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 September 30, 2002.
[ ]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 October 14,
2002.
The registrant meets the conditions set forth in, and is filing
this form with the reduced disclosure format prescribed by,
General Instructions H(1)(a) and (b) of Form 10-Q.
2
INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and nine months
ended September 30, 2002 and 2001
Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001
Condensed Consolidated Statements of Cash Flows -- Nine months
ended September 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements - September
30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
Revenues
Passenger $3,754 $4,031 $10,985 $12,611
Cargo 137 157 411 519
Other revenues 236 266 649 850
Total operating revenues 4,127 4,454 12,045 13,980
Expenses
Wages, salaries and benefits 2,012 2,012 6,001 5,652
Aircraft fuel 657 739 1,775 2,211
Depreciation and amortization 299 330 902 924
Other rentals and landing fees 291 301 843 835
Maintenance, materials and
repairs 251 286 729 766
Aircraft rentals 203 223 630 581
Food service 189 207 536 605
Commissions to agents 100 195 400 651
Special charges - net of
U.S. Government grant 615 (249) 615 337
Other operating expenses 762 882 2,219 2,603
Total operating expenses 5,379 4,926 14,650 15,165
Operating Loss (1,252) (472) (2,605) (1,185)
Other Income (Expense)
Interest income 18 16 54 60
Interest expense (130) (84) (380) (253)
Interest capitalized 21 35 62 109
Related party interest - net 4 (11) 14 (33)
Miscellaneous - net 3 (9) (1) 21
(84) (53) (251) (96)
Loss Before Income Taxes and
Cumulative Effect of
Accounting Change (1,336) (525) (2,856) (1,281)
Income tax benefit (485) (187) (977) (454)
Loss Before Cumulative Effect
of Accounting Change (851) (338) (1,879) (827)
Cumulative Effect of
Accounting Change,
net of tax benefit - - (889) -
Net Loss $ (851) $(338) $(2,768) $ (827)
The accompanying notes are an integral part of these financial statements.
-1-
4
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
September 30, December 31,
2002 2001
Assets
Current Assets
Cash $ 121 $ 117
Short-term investments 2,697 2,856
Receivables, net 1,498 1,371
Inventories, net 590 752
Deferred income taxes 846 844
Other current assets 151 519
Total current assets 5,903 6,459
Equipment and Property
Flight equipment, net 13,093 13,151
Other equipment and property, net 2,278 2,000
Purchase deposits for flight equipment 650 834
16,021 15,985
Equipment and Property Under Capital Leases
Flight equipment, net 1,351 1,492
Other equipment and property, net 121 95
1,472 1,587
Route acquisition costs 829 829
Airport operating and gate lease rights, net 435 459
Other assets 4,409 5,158
$ 29,069 $ 30,477
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 1,278 $ 1,717
Accrued liabilities 2,324 2,017
Air traffic liability 2,852 2,763
Payable to affiliates, net 78 66
Current maturities of long-term debt 301 421
Current obligations under capital leases 116 189
Total current liabilities 6,949 7,173
Long-term debt, less current maturities 8,458 6,530
Obligations under capital leases, less
current obligations 1,314 1,396
Deferred income taxes 1,075 1,465
Postretirement benefits 2,625 2,538
Other liabilities, deferred gains and
deferred credits 5,933 5,896
Stockholder's Equity
Common stock - -
Additional paid-in capital 2,499 2,596
Accumulated other comprehensive loss (44) (145)
Retained earnings 260 3,028
2,715 5,479
$ 29,069 $ 30,477
The accompanying notes are an integral part of these financial statements.
-2-
5
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Nine Months Ended
September 30,
2002 2001
Net Cash (Used) Provided by Operating Activities $ (629) $ 1,132
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (1,164) (2,728)
Acquisition of Trans World Airlines, Inc. - (742)
Net (increase) decrease in short-term
investments 159 (707)
Proceeds from:
Sale of equipment and property 188 308
Other (91) 44
Net cash used for investing activities (908) (3,825)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (341) (249)
Proceeds from:
Issuance of long-term debt 1,967 2,515
Sale-leaseback transactions - 141
Funds transferred (to) from affiliates, net (85) 266
Net cash provided by financing activities 1,541 2,673
Net increase (decrease) in cash 4 (20)
Cash at beginning of period 117 86
Cash at end of period $ 121 $ 66
Activities Not Affecting Cash:
Capital contribution from Parent to American $ - $ 1,500
The accompanying notes are an integral part of these financial statements.
