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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For fiscal year ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number 1-2691.
AMERICAN AIRLINES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1502798
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4333 Amon Carter Blvd. 76155
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Fort Worth, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (817) 963-1234
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
American Airlines, Inc. is a wholly-owned subsidiary of AMR Corporation, and
there is no market for the registrant's common stock. As of March 1, 1997,
1,000 shares of the registrant's common stock were outstanding.
The registrant meets the conditions set forth in, and is filing this form with
the reduced disclosure format prescribed by, General Instructions I(1)(a) and
I(1)(b) of Form 10-K.
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PART I
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ITEM 1. BUSINESS
American Airlines, Inc. (American or the Company), the principal subsidiary of
AMR Corporation (AMR), was founded in 1934.
On July 2, 1996, AMR completed the reorganization of its information
technology businesses known as The SABRE Group into a separate, wholly-owned
subsidiary of AMR known as The SABRE Group Holdings, Inc. (the Reorganization).
Prior to the Reorganization, most of The SABRE Group's business units
were divisions of American. As part of the Reorganization, all of the
businesses of The SABRE Group, including American's SABRE Travel Information
Network, SABRE Computer Services, SABRE Development Services, and SABRE
Interactive divisions (collectively, the Information Services Group), and
certain buildings, equipment, and American's leasehold interest in certain
other buildings used by The SABRE Group were combined in subsidiaries of
American, which were then dividended to AMR.
Following the Reorganization, American operates in only one business
segment which consists primarily of American's Passenger and Cargo divisions.
AMERICAN'S PASSENGER DIVISION is one of the largest scheduled passenger
airlines in the world. At the end of 1996, American provided scheduled jet
service to more than 160 destinations throughout North America, the Caribbean,
Latin America, Europe and the Pacific.
AMERICAN'S CARGO DIVISION is one of the largest scheduled air freight carriers
in the world. It provides a full range of freight and mail services to shippers
throughout the airline's system. In addition, through cooperative agreements
with other carriers, it has the ability to transport shipments to virtually any
country in the world.
COMPETITION
AIR TRANSPORTATION Most major air carriers have developed hub-and-spoke systems
and schedule patterns in an effort to maximize the revenue potential of their
service. American operates four hubs: Dallas/Fort Worth, Chicago O'Hare, Miami
and San Juan, Puerto Rico. In 1995, American implemented schedule reductions
which ended the airline's hub operations at Raleigh/Durham and Nashville. Delta
Air Lines and United Airlines have hub operations at Dallas/Fort Worth and
Chicago O'Hare, respectively.
The American Eagle carriers owned by AMR Eagle, Inc., an AMR subsidiary,
increase the number of markets AMR's Airline Group serves by providing
connections to American at its hubs and certain other major airports. The
American Eagle carriers serve smaller markets through Dallas/Fort Worth,
Chicago, Miami, San Juan, Los Angeles and New York John F. Kennedy
International Airport. American's competitors also own or have marketing
agreements with regional carriers which provide service at their major hubs.
In addition to its extensive domestic service, American provides
international service to the Caribbean, Canada, Latin America, Europe and
Japan. American's operating revenues from foreign operations were approximately
$4.7 billion in 1996 and 1995, and $4.3 billion in 1994. Additional information
about the Company's foreign operations is included in Note 12 to the
consolidated financial statements.
Service over almost all of American's routes is highly competitive.
Currently, any carrier deemed fit by the U.S. Department of Transportation
(DOT) is free to operate scheduled passenger service between any two points
within the U.S. and its possessions. On most of its non-stop routes, American
competes with at least one, and usually more than one, major domestic airline
including: America West Airlines, Continental Airlines, Delta Air Lines,
Northwest Airlines, Southwest Airlines, Trans World Airlines, United Airlines,
and US Airways. Competition is even greater between cities that require a
connection, where as many as eight airlines may compete via their respective
hubs. American also competes with national, regional, all-cargo, and charter
carriers and, particularly on shorter segments, ground transportation.
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On all of its routes, pricing decisions are affected by competition from
other airlines, some of which have cost structures significantly lower than
American's and can therefore operate profitably at lower fare levels.
Approximately 39 percent of American's bookings are impacted by competition
from lower-cost carriers. American and its principal competitors use inventory
management systems that permit them to vary the number of discount seats
offered on each flight in an effort to maximize revenues, yet still be price
competitive with lower-cost carriers.
Competition in many international markets is subject to extensive
government regulation. In these markets, American competes with foreign
investor-owned carriers, state-owned airlines and U.S. carriers that have been
granted authority to provide scheduled passenger and cargo service between the
U.S. and various overseas locations. American's operating authority in these
markets is subject to aviation agreements between the U.S. and the respective
countries, and in some cases, fares and schedules require the approval of the
DOT and the relevant foreign governments. Because international air
transportation is governed by bilateral or other agreements between the U.S.
and the foreign country or countries involved, changes in U.S. or foreign
government aviation policy could result in the alteration or termination of
such agreements, diminish the value of such route authorities, or otherwise
affect American's international operations. Bilateral agreements between the
U.S. and various foreign countries served by American are subject to frequent
renegotiation.
The major U.S. carriers have some advantage over foreign competitors in
their ability to generate traffic from their extensive domestic route systems.
In many cases, however, U.S. carriers are limited in their rights to carry
passengers beyond designated gateway cities in foreign countries. Some of
American's foreign competitors are owned and subsidized by foreign governments.
To improve their access to each others' markets, various U.S. and foreign
carriers -- including American -- have made substantial equity investments in,
or established marketing relationships with, other carriers. American currently
has code-sharing programs with Canadian Airlines International, Qantas Airways,
Singapore Airlines, South African Airways, Gulf Air, British Midland, LOT
Polish Airlines, and Aspen Mountain Air/Lone Star Airlines. Furthermore, in
June 1996, AMR announced its plans to create a worldwide alliance between
American and British Airways Plc. Subject to regulatory approval, the two
carriers will introduce extensive code sharing across each other's networks and
establish full reciprocity between their frequent flyer programs. Additionally,
the carriers will combine their passenger and cargo activities between the
United States and Europe and will share the resulting profits on these
services. In the coming years, the Company expects to develop these
code-sharing programs further and to evaluate new alliances with other
international carriers.
American believes that it has several advantages relative to its
competition. Its fleet is young, efficient and quiet. It has a comprehensive
domestic and international route structure, anchored by efficient hubs, which
permit it to take full advantage of whatever traffic growth occurs. The Company
believes American's AAdvantage frequent flyer program, which is the largest
program in the industry, and its superior service also give it a competitive
advantage.
REGULATION
GENERAL The Airline Deregulation Act of 1978, as amended, eliminated most
domestic economic regulation of passenger and freight transportation. However,
the DOT and the Federal Aviation Administration (FAA) still exercise certain
regulatory authority over air carriers under the Federal Aviation Act of 1958,
as amended. The DOT maintains jurisdiction over international route authorities
and certain consumer protection matters, such as advertising, denied boarding
compensation and baggage liability.
The FAA regulates flying operations generally, including establishing
personnel, aircraft and security standards. In addition, the FAA has
implemented a number of requirements that American is incorporating into its
maintenance program. These matters relate to, among other things, inspection
and maintenance of aging aircraft, corrosion control, collision avoidance and
windshear detection. Based on its current implementation schedule, American
expects to be in compliance with the applicable requirements within the
required time periods.
The U.S. Department of Justice has jurisdiction over airline antitrust
matters. The U.S. Postal Service has jurisdiction over certain aspects of the
transportation of mail and related services. Labor relations in the air
transportation industry are regulated under the Railway Labor Act, which vests
in the National Mediation Board
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certain regulatory powers with respect to disputes between airlines and labor
unions arising under collective bargaining agreements.
AIRLINE FARES Airlines are permitted to establish their own domestic fares
without governmental regulation, and the industry is characterized by
substantial price competition. The DOT maintains authority over international
fares, rates and charges. International fares and rates are also subject to the
jurisdiction of the governments of the foreign countries which American serves.
While air carriers are required to file and adhere to international fare and
rate tariffs, many international markets are characterized by substantial
commissions, overrides, and discounts to travel agents, brokers and
wholesalers.
Fare discounting by competitors has historically had a negative effect
on American's financial results because American is generally required to match
competitors' fares to maintain passenger traffic. During recent years, a number
of new low-cost airlines have entered the domestic market and several major
airlines have begun to implement efforts to lower their cost structures.
Further fare reductions, domestic and international, may occur in the future.
If fare reductions are not offset by increases in passenger traffic or changes
in the mix of traffic that improves yields, American's operating results will
be negatively impacted.
AIRPORT ACCESS In 1968, the FAA issued a rule designating New York John F.
Kennedy, New York LaGuardia, Washington National, Chicago O'Hare and Newark
airports as high density traffic airports. Newark was subsequently removed from
the high-density airport classification. The rule adopted hourly take-off and
landing slot allocations for each of these airports. Currently, the FAA permits
the purchasing, selling, leasing and trading of these slots by airlines and
others, subject to certain restrictions. Certain foreign airports, including
London Heathrow, a major European destination for American, also have slot
allocations.
American currently has sufficient slot authorizations to operate its
existing flights and has generally been able to obtain slots to expand its
operations and change its schedules. However, there is no assurance that
American will be able to obtain slots for these purposes in the future because,
among other factors, slot allocations are subject to changes in government
policies.
ENVIRONMENTAL MATTERS The Company is subject to various laws and government
regulations concerning environmental matters and employee safety and health in
the U.S. and other countries. U.S. federal laws that have a particular impact
on the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the
Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act,
the Safe Drinking Water Act, and the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or the Superfund Act). The Company is
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency (EPA), OSHA, and other federal agencies have
been authorized to promulgate regulations that have an impact on the Company's
operations. In addition to these federal activities, various states have been
delegated certain authorities under the aforementioned federal statutes. Many
state and local governments have adopted environmental and employee safety and
health laws and regulations, some of which are similar to federal requirements.
As a part of its continuing safety, health and environmental program, the
Company has maintained compliance with such requirements without any material
adverse effect on its business.
For purposes of noise standards, jet aircraft are rated by categories or
"stages." The ANCA requires the phase-out by December 31, 1999, of Stage II
aircraft operations, subject to certain exceptions. Under final regulations
issued by the FAA in 1991, air carriers are required to reduce, by modification
or retirement, the number of Stage II aircraft in their fleets 50 percent by
December 31, 1996; 75 percent by December 31, 1998; and 100 percent by December
31, 1999. Alternatively, a carrier may satisfy the regulations by operating a
fleet that is at least 65 percent, 75 percent, and 100 percent Stage III by the
dates set forth in the preceding sentence, respectively. At December 31, 1996,
approximately 88 percent of American's active fleet was Stage III, the quietest
and most fuel efficient rating category.
The ANCA recognizes the rights of airport operators with noise problems
to implement local noise abatement programs so long as they do not interfere
unreasonably with interstate or foreign commerce or the national air
transportation system. Authorities in several cities have promulgated aircraft
noise reduction programs, including the imposition of night-time curfews. The
ANCA generally requires FAA approval of local noise restrictions on Stage III
aircraft first effective after October 1990, and establishes a regulatory
notice and
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review process for local restrictions on Stage II aircraft first
proposed after October 1990. While American has had sufficient scheduling
flexibility to accommodate local noise restrictions imposed to date, American's
operations could be adversely affected if locally-imposed regulations become
more restrictive or widespread.
American has been identified by the EPA as a potentially responsible
party (PRP) at the Operating Industries, Inc. Superfund Site in California.
American has signed a partial consent decree with respect to this site and is
one of several PRPs named. American's alleged waste disposal volumes are minor
compared to the other PRPs.
American, along with most other tenants at Boston Logan International
Airport, has been notified under the Massachusetts State Superfund statute of a
claim for contribution by the Massachusetts Port Authority (Massport). Massport
has claimed that American is responsible for past and future remediation costs
at the airport. American is vigorously defending against Massport's claim.
