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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2007.
[ ]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 1-2691.
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1502798
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (817) 963-1234
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer" and "large
accelerated filer" in Rule 12b-2 of the Exchange Act. Large
Accelerated Filer Accelerated Filer X Non-accelerated
Filer
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of April 13, 2007.
The registrant meets the conditions set forth in, and is filing
this form with the reduced disclosure format prescribed by,
General Instructions H(1)(a) and (b) of Form 10-Q.
INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three months ended March
31, 2007 and 2006
Condensed Consolidated Balance Sheets -- March 31, 2007 and
December 31, 2006
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 2007 and 2006
Notes to Condensed Consolidated Financial Statements -- March 31,
2007
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits
SIGNATURE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended
March 31,
2007 2006
Revenues
Passenger $ 4,326 $4,244
Regional Affiliates 558 569
Cargo 201 186
Other revenues 317 328
Total operating revenues 5,402 5,327
Expenses
Wages, salaries and benefits 1,511 1,576
Aircraft fuel 1,275 1,332
Regional payments to AMR Eagle 544 532
Other rentals and landing fees 301 286
Commissions, booking fees and credit
card expense 249 269
Depreciation and amortization 242 240
Maintenance, materials and repairs 195 187
Aircraft rentals 148 141
Food service 125 123
Other operating expenses 629 589
Total operating expenses 5,219 5,275
Operating Income 183 52
Other Income (Expense)
Interest income 76 52
Interest expense (187) (213)
Interest capitalized 9 7
Related party interest - net (20) 6
Miscellaneous - net (10) (10)
(132) (158)
Earnings (Loss) Before Income Taxes 51 (106)
Income tax - -
Net Earnings (Loss) $ 51 $(106)
The accompanying notes are an integral part of these financial statements.
-1-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
March 31, December 31,
2007 2006
Assets
Current Assets
Cash $ 142 $ 120
Short-term investments 5,165 4,527
Restricted cash and short-term investments 471 468
Receivables, net 1,092 957
Inventories, net 457 465
Other current assets 341 213
Total current assets 7,668 6,750
Equipment and Property
Flight equipment, net 11,449 11,524
Other equipment and property, net 2,356 2,343
Purchase deposits for flight equipment 177 177
13,982 14,044
Equipment and Property Under Capital Leases
Flight equipment, net 745 765
Other equipment and property, net 93 99
838 864
Route acquisition costs and airport operating
and gate lease rights, net 1,137 1,143
Other assets 2,983 3,049
$26,608 $25,850
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities
Accounts payable $ 1,111 $ 987
Accrued liabilities 2,023 2,164
Air traffic liability 4,321 3,782
Payable to affiliates, net 1,486 1,071
Current maturities of long-term debt 946 1,012
Current obligations under capital leases 124 101
Total current liabilities 10,011 9,117
Long-term debt, less current maturities 7,457 7,787
Obligations under capital leases,
less current obligations 750 824
Pension and postretirement benefits 5,364 5,340
Other liabilities, deferred gains and
deferred credits 3,845 3,848
Stockholder's Equity (Deficit)
Common stock - -
Additional paid-in capital 3,791 3,667
Accumulated other comprehensive loss (1,327) (1,399)
Accumulated deficit (3,283) (3,334)
(819) (1,066)
$26,608 $25,850
The accompanying notes are an integral part of these financial statements.
-2-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Three Months Ended March 31,
2007 2006
Net Cash Provided by Operating Activities $ 814 $ 732
Cash Flow from Investing Activities:
Capital expenditures (164) (101)
Net increase in short-term investments (641) (440)
Proceeds from sale of equipment and property 11 1
Other (1) -
Net cash used by investing activities (795) (540)
Cash Flow from Financing Activities:
Payments on long-term debt and capital lease
obligations (447) (184)
Reimbursement from construction reserve account 42 48
Funds transferred from (to) affiliates, net 408 (45)
Net cash provided by (used by) financing
activities 3 (181)
Net increase in cash 22 11
Cash at beginning of period 120 133
Cash at end of period $ 142 $ 144
The accompanying notes are an integral part of these financial statements.
-3-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. American Airlines, Inc. (American or the Company) is a
wholly owned subsidiary of AMR Corporation (AMR). The condensed
consolidated financial statements also include the accounts of
variable interest entities for which the Company is the primary
beneficiary. For further information, refer to the consolidated
financial statements and footnotes thereto included in the American
Airlines, Inc. Annual Report on Form 10-K/A for the year ended
December 31, 2006 (2006 Form 10-K).
2.On March 28, 2007, American announced it will pull forward an order
with The Boeing Company to take delivery of three 737-800 aircraft
in 2009 that American had previously committed to acquire in 2016.
American also announced it intends to continue pulling forward
other aircraft from their 2013 to 2016 delivery schedules to the
2009 to 2012 timeframe. As of March 31, 2007, the Company had
commitments to acquire three Boeing 737-800s in 2009 and an
aggregate of 44 Boeing 737-800s and seven Boeing 777-200ERs in 2013
through 2016. Future payments for all aircraft, including the
estimated amounts for price escalation, are currently estimated to
be approximately $2.8 billion, with the majority occurring in 2011
through 2016. However, if the Company commits to accelerating the
delivery dates of a significant number of aircraft in the future, a
significant portion of the $2.8 billion commitment will be
accelerated into earlier periods, including 2008 and 2009.
3.Accumulated depreciation of owned equipment and property at March
31, 2007 and December 31, 2006 was $10.1 billion and $10.0 billion,
respectively. Accumulated amortization of equipment and property
under capital leases was $1.1 billion at both March 31, 2007 and
December 31, 2006.
4.In April 2007, the United States and the European Union approved
an "open skies" air services agreement that provides airlines from
the United States and E.U. member states open access to each
other's markets, with freedom of pricing and unlimited rights to
fly beyond the United States and beyond each E.U. member state.
