branded credit card agreements that became effective in the third quarter of 2016.

Total operating revenues in the first six months of 2017 increased $931 million, or 4.7%, from the 2016 period driven principally by a 3.8% increase in total passenger revenues as described above. Our mainline and regional TRASM was 15.23 cents in the first six months of 2017, a 4.5% increase as compared to 14.58 cents in the 2016 period.

Mainline Operating Expenses

 

     Six Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $     2,912      $     2,343      $     569       24.2

Salaries, wages and benefits

       5,829        5,322        507       9.5

Maintenance, materials and repairs

       987        871        116       13.3

Other rent and landing fees

       892        879        13       1.5

Aircraft rent

       589        609        (20 )       (3.3 )

Selling expenses

       694        642        52       8.0

Depreciation and amortization

       822        729        93       12.8

Special items, net

       320        161        159       99.4

Other

       2,354        2,205        149       6.8
    

 

 

      

 

 

      

 

 

     

Total mainline operating expenses

     $ 15,399      $ 13,761      $ 1,638       11.9
    

 

 

      

 

 

      

 

 

     

Mainline operating expenses increased $1.6 billion, or 11.9%, in the first six months of 2017 from the 2016 period. The increase in operating expenses was primarily driven by higher fuel costs as well as salaries, wages and benefits. See

 

39


detailed explanations below relating to changes in mainline CASM.

Mainline CASM

We sometimes use financial measures that are derived from the condensed consolidated financial statements but that are not presented in accordance with GAAP to understand and evaluate our current operating performance to allow for period-to-period comparisons. We believe these non-GAAP financial measures may also provide useful information to investors and others. These non-GAAP measures may not be comparable to similarly titled non-GAAP measures of other companies, and should be considered in addition to and not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with GAAP. We are providing a reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis.

The table below presents the reconciliation of mainline operating expenses (GAAP measure) to mainline operating costs excluding special items and fuel (non-GAAP measure). Management uses mainline operating costs excluding special items and fuel to evaluate our current operating performance and for period-to-period comparisons. The price of fuel, over which we have no control, impacts the comparability of period-to-period financial performance. The adjustment to exclude aircraft fuel and special items allows management an additional tool to better understand and analyze our non-fuel costs and core operating performance.

The major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the six months ended June 30, 2017 and 2016 are as follows (amounts may not recalculate due to rounding):

 

     Six Months Ended
June 30,
  Percent
Increase
(Decrease)
     2017   2016  
     (In cents, except percentage changes)

Mainline CASM:

            

Aircraft fuel and related taxes

       2.42       1.95       24.4

Salaries, wages and benefits

       4.85       4.43       9.7

Maintenance, materials and repairs

       0.82       0.72       13.4

Other rent and landing fees

       0.74       0.73       1.6

Aircraft rent

       0.49       0.51       (3.2 )

Selling expenses

       0.58       0.53       8.2

Depreciation and amortization

       0.68       0.61       12.9

Special items, net

       0.27       0.13       99.7

Other

       1.96       1.83       6.9
    

 

 

     

 

 

     

Total mainline CASM

       12.82       11.45       12.0

Special items, net

       (0.27 )       (0.13 )       99.7

Aircraft fuel and related taxes

       (2.42 )       (1.95 )       24.4
    

 

 

     

 

 

     

Mainline CASM, excluding special items and fuel

       10.13       9.36       8.2
    

 

 

     

 

 

     

Significant changes in the components of mainline CASM are as follows:

 

   

Aircraft fuel and related taxes per ASM increased 24.4% primarily due to a 25.7% increase in the average price per gallon of fuel to $1.65 in the first six months of 2017 from $1.31 in the 2016 period, offset in part by a 1.1% decrease in gallons of fuel consumed.

 

   

Salaries, wages and benefits per ASM increased 9.7% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016.

 

   

Maintenance, materials and repairs per ASM increased 13.4% as compared to the 2016 period primarily due to a contract change impacting the timing of maintenance expenses incurred. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown. Previously this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed.

 

   

Selling expenses per ASM increased 8.2% primarily due to higher revenues in the first six months of 2017 as compared to the 2016 period, resulting in higher commissions.

 

   

Depreciation and amortization per ASM increased 12.9% primarily due to aircraft purchased in connection with our fleet renewal program.

 

40


   

Other operating expenses per ASM increased 6.9% primarily due to expenses associated with improving our product offerings, customer experience and operational reliability.