American, along with most other tenants at the San Francisco
International Airport, has been ordered by the California Regional Water
Quality Control Board to engage in various studies of potential environmental
contamination at the airport and to undertake remedial measures, if necessary.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (Airport)
and funding the remediation costs through landing fee revenues. Future costs of
the remediation effort may be borne by carriers operating at the Airport,
including American, through increased landing fees since certain of the PRPs
are no longer in business. The future increase in landing fees may be material
but cannot be reasonably estimated due to various factors, including the
unknown extent of the remedial actions that may be required, the proportion of
the cost that will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will ultimately
supervise the remedial activities and the nature of that supervision.
American, along with other tenants at the Luis Munoz Marin International
Airport in San Juan, Puerto Rico has been named as a PRP for environmental
claims at the airport.
American does not expect these matters, individually or collectively, to
have a significant impact on its financial position or liquidity.
LABOR
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 36 percent of American's consolidated operating
expenses for the year ended December 31, 1996. To improve its competitive
position, American has undertaken various steps to reduce its unit labor costs,
including workforce reductions.
The majority of American's employees are represented by labor unions and
covered by collective bargaining agreements. American's relations with such
labor organizations are governed by the Railway Labor Act. Under this act, the
collective bargaining agreements among American and these organizations do not
expire but instead become amendable as of a stated date. If either party wishes
to modify the terms of any such agreement, it must notify the other party
before the contract becomes amendable. After receipt of such notice, the
parties must meet for direct negotiations, and if no agreement is reached,
either party may request the National Mediation Board (NMB) to appoint a
federal mediator. If no agreement is reached in mediation, the NMB may
determine, at any time, that an impasse exists, and if an impasse is declared,
the NMB proffers binding arbitration to the parties. Either party may decline
to submit to arbitration. If arbitration is rejected, a 30-day "cooling-off"
period commences, following which the labor organization may strike and the
airline may resort to "self-help," including the imposition of its proposed
amendments and the hiring of replacement workers.
In 1995, American reached agreements with the members of the Association
of Professional Flight Attendants (APFA) and the Transport Workers Union (TWU)
on their labor contracts. American's collective bargaining agreements with the
APFA and the TWU become amendable on November 1, 1998 and March 1, 2001,
respectively.
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American's collective bargaining agreement with the Allied Pilots
Association (APA) became amendable on August 31, 1994. On September 2, 1996,
American and the APA reached a tentative agreement on a new labor contract. The
tentative agreement was approved by the APA Board of Directors and sent out for
membership ratification, but subsequently rejected by the APA membership. On
January 10, 1997, the NMB proffered binding arbitration to the APA and American.
American agreed to arbitration but because the APA did not also agree, the
proffer was rejected and on January 15, 1997, the APA and American were notified
(i) that the NMB was terminating its services and (ii) that beginning February
15, 1997, either party could resort to self-help remedies, including a strike by
the members of the APA. On February 15, 1997, the APA did initiate a strike
against American but immediately thereafter President Clinton intervened and
appointed a Presidential Emergency Board (PEB), pursuant to his authority under
the Railway Labor Act. The effect of President Clinton's actions was to stop the
strike and begin a process during which the PEB reviewed the positions advocated
by both parties. On March 19, 1997, before the PEB issued its recommendations,
American and the APA reached a second tentative agreement on a new contract. The
tentative agreement will be voted on by the APA Board of Directors in early
April 1997 and if approved, will be submitted to the APA membership for
ratification. If the tentative agreement is rejected by the APA, and unless the
Congress takes additional action, either party will be permitted to resort to
self-help remedies, which include, but are not limited to, a strike by members
of the APA. The Company and the APA have agreed to a timetable under which
neither party will resort to self-help remedies for a period of 30 days
following either (i) the failure of the APA Board to approve the tentative
agreement or (ii) the failure of the APA membership to ratify the tentative
agreement. Any work stoppage by the APA members would have a material adverse
impact on the company.
FUEL
American's operations are significantly affected by the availability and price
of jet fuel. American's fuel costs and consumption for the years 1992 through
1996 were:
Average
Price Per
Gallon, Percent of
Gallons Average Price Excluding American's
Consumed Total Cost Per Gallon Fuel Tax Operating
Year (in millions) (in millions) (in cents) (in cents) Expenses
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1992 2,862 $1,862 65.1 62.5 14.0
1993 2,939 1,818 61.8 59.1 13.2
1994 2,741 1,556 56.7 54.2 11.7
1995 2,749 1,565 56.9 53.8 11.3
1996 2,734 1,866 68.2 63.3 13.5
Based upon American's 1996 fuel consumption, a one cent increase in the
average annual price-per-gallon of jet fuel would increase American's monthly
fuel costs by approximately $2.3 million, not considering the offsetting effect
of American's fuel cost hedging program.
The impact of fuel price changes on the Company's competitors is
dependent upon various factors, including their hedging strategies. However,
lower fuel prices may be offset by increased price competition and lower
revenues for all air carriers. Conversely, there can be no assurance that
American will be able to pass fuel cost increases on to its customers by
increasing fares in the future.
Most of American's fuel is purchased pursuant to contracts which, by
their terms, may be terminated upon short notice. While American does not
anticipate a significant reduction in fuel availability, dependency on foreign
imports of crude oil and the possibility of changes in government policy on jet
fuel production, transportation and marketing make it impossible to predict the
future availability of jet fuel. If there were major reductions in the
availability of jet fuel, American's business would be adversely affected.
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FREQUENT FLYER PROGRAM
American established the AAdvantage frequent flyer program (AAdvantage) to
develop passenger loyalty by offering awards to travelers for their continued
patronage. AAdvantage members earn mileage credits for flights on American,
American Eagle and certain other participating airlines, or by utilizing
services of other program participants, including hotels, car rental companies
and bank credit card issuers. American sells mileage credits to the other
companies participating in the program. American reserves the right to change
the AAdvantage program rules, regulations, travel awards and special offers at
any time without notice. American may initiate changes impacting, for example,
participant affiliations, rules for earning mileage credit, mileage levels and
awards, blackout dates and limited seating for travel awards, and the features
of special offers. American reserves the right to end the AAdvantage program
with six months notice.
Mileage credits can be redeemed for free, discounted or upgraded travel
on American, American Eagle or participating airlines, or for other travel
industry awards. Once a member accrues sufficient mileage for an award, the
member may request an award certificate from American. Award certificates may
be redeemed up to one year after issuance. Most travel awards are subject to
blackout dates and capacity controlled seating. All miles earned after July
1989 must be redeemed within three years or they expire.
American accounts for its frequent flyer obligation on an accrual basis
using the incremental cost method. American's frequent flyer liability is
accrued each time a member accumulates sufficient mileage in his or her account
to claim the lowest level of free travel award (25,000 miles) and such award is
expected to be used for free travel. American includes fuel, food, and
reservations/ticketing costs, but not a contribution to overhead or profit, in
the calculation of incremental cost. The cost for fuel is estimated based on
total fuel consumption tracked by various categories of markets, with an amount
allocated to each passenger. Food costs are tracked by market category, with an
amount allocated to each passenger. Reservation/ticketing costs are based on
the total number of passengers, including those traveling on free awards,
divided into American's total expense for these costs. American defers a
portion of revenues from the sale of mileage credits to companies participating
in the AAdvantage program and recognizes such revenues over a period
approximating the period during which the mileage credits are used.
At December 31, 1996 and 1995, American estimated that approximately 5.3
million and 4.7 million free travel awards, respectively, were eligible for
redemption. At December 31, 1996 and 1995, American estimated that
approximately 4.5 million and 4.0 million free travel awards, respectively,
were expected to be redeemed for free travel. In making this estimate, American
has excluded mileage in inactive accounts, mileage related to accounts that
have not yet reached the lowest level of free travel award, and mileage in
active accounts that have reached the lowest level of free travel award but
which is not expected to ever be redeemed for free travel. The liability for
the program mileage that has reached the lowest level of free travel award and
is expected to be redeemed for free travel and deferred revenues for mileage
sold to others participating in the program was $469 million and $370 million,
representing 7.7 percent and 7.1 percent of American's total current
liabilities at December 31, 1996 and 1995, respectively.
The number of free travel awards used for travel on American during the
years ended December 31, 1996, 1995 and 1994, was approximately 2.2 million
each year, representing 8.4 percent of total revenue passenger miles at
December 31, 1996 and 1995, and 8.5 percent at December 31, 1994. American
believes displacement of revenue passengers is insignificant given American's
load factors, its ability to manage frequent flyer seat inventory, and the
relatively low ratio of free award usage to revenue passenger miles.
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OTHER MATTERS
SEASONALITY AND OTHER FACTORS American's results of operations for any interim
period are not necessarily indicative of those for the entire year, since the
air transportation business is subject to seasonal fluctuations. Higher demand
for air travel has traditionally resulted in more favorable operating results
for the second and third quarters of the year than for the first and fourth
quarters.
The results of operations in the air transportation business have also
significantly fluctuated in the past in response to general economic
conditions. In addition, fare initiatives, fluctuations in fuel prices, labor
actions and other factors could impact this seasonal pattern. Unaudited
quarterly financial data for the two-year period ended December 31, 1996, is
included in Note 13 to the consolidated financial statements.
No material part of the business of American and its subsidiaries is
dependent upon a single customer or very few customers. Consequently, the loss
of the Company's largest few customers would not have a materially adverse
effect upon American.
INSURANCE American carries insurance for public liability, passenger liability,
property damage and all-risk coverage for damage to its aircraft, in amounts
which, in the opinion of management, are adequate.
OTHER GOVERNMENT MATTERS In time of war or during an unlimited national
emergency or civil defense emergency, American and other major air carriers may
be required to provide airlift services to the Military Airlift Command under
the Civil Reserve Air Fleet program.
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ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
Owned and leased aircraft operated by American at December 31, 1996, included:
Weighted-
Current Average
Seating Capital Operating Age
Equipment Type Capacity Owned Leased Leased Total (Years)
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Airbus A300-600R 192/266/267 10 - 25 35 7
Boeing 727-200 150 64 14 - 78 20
Boeing 757-200 188 50 9 31 90 5
Boeing 767-200 172 8 - - 8 14
Boeing 767-200 Extended Range 165 9 13 - 22 11
Boeing 767-300 Extended Range 207 16 15 10 41 6
Fokker 100 97 66 5 4 75 4
McDonnell Douglas DC-10-10 237/290 11 1 - 12 19
McDonnell Douglas DC-10-30 271 4 1 - 5 22
McDonnell Douglas MD-11 238/255 16 - - 16 4
McDonnell Douglas MD-80 139 119 25 116 260 9
---------- ---------- ---------- ---------- ----------
Total 373 83 186 642 9
========== ========== ========== ========== ==========
For information concerning the estimated useful lives and residual
values for owned aircraft, lease terms for leased aircraft, and amortization
relating to aircraft under capital leases, see Notes 1 and 5 to the
consolidated financial statements.
In April 1995, American announced an agreement to sell 12 of its
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). Three
aircraft were delivered in 1996 and the remaining nine aircraft will be
delivered between 1997 and 1999. In addition, American has the option to sell
its remaining seven MD-11 aircraft to FedEx with deliveries between 2000 and
2002.
Lease expirations for American's leased aircraft included in the above
table as of December 31, 1996, were:
2002
and
Equipment Type 1997 1998 1999 2000 2001 Thereafter
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Airbus A300-600R - - - - - 25
Boeing 727-200 - - 2 4 8 -
Boeing 757-200 - - - 2 2 36
Boeing 767-200 Extended Range - - - - - 13
Boeing 767-300 Extended Range - - - 8 - 17
Fokker 100 - - - - 2 7
McDonnell Douglas DC-10-10 1 - - - - -
McDonnell Douglas DC-10-30 - 1 - - - -
McDonnell Douglas MD-80 - - - 3 9 129
---------- ---------- ---------- ---------- ---------- ----------
1 1 2 17 21 227
========== ========== ========== ========== ========== ==========
Substantially all of American's aircraft leases include an option to
purchase the aircraft or to extend the lease term, or both, with the purchase
price or renewal rental to be based essentially on the market value of the
aircraft at the end of the term of the lease or at a predetermined fixed rate.