Under the agreement, every U.S. and E.U. airline is authorized to
operate between airports in the United States and London's Heathrow
Airport. Only three airlines besides American were previously
allowed to provide that Heathrow service. The agreement will
result in the Company facing increased competition in serving
Heathrow if additional carriers are able to obtain necessary slots
and terminal facilities. However, the Company believes that
American and the other carriers who currently have existing
authorities and the related slots and facilities, will continue to
hold a significant advantage after the advent of open skies. The
Company has recorded route acquisition costs (including
international routes and slots) of $829 million as of March 31,
2007, including a significant amount related to operations at
Heathrow. The Company considers these assets indefinite life
assets under Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangibles" and as a result they are not
amortized but instead are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the
asset might be impaired. The Company completed an impairment
analysis on the Heathrow routes (including slots) effective March
31, 2007 and concluded that no impairment exists. The Company
believes its estimates and assumptions are reasonable, however,
given the significant uncertainty regarding how open skies will
ultimately affect its operations at Heathrow, the actual results
could differ from those estimates. The Company continues to
evaluate the appropriate method of accounting for its routes in
conjunction with its evaluation of the impact of the open skies
agreement on the Company's operations.
-4-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5.On January 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48 "Accounting for Uncertainty
in Income Taxes" (FIN 48). FIN 48 prescribes a recognition
threshold that a tax position is required to meet before being
recognized in the financial statements and provides guidance on
derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition issues
The Company has an unrecognized tax benefit of approximately $38
million which did not change significantly during the three months
ended March 31, 2007. The application of FIN 48 would have
resulted in an immaterial change in retained earnings, except that
it was fully offset by the application of a valuation allowance.
In addition, future changes in the unrecognized tax benefit will
have no impact on the effective tax rate due to the existence of
the valuation allowance. Accrued interest on tax positions is
recorded as a component of interest expense but is not significant
at March 31, 2007. The Company does not reasonably estimate that
the unrecognized tax benefit will change significantly within the
next twelve months.
The Company files its tax returns as prescribed by the tax laws of
the jurisdictions in which it operates. The Company is currently
under audit by the Internal Revenue Service for its 2001 through
2003 tax years with an anticipated closing date in 2007. The
Company's 2004 and 2005 tax years are still subject to examination.
Various state and foreign jurisdiction tax years remain open to
examination as well, though the Company believes any additional
assessment will be immaterial to its consolidated financial
statements.
As discussed in Note 8 to the consolidated financial statements in
the 2006 Form 10-K, the Company has a valuation allowance against
the full amount of its net deferred tax asset. The Company
currently provides a valuation allowance against deferred tax
assets when it is more likely than not that some portion, or all of
its deferred tax assets, will not be realized. The Company's
deferred tax asset valuation allowance increased approximately $25
million during the three months ended March 31, 2007 to $1.8
billion as of March 31, 2007, including the impact of comprehensive
income for the three months ended March 31, 2007, changes described
above from applying FIN 48 and certain other adjustments.
Under special IRS rules (the "Section 382 Limitation"), cumulative
stock purchases by AMR's material shareholders exceeding 50% during
a 3-year period can potentially limit a company's future use of net
operating losses (NOL's). Such limitation is currently increased
by "built-in gains", as provided by current guidance. The Company
is not currently subject to the "Section 382 Limitation", and if it
were triggered in a future period, under current tax rules, is not
expected to significantly impact the recorded value or timing of
utilization of AMR's NOL's.
Various taxes and fees assessed on the sale of tickets to end
customers are collected by the Copmany as an agent and remitted to
taxing authorities. These taxes and fees have been presented on a
net basis in the accompanying condensed consolidate statements of
operations and recorded as a liability until remitted to the
appropriate taxing authority.
-5-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6.On March 30, 2007, American paid in full the $285 million
principal balance of its senior secured revolving credit facility. As
of March 31, 2007, the $444 million term loan facility under the same
bank credit facility was still outstanding and the $285 million
balance of the revolving credit facility remains available to American
through maturity. The revolving credit facility amortizes at a rate
of $10 million quarterly through December 17, 2007. American's
obligations under the credit facility are guaranteed by AMR.
As of March 31, 2007, American had issued guarantees covering
approximately $1.1 billion of AMR's unsecured debt. In addition,
as of March 31, 2007, AMR and American had issued guarantees
covering approximately $368 million of AMR Eagle's secured debt.
7.On January 16, 2007, the AMR Board of Directors approved the
amendment and restatement of the 2005-2007 Performance Share Plan
for Officers and Key Employees and the 2005 Deferred Share Award
Agreement to permit settlement in a combination of cash and/or
stock. However, the amendments did not impact the fair value of
the awards. As a result, certain awards under these plans have
been accounted for as equity awards since that date and the Company
reclassified $113 million from Accrued liabilities to Additional
paid-in-capital in accordance with Statement of Financial
Accounting Standard No. 123 (revised 2004), "Share-Based Payment".
On January 26, 2007, AMR completed a public offering of 13 million
shares of its common stock. The Company realized $497 million from
the sale of equity. The proceeds from the transaction were
transferred to American.
8.The following table provides the components of net periodic benefit
cost for the three months ended March 31, 2007 and 2006 (in
millions):
Other Postretirement
Pension Benefits Benefits
2007 2006 2007 2006
Components of net periodic
benefit cost
Service cost $ 92 $ 99 $ 17 $ 18
Interest cost 168 161 47 47
Expected return on assets (187) (168) (4) (4)
Amortization of:
Prior service cost 4 4 (4) (2)
Unrecognized net (gain) loss 7 20 (2) 1
Net periodic benefit cost $ 84 $ 116 $ 54 $ 60
The Company expects to contribute approximately $364 million to its
defined benefit pension plans in 2007. The Company's estimates of
its defined benefit pension plan contributions reflect the
provisions of the Pension Funding Equity Act of 2004 and the
Pension Protection Act of 2006. Of the $364 million the Company
expects to contribute to its defined benefit pension plans in 2007,
the Company contributed $62 million during the three months ended
March 31, 2007 and contributed $118 million on April 13, 2007.