Operating Special Items, Net

 

     Six Months Ended June 30,
     2017    2016
     (In millions)

Merger integration expenses (1)

     $ 130      $ 201

Fleet restructuring expenses (2)

       111        41

Mark-to-market adjustments for bankruptcy obligations and other

       20        (61 )

Labor contract expenses (3)

       45       

Other operating charges (credits), net

       14        (20 )
    

 

 

      

 

 

 

Total mainline operating special items, net

       320        161

Regional operating special items, net (4)

       4        8
    

 

 

      

 

 

 

Total operating special items, net

     $ 324      $ 169
    

 

 

      

 

 

 

 

(1) 

Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.

 

(2) 

Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.

 

(3) 

Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.

 

(4) 

Regional operating special items, net principally related to Merger integration expenses.

Regional Operating Expenses

 

     Six Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $       648      $       498      $       150              30.0

Other

       2,546        2,452        94        3.8
    

 

 

      

 

 

      

 

 

      

Total regional operating expenses

     $ 3,194      $ 2,950      $ 244        8.3
    

 

 

      

 

 

      

 

 

      

Regional operating expenses increased $244 million, or 8.3%, in the first six months of 2017 from the 2016 period. The period-over-period increase was primarily due to a $150 million, or 30.0%, increase in fuel costs and a $94 million, or 3.8%, increase in other regional operating expenses. The average price per gallon of fuel increased 27.2% to $1.72 in the first six months of 2017 from $1.35 in the 2016 period, on a 2.2% increase in consumption. The increase in other regional operating expenses was primarily driven by a 2.7% increase in capacity, principally from our wholly-owned regional carriers. See Note 10 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on regional expenses.

 

41


Nonoperating Results

 

     Six Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Interest income

     $ 45      $ 28      $ 17       57.7

Interest expense, net

       (520)          (488)          (32 )       6.6

Other, net

       (5)          (17)          12       (69.2 )
    

 

 

      

 

 

      

 

 

     

Total nonoperating expense, net

     $     (480)        $     (477)        $ (3 )       0.8
    

 

 

      

 

 

      

 

 

     

Our short-term investments in each period consisted of highly liquid investments that provided relatively nominal returns. Interest income increased $17 million, or 57.7%, principally due to an increase in interest rates, which drove more than a 50 basis point increase in average yields in the first six months of 2017 as compared to the 2016 period.

Interest expense, net increased $32 million in the first six months of 2017 as compared to the 2016 period primarily due to higher outstanding debt as a result of aircraft financings associated with our fleet renewal program.

Other nonoperating expense, net in the 2016 period primarily included $36 million of net special charges consisting of debt issuance and extinguishment costs associated with a bond refinancing, offset in part by $27 million of foreign currency gains.

Income Taxes

In the first six months of 2017, we recorded an income tax provision of $619 million, which was substantially non-cash due to utilization of our NOLs. Substantially all of our income before income taxes is attributable to the United States. At December 31, 2016, we had approximately $10.5 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.

See Note 6 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for additional information on income taxes.

American’s Results of Operations

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

American realized pre-tax income of $1.3 billion and $1.5 billion in the second quarters of 2017 and 2016, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $1.5 billion and $1.6 billion in the second quarters of 2017 and 2016, respectively.

American’s second quarter 2017 pre-tax results on both a GAAP basis and excluding pre-tax net special items were principally driven by higher salaries, wages and benefits and higher fuel costs, which were offset in part by higher revenues.

Operating Revenues

 

     Three Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Mainline passenger

     $ 7,747      $ 7,209      $ 538        7.5

Regional passenger

       1,835        1,786        49        2.8

Cargo

       196        174        22        13.1

Other

       1,324        1,191        133        11.2
    

 

 

      

 

 

      

 

 

      

Total operating revenues

     $     11,102      $     10,360      $          742        7.2
    

 

 

      

 

 

      

 

 

      

Total passenger revenues increased $587 million, or 6.5%, in the second quarter of 2017 from the 2016 period primarily driven by a period-over-period increase in consolidated passenger yields.

Cargo revenue increased $22 million, or 13.1%, in the second quarter of 2017 from the 2016 period primarily driven by an increase in freight volume.

 

42


Other revenue primarily includes revenue associated with American’s loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $133 million, or 11.2%, in the second quarter of 2017 from the 2016 period primarily driven by an increase in loyalty program revenue. In the second quarters of 2017 and 2016, other revenue associated with American’s loyalty program was $581 million and $461 million, respectively, of which $549 million and $430 million, respectively, related to the marketing component of mileage sales and other marketing related payments. This period-over-period increase was primarily due to revenues associated with American’s new co-branded credit card agreements that became effective in the third quarter of 2016.

Total operating revenues in the second quarter of 2017 increased $742 million, or 7.2%, from the 2016 period driven principally by a 6.5% increase in total passenger revenues as described above.