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GROUND PROPERTIES
American leases, or has built as leasehold improvements on leased property,
most of its airport and terminal facilities; certain corporate office,
maintenance and training facilities in Fort Worth, Texas; its principal
overhaul and maintenance base at Tulsa International Airport, Tulsa, Oklahoma;
its regional reservation offices; and local ticket and administration offices
throughout the system. American has entered into agreements with the Tulsa
Municipal Airport Trust; the Alliance Airport Authority, Fort Worth, Texas; and
the Dallas/Fort Worth, Chicago O'Hare, Raleigh/Durham, Nashville, San Juan, New
York, and Los Angeles airport authorities to provide funds for constructing,
improving and modifying facilities and acquiring equipment which are or will be
leased to American. American also utilizes public airports for its flight
operations under lease or use arrangements with the municipalities or
governmental agencies owning or controlling them and leases certain other
ground equipment for use at its facilities.
For information concerning the estimated lives and residual values for
owned ground properties, lease terms and amortization relating to ground
properties under capital leases, and acquisitions of ground properties, see
Notes 1, 4 and 5 to the consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
In January 1985, American announced a new fare category, the "Ultimate
SuperSaver," a discount, advance purchase fare that carried a 25 percent
penalty upon cancellation. On December 30, 1985, a class action lawsuit was
filed in Circuit Court, Cook County, Illinois entitled Johnson vs. American
Airlines, Inc. The Johnson plaintiffs allege that the 10 percent federal excise
transportation tax should be excluded from the "fare" upon which the 25 percent
penalty is assessed. The case has not been certified as a class action. Summary
judgment was granted in favor of American but subsequently reversed and vacated
by the Illinois Appellate Court. American believes the matter is without merit
and is vigorously defending the lawsuit.
American has been sued in two class action cases that have been
consolidated in the Circuit Court of Cook County, Illinois, in connection with
certain changes made to American's AAdvantage frequent flyer program in May
1988. (Wolens et al v. American Airlines, Inc., No. 88 CH 7554, and Tucker v.
American Airlines, Inc., No. 89 CH 199.) In both cases, the plaintiffs seek to
represent all persons who joined the AAdvantage program before May 1988.
Although the complaint originally involved numerous claims, after a January 18,
1995 preemption ruling by the U.S. Supreme Court, only the plaintiffs' breach
of contract claim remains. Currently, the plaintiffs allege that in May 1988,
American implemented changes that limited the number of seats available to
participants traveling on certain awards and established blackout dates during
which no AAdvantage seats would be available for certain awards and that these
changes breached American's contracts with AAdvantage members. The case has not
been certified as a class action. Although the case has been pending for
numerous years, it still is in a preliminary stage. American believes the
matter is without merit and is vigorously defending it. Plaintiffs seek money
damages for the alleged breach and attorneys' fees.
In December 1993, American announced that the number of miles required
to claim a certain travel award under American's AAdvantage frequent flyer
program would be increased effective February 1, 1995. On February 1, 1995, a
class action lawsuit entitled Gutterman vs. American Airlines, Inc., was filed
in the Circuit Court of Cook County, Illinois. The Gutterman plaintiffs claim
that this increase in mileage level violated the terms and conditions of the
agreement between American and AAdvantage members. On February 9, 1995, a
virtually identical class action lawsuit entitled Benway vs. American Airlines,
Inc., was filed in District Court, Dallas County, Texas. After limited
discovery and prior to class certification, a summary judgment dismissing the
Benway case was entered by the Dallas County court in July 1995. Although
American's motion to dismiss the Gutterman lawsuit was denied, American's
motion for summary judgment is still pending. No class has been certified in
the Gutterman lawsuit and to date only very limited discovery has been
undertaken. American believes the Gutterman complaint is without merit and is
vigorously defending the lawsuit.
9
11
On February 10, 1995, American capped travel agency commissions for
one-way and round-trip domestic tickets at $25 and $50, respectively.
Immediately thereafter, numerous travel agencies, and two travel agency trade
association groups, filed class action lawsuits against American and other
major air carriers (Continental, Delta, Northwest, United, USAir and TWA) that
had independently imposed similar limits on travel agency commissions. The
suits were transferred to the United States District Court for the District of
Minnesota, and consolidated as a multi-district litigation captioned In Re:
Airline Travel Agency Commission Antitrust Litigation. On September 3, 1996,
American reached a tentative settlement with plaintiffs whereby American
agreed, inter alia, to pay $21.3 million in exchange for a release from all
claims. The court entered a final judgment approving the settlement on February
7, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
American is a wholly-owned subsidiary of AMR Corporation and there is no market
for the Registrant's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(a) of Form 10-K.
10
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Abbreviated pursuant to General Instruction I(2)(a)
of Form 10-K).
American Airlines, Inc., the principal subsidiary of AMR, was founded in 1934.
On July 2, 1996, AMR completed the reorganization of its information
technology businesses known as The SABRE Group into a separate, wholly-owned
subsidiary of AMR known as The SABRE Group Holdings, Inc. (the Reorganization).
Prior to the Reorganization, most of The SABRE Group's business units
were divisions of American. As part of the Reorganization, all of the
businesses of The SABRE Group, including American's SABRE Travel Information
Network, SABRE Computer Services, SABRE Development Services, and SABRE
Interactive divisions (collectively, the Information Services Group), and
certain buildings, equipment, and American's leasehold interest in certain
other buildings used by The SABRE Group were combined in subsidiaries of
American, which were then dividended to AMR.
Following the Reorganization, American operates in only one business
segment which consists primarily of American's Passenger and Cargo divisions.
AMERICAN'S PASSENGER DIVISION is one of the largest scheduled passenger
airlines in the world. At the end of 1996, American provided scheduled jet
service to more than 160 destinations, throughout North America, the Caribbean,
Latin America, Europe and the Pacific.
AMERICAN'S CARGO DIVISION is one of the largest scheduled air freight carriers
in the world. It provides a full range of freight and mail services to shippers
throughout the airline's system. In addition, through cooperative agreements
with other carriers, it has the ability to transport shipments to virtually any
country in the world.
HIGHLIGHTS
SUMMARY As discussed above, as of July 2, 1996, AMR completed the
Reorganization of The SABRE Group. Thus, the results of operations of
American's Information Services Group have been reflected in the consolidated
statement of operations as income from discontinued operations. Following the
Reorganization, American operates in only one business segment, and, as such,
the discussion below relates only to the operations of what was formerly
American's Airline Group.
American recorded income from continuing operations in 1996 of $569
million. American recorded a $26 million charge ($16 million after tax) in the
fourth quarter of 1996 to write down the value of aircraft interiors the
Company plans to refurbish. Excluding this special charge, income from
continuing operations was $585 million.
American's loss from continuing operations in 1995 was $11 million.
During the fourth quarter of 1995, American recorded restructuring costs of
$485 million ($302 million after tax) related to the cost of future pension and
other postretirement benefits for voluntary early retirement programs offered
in conjunction with renegotiated labor contracts covering members of the
Transport Workers Union (TWU) and the Association of Professional Flight
Attendants (APFA), as well as provisions for the write-down of certain
McDonnell Douglas DC-10 aircraft, and other restructuring activities. In
addition to the restructuring costs, the Company's 1995 earnings include a
charge of $41 million ($26 million after tax) related to the loss of an
aircraft operated by American. During 1995, American retired prior to scheduled
maturity $139 million in face value of long-term debt, net of sinking fund
balances. In addition, $616 million in outstanding principal of certain debt
and lease obligations was refinanced during 1995. These transactions resulted
in an extraordinary loss of $21 million ($13 million after tax) in 1995.
Excluding these special charges, income from continuing operations was $330
million.
In June 1996, AMR announced its plans to create a worldwide alliance
between American and British Airways Plc. Subject to regulatory approval, the
two carriers will introduce extensive code sharing across each other's networks
and establish full reciprocity between their frequent flyer programs.
Additionally, the carriers will combine their passenger and cargo activities
between the United States and Europe and will share the resulting profits on
these services.
11
13
During the second quarter of 1996, American and The SABRE Group
completed the negotiations of certain agreements, and the parties agreed to
apply the financial terms of such agreements as of January 1, 1996. For
additional information regarding the agreements, see Note 2.
As part of the Reorganization, $850 million of American's long-term debt
owed to AMR was repaid through the transfer by American to AMR of an $850
million debenture issued by The SABRE Group to American. The Reorganization
resulted in a net increase to American's stockholder's equity of $199 million,
representing the amount of the debenture transferred to AMR in excess of the
carrying value of the assets and liabilities of The SABRE Group as of July 2,
1996.
In addition, during 1996, American retired prior to scheduled maturity
$449 million in face value of long-term debt and capital lease obligations at
amounts which approximated their carrying value.
REVENUES
1996 COMPARED TO 1995 American's operating revenues increased 4.4 percent to
$15.1 billion in 1996, compared to $14.5 billion in 1995. Passenger revenues
increased 3.9 percent, or $511 million. The increase in passenger revenues
resulted primarily from a 2.1 percent increase in passenger yield (the average
amount one passenger pays to fly one mile) from 12.76 to 13.03 cents and a 1.7
percent increase in passenger traffic. For the year, domestic yields increased
2.6 percent, Latin American yields increased 0.2 percent and European yields
increased 3.1 percent, while Pacific yields decreased 10.5 percent. The decline
in Pacific yields was primarily due to the foreign exchange impact of the
weaker yen. In 1996, American derived 69.6 percent of its passenger revenues
from domestic operations and 30.4 percent from international operations.
American's domestic traffic increased 2.3 percent to 72.9 billion
revenue passenger miles (RPMs), while domestic capacity, as measured by
available seat miles (ASMs), decreased 1.7 percent. International traffic grew
0.4 percent to 31.8 billion RPMs on a capacity decline of 1.2 percent. The
increase in international traffic was led by a 5.0 percent increase in Latin
America on capacity growth of 3.9 percent, offset by a 3.9 percent decrease in
Europe on a capacity decline of 6.4 percent.
American benefited from a number of external factors in 1996. First, a
healthy U.S. economy produced strong demand for air travel. Second, industry
capacity grew at a more modest rate, which led to higher industry load factors
and a healthy pricing environment. And third, U.S. carriers benefited from an
eight-month lapse in the application of the 10 percent excise tax on airline
tickets.
Other revenues increased 16.8 percent, or $118 million, primarily as a
result of an increase in aircraft maintenance work and airport ground services
performed by American for other airlines and increased employee travel service
charges. The remaining portion of the increase is attributable to the growth in
passenger traffic.
OPERATING EXPENSES
1996 COMPARED TO 1995 Operating expenses in 1995 included restructuring costs
of $485 million described above. Excluding the restructuring costs, American's
operating expenses increased 2.9 percent, or $388 million. American's capacity
decreased 1.6 percent to 152.9 billion ASMs. As a result, cost per ASM,
excluding restructuring costs in 1995 and the write-down of aircraft interiors
in 1996, increased 4.0 percent to 8.91 cents.
Fuel expense increased 19.2 percent, or $301 million, due to a 19.9
percent increase in American's average price per gallon, including the 4.3
cents per gallon domestic fuel tax imposed on the airline industry since
October 1995.
Commissions to agents decreased 4.4 percent, or $54 million, due
principally to a reduction in average rates paid to agents attributable
primarily to the change in commission structure implemented in February 1995,
partially offset by commissions on increased passenger revenues.
Aircraft rentals decreased 7.0 percent, or $42 million, primarily as a
result of American's decision to prepay the cancelable operating leases it had
on 12 of its Boeing 767-300 aircraft during June and July 1996. Following the
prepayments, these aircraft have been accounted for as capital leases and the
related costs included in amortization expense. Maintenance materials and
repairs expense increased 13.4 percent, or $66 million,
12
14
primarily due to five additional aircraft check lines added at American's
maintenance bases in 1996 as a result of the maturing of its fleet.