-6-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
9.As a result of the revenue environment, high fuel prices and the
Company's restructuring activities, the Company has recorded a
number of charges during the last few years. The following table
summarizes the components of these changes and the remaining
accruals for these charges (in millions):
Aircraft Facility
Charges Exit Costs Total
Remaining accrual at
December 31, 2006 $ 126 $ 19 $ 145
Adjustments - - -
Payments (7) - (7)
Remaining accrual at
March 31,2007 $ 119 $ 19 $ 138
Cash outlays related to the accruals for aircraft charges and
facility exit costs will occur through 2017 and 2018, respectively.
10.The Company includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting
and unrealized gains and losses on available-for-sale securities in
comprehensive income. For the three months ended March 31, 2007 and
2006, comprehensive income was $123 million and $86 million,
respectively. The difference between net income (loss) and
comprehensive income for the three months ended March 31, 2007 and
2006 is due primarily to the accounting for the Company's
derivative financial instruments.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related
commodities. As required by Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company assesses, both at the inception of
each hedge and on an on-going basis, whether the derivatives that
are used in its hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items. In doing so,
the Company uses a regression model to determine the correlation of
the change in prices of the commodities used to hedge jet fuel
(e.g. WTI Crude oil and NYMEX Heating oil) to the change in the
price of jet fuel. The Company also monitors the actual dollar
offset of the hedges' market values as compared to hypothetical jet
fuel hedges. The fuel hedge contracts are generally deemed to be
"highly effective" if the R-squared is greater than 80 percent and
the dollar offset correlation is within 80 percent to 125 percent.
The Company discontinues hedge accounting prospectively if it
determines that a derivative is no longer expected to be highly
effective as a hedge or if it decides to discontinue the hedging
relationship.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Information
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in documents
incorporated herein by reference, the words "expects," "plans,"
"anticipates," "indicates," "believes," "forecast," "guidance,"
"outlook," "may," "will," "should," and similar expressions are
intended to identify forward-looking statements. Similarly, statements
that describe our objectives, plans or goals are forward-looking
statements. Forward-looking statements include, without limitation,
the Company's expectations concerning operations and financial
conditions, including changes in capacity, revenues, and costs, future
financing plans and needs, overall economic conditions, plans and
objectives for future operations, and the impact on the Company of its
results of operations in recent years and the sufficiency of its
financial resources to absorb that impact. Other forward-looking
statements include statements which do not relate solely to historical
facts, such as, without limitation, statements which discuss the
possible future effects of current known trends or uncertainties, or
which indicate that the future effects of known trends or
uncertainties cannot be predicted, guaranteed or assured. All forward-
looking statements in this report are based upon information available
to the Company on the date of this report. The Company undertakes no
obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events, or otherwise.
Forward-looking statements are subject to a number of factors that
could cause the Company's actual results to differ materially from the
Company's expectations. The following factors, in addition to other
possible factors not listed, could cause the Company's actual results
to differ materially from those expressed in forward-looking
statements: the materially weakened financial condition of the
Company, resulting from its significant losses in recent years; the
ability of the Company to generate additional revenues and
significantly reduce its costs; changes in economic and other
conditions beyond the Company's control, and the volatile results of
the Company's operations; the Company's substantial indebtedness and
other obligations; the ability of the Company to satisfy existing
financial or other covenants in certain of its credit agreements;
continued high and volatile fuel prices and further increases in the
price of fuel, and the availability of fuel; the fiercely and
increasingly competitive business environment faced by the Company;
industry consolidation, competition with reorganized and reorganizing
carriers; low fare levels by historical standards and the Company's
reduced pricing power; the Company's potential need to raise
additional funds and its ability to do so on acceptable terms; changes
in the Company's corporate or business strategy; government regulation
of the Company's business; conflicts overseas or terrorist attacks;
uncertainties with respect to the Company's international operations;
outbreaks of a disease (such as SARS or avian flu) that affects travel
behavior; labor costs that are higher than the Company's competitors;
uncertainties with respect to the Company's relationships with
unionized and other employee work groups; increased insurance costs
and potential reductions of available insurance coverage; the
Company's ability to retain key management personnel; potential
failures or disruptions of the Company's computer, communications or
other technology systems; changes in the price of AMR's common stock;
and the ability of the Company to reach acceptable agreements with
third parties. Additional information concerning these and other
factors is contained in the Company's Securities and Exchange
Commission filings, including but not limited to the Company's 2006
Form 10-K (see in particular Item 1A "Risk Factors" in the 2006 Form
10-K).
Overview
The Company recorded net earnings of $51 million in the first quarter
of 2007 compared to a net loss of $106 million in the same period last
year. The Company's first quarter 2007 results were impacted by an
improvement in unit revenues (passenger revenue per available seat
mile) and by fuel prices that remain high by historical standards. In
addition, a significant number of weather related events impacted the
Company's first quarter results and the Company estimates these
disruptions decreased scheduled mainline departures for the first
quarter of 2007 by approximately 2.9 percent and reduced the Company's
revenue by $60 million during the quarter.
-8-
Mainline passenger unit revenues increased 4.5 percent for the first
quarter due to a 0.9 point load factor increase and a 3.3 percent
increase in passenger yield (passenger revenue per passenger mile)
compared to the same period in 2006. Although load factor performance
and passenger yield showed significant year-over-year improvement,
passenger yield remains low by historical standards. The Company
believes this is the result of excess industry capacity and its
reduced pricing power resulting from a number of factors, including
greater cost sensitivity on the part of travelers (especially
business travelers), increased competition from LCC's and pricing
transparency resulting from the use of the internet.
On March 28, 2007, American announced it will pull forward an order
with The Boeing Company to take delivery of three 737-800 aircraft in
2009 that American had previously committed to acquiring in 2016.
American also announced it intends to continue pulling forward other
aircraft from their 2013 to 2016 delivery schedules to the 2009 to
2012 timeframe. As the Company commits to accelerating the delivery
dates of aircraft, the related capital expenditure commitments will
be accelerated as well. Any decisions to accelerate aircraft
deliveries will depend on such factors as future economic and
industry conditions and the financial condition of the Company. See
Note 2 to the condensed consolidated financial statements for more
information.