-3-
6
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 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, the impact of the September 11, 2001 terrorist attacks and
the initiatives announced on August 13, 2002 referred to below, and
asset impairment and other charges necessary to present fairly the
financial position, results of operations and cash flows for the
periods indicated. The Company's 2002 results continue to be adversely
impacted by the September 11, 2001 terrorist attacks and the resulting
effect on the economy and the air transportation industry. In
addition, on April 9, 2001, Trans World Airlines LLC (TWA LLC, a
wholly owned subsidiary of AMR Corporation (AMR)) purchased
substantially all of the assets and assumed certain liabilities of
Trans World Airlines, Inc. (TWA). Accordingly, the operating results
of TWA LLC are included in the accompanying condensed consolidated
financial statements for the three and nine month periods ended
September 30, 2002 whereas for 2001 the results of TWA LLC were
included only for the period April 10, 2001 through September 30,
2001. When utilized in this report, all references to American
Airlines, Inc. include the operations of TWA LLC since April 10, 2001
(collectively, American). Certain amounts have been reclassified to
conform with the 2002 presentation. Results of operations for the
periods presented herein are not necessarily indicative of results of
operations for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the American Airlines, Inc. Annual Report on Form 10-K for the year
ended December 31, 2001 ("2001 Form 10-K").
2.On August 13, 2002, the Company announced a series of initiatives
to reduce its costs, reduce capacity, simplify its aircraft fleet, and
enhance productivity. These initiatives include, among other things,
de-peaking of the Company's Dallas/Fort Worth International Airport
hub; gradually phasing out operation of its Fokker aircraft fleet by
2005; and reducing capacity in the fourth quarter of 2002. In
addition, the Company announced that it would reduce an estimated
7,000 jobs by March 2003 to realign its workforce with the planned
capacity reductions, fleet simplification, and hub restructurings.
On September 11, 2001, two American Airlines aircraft were hijacked
and destroyed in terrorist attacks on The World Trade Center in New
York City and the Pentagon in northern Virginia. On the same day,
two United Air Lines aircraft were also hijacked and used in
terrorist attacks. In addition to the loss of life on board the
aircraft, these attacks resulted in thousands of deaths and injuries
to persons on the ground and massive property damage. In response
to those terrorist attacks, the Federal Aviation Administration
issued a federal ground stop order on September 11, 2001,
prohibiting all flights to, from, and within the United States.
Airports did not reopen until September 13, 2001 (except for
Washington Reagan Airport, which was partially reopened on October
4, 2001). The Company was able to operate only a portion of its
scheduled flights for several days thereafter. When flights were
permitted to resume, passenger traffic and yields on the Company's
flights were significantly lower than prior to the attacks. As a
result, following these attacks, the Company reduced its operating
schedule to approximately 80 percent of the schedule it flew prior
to September 11, 2001. In addition, as a result of its schedule
reduction and the sharp fall off in passenger traffic, the Company
eliminated approximately 20,000 jobs.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act). Under
the airline compensation provisions of the Act, each air carrier was
entitled to receive the lesser of: (i) its direct and incremental
losses for the period September 11, 2001 to December 31, 2001 or
(ii) its proportional available seat mile allocation of the $5
billion compensation available under the Act. The Company received
its final compensation from the U.S. Government under the Act during
the third quarter of 2002. The Company received a total of $837
million from the U.S. Government under the Act. For the nine months
ended September 30, 2002 and 2001, the Company recorded
approximately $10 million and $780 million, respectively, as
compensation under the Act, which is included in Special charges -
net of U.S. Government grant, on the accompanying consolidated
statements of operations.
-4-
7
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Special charges - net of U.S. Government grant includes the
following (in millions):
Nine Months Ended
September 30,
2002 2001
Aircraft charges $ 565 $ 984
Facility exit costs 3 60
Employee charges 57 53
Other - 20
Total special charges 625 1,117
Less: U.S. Government grant (10) (780)
$ 615 $ 337
Aircraft Charges
In connection with the Company's August 13, 2002 announcement and
related revisions to its fleet plan to accelerate the retirement of
its owned Fokker 100 aircraft, the Company determined that these
aircraft are impaired under Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" (SFAS 144). As a result of this determination, during
the third quarter of 2002, the Company recorded an asset impairment
charge of approximately $277 million reflecting the diminution in
the fair value of these aircraft and related rotables, the write-
down of certain related inventory to realizable value, and the
accrual of certain other costs. Cash outlays are estimated to be
approximately $10 million and will extend through 2007.
