1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1998.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to .
Commission file number 1-2691.
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1502798
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (817) 963-1234
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of May 11, 1998
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-Q.
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INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three months ended March
31, 1998 and 1997
Condensed Consolidated Balance Sheet -- March 31, 1998 and December
31, 1997
Condensed Consolidated Statement of Cash Flows -- Three months
ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements -- March 31,
1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Ended
March 31,
1998 1997
Revenues
Passenger $3,578 $3,390
Cargo 162 162
Other 220 198
Total operating revenues 3,960 3,750
Expenses
Wages, salaries and benefits 1,314 1,270
Aircraft fuel 402 503
Commissions to agents 285 298
Depreciation and amortization 235 241
Maintenance materials and repairs 198 162
Other rentals and landing fees 191 190
Food service 163 160
Aircraft rentals 133 132
Other operating expenses 643 595
Total operating expenses 3,564 3,551
Operating Income 396 199
Other Income (Expense)
Interest income 27 3
Interest expense (34) (50)
Related party interest - net (9) (19)
Miscellaneous - net (16) (5)
(32) (71)
Earnings Before Income Taxes 364 128
Income tax provision 143 54
Net Earnings $ 221 $ 74
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited) (In millions)
March 31, December 31,
1998 1997
(Note 1)
Assets
Current Assets
Cash $ 103 $ 47
Short-term investments 1,640 1,762
Receivables, net 1,211 1,057
Inventories, net 555 555
Deferred income taxes 360 360
Other current assets 201 201
Total current assets 4,070 3,982
Equipment and Property
Flight equipment, net 7,625 7,790
Other equipment and property, net 1,246 1,232
Purchase deposits for flight equipment 886 695
9,757 9,717
Equipment and Property Under Capital Leasess
Flight equipment, net 1,618 1,652
Other equipment and property, net 91 92
1,709 1,744
Route acquisition costs, net 937 945
Other assets, net 1,380 1,365
$ 17,853 $ 17,753
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 950 $ 855
Payable to affiliates 459 595
Accrued liabilities 1,561 1,720
Air traffic liability 2,151 2,044
Current maturities of long-term debt 22 21
Current obligations under capital leases 112 112
Total current liabilities 5,255 5,347
Long-term debt, less current maturities 926 937
Obligations under capital leases,
less current obligations 1,310 1,382
Deferred income taxes 1,000 999
Other liabilities, deferred gains, deferred
credits and postretirement benefits 3,786 3,734
Stockholders' Equity
Common stock - -
Additional paid-in capital 1,732 1,732
Retained earnings 3,844 3,622
5,576 5,354
$ 17,853 $ 17,753
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (In millions)
Three Months Ended
March 31,
1998 1997
Net Cash Provided by Operating Activities $ 371 $ 125
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (299) (79)
Net decrease in short-term investments 122 133
Proceeds from sale of equipment
and property 76 89
Net cash used for investing activities (101) 143
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (78) (73)
Funds transferred to affiliates, net (136) (162)
Net cash used for financing activities (214) (235)
Net increase in cash 56 33
Cash at beginning of period 47 37
Cash at end of period $ 103 $ 70
Cash Payments For:
Interest $ 65 $ 96
Income taxes 25 102
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. The balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the American Airlines, Inc.
(American or the Company) Annual Report on Form 10-K for the year
ended December 31, 1997.
2.Accumulated depreciation of owned equipment and property at March
31, 1998 and December 31, 1997, was $5.8 billion and $5.7 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at March 31, 1998 and December 31, 1997, was
$966 million and $965 million, respectively.
3.As discussed in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, the Miami International Airport Authority
is currently remediating various environmental conditions at 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 and/or other charges. The
ultimate resolution of this matter is not expected to have a
significant impact on the financial position or liquidity of
American.
4.Subsequent to December 31, 1997, the Company exercised its purchase
rights to acquire 25 Boeing 737-800s and eight Boeing 777-200IGWs.
As of May 15, 1998, the Company had commitments to acquire the
following aircraft: 100 Boeing 737-800s, 19 Boeing 777-200IGWs, 12
Boeing 757-200s and seven Boeing 767-300ERs. Deliveries of these
aircraft commence in 1998 and will continue through 2004. Payments
for these aircraft will approximate $1.0 billion in 1998, $1.9
billion in 1999, $1.2 billion in 2000 and an aggregate of
approximately $1.5 billion in 2001 through 2004. The exercise of
these aircraft purchase rights will allow the Company to continue
the retirement of its Boeing 727-200 fleet, which the Company
anticipates to be complete by 2004, as well as to provide for
modest growth.