The Company's ability to become consistently profitable and its
ability to continue to fund its obligations on an ongoing basis will
depend on a number of factors, many of which are largely beyond the
Company's control. Certain risk factors that affect the Company's
business and financial results are referred to under "Forward-Looking
Information" above and are discussed in the Risk Factors listed in
Item 1A (on pages 11-17) in the 2006 Form 10-K. In addition, four of
the Company's largest domestic competitors have filed for bankruptcy
in the last several years and have used this process to significantly
reduce contractual labor and other costs. In order to remain
competitive and to improve its financial condition, the Company must
continue to take steps to generate additional revenues and to reduce
its costs. Although the Company has a number of initiatives underway
to address its cost and revenue challenges, the ultimate success of
these initiatives is not known at this time and cannot be assured.
LIQUIDITY AND CAPITAL RESOURCES
Significant Indebtedness and Future Financing
The Company remains heavily indebted and has significant obligations
(including substantial pension funding obligations), as described more
fully under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2006 Form 10-K. As of the
date of this Form 10-Q, the Company believes it should have sufficient
liquidity to fund its operations for the foreseeable future, including
repayment of debt and capital leases, capital expenditures and other
contractual obligations. However, to maintain sufficient liquidity as
the Company continues to implement its restructuring and cost
reduction initiatives, and because the Company has significant debt,
lease and other obligations in the next several years, as well as
substantial pension funding obligations, the Company may need access
to additional funding. The Company also continues to evaluate the
economic benefits and other aspects of replacing some of the older
aircraft in its fleet prior to 2013. The Company's possible financing
sources primarily include: (i) a limited amount of additional secured
aircraft debt (a very large majority of the Company's owned aircraft,
including virtually all of the Company's Section 1110-eligible
aircraft, are encumbered) or sale-leaseback transactions involving
owned aircraft; (ii) debt secured by new aircraft deliveries; (iii)
debt secured by other assets; (iv) securitization of future operating
receipts; (v) the sale or monetization of certain assets; and (vi)
unsecured debt. However, the availability and level of these financing
sources cannot be assured, particularly in light of the Company's
recent financial results, substantial indebtedness, reduced credit
ratings, high fuel prices and the financial difficulties that have
been experienced in the airline industry. The inability of the Company
to obtain additional funding on acceptable terms would have a material
adverse impact on the ability of the Company to sustain its operations
over the long-term.
The Company's substantial indebtedness and other obligations could
have important consequences. For example, they could: (i) limit the
Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes, or
adversely affect the terms on which such financing could be obtained;
(ii) require the Company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness and other
obligations, thereby reducing the funds available for other purposes;
(iii) make the Company more vulnerable to economic downturns; (iv)
limit the Company's ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions; and (v) limit the Company's flexibility in planning for,
or reacting to, changes in its business and the industry in which it
operates.
-9-
Credit Facility Covenants
American has a secured bank credit facility which consists of a $285
million revolving credit facility, with a final maturity on June 17,
2009, and a fully drawn $444 million term loan facility, with a final
maturity on December 17, 2010 (the Revolving Facility and the Term
Loan Facility, respectively, and collectively, the Credit Facility).
On March 30, 2007, American paid in full the $285 million principal
balance of the Revolving Facility and as of March 31, 2007, it
remained undrawn. American's obligations under the Credit Facility
are guaranteed by AMR.
The Credit Facility contains a covenant (the Liquidity Covenant)
requiring American to maintain, as defined, unrestricted cash,
unencumbered short term investments and amounts available for drawing
under committed revolving credit facilities of not less than $1.25
billion for each quarterly period through the life of the Credit
Facility. In addition, the Credit Facility contains a covenant (the
EBITDAR Covenant) requiring AMR to maintain a ratio of cash flow
(defined as consolidated net income, before interest expense (less
capitalized interest), income taxes, depreciation and amortization and
rentals, adjusted for certain gains or losses and non-cash items) to
fixed charges (comprising interest expense (less capitalized interest)
and rentals). The required ratio was 1.30 to 1.00 for the four
quarter period ending March 31, 2007, and will increase gradually for
each four quarter period ending on each fiscal quarter thereafter
until it reaches 1.50 to 1.00 for the four quarter period ending June
30, 2009. AMR and American were in compliance with the Liquidity
Covenant and the EBITDAR covenant as of March 31, 2007 and expect to
be able to continue to comply with these covenants. However, given
fuel prices that are high by historical standards and the volatility
of fuel prices and revenues, it is difficult to assess whether AMR and
American will, in fact, be able to continue to comply with these
covenants, and there are no assurances that AMR and American will be
able to do so. Failure to comply with these covenants would result in
a default under the Credit Facility which - - if the Company did not
take steps to obtain a waiver of, or otherwise mitigate, the default -
- - could result in a default under a significant amount of the
Company's other debt and lease obligations and otherwise have a
material adverse impact on the Company.
Pension Funding Obligation
The Company expects to contribute approximately $364 million to its
defined benefit pension plans in 2007. The Company's estimates of its
defined benefit pension plan contributions reflect the provisions of
the Pension Funding Equity Act of 2004 and the Pension Protection Act
of 2006. Of the $364 million the Company expects to contribute to its
defined benefit pension plans in 2007, the Company contributed $62
million during the three months ended March 31, 2007 and contributed
$118 million on April 13, 2007.
Compensation
As described in Note 7 to the condensed consolidated financial
statements, during 2006 and January 2007, the AMR Board of Directors
approved the amendment and restatement of all of the outstanding
performance share plans, the related performance share agreements and
deferred share agreements that required settlement in cash. The plans
were amended to permit settlement in cash and/or stock; however, the
amendments did not impact the fair value of the awards under the
plans. These changes were made in connection with a grievance filed
by the Company's three labor unions which asserted that a cash
settlement may be contrary to a component of AMR's 2003 Annual
Incentive Program agreement with the unions.
American has a profit sharing program that provides variable
compensation that rewards frontline employees when American achieves
certain financial targets. Generally, the profit sharing plan
provides for a profit sharing pool for eligible employees equal to 15
percent of pre-tax income of American in excess of $500 million.
Based on current conditions, the Company's condensed consolidated
financial statements include an accrual for profit sharing. There can
be no assurance that the Company's forecasts will approximate actual
results. Additionally, reductions in the Company's forecasts of
income for 2007 could result in the reversal of a portion or all of
the previously recorded profit sharing expense.