OTHER INCOME (EXPENSE)
1996 COMPARED TO 1995 Interest expense, net of amounts capitalized, decreased
31.0 percent, or $170 million, due primarily to the decline in the balance of
American's intercompany subordinated note with AMR during 1996, and also due to
the repurchase and refinancing of debt and scheduled debt repayments.
Miscellaneous - net for 1996 includes a $21 million provision for a cash
payment representing American's share of a multi-carrier travel agency class
action litigation settlement. Miscellaneous - net for 1995 includes a $41
million charge related to the loss of an aircraft operated by American.
OTHER INFORMATION
WORKING CAPITAL American historically operates with a working capital deficit
as do most other airline companies. The existence of such a deficit has not in
the past impaired the Company's ability to meet its obligations as they become
due and is not expected to do so in the future.
ENVIRONMENTAL MATTERS American has been notified of potential liability with
regard to several environmental cleanup sites and certain airport locations. At
sites where remedial litigation has commenced, potential liability is joint and
several. American's alleged volumetric contributions at these sites are
minimal. American does not expect these matters, individually or collectively,
to have a significant impact on its financial position or liquidity. Additional
information is included in Note 4 to the consolidated financial statements.
CREDIT FACILITIES American has a $1.0 billion credit facility agreement which
expires December 19, 2001 (the original agreement). At American's option,
interest on the original agreement can be calculated on one of several
different bases. For most borrowings, American would anticipate choosing a
floating rate based upon the London Interbank Offered Rate (LIBOR). In February
1997, American negotiated an additional $1.0 billion credit facility agreement,
which will expire December 31, 1997 (the new agreement). Any borrowings under
the new agreement will be secured by aircraft owned by American. To the extent
that the value of such aircraft exceeds any claims due under the new agreement,
the excess value will secure borrowings under the original agreement. At March
24, 1997, no borrowings were outstanding under either agreement.
FORWARD-LOOKING INFORMATION
The preceding discussions under Business and Management's Discussion and
Analysis of Financial Condition and Results of Operations 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,"
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements include, without limitation, projections relating to
results of operations and financial conditions and the Company's plans and
objectives for future operations, including plans to develop future
code-sharing programs and to evaluate new alliances. 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 actual results to differ materially
from our 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:
13
15
UNCERTAINTY OF FUTURE COLLECTIVE BARGAINING AGREEMENTS The Company's operations
could be adversely affected by failure of the Company to reach agreement with
any labor union representing the Company's employees or by an agreement with a
labor union representing the Company's employees that contains terms which
prevent the Company from competing effectively with other airlines.
Specifically, as discussed above, if the tentative agreement is rejected by the
APA and unless the Congress takes additional action, either party will be
permitted to resort to self-help remedies, which include, but are not limited
to, a strike by members of the APA. The Company and the APA have agreed to a
timetable under which neither party will resort to self-help remedies for a
period of 30 days following either (i) the failure of the APA Board to approve
the tentative agreement or (ii) the failure of the APA membership to ratify
the tentative agreement.
ECONOMIC AND OTHER CONDITIONS The airline industry is affected by changes in
national, regional and local economic conditions, inflation, war (or the threat
thereof), consumer preferences and spending patterns, demographic trends,
consumer perceptions of airline safety, costs of safety and security measures
and weather.
COMMODITY PRICES Due to the competitive nature of the airline industry, in the
event of any increase in the price of jet fuel, there can be no assurance that
American would be able to pass on increased fuel prices to its customers by
increasing fares.
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of American's
routes is highly competitive. On most of its non-stop routes, American competes
with at least one, and usually more than one, major domestic airline, as well
as lower-cost carriers. American also competes with national, regional,
all-cargo and charter carriers and, particularly on shorter segments, ground
transportation. Pricing decisions are affected by competition from other
airlines. Fare discounting by competitors has historically had a negative
effect on American's financial results because American is generally required
to match competitors' fares to maintain passenger traffic. No assurance can be
give that any future fare reduction would be offset by increases in passenger
traffic or changes in the mix of traffic that improves yields.
CHANGING BUSINESS STRATEGY Although it has no current plan to do so, the
Company may change its business strategy in the future and may not pursue some
of the goals stated herein.
GOVERNMENT REGULATION Future results of the Company's operations may vary based
upon any actions which the governmental agencies with jurisdiction over the
Company's operations may take, including the granting and timing of certain
governmental approvals needed for code sharing and other arrangements with
other airlines and the adoption of more restrictive locally-imposed noise
restrictions.
UNCERTAINTY IN INTERNATIONAL OPERATIONS The Company's current international
activities and prospects could be adversely affected by factors such as
reversals or delays in the opening of foreign markets, exchange controls,
currency and political risks, taxation and changes in international government
regulation of the Company's operations.
14
16
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 16
Consolidated Statement of Operations 17
Consolidated Balance Sheet 18
Consolidated Statement of Cash Flows 20
Consolidated Statement of Stockholder's Equity 21
Notes to Consolidated Financial Statements 22
15
17
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited the accompanying consolidated balance sheets of
American Airlines, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Airlines, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 11 to the consolidated financial statements,
effective January 1, 1995, the Company changed its method of accounting for the
impairment of long-lived assets.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 14, 1997, except for the first
paragraph of Note 4, for which the
date is March 24, 1997
16
18
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions)
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
------------- ------------ ------------
REVENUES
Passenger $ 13,645 $ 13,134 $ 12,652
Cargo 672 668 657
Other 819 701 601
------------- ------------ ------------
Total operating revenues 15,136 14,503 13,910
------------- ------------ ------------
EXPENSES
Wages, salaries and benefits 4,934 4,818 4,685
Aircraft fuel 1,866 1,565 1,556
Commissions to agents 1,182 1,236 1,273
Depreciation and amortization 930 975 966
Other rentals and landing fees 762 754 729
Food service 667 675 663
Aircraft rentals 562 604 620
Maintenance materials and repairs 560 494 438
Other operating expenses 2,342 2,296 2,135
Restructuring costs - 485 276
------------- ------------ ------------
Total operating expenses 13,805 13,902 13,341
------------- ------------ ------------
OPERATING INCOME 1,331 601 569
OTHER INCOME (EXPENSE)
Interest income 22 23 5
Interest expense (378) (548) (429)
Miscellaneous - net (19) (56) (45)
------------- ------------ ------------
(375) (581) (469)
------------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 956 20 100
Income tax provision 387 31 46
------------- ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 569 (11) 54
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAXES (1996 - $82; 1995 - $141; 1994 - $128) 136 232 214
------------- ------------ ------------
EARNINGS BEFORE EXTRAORDINARY LOSS 705 221 268
EXTRAORDINARY LOSS, NET OF TAX BENEFIT (1995 - $8) - (13) -
------------- ------------ ------------
NET EARNINGS $ 705 $ 208 $ 268
============= ============ ============
- --------
The accompanying notes are an integral part of these financial statements.
17
19
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
- --------------------------------------------------------------------------------
December 31,
------------------------------------
1996 1995
-------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 37 $ 70
Short-term investments 1,312 816
Receivables, less allowance for uncollectible
accounts (1996 - $6; 1995 - $13) 1,087 1,013
Inventories, less allowance for obsolescence
(1996 - $197; 1995 - $228) 559 516
Deferred income taxes 328 310
Other current assets 221 128
------------ ------------
Total current assets 3,544 2,853
EQUIPMENT AND PROPERTY
Flight equipment, at cost 12,282 12,442
Less accumulated depreciation 3,737 3,346
------------ ------------
8,545 9,096
Other equipment and property, at cost 2,611 3,911
Less accumulated depreciation 1,371 2,091
------------ ------------
1,240 1,820
------------ ------------
9,785 10,916
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 2,473 1,958
Other equipment and property 135 254
------------ ------------
2,608 2,212
Less accumulated amortization 792 778
------------ ------------
1,816 1,434
OTHER ASSETS
Route acquisition costs, less accumulated amortization
(1996 - $182; 1995 - $153) 974 1,003
Airport operating and gate lease rights, less accumulated amortization
(1996 - $106; 1995 - $89) 306 323
Prepaid pension cost 446 268
Other 691 832
------------ ------------
2,417 2,426
------------ ------------
TOTAL ASSETS $ 17,562 $ 17,629
============ ============
- ----------
The accompanying notes are an integral part of these financial statements.
18
20
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEET
(in millions, except shares and par value)
- --------------------------------------------------------------------------------
December 31,
-----------------------------------
1996 1995
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 914 $ 742
Payables to affiliates 1,410 907
Accrued salaries and wages 733 651
Accrued liabilities 1,005 1,138
Air traffic liability 1,889 1,467
Current maturities of long-term debt 22 49
Current maturities of long-term debt due to parent - 193
Current obligations under capital leases 109 101
------------- -------------
Total current liabilities 6,082 5,248
LONG-TERM DEBT, LESS CURRENT MATURITIES 983 1,318
LONG-TERM DEBT DUE TO PARENT, LESS CURRENT MATURITIES 118 1,676
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,520 1,777
OTHER LIABILITIES AND CREDITS
Deferred income taxes 680 480
Deferred gains 647 696
Postretirement benefits 1,481 1,431
Other liabilities and deferred credits 1,523 1,357
------------- -------------
4,331 3,964
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock - $1 par value;
1,000 shares authorized, issued and outstanding - -
Additional paid-in capital 1,717 1,699
Minimum pension liability adjustment (22) (1)
Retained earnings 2,833 1,948
------------- -------------
4,528 3,646
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 17,562 $ 17,629
============= =============
- ----------
The accompanying notes are an integral part of these financial statements.
19
21
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 705 $ 208 $ 268
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,013 1,138 1,138
Deferred income taxes 215 54 51
Provision for restructuring costs - 485 276
Provisions for losses - 41 -
Change in assets and liabilities:
Increase in receivables (354) (136) (146)
Increase in inventories (61) (15) (12)
Increase in accounts payable
and accrued liabilities 174 408 10
Increase (decrease) in air traffic liability 422 (6) 13
Other, net 25 (181) 93
------------- ------------- -------------
Net cash provided by operating activities 2,139 1,996 1,691
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (409) (842) (899)
Net increase in short-term investments (496) (72) (238)
Proceeds from sale of equipment and property 268 59 36
------------- ------------- -------------
Net cash used for investing activities (637) (855) (1,101)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of long-term debt - 184 130
Sale-leaseback transactions - - 280
Payments on long-term debt and capital lease obligations (1,136) (582) (206)
Funds transferred to affiliates, net (399) (686) (839)
Other, net - - 3
------------- ------------- -------------
Net cash used for financing activities (1,535) (1,084) (632)
------------- ------------- -------------
Net increase (decrease) in cash (33) 57 (42)
Cash at beginning of year 70 13 55
------------- ------------- -------------
Cash at end of year $ 37 $ 70 $ 13
============= ============= =============
- --------
The accompanying notes are an integral part of these financial statements.
20
22
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in millions)
- --------------------------------------------------------------------------------
Minimum
Additional Pension
Common Paid-in Liability Retained
Stock Capital Adjustment Earnings Total
---------- ------------ ---------- ------------ ------------
Balance at January 1, 1994 $ - $ 1,699 $ - $ 1,469 $ 3,168
Net earnings - - - 268 268
Adjustment for minimum
pension liability - - (199) - (199)
Other - - (4) (4)
---------- ------------ --------- ------------ ------------
-
Balance at December 31, 1994 - 1,699 (199) 1,733 3,233
Net earnings - - - 208 208
Adjustment for minimum
pension liability - - 198 - 198
Other - - - 7 7
---------- ------------ --------- ------------ ------------
Balance at December 31, 1995 - 1,699 (1) 1,948 3,646
Net earnings - - - 705 705
Reorganization of The SABRE
Group:
Dividend of Assets of The
SABRE Group to Parent - 18 - (669) (651)
Transfer of debenture to
Parent - - - 850 850
Adjustment for minimum
pension liability - - (21) - (21)
Other - - - (1) (1)
---------- ------------ --------- ------------ ------------
Balance at December 31, 1996 $ - $ 1,717 $ (22) $ 2,833 $ 4,528
========== ============ ========= ============ ============
- ---------
The accompanying notes are an integral part of these financial statements.