Furthermore, the Company accelerated the retirement of nine
operating leased Boeing 767-300 aircraft to the fourth quarter of
2002 (previously scheduled to be retired by May 2003), and its four
operating leased Fokker 100 aircraft to 2004 (previously scheduled
to be retired by 2010). As a result, during the third quarter of
2002, the Company recorded a charge of approximately $189 million
related primarily to future lease commitments on these aircraft past
the dates they will be removed from service, lease return costs, the
write-down of excess Boeing 767-300 related inventory and rotables
to realizable value, and the accrual of certain other costs. Cash
outlays are estimated to be approximately $159 million and will
occur over the remaining lease terms, which extend through 2014.
In addition, during the third quarter of 2002, as a result of
revisions to its fleet plan, the Company recorded a charge of
approximately $99 million related primarily to contract cancellation
costs and other costs related to discontinued aircraft
modifications.
During the second quarter of 2001, in conjunction with the
acquisition of certain assets from TWA, coupled with revisions to
the Company's fleet plan to accelerate the retirement dates of its
owned Fokker 100 aircraft, the Company determined these aircraft
were impaired. As a result, during the second quarter of 2001, the
Company recorded an asset impairment charge of approximately $586
million relating to the write-down of the carrying value of these
aircraft and related rotables to their estimated fair values.
Furthermore, during the third quarter of 2001, following the events
of September 11, 2001 and decisions by other carriers to ground
their Fokker 100 fleets, the Company determined that its Fokker 100
aircraft were further impaired. Therefore, during the third quarter
of 2001, the Company recorded an additional charge of approximately
$325 million reflecting the diminution in the estimated fair value
of these aircraft and related rotables.
-5-
8
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In September 2001, the Company announced that it would accelerate
the retirement of its remaining 50 owned Boeing 727-200 aircraft to
early 2002, ground all McDonnell Douglas DC-9 (DC9) aircraft by the
end of October 2001, and immediately ground eight McDonnell Douglas
MD-80 (MD80) aircraft. As a result, during the third quarter of
2001, the Company recorded a charge of approximately $73 million
related primarily to future lease commitments on the DC9 and MD80
operating leased aircraft past the dates they were removed from
service, lease return and storage costs, and the write-down of one
owned MD80 aircraft to its estimated fair value. Cash outlays
during 2002 related to the accelerated retirement of these operating
leased DC9 and MD80 aircraft total $17 million.
In determining the asset impairment charges described above,
management estimated the undiscounted future cash flows utilizing
models used by the Company in making fleet and scheduling decisions.
In determining the fair value of these aircraft, the Company
considered outside third party appraisals and recent transactions
involving sales of similar aircraft. In 2002, the Company also
considered internal valuation models in determining the fair value
of these aircraft, incorporating the fact that with this grounding,
no major airline will operate the Fokker F100 fleet type. As a
result of the write-down of these aircraft to fair value, as well as
the acceleration of the retirement dates, depreciation and
amortization will decrease from the amounts recognized in the third
quarter of 2002 by approximately $33 million on an annualized basis.
Facility exit costs
In response to the September 11, 2001 terrorist attacks, the Company
announced that it would discontinue service at Dallas Love Field and
discontinue or reduce service on several of its international
routes. In addition, the Company announced it would close six
Admiral's Clubs, five airport Platinum Service Centers and
approximately 105 off-airport Travel Centers in 37 cities, all
effective September 28, 2001. As a result of these announcements,
during the third quarter of 2001, the Company recorded a $60 million
charge related primarily to future lease commitments and the write-
off of leasehold improvements and fixed assets. Cash outlays during
2002 related to these accruals total $3 million.
Employee charges
On August 13, 2002, the Company announced that it would reduce an
estimated 7,000 jobs by March 2003 to realign its workforce with the
planned capacity reductions, fleet simplification, and hub
restructurings. This reduction in workforce, which will affect all
work groups (pilots, flight attendants, mechanics, fleet service
clerks, agents, management and support staff personnel), will be
accomplished through various measures, including limited voluntary
programs, leaves of absence, part-time work schedules, furloughs in
accordance with collective bargaining agreements, and permanent
layoffs. As a result, during the third quarter of 2002, the Company
recorded an employee charge of approximately $57 million primarily
related to voluntary programs in accordance with collective
bargaining agreements with its pilot and flight attendant work
groups. Cash outlays for the employee charge will be incurred over
a period of up to twelve months and will approximate the amount of
the charge recorded. In addition, the Company expects to incur
additional employee charges related to this reduction in workforce
in the fourth quarter of 2002.