-10-
Cash Flow Activity
At March 31, 2007, the Company had $5.3 billion in unrestricted cash
and short-term investments, an increase of $660 million from December
31, 2006, and $285 million available under the Revolving Facility.
Net cash provided by operating activities in the three-month period
ended March 31, 2007 was $814 million, an increase of $82 million
over the same period in 2006 primarily due to an improved revenue
environment and the impact of certain Company initiatives to improve
revenue. The Company contributed $62 million to its defined benefit
pension plans in the first quarter of 2007 compared to $36 million
during the first quarter of 2006.
Capital expenditures for the first three months of 2007 were $164
million and primarily included aircraft modifications and the cost of
improvements at New York's John F. Kennedy airport (JFK).
Substantially all of the Company's construction costs at JFK will be
reimbursed through a fund established from a previous financing
transaction. Substantially all of the Company's construction costs
at JFK will be reimbursed through a fund established from a previous
financing transaction.
On January 26, 2007, AMR completed a public offering of 13 million
shares of its common stock. AMR realized $497 million from the sale
of equity and the proceeds were transferred to American.
-11-
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2007 and 2006
Revenues
The Company's revenues increased approximately $75 million, or 1.4
percent, to $5.4 billion in the first quarter of 2007 from the same
period last year. American's passenger revenues increased by 1.9
percent, or $82 million, on a 2.5 percent decrease in capacity
(available seat mile) (ASM). American's passenger load factor
increased 0.9 points to 78.1 percent while passenger yield increased
by 3.3 percent to 13.28 cents. This resulted in an increase in
passenger revenue per available seat mile (RASM) of 4.5 percent to
10.38 cents. Following is additional information regarding American's
domestic and international RASM and capacity:
Three Months Ended March 31, 2007
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 10.19 1.0% 26.8 (3.1)%
International 10.71 11.3 14.9 (1.4)
DOT Latin America 11.54 10.3 7.8 1.3
DOT Atlantic 9.94 9.7 5.4 (2.1)
DOT Pacific 9.29 19.3 1.7 (10.5)
Regional Affiliates include two wholly owned subsidiaries, American
Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR
Eagle), and two independent carriers with which American has capacity
purchase agreements, Trans States Airlines, Inc. (Trans States) and
Chautauqua Airlines, Inc. (Chautauqua).
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, decreased $11 million, or 1.9 percent, to $558 million as a
result of decreased load factors and passenger yield. Regional
Affiliates' traffic decreased 0.7 percent to 2.3 billion revenue
passenger miles (RPMs), while capacity increased 0.5 percent to 3.3
billion ASMs, resulting in a 0.8 point decrease in the passenger load
factor to 69.1 percent.
-12-
Operating Expenses
The Company's total operating expenses decreased 1.1 percent, or $56
million, to $5.2 billion in the first quarter of 2007 compared to the
first quarter of 2006. American's mainline operating expenses per ASM
in the first quarter of 2007 increased 0.9 percent to 10.91 cents
compared to the first quarter of 2006. These increases are due
primarily to a significant number of weather related cancellations
that resulted in a 2.9 percent decrease in the Company's scheduled
mainline departures during the first quarter of 2007. In addition,
the Company's operating and financial results are significantly
affected by the price of jet fuel. Continuing high fuel prices,
additional increases in the price of fuel and/or disruptions in the
supply of fuel would further adversely affect the Company's financial
condition and results of operations.
(in millions) Three Months Change
Ended from Percentage
Operating Expenses March 31,2007 2006 Change
Wages, salaries and benefits $ 1,511 $(65) (4.1)%
Aircraft fuel 1,275 (57) (4.3)
Regional payments to AMR Eagle 544 12 2.2
Other rentals and landing fees 301 15 5.2
Commissions, booking fees and
credit card expense 249 (20) (7.4)
Depreciation and amortization 242 2 0.8
Maintenance, materials and repairs 195 8 4.3
Aircraft rentals 148 7 5.0
Food service 125 2 1.6
Other operating expenses 629 40 6.8
Total operating expenses $ 5,219 $(56) (1.1)%
Other Income (Expense)
Interest income increased $24 million due primarily to an increase in
short-term investment balances. Interest expense decreased $26
million as a result of a decrease in the Company's long-term debt
balance.
Income Tax Benefit
The Company did not record a net tax benefit associated with its first
quarter 2007 earnings and first quarter 2006 loss due to the Company
providing a valuation allowance, as discussed in Note 5 to the
condensed consolidated financial statements.
-13-
Regional Affiliates
The following table summarizes the combined capacity purchase activity
for the American Connection carriers and AMR Eagle for the three
months ended March 31, 2007 and 2006 (in millions):
Three Months Ended
March 31,
2007 2006
Revenues:
Regional Affiliates $ 558 $ 569
Other 23 24
$ 581 $ 593
Expenses:
Regional payments $ 591 $ 580
Other incurred expenses 77 74
$ 668 $ 654
In addition, passengers connecting to American's flights from American
Connection and AMR Eagle flights generated passenger revenues for
American flights of $413 million and $402 million in the first quarter
of 2007 and 2006, respectively, which are included in Revenues -
Passenger in the consolidated statements of operations.
Outlook
The Company currently expects second quarter 2007 mainline unit costs
to increase approximately 2.1 percent year over year and full year
2007 mainline unit cost to increase approximately 1.6 percent year
over year.
Capacity for American's mainline jet operations is expected to decline
approximately 3.1 percent in the second quarter compared to the second
quarter of 2006 and is expected to decline approximately 1.8 percent
for the full year 2007 compared to 2006.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The Company
believes its estimates and assumptions are reasonable; however, actual
results and the timing of the recognition of such amounts could differ
from those estimates. The Company has identified the following
critical accounting policies and estimates used by management in the
preparation of the Company's financial statements: accounting for long-
lived assets, passenger revenue, frequent flyer program, stock
compensation, pensions and other postretirement benefits, and income
taxes. These policies and estimates are described in the 2006 Form 10-
K. In addition, the following policy was added during the three
months ended March 31, 2007.