Mainline Operating Expenses

 

     Three Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $     1,510      $     1,314      $        196       14.9

Salaries, wages and benefits

       2,999        2,668        331       12.5

Maintenance, materials and repairs

       495        453        42       9.4

Other rent and landing fees

       452        458        (6 )       (1.2 )

Aircraft rent

       294        302        (8 )       (2.8 )

Selling expenses

       376        334        42       12.5

Depreciation and amortization

       418        374        44       11.5

Special items, net

       202        62        140       nm

Other

       1,200        1,128        72       6.3
    

 

 

      

 

 

      

 

 

     

Total mainline operating expenses

     $ 7,946      $ 7,093      $ 853       12.0
    

 

 

      

 

 

      

 

 

     

Mainline operating expenses increased $853 million, or 12.0%, in the second quarter of 2017 from the 2016 period. The increase in operating expenses was primarily driven by higher salaries, wages and benefits as well as higher fuel costs. Detailed explanations related to the changes in American’s mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes increased 14.9% primarily due to a 14.5% increase in the average price per gallon of fuel to $1.62 in the second quarter of 2017 from $1.41 in the 2016 period.

 

   

Salaries, wages and benefits increased 12.5% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016.

 

   

Maintenance, materials and repairs increased 9.4% as compared to the 2016 period primarily due to a contract change impacting the timing of maintenance expenses incurred. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown. Previously this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed.

 

   

Selling expenses increased 12.5% primarily due to higher revenues in the second quarter of 2017 as compared to the 2016 period, resulting in higher commissions.

 

   

Depreciation and amortization increased 11.5% primarily due to aircraft purchased in connection with American’s fleet renewal program.

 

   

Other operating expenses increased 6.3% primarily due to expenses associated with improving our product offerings, customer experience and operational reliability.

 

43


Operating Special Items, Net

 

         Three Months Ended June 30,    
     2017    2016
     (In millions)

Merger integration expenses (1)

     $ 68      $ 97

Fleet restructuring expenses (2)

       48        15

Mark-to-market adjustments for bankruptcy obligations and other

       38        (56 )

Labor contract expenses (3)

       45       

Other operating charges, net

       3        6
    

 

 

      

 

 

 

Total mainline operating special items, net

       202        62

Regional operating special items, net (4)

       1        3
    

 

 

      

 

 

 

Total operating special items, net

     $ 203      $ 65
    

 

 

      

 

 

 

 

(1) 

Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 period also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.

 

(2) 

Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.

 

(3) 

Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.

 

(4) 

Regional operating special items, net principally related to Merger integration expenses.

Regional Operating Expenses

 

     Three Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $ 329      $ 279      $ 50        18.0

Other

       1,300        1,231        69        5.6
    

 

 

      

 

 

      

 

 

      

Total regional operating expenses

     $ 1,629      $ 1,510      $   119        7.9
    

 

 

      

 

 

      

 

 

      

Regional operating expenses increased $119 million, or 7.9%, in the second quarter of 2017 from the 2016 period. The period-over-period increase was primarily due to a $50 million, or 18.0%, increase in fuel costs and a $69 million, or 5.6%, increase in other regional operating expenses. The average price per gallon of fuel increased 15.9% to $1.69 in the second quarter of 2017 from $1.46 in the 2016 period, on a 1.8% increase in consumption. The increase in other regional operating expenses was primarily driven by increased capacity. See Note 8 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B for further information on regional expenses.

Nonoperating Results

 

     Three Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Interest income

     $ 53      $ 25      $ 28       nm

Interest expense, net

       (246)          (228)                (18       8.4

Other, net

       (5)          (26)          21       (82.7 )
    

 

 

      

 

 

      

 

 

     

Total nonoperating expense, net

     $     (198)        $     (229)        $ 31       (13.4 )
    

 

 

      

 

 

      

 

 

     

American’s short-term investments in each period consisted of highly liquid investments that provided relatively nominal returns. Interest income increased $28 million principally due to an increase in interest rates, which drove more than a 50 basis point increase in average yields in the second quarter of 2017 as compared to the 2016 period.

Interest expense, net increased $18 million in the second quarter of 2017 as compared to the 2016 period primarily due to higher outstanding debt as a result of aircraft financings associated with American’s fleet renewal program.

 

44


Other nonoperating expense, net in the 2016 period primarily included $36 million of net special charges consisting of debt issuance and extinguishment costs associated with a bond refinancing, offset in part by $17 million of foreign currency gains.