21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF CONSOLIDATION American Airlines, Inc. (American or the Company) is a
wholly-owned subsidiary of AMR Corporation (AMR). The consolidated financial
statements include the accounts of American and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated. Certain amounts
from prior years have been reclassified to conform with the 1996 presentation.
GENERAL American's Passenger Division is one of the largest scheduled passenger
airlines in the world. At the end of 1996, American provided scheduled jet
service to more than 160 destinations throughout North America, the Caribbean,
Latin America, Europe and the Pacific. American's Cargo Division is one of the
largest scheduled air freight carriers in the world, providing a full range of
freight and mail services to shippers throughout the airline's system.
USE OF ESTIMATES The preparation of 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. Actual results could differ from those
estimates.
INVENTORIES Spare parts, materials and supplies relating to flight equipment
are carried at average cost and are expensed when used in operations.
Allowances for obsolescence are provided, over the estimated useful life of the
related aircraft and engines, for spare parts expected to be on hand at the
date aircraft are retired from service, as well as allowances for spare parts
currently identified as excess. These allowances are based on management
estimates, which are subject to change.
EQUIPMENT AND PROPERTY The provision for depreciation of operating equipment
and property is computed on the straight-line method applied to each unit of
property, except that spare assemblies are depreciated on a group basis. The
depreciable lives and residual values used for the principal depreciable asset
classifications are:
Residual
Depreciable Life Value
----------------------------------- -------------
Boeing 727-200 (Stage II) December 31, 1999(1) None
Boeing 727-200 (to be converted to Stage III) December 31, 2005(1) None
DC-10-10/ DC-10-30 December 31, 2002(2) None
Other aircraft 20 years 5%
Major rotable parts, avionics and assemblies Life of equipment to which 0-10%
applicable
Improvements to leased flight equipment Term of lease None
Buildings and improvements (principally on 10-30 years or term of lease None
leased land)
Other equipment 3-20 years None
(1) In 1996, American changed the estimated useful lives of its Boeing
727-200 aircraft and engines from an average depreciable life of 21
years to an approximate common retirement date of December 31, 1999
for those aircraft which will not be converted to Stage III noise
standards and December 31, 2005 for those which will be converted to
Stage III. The impact of this change was not material.
(2) Approximate common retirement date.
Equipment and property under capital leases are amortized over the term
of the leases and such amortization is included in depreciation and
amortization. Lease terms vary but are generally 10 to 25 years for aircraft
and 7 to 40 years for other leased equipment and property.
MAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased
flight equipment are charged to operating expense as incurred.
22
24
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS The Company continually evaluates intangible assets to
determine whether current events and circumstances warrant adjustment of the
carrying values or amortization periods.
Route acquisition costs and airport operating and gate lease rights
represent the purchase price attributable to route authorities, airport
take-off and landing slots and airport gate leasehold rights acquired. These
assets are being amortized on a straight-line basis over 40 years for route
authorities, 25 years for airport take-off and landing slots, and over the term
of the lease for airport gate leasehold rights.
PASSENGER REVENUES Passenger ticket sales are initially recorded as a component
of air traffic liability. Revenue derived from ticket sales is recognized at
the time transportation is provided. However, due to various factors, including
the complex pricing structure and interline agreements throughout the industry,
certain amounts are recognized in revenue using estimates regarding both the
timing of the revenue recognition and the amount of revenue to be recognized.
Actual results could differ from those estimates.
ADVERTISING COSTS The Company expenses the costs of advertising as incurred.
Advertising expense was $183 million, $175 million, and $190 million for the
years ended December 31, 1996, 1995, and 1994.
FREQUENT FLYER PROGRAM The estimated incremental cost of providing free travel
awards is accrued when such award levels are reached. American sells mileage
credits and related services to companies participating in its frequent flyer
program. The portion of the revenue related to the sale of mileage credits is
deferred and recognized over a period approximating the period during which the
mileage credits are used.
During 1994, the Company changed its estimate of the usage patterns of
mileage credits sold to companies participating in American's AAdvantage
frequent flyer program. The positive impact of the change in estimate on
passenger revenues for 1994 was $59 million.
INCOME TAXES AMR and its eligible subsidiaries, including American, file a
consolidated federal income tax return. Deferred income taxes reflect the net
tax effects of temporary differences between the financial reporting carrying
amounts of assets and liabilities and the income tax amounts.
DEFERRED GAINS Gains on the sale and leaseback of equipment and property are
deferred and amortized over the terms of the related leases as a reduction of
rent expense.
STATEMENT OF CASH FLOWS Short-term investments, without regard to remaining
maturity at acquisition, are not considered as cash equivalents for purposes of
the statement of cash flows.
2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
On July 2, 1996, AMR completed the reorganization of its information
technology businesses known as The SABRE Group into a separate, wholly-owned
subsidiary of AMR known as The SABRE Group Holdings, Inc. (the Reorganization).
Prior to the Reorganization, most of The SABRE Group's business units were
divisions of American. As part of the Reorganization, all of the businesses of
The SABRE Group, including American's SABRE Travel Information Network, SABRE
Computer Services, SABRE Development Services, and SABRE Interactive divisions
(collectively, the Information Services Group), and certain buildings,
equipment, and American's leasehold interest in certain other buildings used by
The SABRE Group were combined in subsidiaries of American, which were then
dividended to AMR. Also, as part of the Reorganization, $850 million of
American's long-term debt owed to AMR was repaid through the transfer by
American to AMR of an $850 million debenture issued by The SABRE Group
Holdings, Inc. to American. Thus, the results of operations of American's
Information Services Group have been reflected in the consolidated statement
of operations as income from discontinued operations. Revenues from the
operations of the Information Services Group were $754 million, $1.4 billion
and $1.3 billion for the period January 1, 1996 through July 1, 1996, 1995 and
1994, respectively. Following the Reorganization, American operates in only
one business segment, formerly American's Airline Group.
23
25
2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
In connection with the Reorganization, the Company entered into various
agreements with The SABRE Group, the primary ones of which are discussed below.
The parties agreed to apply the financial terms of such agreements as of
January 1, 1996.
INFORMATION TECHNOLOGY SERVICES AGREEMENT The Company is party to the
Information Technology Services Agreement with The SABRE Group dated July 1,
1996 (the Technology Services Agreement), whereby The SABRE Group provides
American with certain information technology services, including data center
and data network services, services relating to client server operations and
device support services. The base term of the Technology Services Agreement
expires June 30, 2006; however, the terms of the specific services to be
provided by The SABRE Group to American expire at various dates beginning in
June 1999. The Technology Services Agreement provides for annual price
adjustments. For certain prices, adjustments are made according to formulas
which, commencing in 1998, are reset every two years and which may take into
account the market for similar services provided by other companies. The
resulting rates may reflect an increase or decrease over the previous rates.
With limited exceptions, under the Technology Services Agreement, The
SABRE Group will continue to be the exclusive provider of all information
technology services that were provided by The SABRE Group to American
immediately prior to the execution of the Technology Services Agreement. Any
new information technology services, including most new application development
services, requested by the Company can be outsourced pursuant to competitive
bidding by the Company or performed by the Company on its own behalf.
American paid The SABRE Group $458 million, $505 million and $489 million
in 1996, 1995 and 1994, respectively, for services contemplated under the
Technology Services Agreement, as well as airline booking fees, for which
American is billed by The SABRE Group at rates similar to those charged to other
carriers.
MARKETING COOPERATION AGREEMENT The SABRE Group and American are parties to the
Marketing Cooperation Agreement dated as of July 1, 1996 (the Marketing
Cooperation Agreement), pursuant to which American will provide marketing
support for The SABRE Group's products targeted to travel agencies until June
30, 2006. For such support, The SABRE Group will pay American a fee based upon
booking volumes. That fee was approximately $20 million in 1996 and will range
between $10 million and $30 million annually thereafter. Additionally, American
will support The SABRE Group's promotion of certain other products until 2001,
for which The SABRE Group will pay American a marketing fee based upon booking
volume. With limited exceptions, the Marketing Cooperation Agreement does not
restrict American from distributing its airline products and services directly
to corporate or individual consumers. Additionally, The SABRE Group has
guaranteed to American certain cost savings in the fifth year of the Marketing
Cooperation Agreement. If American does not achieve those savings, The SABRE
Group will pay American any shortfall, up to a maximum of $50 million.
TRAVEL AGREEMENTS American and The SABRE Group are parties to travel agreements
dated July 1, 1996, pursuant to which The SABRE Group is entitled to purchase
personal travel for its employees and retirees at reduced fares, and business
travel at a discount for certain flights on American. The Travel Privileges
Agreement and the Corporate Travel Agreement expire on June 30, 2008 and June
30, 1998, respectively. The SABRE Group paid American approximately $41 million
in 1996 pursuant to these agreements.
CREDIT AGREEMENT On July 1, 1996, The SABRE Group and American entered into a
Credit Agreement pursuant to which The SABRE Group is required to borrow from
American, and American is required to lend to The SABRE Group, amounts required
by The SABRE Group to fund its daily cash requirements. In addition, American
may, but is not required to, borrow from The SABRE Group to fund its daily cash
requirements. The maximum amount The SABRE Group may borrow at any time from
American under the Credit Agreement is $300 million. The maximum amount that
American may borrow at any time from The SABRE Group under the Credit Agreement
is $100 million. The interest rate to be charged to The SABRE Group is a
function of American's cost of capital and The SABRE Group's credit rating. The
interest rate to be charged to American is The SABRE Group's average portfolio
rate for the months in which borrowing occurred plus an additional
24
26
2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
spread based upon American's credit risk. At the end of each quarter, American
must pay all amounts owed under the Credit Agreement to The SABRE Group. No
borrowings occurred by either The SABRE Group or American during 1996.
INDEMNIFICATION AGREEMENTS Airline Management Services Holdings, Inc. (AMS), a
subsidiary of AMR, and Canadian Airlines International Limited (Canadian) have
entered into an agreement pursuant to which AMR and American supply to Canadian
various services, including technology services. American has subsequently
entered into the Canadian Technical Services Subcontract (the Canadian
Subcontract), which expires in 2006, with The SABRE Group to provide data
processing and network distributed systems services to Canadian. Under the
terms of the Canadian Subcontract, American has guaranteed full payment for
services actually performed by The SABRE Group and deferred costs associated
with the installation and implementation of certain systems. Additionally, AMS
has guaranteed full payment to American for any services actually performed by
American in connection with the Canadian services agreement, certain deferred
costs incurred by American, and any amounts paid by American to The SABRE Group
under the indemnification provisions of the Canadian Subcontract. In connection
with these guarantees, AMS reimbursed American $40 million for amounts paid by
American to The SABRE Group in December 1996 and $7 million for certain
deferred costs previously incurred by American.
OTHER AGREEMENTS WITH THE SABRE GROUP American and The SABRE Group are also
parties to a Management Services Agreement dated July 1, 1996, pursuant to
which American performs various management services for The SABRE Group,
including treasury, risk management, tax, and other administrative services
that American has historically provided to The SABRE Group, for a fee
approximating American's cost of providing the services plus a margin. The
SABRE Group paid American $17 million in 1996 pursuant to the Management
Services Agreement.
AMR, American and The SABRE Group have also entered into a
Non-Competition Agreement dated July 1, 1996, pursuant to which AMR and
American, on behalf of themselves and certain of their subsidiaries, have
agreed to limit their competition with The SABRE Group's businesses of (i)
electronic travel distribution; (ii) development, maintenance, marketing and
licensing of software for travel agency, travel, transportation and logistics
management; (iii) computer system integration; (iv) development, maintenance
and operation of a data processing center providing data processing services to
third parties; and (v) travel industry, transportation and logistics consulting
services relating primarily to computer technology and automation.