Routes - American performs annual impairment tests on its routes,
which are indefinite life intangible assets under Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangibles"
and as a result they are not amortized. The Company also performs
impairment tests when events and circumstances indicate that the
assets might be impaired. These tests are based on estimates of
discounted future cash flows, using assumptions based on historical
results adjusted to reflect the Company's best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. The Company's estimates of fair
value represent its best estimate based on industry trends and
reference to market rates and transactions.
The Company has recorded route acquisition costs (including
international routes and slots) of $829 million as of March 31, 2007,
including a significant amount related to operations at London
Heathrow. The Company completed an impairment analysis on the London
Heathrow routes (including slots) effective March 31, 2007 and
concluded that no impairment exists. The Company believes its
estimates and assumptions are reasonable, however, given the
significant uncertainty regarding how the recent open skies agreement
will ultimately affect its operations at Heathrow, the actual results
could differ from those estimates. In addition, the Company continues
to evaluate the appropriate method of accounting for its routes in
conjunction with its evaluation of the impact of the open skies
agreement on the Company's operations. See Note 4 to the condensed
consolidated financial statements for additional information.
-14-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the Company's 2006 Form 10-K. The
change in market risk for aircraft fuel is discussed below for
informational purposes.
The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analyses presented do
not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management
may take to mitigate the Company's exposure to such changes.
Therefore, actual results may differ. The Company does not hold or
issue derivative financial instruments for trading purposes.
Aircraft Fuel The Company's earnings are affected by changes in the
price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships
fuel and maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel, heating oil, and crude oil hedging
contracts. Market risk is estimated as a hypothetical 10 percent
increase in the March 31, 2007 cost per gallon of fuel. Based on
projected 2007 and 2008 fuel usage through March 31, 2008, such an
increase would result in an increase to aircraft fuel expense of
approximately $467 million in the twelve months ended March 31, 2008,
inclusive of the impact of effective fuel hedge instruments
outstanding at March 31, 2007, and assumes the Company's fuel hedging
program remains effective under Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Comparatively, based on projected 2007 fuel usage, such
an increase would have resulted in an increase to aircraft fuel
expense of approximately $478 million in the twelve months ended
December 31, 2007, inclusive of the impact of fuel hedge instruments
outstanding at December 31, 2006. The change in market risk is
primarily due to the increase in fuel prices.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related commodities.
As required by Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the
Company assesses, both at the inception of each hedge and on an on-
going basis, whether the derivatives that are used in its hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items. In doing so, the Company uses a regression model
to determine the correlation of the change in prices of the
commodities used to hedge jet fuel (e.g. WTI Crude oil and NYMEX
Heating oil) to the change in the price of jet fuel. The Company also
monitors the actual dollar offset of the hedges' market values as
compared to hypothetical jet fuel hedges. The fuel hedge contracts
are generally deemed to be "highly effective" if the R-squared is
greater than 80 percent and the dollar offset correlation is within 80
percent to 125 percent. The Company discontinues hedge accounting
prospectively if it determines that a derivative is no longer expected
to be highly effective as a hedge or if it decides to discontinue the
hedging relationship.
As of March 31, 2007, the Company had effective hedges, including
option contracts and collars, covering approximately 26 percent of its
estimated remaining 2007 fuel requirements and an insignificant amount
of its estimated fuel requirements thereafter. The consumption hedged
for the remainder of 2007 is capped at an average price of
approximately $64 per barrel of crude oil. A deterioration of the
Company's financial position could negatively affect the Company's
ability to hedge fuel in the future.
-15-
Item 4. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
Exchange Act. This term refers to the controls and procedures of a
company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Company's disclosure controls and procedures as
of March 31, 2007. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of March 31,
2007. During the quarter ending on March 31, 2007, there was no change
in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-16-
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1999, a class action lawsuit was filed, and in November
1999 an amended complaint was filed, against AMR, American, AMR Eagle,
Airlines Reporting Corporation, and the Sabre Group Holdings, Inc. in
the United States District Court for the Central District of
California, Western Division (Westways World Travel, Inc. v. AMR
Corp., et al.). The lawsuit alleges that requiring travel agencies to
pay debit memos to American for violations of American's fare rules
(by customers of the agencies): (1) breaches the Agent Reporting
Agreement between American and AMR Eagle and the plaintiffs;
(2) constitutes unjust enrichment; and (3) violates the Racketeer
Influenced and Corrupt Organizations Act of 1970 (RICO). On July 9,
2003, the court certified a class that included all travel agencies
who have been or will be required to pay money to American for debit
memos for fare rules violations from July 26, 1995 to the present.
The plaintiffs sought to enjoin American from enforcing the pricing
rules in question and to recover the amounts paid for debit memos,
plus treble damages, attorneys' fees, and costs. On February 24, 2005,
the court decertified the class. The claims against Airlines
Reporting Corporation have been dismissed, and in September 2005, the
Court granted Summary Judgment in favor of the Company and all other
defendants. Plaintiffs have filed an appeal to the United States
Court of Appeals for the Ninth Circuit. Although the Company believes
that the litigation is without merit, a final adverse court decision
could impose restrictions on the Company's relationships with travel
agencies, which could have a material adverse impact on the Company.
Between April 3, 2003 and June 5, 2003, three lawsuits were filed by
travel agents, some of whom opted out of a prior class action (now
dismissed) to pursue their claims individually against American, other
airline defendants, and in one case against certain airline defendants
and Orbitz LLC. The cases, Tam Travel et. al., v. Delta Air Lines et.
al., in the United States District Court for the Northern District of
California, San Francisco (51 individual agencies), Paula Fausky d/b/a
Timeless Travel v. American Airlines, et. al, in the United States
District Court for the Northern District of Ohio, Eastern Division (29
agencies) and Swope Travel et al. v. Orbitz et. al. in the United
States District Court for the Eastern District of Texas, Beaumont
Division (71 agencies) were consolidated for pre-trial purposes in the
United States District Court for the Northern District of Ohio,
Eastern Division. Collectively, these lawsuits seek damages and
injunctive relief alleging that the certain airline defendants and
Orbitz LLC: (i) conspired to prevent travel agents from acting as
effective competitors in the distribution of airline tickets to
passengers in violation of Section 1 of the Sherman Act; (ii)
conspired to monopolize the distribution of common carrier air travel
between airports in the United States in violation of Section 2 of the
Sherman Act; and that (iii) between 1995 and the present, the airline
defendants conspired to reduce commissions paid to U.S.-based travel
agents in violation of Section 1 of the Sherman Act. On September 23,
2005, the Fausky plaintiffs dismissed their claims with prejudice. On
September 14, 2006, the court dismissed with prejudice 28 of the Swope
plaintiffs. American continues to vigorously defend these lawsuits.