5.In March 1998, the Company exercised its option to sell seven MD-11
aircraft to Federal Express Corporation (FedEx), thereby committing
to sell its entire MD-11 fleet to FedEx. Seven aircraft have been
delivered as of March 31, 1998. The remaining 12 aircraft will be
delivered to FedEx between 1998 and 2003.
6.In April 1998, American and US Airways, Inc. (US Airways) announced
plans to create a broad marketing alliance between the two carriers
which would include (i) reciprocal benefits to members of both
carriers frequent flyer programs and (ii) access to the carriers
domestic and international club facilities. The companies expect
to implement the first phases of linking their frequent flier
programs and lounge access by late summer.
7.As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or
stockholders' equity. SFAS 130 requires unrealized gains or losses
on the Company"s available-for-sale securities and changes in
minimum pension liabilities, which prior to adoption were reported
separately in stockholders' equity, to be included in other
comprehensive income. Total comprehensive income for the three
months ended March 31, 1998 and 1997 was approximately $222 million
and $75 million, respectively.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Effective January 1, 1998, the Company adopted early the provisions
of Statement of Position No. 98-5, "Reporting on the Costs of Start-
Up Activities," (SOP 98-5). SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The
adoption of SOP 98-5 did not have a material impact on the
Company's financial position or results of operations for the
quarter ended March 31, 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
American recorded net earnings for the three months ended March 31,
1998 of $221 million. This compares to net earnings of $74 million
for the first quarter of 1997. American's operating income of $396
million increased 99 percent, or $197 million, compared to $199
million for the same period in 1997.
American's passenger revenues increased by 5.5 percent, or $188
million, primarily as a result of strong demand for air travel driven
by continued economic growth in the U.S., Europe and Latin America,
as well as a shift to a greater mix of full fare traffic. American's
yield (the average amount one passenger pays to fly one mile) of
14.09 cents increased by 5.1 percent compared to the same period in
1997. Domestic yields increased 6.4 percent from the first quarter of
1997. International yields increased 2.8 percent, primarily due to a
4.1 percent increase in Europe and a 1.2 percent increase in Latin
America, partially offset by a decrease of 6.4 percent in Pacific
yields. The increase in European yields was partially attributable
to the cancellation of American's New York Kennedy - Zurich, New York
- - Brussels and Miami - Frankfurt routes in 1997, while the decrease
in Pacific yields was primarily due to the weakness in Asian
economies.
American's traffic or revenue passenger miles (RPMs) increased 0.4
percent to 25.4 billion miles for the quarter ended March 31, 1998.
American's capacity or available seat miles (ASMs) increased 0.5
percent to 37.7 billion miles in the first quarter of 1998.
American's domestic traffic decreased 0.5 percent on capacity
decreases of 0.3 percent and international traffic grew 2.4 percent
on capacity growth of 2.3 percent. The increase in international
traffic was driven by a 3.9 percent increase in traffic to Latin
America on capacity growth of 8.3 percent and a 11.3 percent increase
in traffic to the Pacific on capacity growth of 1.6 percent,
partially offset by a 0.9 percent decrease in traffic to Europe on a
capacity decrease of 5.7 percent, primarily due to the cancellation
of the above mentioned routes in 1997.
American's yield and traffic were both negatively impacted in 1997 by
the effects of the pilot contract negotiations throughout the first
quarter of 1997. During the first quarter of 1998, American's yield
and traffic were adversely impacted by the imposition of the
transportation tax for the entire quarter compared to slightly less
than one month during the first quarter of 1997.
American's other revenues increased $22 million, or 11.1 percent,
primarily as a result of an increase in aircraft maintenance work
performed by American for other airlines and increased employee
travel service charges.
American's operating expenses increased 0.4 percent, or $13 million.
American's Jet Operations cost per ASM decreased 0.5 percent to 9.35
cents. Wages, salaries and benefits increased 3.5 percent, or $44
million, primarily due to an increase in the average number of
equivalent employees, contractual wage rate and seniority increases
that are built into the Company's labor contracts and an increase in
the provision for profit sharing. The increased headcount is due
primarily to increased volumes of work at American's maintenance
bases and increases associated with American's flight dependability
initiatives. Aircraft fuel expense decreased 20.1 percent, or $101
million, due to a 21.1 percent decrease in American's average price
per gallon, including taxes, partially offset by a 1.2 percent
increase in American's fuel consumption. Commissions to agents
decreased 4.4 percent, or $13 million, despite a 5.5 percent increase
in passenger revenues, due to the continued benefit from the
commission rate reduction initiated during September 1997.
Maintenance materials and repairs expense increased $36 million, or
22.2 percent, due primarily to higher volumes for both airframe and
engine maintenance at American's maintenance bases as a result of the
maturing of its fleet.