OTHER RELATED PARTY TRANSACTIONS American invests funds, including funds of
certain affiliates, in a combined short-term investment portfolio and passes
through interest income on such funds at the average rate earned on the
portfolio. To the extent funds transferred to American exceed the invested
portfolio, such amounts are converted to Long-Term Debt Due to Parent under a
subordinated note agreement with AMR. To the extent American invests its excess
cash flows in the short-term investment portfolio, Long-Term Debt Due to Parent
is reduced with a corresponding increase in Payables to Affiliates. The
subordinated promissory note bears interest based on the weighted-average rate
on AMR's long-term debt (9.22 percent at December 31, 1996). The interest rate
is reset every six months. The note is due September 30, 2004, unless extended.
American may prepay the note without penalty at any time. Under the provisions
of such note agreement, approximately $118 million and $1.68 billion was
included in Long-Term Debt Due to Parent as of December 31, 1996 and 1995,
respectively. Interest paid to affiliates in addition to interest income passed
through on invested funds was approximately $157 million, $259 million and $190
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest expense includes $3 million for the year ended December 31,
1996 and $17 million for the years ended December 31, 1995 and 1994, relating
to debentures held by AMR calculated at a 9.03 percent effective interest rate.
The debenture was paid at its scheduled maturity date of March 1, 1996.
American issues tickets for flights on its American Eagle affiliate
regional carriers, owned by AMR Eagle, Inc., a subsidiary of AMR. As a result,
the revenue collected for such tickets is prorated between American and the AMR
Eagle carriers based on the segments flown by the respective carriers. In
addition, in 1996,
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27
1995 and 1994, American paid fees of $196 million, $201
million and $174 million, respectively, recorded as a reduction in passenger
revenues, to AMR Eagle primarily for passengers connecting with American
flights.
American paid affiliates in AMR's Management Services Group $120
million, $108 million and $92 million in 1996, 1995 and 1994, respectively, for
ground handling services provided at selected airports, consulting services and
investment management and advisory services with respect to short-term
investments and the assets of its retirement benefit plans.
American recognizes compensation expense associated with certain AMR
common stock-based awards for employees of American (See Note 9).
3. SHORT-TERM INVESTMENTS
Short-term investments consisted of (in millions):
December 31,
-----------------------------------
1996 1995
------------- -------------
Overnight investments and time deposits $ 47 $ 136
Corporate notes 1,014 457
Other debt securities 251 223
------------- -------------
$ 1,312 $ 816
============= =============
Short-term investments at December 31, 1996, by contractual maturity
included (in millions):
Due in one year or less $ 845
Due after one year through three years 363
Due after three years 104
-------------
$ 1,312
=============
All short-term investments are classified as available-for-sale and
stated at fair value. Net unrealized gains and losses, net of deferred taxes,
are reflected as an adjustment to stockholder's equity.
4. COMMITMENTS AND CONTINGENCIES
American's collective bargaining agreement with the Allied Pilots
Association (APA) became amendable on August 31, 1994. On September 2, 1996,
American and the APA reached a tentative agreement on a new labor contract. The
tentative agreement was approved by the APA Board of Directors and sent out for
membership ratification, but subsequently rejected by the APA membership. On
January 10, 1997, the National Mediation Board (NMB) proffered binding
arbitration to the APA and American. American agreed to arbitration but because
the APA did not also agree, the proffer was rejected and on January 15, 1997,
the APA and American were notified (i) that the NMB was terminating its services
and (ii) that beginning February 15, 1997, either party could resort to
self-help remedies, including a strike by the members of the APA. On February
15, 1997, the APA did initiate a strike against American but immediately
thereafter President Clinton intervened and appointed a Presidential Emergency
Board (PEB), pursuant to his authority under the Railway Labor Act. The effect
of President Clinton's actions was to stop the strike and begin a process during
which the PEB reviewed the positions advocated by both parties. On March 19,
1997, before the PEB issued its recommendations, American and the APA reached a
second tentative agreement on a new contract. The tentative agreement will be
voted on by the APA Board of Directors in early April 1997 and if approved, will
be submitted to the APA membership for ratification. If the tentative agreement
is rejected by the APA, and unless the Congress takes additional action, either
party will be permitted to resort to self-help remedies, which include, but are
not limited to, a strike by members of the APA. The Company and the APA have
agreed to a timetable under which neither party will resort to self-help
remedies for a period of 30 days following either (i) the failure of the APA
Board to approve the tentative agreement or (ii) the failure of the APA
membership to ratify the tentative agreement. Any work stoppage by the APA
members would have a material adverse impact on the company.
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28
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In November 1996, the Company announced an aircraft acquisition
arrangement with Boeing, including firm orders for 103 aircraft and "purchase
rights" for 527 additional jets. This arrangement would allow the airline to
move gradually toward a very high level of fleet commonality, and provide for
modest capacity growth in future years. The Company made its arrangement with
Boeing contingent on ratification of the tentative agreement with the APA
reached in September 1996. Since this did not occur, the future of this
aircraft order is uncertain.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (Airport)
and funding the remediation costs through landing fee revenues. Future costs of
the remediation effort may be borne by carriers operating at the Airport,
including American, through increased landing fees since certain of the
potentially responsible parties are no longer in business. The future increase
in landing fees may be material but cannot be reasonably estimated due to
various factors, including the unknown extent of the remedial actions that may
be required, the proportion of the cost that will ultimately be recovered from
the responsible parties, and uncertainties regarding the environmental agencies
that will ultimately supervise the remedial activities and the nature of that
supervision. The ultimate resolution is not, however, expected to have a
significant impact on the financial position or the liquidity of American.
The Company has authorized expenditures of approximately $285 million
for modifications to aircraft, renovations of, and additions to, airport and
office facilities, and the acquisition of various other equipment and assets.
American expects to spend approximately $185 million of this amount in 1997.
In April 1995, American announced an agreement to sell 12 of its
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx), with
delivery of the aircraft between 1996 and 1999. No gain or loss is expected to
be recognized as a result of this transaction. Three aircraft had been
delivered as of December 31, 1996. The carrying value of the nine remaining
aircraft American has committed to sell was approximately $600 million as of
December 31, 1996. In addition, American has the option to sell its remaining
seven MD-11 aircraft to FedEx with deliveries between 2000 and 2002.
American has included an event risk covenant in approximately $2.9
billion of debt and lease agreements. The covenant permits the holders of such
instruments to receive a higher rate of return (between 50 and 700 basis points
above the stated rate) if a designated event, as defined, should occur and the
credit rating of the debt obligations underlying the lease agreements is
downgraded below certain levels.
Special facility revenue bonds have been issued by certain
municipalities, primarily to purchase equipment and improve airport facilities
which are leased by American. In certain cases, the bond issue proceeds were
loaned to American and are included in long-term debt. Certain bonds have rates
that are periodically reset and are remarketed by various agents. In certain
circumstances, American may be required to purchase up to $437 million of the
special facility revenue bonds prior to scheduled maturity, in which case
American has the right to resell the bonds or to use the bonds to offset its
lease or debt obligations. American may borrow the purchase price of these
bonds under standby letter of credit agreements. At American's option, these
letters of credit are secured by funds held by bond trustees and by
approximately $439 million of short-term investments.
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5. LEASES
American leases various types of equipment and property, including
aircraft, passenger terminals, equipment and various other facilities. The
future minimum lease payments required under capital leases, together with the
present value of net minimum lease payments, and future minimum lease payments
required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 1996, were (in millions):
Capital Operating
Year Ending December 31, Leases Leases
--------------- ---------------
1997 $ 216 $ 907
1998 211 919
1999 206 909
2000 272 869
2001 254 871
2002 and subsequent 1,271 13,802
------------- -------------
2,430(1) $ 18,277(2)
=============
Less amount representing interest 801
-------------
Present value of net minimum lease payments $ 1,629
=============
(1) Future minimum payments required under capital leases include $202
million guaranteed by AMR relating to special facility revenue
bonds issued by municipalities.
(2) Future minimum payments required under operating leases include $6.4
billion guaranteed by AMR relating to special facility revenue bonds
issued by municipalities.
At December 31, 1996, the Company had 186 jet aircraft under operating
leases and 83 jet aircraft under capital leases. The aircraft leases can
generally be renewed at rates based on fair market value at the end of the
lease term for one to five years. Most aircraft leases have purchase options at
or near the end of the lease term at fair market value, but generally not to
exceed a stated percentage of the defined lessor's cost of the aircraft.
In 1994, the Company entered into capital leases aggregating $280
million. During 1996, American made prepayments totaling $565 million on the
cancelable operating leases it had on 12 of its Boeing 767-300 aircraft. Upon
the expiration of the amended leases, American can purchase the aircraft for a
nominal amount. As a result, the aircraft are recorded as flight equipment
under capital leases.
Rent expense, excluding landing fees, was $1.1 billion for 1996 and $1.2
billion for 1995 and 1994.
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6. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted of
(in millions):
December 31,
-----------------------------------
1996 1995
------------- -------------
7.67% - 9.59% notes due through 2014 $ 611 $ 624
Variable rate indebtedness due through 2024
(3.55% - 6.82% at December 31, 1996) 162 475
6.0% - 9.25% bonds due through 2031 176 176
Other 34 43
------------- -------------
Long-term debt, less current maturities $ 983 $ 1,318
============== ==============
Maturities of long-term debt (including sinking fund requirements)
for the next five years are: 1997 - $22 million; 1998 - $27 million; 1999 -
$26 million; 2000 - $30 million; 2001 - $35 million.
Certain debt is secured by aircraft, engines, equipment and other assets
having a net book value of approximately $826 million.
During 1996, American retired prior to scheduled maturity $449 million
in face value of long-term debt and capital lease obligations at amounts which
approximated their carrying value.
During 1995, American retired prior to scheduled maturity $139 million
in face value of long-term debt, net of sinking fund balances. Cash from
operations provided the funding for the retirements. In addition, $616 million
in outstanding principal of certain debt and lease obligations was refinanced
during 1995. These transactions resulted in an extraordinary loss of $21
million ($13 million after tax) in 1995.
American has a $1.0 billion credit facility agreement which expires
December 19, 2001. At American's option, interest on the agreement can be
calculated on one of several different bases. For most borrowings, American
would anticipate choosing a floating rate based upon the London Interbank
Offered Rate (LIBOR). At December 31, 1996, no borrowings were outstanding
under the agreement.
Certain of American's debt and credit facility agreements contain
certain restrictive covenants, including a cash flow coverage test and a
minimum net worth requirement. At December 31, 1996, under the most restrictive
provisions of those agreements, approximately $1.5 billion of American's
retained earnings were available for payment of dividends to AMR.
Cash payments for interest were $367 million, $542 million and
$406 million for 1996, 1995 and 1994, respectively.
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31
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, American uses a
variety of financial instruments, including interest rate swaps, fuel swaps and
collars and currency exchange agreements. The Company does not hold or issue
derivative financial instruments for trading purposes.
NOTIONAL AMOUNTS AND CREDIT EXPOSURES OF DERIVATIVES
The notional amounts of derivative financial instruments summarized in
the tables which follow do not represent amounts exchanged between the parties
and, therefore, are not a measure of the Company's exposure resulting from its
use of derivatives. The amounts exchanged are calculated based on the notional
amounts and other terms of the instruments, which relate to interest rates,
exchange rates or other indices.
The Company is exposed to credit losses in the event of non-performance
by counterparties to these financial instruments, but it does not expect any of
the counterparties to fail to meet its obligations. The credit exposure related
to these financial instruments is represented by the fair value of contracts
with a positive fair value at the reporting date, reduced by the effects of
master netting agreements. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position of the
program and its relative market position with each counterparty. The Company
also maintains industry-standard security agreements with the majority of its
counterparties which may require the Company or the counterparty to post
collateral if the value of these instruments fall below certain mark-to-market
thresholds. As of December 31, 1996, no collateral was required under these
agreements, and the Company does not expect to post collateral in the near
future.