A final adverse court decision awarding substantial money damages or
placing material restrictions on the Company's distribution practices
would have a material adverse impact on the Company.
Miami-Dade County (the County) is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American and AMR
Eagle have been named as potentially responsible parties (PRPs) for
the contamination at MIA. During the second quarter of 2001, the
County filed a lawsuit against 17 defendants, including American, in
an attempt to recover its past and future cleanup costs (Miami-Dade
County, Florida v. Advance Cargo Services, Inc., et al. in the Florida
Circuit Court). The Company is vigorously defending the lawsuit. In
addition to the 17 defendants named in the lawsuit, 243 other agencies
and companies were also named as PRPs and contributors to the
contamination. The case is currently stayed while the parties pursue
an alternative dispute resolution process. The County has proposed
draft allocation models for remedial costs for the Terminal and Tank
Farm areas of MIA. While it is anticipated that American and AMR
Eagle will be allocated equitable shares of remedial costs, the
Company does not expect the allocated amounts to have a material
adverse effect on the Company.
-17-
American is defending an appeal of a lawsuit, filed as a class action
but not certified as such, arising from allegedly improper failure to
refund certain governmental taxes and fees collected by American upon
the sale of nonrefundable tickets when such tickets are not used for
travel. In Harrington v. Delta Air Lines, Inc., et al. (filed
November 24, 2004 in the United States District Court for the District
of Massachusetts), the plaintiffs sought unspecified actual damages
(trebled), declaratory judgment, injunctive relief, costs, and
attorneys' fees. The suit asserted various causes of action,
including breach of contract, conversion, and unjust enrichment
against American and numerous other airline defendants. The defendants
filed a motion to dismiss, which was granted. The plaintiffs appealed
to the First Circuit Court of Appeals. On February 7, 2007, the First
Circuit affirmed the dismissal. American is vigorously defending the
suit and believes it to be without merit. However, a final adverse
court decision requiring American to refund collected taxes and/or
fees could have a material adverse impact on the Company.
On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
and the Association of Professional Flight Attendants (APFA), the
union which represents the American's flight attendants (Ann M.
Marcoux, et al., v. American Airlines Inc., et al. in the United
States District Court for the Eastern District of New York). While a
class has not yet been certified, the lawsuit seeks on behalf of all
of American's flight attendants or various subclasses to set aside,
and to obtain damages allegedly resulting from, the April 2003
Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor
agreements American successfully reached with its unions in order to
avoid filing for bankruptcy in 2003. In a related case (Sherry
Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States
District Court for the Eastern District of New York), the court denied
a preliminary injunction against implementation of the RPA on June 30,
2003. The Marcoux suit alleges various claims against the APFA and
American relating to the RPA and the ratification vote on the RPA by
individual APFA members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the APFA of its duty of fair representation to
its members, violation by American of provisions of the Railway Labor
Act (RLA) through improper coercion of flight attendants into voting
or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). On
March 28, 2006, the district court dismissed all of various state law
claims against American, all but one of the LMRDA claims against the
APFA, and the claimed violations of RICO. This left the claimed
violations of the RLA and the duty of fair representation against
American and the APFA (as well as one LMRDA claim and one claim
against the APFA of a breach of its constitution). By letter dated
February 9, 2007, plaintiffs' counsel informed counsel for the
defendants that plaintiffs do not intend to pursue the LMRDA claim
against APFA further. Although the Company believes the case against
it is without merit and both American and the APFA are vigorously
defending the lawsuit, a final adverse court decision invalidating the
RPA and awarding substantial money damages would have a material
adverse impact on the Company.
-18-
On February 14, 2006, the Antitrust Division of the United States
Department of Justice (the "DOJ") served the Company with a grand jury
subpoena as part of an ongoing investigation into possible criminal
violations of the antitrust laws by certain domestic and foreign air
cargo carriers. At this time, the Company does not believe it is a
target of the DOJ investigation. The New Zealand Commerce Commission
notified the Company on February 17, 2006 that it is also
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On
February 22, 2006, the Company received a letter from the Swiss
Competition Commission informing the Company that it too is
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On
December 19, 2006, the Company received a request for information from
the European Commission seeking information regarding the Company's
revenue and pricing announcements for air cargo shipments to and from
the European Union. On January 23, 2007, the Brazilian competition
authorities, as part of an ongoing investigation, conducted an
unannounced search of the Company's cargo facilities in Sao Paulo,
Brazil. The authorities are investigating whether the Company and
certain other foreign and domestic air carriers violated Brazilian
competition laws by illegally conspiring to set fuel surcharges on
cargo shipments. The Company intends to cooperate fully with these
investigations. In the event that these or other investigations
uncover violations of the U.S. antitrust laws or the competition laws
of some other jurisdiction, such findings and related legal
proceedings could have a material adverse impact on the Company.
Approximately 44 purported class action lawsuits have been filed in
the U.S. against the Company and certain foreign and domestic air
carriers alleging that the defendants violated U.S. antitrust laws by
illegally conspiring to set prices and surcharges on cargo shipments.
These cases, along with other purported class action lawsuits in which
the Company was not named, were consolidated in the United States
District Court for the Eastern District of New York as In re Air Cargo
Shipping Services Antitrust Litigation, 06-MD-1775 on June 20, 2006.
Plaintiffs are seeking trebled money damages and injunctive relief.