Income Taxes

In the second quarter 2017, American recorded an income tax provision of $502 million, which was substantially non-cash due to utilization of its NOLs. Substantially all of American’s income before income taxes is attributable to the United States. At December 31, 2016, American had approximately $11.3 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017.

See Note 4 to American’s Condensed Consolidated Financial Statements in Part I, Item 1B for additional information on income taxes.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

American realized pre-tax income of $1.7 billion and $2.7 billion in the first six months of 2017 and 2016, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $2.1 billion and $2.9 billion in the first six months of 2017 and 2016, respectively.

American’s pre-tax results on both a GAAP basis and excluding pre-tax net special items for the first six months of 2017 were principally driven by higher fuel costs as well as higher salaries, wages and benefits, which were offset in part by higher revenues.

Operating Revenues

 

     Six Months Ended
June 30,
   Increase
(Decrease)
   Percent
Increase
(Decrease)
     2017    2016      
     (In millions, except percentage changes)

Mainline passenger

     $ 14,353      $ 13,773      $ 580        4.2

Regional passenger

       3,384        3,309        75        2.3

Cargo

       368        336        32        9.8

Other

       2,617        2,369        248        10.5
    

 

 

      

 

 

      

 

 

      

Total operating revenues

     $ 20,722      $ 19,787      $      935        4.7
    

 

 

      

 

 

      

 

 

      

Total passenger revenues increased $655 million, or 3.8%, in the first six months of 2017 from the 2016 period primarily driven by a period-over-period increase in consolidated passenger yields.

Cargo revenue increased $32 million, or 9.8%, in the first six months of 2017 from the 2016 period primarily driven by an increase in freight volume.

Other revenue primarily includes revenue associated with American’s loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $248 million, or 10.5%, in the first six months of 2017 from the 2016 period primarily driven by an increase in loyalty program revenue. In the first six months of 2017 and 2016, other revenue associated with American’s loyalty program was $1.2 billion and $952 million, respectively, of which $1.1 billion and $856 million, respectively, related to the marketing component of mileage sales and other marketing related payments. This period-over-period increase was primarily due to revenues associated with American’s new co-branded credit card agreements that became effective in the third quarter of 2016.

Total operating revenues in the first six months of 2017 increased $935 million, or 4.7%, from the 2016 period driven principally by a 3.8% increase in total passenger revenues as described above.

 

45


Mainline Operating Expenses

 

     Six Months Ended
June 30,
   Increase
(Decrease)
  Percent
Increase
(Decrease)
     2017    2016     
     (In millions, except percentage changes)

Aircraft fuel and related taxes

     $ 2,912      $ 2,343      $ 569       24.2

Salaries, wages and benefits

       5,823        5,318        505       9.5

Maintenance, materials and repairs

       987        871        116       13.3

Other rent and landing fees

       892        879        13       1.5

Aircraft rent

       589        609        (20 )       (3.3 )

Selling expenses

       694        642        52       8.0

Depreciation and amortization

       822        729        93       12.8

Special items, net

       320        161        159       99.4

Other

       2,354        2,208        146       6.6
    

 

 

      

 

 

      

 

 

     

Total mainline operating expenses

     $     15,393      $     13,760      $       1,633       11.9
    

 

 

      

 

 

      

 

 

     

Mainline operating expenses increased $1.6 billion, or 11.9%, in the first six months of 2017 from the 2016 period. The increase in operating expenses was primarily driven by higher fuel costs as well as salaries, wages and benefits. Detailed explanations related to the changes in American’s mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes increased 24.2% primarily due to a 25.7% increase in the average price per gallon of fuel to $1.65 in the first six months of 2017 from $1.31 in the 2016 period, offset in part by a 1.1% decrease in gallons of fuel consumed.

 

   

Salaries, wages and benefits increased 9.5% primarily due to mid-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016.

 

   

Maintenance, materials and repairs increased 13.3% as compared to the 2016 period primarily due to a contract change impacting the timing of maintenance expenses incurred. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown. Previously this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed.

 

   

Selling expenses increased 8.0% primarily due to higher revenues in the first six months of 2017 as compared to the 2016 period, resulting in higher commissions.

 

   

Depreciation and amortization increased 12.8% primarily due to aircraft purchased in connection with American’s fleet renewal program.

 

   

Other operating expenses increased 6.6% primarily due to expenses associated with improving our product offerings, customer experience and operational reliability.

Operating Special Items, Net

 

     Six Months Ended June 30,
     2017    2016
     (In millions)

Merger integration expenses (1)

     $ 130      $ 201

Fleet restructuring expenses (2)

       111        41

Mark-to-market adjustments for bankruptcy obligations and other

       20        (61 )