Other Income (Expense) decreased 54.9 percent, or $39 million,
primarily as a result of an increase in interest income of
approximately $24 million due to higher investment balances. In
addition, capitalized interest on aircraft purchase deposits
increased approximately $15 million compared to the same period in
1997.
9
AIRCRAFT COMMITMENTS
As of May 15, 1998, the Company had commitments to acquire the
following aircraft: 100 Boeing 737-800s, 19 Boeing 777-200IGWs, 12
Boeing 757-200s and seven Boeing 767-300ERs. Deliveries of these
aircraft commence in 1998 and will continue through 2004. Payments
for these aircraft will approximate $1.0 billion in 1998, $1.9
billion in 1999, $1.2 billion in 2000 and an aggregate of
approximately $1.5 billion in 2001 through 2004. The exercise of
these aircraft purchase rights will allow the Company to continue the
retirement of its Boeing 727-200 fleet, which the Company anticipates
to be complete by 2004, as well as to provide for modest growth. The
Company will determine the method of financing these aircraft
acquisitions near their respective delivery date; however, deliveries
in 1998 are currently expected to be financed with internally
generated funds as well as external financing.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will
function properly beyond 1999. The SABRE Group, which operates and
maintains substantially all of the computer systems and applications
utilized by the Company, has also implemented a Year 2000 compliance
program. The Company and The SABRE Group believe adequate resources
have been allocated for this purpose and expect their Year 2000 date
conversion programs to be completed on a timely basis. Testing on
certain systems and applications has commenced and will continue
throughout the course of the Year 2000 programs. However, there can
be no assurance that the systems of other parties (e.g., Federal
Aviation Administration, Department of Transportation, airport
authorities, data providers) upon which the Company's businesses also
rely will be converted on a timely basis. The Company's business,
financial condition, or results of operations could be materially
adversely affected by the failure of its systems and applications or
those operated by other parties to properly operate or manage dates
beyond 1999.
The Company expects to incur significant costs from The SABRE
Group, internal staff costs and consulting and other expenses related
to infrastructure and facilities enhancements necessary to prepare its
system for the Year 2000. The Company's total estimated cost of the
Year 2000 compliance program is approximately $125 million to $160
million, of which approximately $80 million was incurred as of March
31, 1998. The remaining expenses are expected to be incurred
primarily throughout the remainder of 1998. A significant portion of
these costs are not likely to be incremental costs to the Company, but
rather will represent the redeployment of current information
technology spending. Maintenance or modification costs associated
with making existing computer systems Year 2000 compliant will be
expensed as incurred.
The costs of the project and the date on which the Company plans to
complete the Year 2000 compliance program are based on management's
best estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from these estimates. Specific
factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes
and similar uncertainties.
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DALLAS LOVE FIELD
In 1968, as part of an agreement between the cities of Fort Worth and
Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond
ordinance was enacted by both cities (the Bond Ordinance). The Bond
Ordinance required both cities to direct all scheduled interstate
passenger operations to DFW and was an integral part of the bonds
issued for the construction and operation of DFW. In 1979, as part of
a settlement to resolve litigation with Southwest Airlines, the cities
agreed to expand the scope of operations allowed under the Bond
Ordinance at Dallas' Love Field. This settlement was codified by
Congress and became known as the Wright Amendment. The Wright
Amendment limited interstate operations at Love Field to the four
states contiguous to Texas (New Mexico, Oklahoma, Arkansas and
Louisiana) and prohibited through ticketing to any destination outside
that perimeter. In 1997, without the consent of either city, Congress
amended the Wright Amendment by (i) adding three states (Kansas,
Mississippi and Alabama) to the perimeter and (ii) removing all
federal restrictions on large aircraft configured with 56 seats or
less (the 1997 Amendment). In October 1997, the City of Fort Worth
filed suit in state district court against the City of Dallas and
others seeking to enforce the Bond Ordinance. Fort Worth contends
that the 1997 Amendment does not preclude the City of Dallas from
exercising its proprietary rights to restrict traffic at Love Field in
a manner consistent with the Bond Ordinance and, moreover, that it has
an obligation to do so. American has joined in this litigation.
Thereafter, Dallas filed a separate declaratory judgment action in
federal district court seeking to have the court declare that, as a
matter of law, the 1997 Amendment precludes Dallas from exercising any
restrictions on operations at Love Field. Further, in March 1998,
Southwest Airlines, relying upon a 1982 injunction that resulted from
prior litigation that established Southwest's right to operate
intrastate flights from Love Field, filed a motion in Dallas federal
court seeking to enjoin the Fort Worth lawsuit. The court has not yet
ruled on Southwest's motion. As a result of the foregoing, the future
of interstate flight operations at Love Field and American's DFW hub
is uncertain. To the extent that operations at Love Field to new
interstate destinations increase, American may be compelled for
competitive reasons to divert resources from DFW to Love Field. A
substantial diversion of resources could adversely impact American's
business.