The Company has not been named as a defendant in the consolidated
complaint filed by the plaintiffs. However, the plaintiffs have not
released any claims that they may have against the Company, and the
Company may later be added as a defendant in the litigation. If the
Company is sued on these claims, it will vigorously defend the suit,
but any adverse judgment could have a material adverse impact on the
Company. Also, on January 23, 2007, the Company was served with a
purported class action complaint filed against the Company, American,
and certain foreign and domestic air carriers in the Supreme Court of
British Columbia in Canada (McKay v. Ace Aviation Holdings, et al.).
The plaintiff alleges that the defendants violated Canadian
competition laws by illegally conspiring to set prices and surcharges
on cargo shipments. The complaint seeks compensatory and punitive
damages under Canadian law. American will vigorously defend these
lawsuits; however, any adverse judgment could have a material adverse
impact on the Company.
On June 20, 2006, the DOJ served the Company with a grand jury
subpoena as part of an ongoing investigation into possible criminal
violations of the antitrust laws by certain domestic and foreign
passenger carriers. At this time, the Company does not believe it is a
target of the DOJ investigation. The Company intends to cooperate
fully with this investigation. In the event that this or other
investigations uncover violations of the U.S. antitrust laws or the
competition laws of some other jurisdiction, such findings and related
legal proceedings could have a material adverse impact on the Company.
Approximately 52 purported class action lawsuits have been filed in
the U.S. against the Company and certain foreign and domestic air
carriers alleging that the defendants violated U.S. antitrust laws by
illegally conspiring to set prices and surcharges for passenger
transportation. These cases, along with other purported class action
lawsuits in which the Company was not named, were consolidated in the
United States District Court for the Northern District of California
as In re International Air Transportation Surcharge Antitrust
Litigation, M 06-01793 on October 25, 2006. Plaintiffs are seeking
trebled money damages and injunctive relief. American will vigorously
defend these lawsuits; however, any adverse judgment could have a
material adverse impact on the Company.
American is defending a lawsuit (Love Terminal Partners, L.P. et al.
v. The City of Dallas, Texas et al.) filed on July 17, 2006 in the
United States District Court in Dallas. The suit was brought by two
lessees of facilities at Dallas Love Field Airport against American,
the cities of Fort Worth and Dallas, Southwest Airlines, Inc., and the
Dallas/Fort Worth International Airport Board. The suit alleges that
an agreement by and between the five defendants with respect to Dallas
Love Field violates Sections 1 and 2 of the Sherman Act. Plaintiffs
seek injunctive relief and compensatory and statutory damages.
American will vigorously defend this lawsuit; however, any adverse
judgment could have a material adverse impact on the Company.
-19-
On August 21, 2006, a patent infringement lawsuit was filed against
American and American Beacon Advisors, Inc. (a wholly-owned subsidiary
of the Company), in the United States District Court for the Eastern
District of Texas (Ronald A. Katz Technology Licensing, L.P. v.
American Airlines, Inc., et al.). The plaintiff alleges that American
and American Beacon infringe a number of the plaintiff's patents, each
of which relates to automated telephone call processing systems. The
plaintiff is seeking past and future royalties, injunctive relief,
costs and attorneys' fees. Although the Company believes that the
plaintiff's claims are without merit and is vigorously defending the
lawsuit, a final adverse court decision awarding substantial money
damages or placing material restrictions on existing automated
telephone call system operations would have a material adverse impact
on the Company.
American is defending a lawsuit (Kelley Kivilaan v. American Airlines,
Inc.), filed on September 16, 2004 in the United States District Court
for the Middle District of Tennessee. The suit was brought by a
flight attendant who seeks to represent a purported class of current
and former flight attendants. The suit alleges that several of the
Company's medical benefits plans discriminate against females on the
basis of their gender in not providing coverage in all circumstances
for prescription contraceptives. Plaintiff seeks injunctive relief
and monetary damages. The case has not been certified as a class
action, but we anticipate that a motion for class certification will
be filed in the first quarter of 2007. American will vigorously
defend this lawsuit; however, any adverse judgment could have a
material adverse impact on the Company.
-20-
Item 5. Other Information
American has announced a pay plan, funded at 1.5 percent of base
salaries, for all American employees on U.S. payroll, to be effective
May 1, 2007. On April 18, 2007, the Board approved 1.5 percent
increases in the base salaries for officers (including the executive
officers of AMR and American), to be effective May 1, 2007.
Item 6. Exhibits
The following exhibits are included herein:
12 Computation of ratio of earnings to fixed charges for the three
months ended March 31, 2007 and 2006.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a).
32 Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code).
-21-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: April 20, 2007 BY: /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
-22-
Exhibit 12
AMERICAN AIRLINES, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions)
Three Months Ended March 31,
2007 2006
Earnings (loss):
Earnings (loss) before income taxes $ 51 $ (106)
Add: Total fixed charges (per below) 434 418
Less: Interest capitalized 9 7
Total earnings (loss) before income taxes $ 476 $ 305
Fixed charges:
Interest $ 207 $ 207
Portion of rental expense representative
of the interest factor 224 206
Amortization of debt expense 3 5
Total fixed charges $ 434 $ 418
Ratio of earnings to fixed charges 1.10 -
Coverage deficiency $ - $ 113
Note: As of March 31,2007 American has guaranteed approximately $1.1 billion
of AMR's unsecured debt and approximately $368 million of AMR Eagle's
secured debt. The impact of these unconditional guarantees is not
included in the above computation
Exhibit 31.1
I, Gerard J. Arpey, certify that:
1.I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2.Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4.The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b)Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 20, 2007 /s/ Gerard J. Arpey
Gerard J. Arpey
Chairman, President and Chief
Executive Officer
Exhibit 31.2
I, Thomas W. Horton, certify that:
1.I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2.Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4.The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b)Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 20, 2007 /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
Exhibit 32
American Airlines, Inc.
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code), each of the undersigned officers of American
Airlines, Inc., a Delaware corporation (the Company), does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended March 31,
2007 (the Form 10-Q) of the Company fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and information contained in the Form 10-Q fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Date: April 20, 2007 /s/ Gerard J. Arpey
Gerard J. Arpey
Chairman, President and Chief
Executive Officer
Date: April 20, 2007 /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and
is not being filed as part of the Form 10-Q or as a separate
disclosure document.