INTEREST RATE RISK MANAGEMENT
American enters into interest rate swap contracts to effectively convert
a portion of its fixed-rate obligations to floating-rate obligations. These
agreements involve the exchange of amounts based on a floating interest rate
for amounts based on fixed interest rates over the life of the agreement
without an exchange of the notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the obligation. The
related amount payable to or receivable from counterparties is included in
current liabilities or assets. The fair values of the swap agreements are not
recognized in the financial statements. Gains and losses on terminations of
interest rate swap agreements are deferred as an adjustment to the carrying
amount of the outstanding obligation and amortized as an adjustment to interest
expense related to the obligation over the remaining term of the original
contract life of the terminated swap agreement. In the event of the early
extinguishment of a designated obligation, any realized or unrealized gain or
loss from the swap would be recognized in income coincident with the
extinguishment. Because American's operating results tend to be better in
economic cycles with relatively high interest rates and its capital investments
tend to be financed with long-term fixed-rate instruments, interest rate swaps
in which American pays the floating rate and receives the fixed rate are used
to reduce the impact of economic cycles on American's net income.
The following table indicates the notional amounts and fair values of
the Company's interest rate swap agreements (in millions):
December 31,
-------------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Notional Notional
Amount Fair Value Amount Fair Value
-------------- --------------- -------------- --------------
Interest rate swap agreements $ 1,480 $ (9) $ 1,980 $ 12
The fair values represent the amount the Company would pay or receive to
terminate the agreements at December 31, 1996 and 1995, respectively.
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32
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
At December 31, 1996, the weighted-average remaining duration of the
interest rate swap agreements in effect was 2.9 years. The weighted-average
floating rates and fixed rates on the contracts outstanding were:
December 31,
------------------------------------
1996 1995
-------------- --------------
Average floating rate 5.728% 5.786%
Average fixed rate 5.627% 5.304%
Floating rates are primarily based on LIBOR and may change
significantly, affecting future cash flows.
FUEL PRICE RISK MANAGEMENT
American enters into fuel swap contracts to protect against increases in
jet fuel prices. Under the agreements, American receives or makes payments
based on the difference between a fixed price and a variable price for certain
fuel commodities. Gains and losses on fuel swap agreements are recognized as a
component of fuel expense when the underlying fuel being hedged is used. At
December 31, 1996, American had agreements with broker-dealers to exchange
payments on approximately 405 million gallons of fuel products, which
represents approximately 12 percent of its expected 1997 fuel needs and
approximately three percent of its expected 1998 fuel needs. The fair value of
the Company's fuel swap agreements at December 31, 1996, representing the
amount the Company would receive to terminate the agreements, totaled $31
million.
FOREIGN EXCHANGE RISK MANAGEMENT
To hedge against the risk of future currency exchange rate fluctuations
on certain debt and lease obligations and related interest payable in foreign
currencies, the Company has entered into various foreign currency exchange
agreements. Changes in the value of the agreements due to exchange rate
fluctuations are offset by changes in the value of the foreign currency
denominated debt and lease obligations translated at the current exchange rate.
Discounts or premiums are accreted or amortized as an adjustment to interest
expense over the lives of the underlying debt or lease obligations. The related
amounts due to or from counterparties are included in other liabilities or
other assets. The net fair values of the Company's currency exchange
agreements, representing the amount American would receive to terminate the
agreements, were:
December 31,
-------------------------------------------------------------------------
1995 1994
---------------------------------- ----------------------------------
Notional Fair Value Notional Fair Value
Amount (in millions) Amount (in millions)
-------------- --------------- -------------- --------------
Japanese yen 24.7 billion $ 14 25.0 billion $ 28
The exchange rates on the Japanese yen agreements range from 66.50 to
125.59 yen per U.S. dollar.
To hedge against the risk of future exchange rate fluctuations on a
portion of American's foreign cash flows, the Company enters into various
currency put option agreements on a number of foreign currencies. The option
contracts are denominated in the same foreign currency in which the projected
foreign cash flows are expected to occur. These contracts are designated and
effective as hedges of probable quarterly foreign cash flows for various
periods through September 30, 1999, which otherwise would expose the Company to
foreign currency risk. Realized gains on the currency put option agreements are
recognized as a component of passenger revenue. At December 31, 1996, the
notional amount related to these options totaled approximately $629 million and
the fair value, representing the amount American would receive to terminate the
agreements, totaled approximately $20 million.
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33
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt were estimated using
quoted market prices where available. For long-term debt not actively traded,
fair values were estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts and fair values of the Company's long-term
debt, including current maturities, were (in millions):
December 31,
------------------------------------------------------------------------
1996 1995
-------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
Long-term debt due to Parent $ 118 $ 134 $ 1,869 $ 2,077
7.67% - 9.59% notes 625 685 636 718
Variable rate indebtedness 165 165 501 501
6.0% - 9.25% bonds 176 180 176 183
Other 39 41 54 60
------------- ------------- ------------- -------------
$ 1,123 $ 1,205 $ 3,236 $ 3,539
============= ============= ============= =============
All other financial instruments are either carried at fair value or
their carrying value approximates fair value.
8. INCOME TAXES
American, as a wholly-owned subsidiary, is included in AMR's
consolidated tax return. Under the terms of American's tax sharing agreement
with AMR, American's provision for income taxes has been computed on the basis
that American files separate consolidated income tax returns with its
subsidiaries.
The significant components of the income tax provision were (in
millions):
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Current $ 208 $ 21 $ 33
Deferred 179 10 25
Benefit of operating loss carryforwards - - (12)
------------- ------------- -------------
$ 387 $ 31 $ 46
============= ============= =============
The income tax provision includes a federal income tax provision of
$342 million, $24 million and $31 million for the years ended December 31,
1996, 1995 and 1994, respectively.
32
34
8. INCOME TAXES (CONTINUED)
The income tax provision differed from amounts computed at the statutory
federal income tax rate as follows (in millions):
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Statutory income tax provision $ 335 $ 7 $ 36
State income tax provision, net 27 2 4
Meal expense 16 19 19
Other, net 9 3 (13)
------------ ------------ ------------
Income tax provision $ 387 $ 31 $ 46
============ ============ ============
The components of American's deferred tax assets and liabilities were
(in millions):
December 31,
-----------------------------------
1996 1995
------------- -------------
Deferred tax assets:
Alternative minimum tax credit carryforwards $ 804 $ 566
Postretirement benefits other than pensions 543 501
Gains from lease transactions 248 253
Rent expense 231 120
Frequent flyer obligation 172 130
Operating loss carryforwards 45 426
Other 341 379
Valuation allowance (3) (10)
------------- -------------
Total deferred tax assets 2,381 2,365
------------- -------------
Deferred tax liabilities:
Accelerated depreciation and amortization (2,396) (2,244)
Pensions (144) (65)
Other (193) (226)
------------- -------------
Total deferred tax liabilities (2,733) (2,535)
------------- -------------
Net deferred tax liability $ (352) $ (170)
============= =============
At December 31, 1996, American had available under the terms of its tax
sharing agreement with AMR approximately $804 million of alternative minimum
tax credit carryforwards available for an indefinite period, and approximately
$125 million of net operating loss carryforwards for regular tax purposes,
which expire in 2009.
Cash payments for income taxes were $191 million, $49 million
and $34 million for 1996, 1995 and 1994,respectively.
33
35
9. STOCK AWARDS AND OPTIONS
The Company participates in AMR's 1988 Long Term Incentive Plan (1988
Plan), as amended in 1994, whereby officers and key employees of AMR and its
subsidiaries may be granted stock options, stock appreciation rights,
restricted stock, deferred stock, stock purchase rights and/or other
stock-based awards.
The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. In 1996, the
total charge for stock compensation expense included in wages, salaries and
benefits expense was $46 million. No compensation expense was recognized for
stock option grants since the exercise price of the Company's stock option
grants was the fair market value of the underlying stock on the date of grant.
The Company has adopted the pro forma disclosure features of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). As required by FAS 123, pro forma information
regarding net income has been determined as if the Company had accounted for
its employee stock options and awards granted subsequent to December 31, 1994
using the fair value method prescribed by FAS 123. The pro forma effect of FAS
123 is immaterial to 1996 and 1995 net earnings. Because FAS 123 is applicable
only to options and stock-based awards granted subsequent to December 31, 1994,
its pro forma effect will not be fully reflected until 1999.
10. RETIREMENT BENEFITS
Substantially all employees of American are eligible to participate in
pension plans. The defined benefit plans provide benefits for participating
employees based on years of service and average compensation for a specified
period of time before retirement. Airline pilots and flight engineers also
participate in defined contribution plans for which company contributions are
determined as a percentage of participant compensation.
Total costs for all pension plans were (in millions):
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Defined benefit plans:
Service cost - benefits earned during
the period $ 193 $ 162 $ 201
Interest cost on projected benefit obligation 356 323 292
Loss (return) on assets (87) (1,288) 232
Net amortization and deferral (305) 1,008 (541)
------------ ------------ ------------
Net periodic pension cost for defined
benefit plans 157 205 184
Defined contribution plans 132 124 119
------------ ------------ ------------
Total $ 289 $ 329 $ 303
============ ============ ============
In addition to the pension costs shown above, in late 1995 and 1994,
American offered early retirement programs to select groups of employees as
part of its restructuring efforts. In accordance with Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
American recognized additional pension expense of $220 million and $154 million
associated with these programs in 1995 and 1994, respectively. Of these
amounts, $118 million and $120 million were for special termination benefits
and $102 million and $34 million were for the actuarial losses resulting from
the early retirements for 1995 and 1994, respectively.
34
36
10. RETIREMENT BENEFITS (CONTINUED)
The funded status and actuarial present value of benefit obligations of
the defined benefit plans were (in millions):
December 31,
-------------------------------------------------------------------------------
1996 1995
-------------------------------------- -------------------------------------
Plans with
Plans with Plans with Assets in Plans with
Assets in Excess Accumulated Excess of Accumulated
of Accumulated Benefit Accumulated Benefit
Benefit Obligation in Benefit Obligation in
Obligation Excess of Assets Obligation Excess of Assets
----------------- ----------------- ---------------- ----------------
Vested benefit obligation $ 2,729 $ 1,435 $ 4,145 $ 42
============== ============== ============== ==============
Accumulated benefit obligation
$ 2,882 $ 1,510 $ 4,279 $ 46
Effect of projected future salary
increases 650 202 728 20
-------------- -------------- -------------- --------------
Projected benefit obligation 3,532 1,712 5,007 66
-------------- -------------- -------------- --------------
Plan assets at fair value 3,154 1,463 4,545 6
Plan assets less than projected
benefit obligation (378) (249) (462) (60)
Unrecognized net loss 729 237 703 19
Unrecognized prior service cost 37 29 14 9
Unrecognized transition asset (32) - (45) (1)
Adjustment to record minimum
pension liability - (69) - (12)
-------------- -------------- -------------- --------------
Prepaid (accrued) pension cost(1) $ 356 $ (52) $ 210 $ (45)
============== ============== ============== ==============
(1) American's funding policy is to make contributions equal to, or in
excess of, the minimum funding requirements of the Employee Retirement
Income Security Act of 1974.
Plan assets consist primarily of domestic and foreign government and
corporate debt securities, marketable equity securities, and money market fund
and mutual fund shares, of which approximately $71 million and $119 million of
plan assets at December 31, 1996 and 1995, respectively, were invested in
shares of mutual funds managed by a subsidiary of AMR.
The projected benefit obligation was calculated using weighted-average
discount rates of 7.75% and 7.25% at December 31, 1996 and 1995, respectively;
rates of increase for compensation of 4.20% at December 31, 1996 and 1995; and
the 1983 Group Annuity Mortality Table. The weighted-average expected long-term
rate of return on assets was 9.50% in 1996, 1995 and 1994. The vested benefit
obligation and plan assets at fair value at December 31, 1996, for plans whose
benefits are guaranteed by the Pension Benefit Guaranty Corporation were $4.1
billion and $4.6 billion, respectively.
AMR intends to spin off the portion of its defined benefit pension plan
applicable to employees of The SABRE Group to the Legacy Pension Plan (LPP), a
defined benefit plan established by The SABRE Group effective January 1, 1997.
The net obligation attributable to The SABRE Group employees participating in
AMR's plan was approximately $40 million at December 31, 1996.