Recently, American announced its intent to initiate limited
intrastate service at Love Field and has commenced implementation of a
business plan to start such service, including requesting gates at
Love Field from the City of Dallas.
OTHER INFORMATION
Several items of legislation have been introduced in Congress that
would, if enacted; (i) authorize the withdrawal of slots from major
carriers -- including American -- at key airports for redistribution
to new entrants and smaller carriers and/or (ii) provide financial
assistance, in the form of guarantees and/or subsidized loans, to
smaller carriers for aircraft purchases. In addition, the Department
of Justice is investigating competition at major hub airports, and in
April 1998, the Department of Transportation (DOT) issued proposed
competition guidelines which would severely limit major carriers'
ability to compete with new entrant carriers. The outcomes of the
proposed legislation, the investigations and the proposed DOT
guidelines are unknown. However, to the extent that (i) slots are
taken from American at key airports, (ii) restrictions are imposed
upon American's ability to respond to a competitor, or (iii)
competitors have a financial advantage in the purchase of aircraft
because of federal assistance, American's business may be adversely
impacted.
11
PART II: OTHER INFORMATION
Item 1. 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 plaintiff
alleges that the 10 percent federal excise transportation tax should
have been excluded from the "fare" upon which the 25 percent penalty
was assessed. Summary judgment was granted in favor of American but
subsequently reversed and vacated by the Illinois Appellate Court. In
August 1997, the Court denied the plaintiffs' motion for class
certification. American is vigorously defending the lawsuit.
In connection with its frequent flyer program, American was sued in
two cases (Wolens et al v. American Airlines, Inc. and Tucker v.
American Airlines, Inc.) seeking class action certification that were
consolidated and are currently pending in the Circuit Court of Cook
County, Illinois. The litigation arises from certain changes made to
American's AAdvantage frequent flyer program in May 1988 which 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. In the consolidated action,
the plaintiffs allege that these changes breached American's contract
with AAdvantage members, seek money damages for the alleged breach and
attorney's fees and seek to represent all persons who joined the
AAdvantage program before May 1988 and accrued mileage credits before
the seat limitations were introduced. The complaint originally
asserted several state law claims, however only the plaintiffs' breach
of contract claim remains after the U. S. Supreme Court ruled that
federal law preempted the other claims. Although the case has been
pending for numerous years, it still is in its preliminary stages.
The court has not ruled as to whether the case should be certified as
a class action. American is vigorously defending the lawsuit.
Gutterman et al. v. American Airlines, Inc., is also pending in the
Circuit Court of Cook County, Illinois, arising from an announced
increase in AAdvantage mileage credits required for free travel. 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, giving
rise to the Gutterman litigation filed on that same date. The
Gutterman plaintiffs claim that the announced increase in award
mileage level violated the terms and conditions of the agreement
between American and AAdvantage members. A hearing on plaintiffs'
motion for class certification is currently scheduled for May 19,
1998. To date, only limited discovery has been undertaken. American
is vigorously defending the lawsuit.
A federal grand jury is investigating whether American handled
hazardous materials and processed courier shipments, cargo and excess
baggage in accordance with applicable laws and regulations. In
connection with this investigation, federal agents executed a search
warrant at American's Miami facilities on October 22, 1997. In
addition, American was served with a subpoena calling for the
production of documents relating to the handling of courier shipments,
cargo, excess baggage and hazardous materials. American has produced
documents responsive to the subpoena and intends to cooperate fully
with the government's investigation.
12
PART II
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
27 Financial Data Schedule
On April 15, 1998, American filed a report on Form 8-K relative to a
press release issued by the Company to announce that Robert L.
Crandall, Chairman, President and CEO of AMR and Chairman and CEO of
American, will retire from his affiliations with AMR and American
after the AMR annual meeting on May 20, 1998. Donald J. Carty,
currently an Executive Vice President and President of American, has
been chosen by the Board of Directors to succeed Mr. Crandall.
13
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: May 15, 1998 BY: /s/ Gerard J. Arpey
Gerard J. Arpey
Senior Vice President - Finance
and Chief Financial Officer
5
1,000,000
3-MOS
DEC-31-1998
MAR-31-1998
103
1,640
1,219
8
555
4,070
18,265
6,799
17,853
5,255
2,236
0
0
1,732
3,844
17,853
0
3,960
0
3,564
0
0
34
364
143
221
0
0
0
221
0
0