35
37
10. RETIREMENT BENEFITS (CONTINUED)
In addition to pension benefits, other postretirement benefits,
including certain health care and life insurance benefits, are also provided to
retired employees. The amount of health care benefits is limited to lifetime
maximums as outlined in the plan. Substantially all employees of American and
employees of certain other subsidiaries may become eligible for these benefits
if they satisfy eligibility requirements during their working lives.
Certain employee groups make contributions toward funding a portion of
their retiree health care benefits during their working lives. American funds
benefits as incurred and makes contributions to match employee prefunding.
Net other postretirement benefit cost was (in millions):
Year Ended December 31,
---------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Service cost - benefits earned during the period $ 55 $ 48 $ 62
Interest cost on accumulated other postretirement
benefit obligation 98 99 86
Return on assets (3) (2) (1)
Net amortization and deferral (5) (6) (4)
------------- ------------- -------------
Net other postretirement benefit cost $ 145 $ 139 $ 143
============= ============= =============
In addition to net other postretirement benefit cost, in late 1995 and
1994, American offered early retirement programs to select groups of employees
as part of its restructuring efforts. In accordance with Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," American recognized additional other
postretirement benefit expense of $93 million and $71 million associated with
these programs in 1995 and 1994, respectively. Of these amounts, $26 million
and $43 million were for special termination benefits and $67 million and $28
million were for the net actuarial losses resulting from the early retirements
for 1995 and 1994, respectively.
The funded status of the plan, reconciled to the accrued other
postretirement benefit cost recognized in American's balance sheet, was (in
millions):
December 31,
-----------------------------------
1996 1995
------------- -------------
Retirees $ 593 $ 705
Fully eligible active plan participants 123 176
Other active plan participants 461 546
------------- -------------
Accumulated other postretirement benefit obligation 1,177 1,427
Plan assets at fair value 35 28
------------- -------------
Accumulated other postretirement benefit obligation
in excess of plan assets 1,142 1,399
Unrecognized net gain (loss) 287 (29)
Unrecognized prior service benefit 52 61
------------- -------------
Accrued other postretirement benefit cost $ 1,481 $ 1,431
============= =============
Plan assets consist primarily of shares of a mutual fund managed by a
subsidiary of AMR.
36
38
10. RETIREMENT BENEFITS (CONTINUED)
For 1996 and 1995, future benefit costs were estimated assuming per
capita cost of covered medical benefits would increase at a six and eight
percent annual rate, respectively, decreasing gradually to a four percent
annual growth rate in 1999 and thereafter. A one percent increase in this
annual trend rate would have increased the accumulated other postretirement
benefit obligation at December 31, 1996, by approximately $123 million and 1996
other postretirement benefit cost by approximately $23 million. The
weighted-average discount rate used in estimating the accumulated other
postretirement benefit obligation was 7.75% and 7.25% at December 31, 1996 and
1995, respectively.
11. RESTRUCTURING COSTS
In 1995 and 1994, the Company recorded $485 million and $276 million
respectively, for restructuring costs which included (in millions):
Year Ended December 31,
-----------------------------------
1995 1994
------------- -------------
Special termination benefits:
Pension $ 118 $ 120
Other postretirement benefits 26 43
Other termination benefits 19 -
Actuarial losses:
Pension 102 34
Other postretirement benefits 67 28
------------- -------------
Total cost of early retirement programs 332 225
Provisions for aircraft impairment and retirement 145 -
Severance - 28
Other 8 23
------------- -------------
$ 485 $ 276
============= =============
In 1995, approximately 2,100 mechanics and fleet service clerks and 300
flight attendants elected early retirement under programs offered in
conjunction with renegotiated union labor contracts, and the majority of these
employees left the Company's workforce during 1996. The Company recorded
restructuring costs of $332 million in 1995 related to these early retirement
programs. A large portion of the funding for the programs was done in 1995. The
remaining cash payments associated with these programs will be expended as
required for funding the appropriate pension and other postretirement benefit
plans in future years.
The aircraft portion of the 1995 restructuring costs consists of a $145
million provision related to the write-down of certain McDonnell Douglas DC-10
aircraft. Effective January 1, 1995, American adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment
losses to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In 1995,
the Company evaluated its fleet operating plan with respect to the DC-10-10
fleet and, as a result, believes that the estimated future cash flows expected
to be generated by these aircraft will not be sufficient to recover their net
book value. Management estimated the undiscounted future cash flows utilizing
models used by the Company in making fleet and scheduling decisions. As a
result of this analysis, the Company determined that a write-down of the
DC-10-10 aircraft to the net present value of their estimated discounted future
cash flows was warranted, which resulted in a $112 million charge. In addition,
the Company recorded a $33 million charge to reflect a diminution in the
estimated market value of certain DC-10 aircraft previously grounded by the
Company. No cash costs have been incurred or are expected as a result of these
DC-10 write-downs.
37
39
11. RESTRUCTURING COSTS (CONTINUED)
In 1994, approximately 1,700 agents and 600 management employees elected
early retirement under programs offered to select groups of employees and left
the Company's workforce during 1995. The Company recorded restructuring costs
of $225 million in 1994 related to these early retirement programs. A large
portion of the funding for these programs was done in 1994. The remaining cash
payments associated with these programs will be expended as required for
funding the appropriate pension and other postretirement benefit plans in
future years.
The $28 million severance provision recorded in 1994 was for additional
workforce reductions affecting approximately 2,300 agent and management
personnel as a result of scheduled service reductions and improved
administrative efficiencies. Cash outlays for severance payments in 1996 and
1995 totaled approximately $6 million and $22 million, respectively.
The remaining $23 million included in the 1994 restructuring costs
represents provisions for excess leased facilities and other restructuring
activities. Cash outlays are estimated to be approximately $18 million, of
which approximately $3 million occurred in both 1996 and 1995.
12. FOREIGN OPERATIONS
American conducts operations in various foreign countries. American's
operating revenues from foreign operations were (in millions):
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Latin America $ 2,438 $ 2,316 $ 2,134
Europe 1,967 2,059 1,839
Pacific 336 373 347
------------- ------------- -------------
Foreign operating revenues $ 4,741 $ 4,748 $ 4,320
============= ============= =============
38
40
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1996 and 1995 (in
millions):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- -------------- --------------
1996
Operating revenues $ 3,639 $ 3,885 $ 3,900 $ 3,712
Operating income 240 447 444 200
Net earnings 150 274 208 73
1995
Operating revenues $ 3,399 $ 3,700 $ 3,814 $ 3,590
Operating income (loss) 137 358 380 (274)
Earnings (loss) before
extraordinary loss 56 192 212 (239)
Net earnings (loss) 56 192 212 (252)
Results for the third quarter of 1996 include a $21 million provision
for American's share of a multi-carrier travel agency class action litigation
settlement. Results for the fourth quarter of 1996 include a $26 million charge
to write down the value of aircraft interiors the Company plans to refurbish.
Results for the fourth quarter of 1995 include $485 million in
restructuring costs, primarily representing the cost of early retirement
programs for certain American employees, and provisions for the write-down of
certain DC-10 aircraft. Results for the fourth quarter of 1995 also include a
$41 million charge related to the loss of an aircraft operated by American.
39
41
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
- ------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and Independent Auditor's
Report are filed as part of this report:
Page
----
Report of Independent Auditors 16
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1995 and 1994 17
Consolidated Balance Sheet at December 31, 1996 and 1995 18-19
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 20
Consolidated Statement of Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994 21
Notes to Consolidated Financial Statements 22-39
(2) The following financial statement schedule is filed as part of this
report:
Schedule II Valuation and Qualifying Accounts and Reserves 43
40
42
Schedules not included have been omitted because they are not
applicable or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
(Where the amount of securities authorized to be issued under any
of American's long-term debt agreements does not exceed 10
percent of American's assets, pursuant to paragraph (b)(4) of
Item 601 of Regulation S-K, in lieu of filing such as an exhibit,
American hereby agrees to furnish to the Commission upon request
a copy of any agreement with respect to such long-term debt.)
EXHIBIT
3.1 Composite of the Certificate of Incorporation of
American, incorporated by reference to Exhibit 3(a) to
American's report on Form 10-K for the year ended
December 31, 1982.
3.2 Amended Bylaws of American, incorporated by reference to
Exhibit 3(b) to American's report on Form 10-K for the
year ended December 31, 1990.
10.1 Aircraft Sales Agreement by and between American
Airlines, Inc. and Federal Express Corporation, dated
April 7, 1995, incorporated by reference to Exhibit
10(ee) to American's report on Form 10-K for the year
ended December 31, 1995. Confidential treatment was
granted as to a portion of this document.
10.2 Information Technology Services Agreement, dated July 1,
1996, between American and The SABRE Group, Inc.,
incorporated by reference to Exhibit 10.6 to The SABRE
Group Holdings, Inc.'s Registration Statement on Form
S-1, file number 333-09747. Confidential treatment was
granted as to a portion of this document.
23 Consent of Independent Auditors appears on page 44 hereof.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Form 8-K dated January 21, 1997 to report events regarding labor
negotiations with the Allied Pilots Association.
Form 8-K dated February 6, 1997 to report American's drawing under an
existing credit facility agreement and negotiation of an additional credit
facility agreement.
Form 8-K dated March 3, 1997 to report events regarding labor
negotiations with the Allied Pilots Association.
41
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Robert L. Crandall
- ------------------------------------------------
Robert L. Crandall
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard J. Arpey
- ------------------------------------------------
Gerard J. Arpey
Senior Vice President - Finance and Planning and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates noted:
Directors:
/s/ David L. Boren /s/ Dee J. Kelly
- -------------------------------- --------------------------------------
David L. Boren Dee J. Kelly
/s/ Edward A. Brennan /s/ Ann D. McLaughlin
- -------------------------------- --------------------------------------
Edward A. Brennan Ann D. McLaughlin
/s/ Armando M. Codina /s/ Charles H. Pistor, Jr.
- -------------------------------- --------------------------------------
Armando M. Codina Charles H. Pistor, Jr.
/s/ Christopher F. Edley /s/ Joe M. Rodgers
- -------------------------------- --------------------------------------
Christopher F. Edley Joe M. Rodgers
/s/ Charles T. Fisher, III /s/ Maurice Segall
- -------------------------------- --------------------------------------
Charles T. Fisher, III Maurice Segall
Date: March 19, 1997
42
44
AMERICAN AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DEDUCTED FROM ASSET TO WHICH APPLICABLE)
(IN MILLIONS)
CHARGED TO
---------- SALES,
BALANCE RETIRE- BALANCE
AT OTHER DEPREC. NET MENTS AT
BEGINNING OPERATING AND RESTRUCT WRITE- AND END OF
OF YEAR EXPENSES AMORT. COSTS OFF TRANSFERS YEAR
--------- --------- ------- -------- ------ --------- -------
YEAR ENDED DECEMBER 31, 1996
Allowance for
uncollectible accounts $ 13 $ 10 $ - $ - $(14) $ (3) $ 6
Allowance for
obsolescence of inventories 228 - 20 - - (51) 197
YEAR ENDED DECEMBER 31, 1995
Allowance for
uncollectible accounts 14 14 - - (15) - 13
Allowance for
obsolescence of inventories 171 - 36 9 - 12 228
YEAR ENDED DECEMBER 31, 1994
Allowance for
uncollectible accounts 26 18 - - (30) - 14
Allowance for
obsolescence of inventories 161 - 28 - - (18) 171
43
45
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23 Consent of Independent Auditors
27 Financial Data Schedule
1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post Effective Amendment No. 2
to the Registration Statement (Form S-3 No. 33-42998) of American Airlines,
Inc., and in the related Prospectus, of our report dated January 14, 1997
(except for the first paragraph of Note 4, for which the date is March 24,
1997), with respect to the consolidated financial statements and schedule of
American Airlines, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
March 24, 1997
5
1,000,000
YEAR
DEC-31-1996
JAN-01-1996
DEC-31-1996
37
1,312
1,093
6
559
3,544
17,501
5,900
17,562
6,082
2,621
0
0
1,717
2,811
17,562
0
15,136
0
13,805
0
0
378
956
387
569
136
0
0
705
0
0