On September 19, 2001, the Company announced that it would be forced
to reduce its workforce by approximately 20,000 jobs across all work
groups. This reduction in workforce, which the Company accomplished
through various measures, including leaves of absence, job sharing,
elimination of open positions, furloughs in accordance with
collective bargaining agreements, and permanent layoffs, resulted
from the September 11, 2001 terrorist attacks and the Company's
subsequent reduction of its operating schedule by approximately 20
percent. In connection therewith, during the third quarter of 2001,
the Company recorded a charge of approximately $53 million for
employee termination benefits. Cash outlays for the employee
charges were incurred substantially during the fourth quarter of
2001.
-6-
9
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3.Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 requires the Company to test goodwill
and indefinite-lived intangible assets (for American, route
acquisition costs) for impairment rather than amortize them. During
the first quarter of 2002, the Company completed its impairment
analysis for route acquisition costs in accordance with SFAS 142. The
analysis did not result in an impairment charge. During the third
quarter of 2002, the Company completed its impairment analysis related
to its $1.3 billion of goodwill and determined the Company's entire
goodwill balance was impaired. In arriving at this conclusion, the
Company's net book value was determined to be in excess of the
Company's fair value at January 1, 2002, using American as the
reporting unit for purposes of the fair value determination. The
Company determined its fair value as of January 1, 2002 using various
valuation methods, utimately using an allocation of AMR's fair value,
which was determined using market capitalization as the primary
indicator of fair value. As a result, the Company recorded a one-
time, non-cash charge, effective January 1, 2002, of $889 million (net
of a tax benefit of $363 million) to write-off all of American's
goodwill. This charge is nonoperational in nature and is reflected as
a cumulative effect of accounting change in the consolidated
statements of operations. This charge does not affect the Company's
financial covenants in any of its credit agreements.
The following table provides information relating to the Company's
amortized intangible assets as of September 30, 2002 (in millions):
Accumulated Net Book
Cost Amortization Value
Amortized intangible assets:
Airport operating rights $ 449 $ 141 $ 308
Gate lease rights 204 77 127
Total $ 653 $ 218 $ 435
Airport operating and gate lease rights are being amortized on a
straight-line basis over 25 years to a zero residual value. For
the three and nine month periods ended September 30, 2002, the
Company recorded amortization expense of approximately $6 million
and $19 million, respectively, related to these intangible assets.
The Company expects to record annual amortization expense of
approximately $26 million in each of the next five years related to
these intangible assets.
The pro forma effect of discontinuing amortization of goodwill and
route acquisition costs under SFAS 142 - assuming the Company had
adopted this standard as of January 1, 2001 - results in an adjusted
net loss of approximately $329 million and $800 million,
respectively, for the three and nine month periods ended September
30, 2001.
In addition, effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended (SFAS
133). SFAS 133 required the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges
are adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in
earnings. The adoption of SFAS 133 did not result in a cumulative
effect adjustment being recorded to net income for the change in
accounting. However, the Company recorded a transition adjustment
of approximately $64 million in Accumulated other comprehensive loss
in the first quarter of 2001.
-7-
10
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4.Accumulated depreciation of owned equipment and property at
September 30, 2002 and December 31, 2001 was $7.7 billion and $8.2
billion, respectively. Accumulated amortization of equipment and
property under capital leases at September 30, 2002 and December 31,
2001 was approximately $945 million and $1.0 billion, respectively.
Receivables, net at September 30, 2002 includes a receivable from
the U.S. Government of $522 million as a result of a provision in
the recently passed economic stimulus package regarding net
operating loss carrybacks.
5.The following table provides unaudited pro forma consolidated
results of operations, assuming the acquisition of TWA had occurred as
of January 1, 2001 (in millions, except per share amounts):
Nine Months Ended
September 30, 2001
Operating revenues $ 14,846
Net loss $ (834)
The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only. These amounts are not
indicative of the combined results that would have occurred had the
transaction actually been consummated on the date indicated above
and are not indicative of the consolidated results of operations
which may occur in the future.
6.As discussed in the notes to the consolidated financial
statements included in the Company's 2001 Form 10-K, Miami-Dade County
(the County) is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and
funding the remediation costs through landing fees and various cost
recovery methods. American has been named as a potentially
responsible party (PRP) for the contamination at MIA. During the
second quarter of 2001, the County filed a lawsuit against 17
defendants, including American, in an attempt to recover its past and
future cleanup costs (Miami-Dade County, Florida v. Advance Cargo
Services, Inc., et al. in the Florida Circuit Court). In addition to
the 17 defendants named in the lawsuit, 243 other agencies and
companies were also named as PRPs and contributors to the
contamination. American's portion of the cleanup costs 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.
In addition, the Company is subject to environmental issues at
various other airport and non-airport locations. Management
believes, after considering a number of factors, that the ultimate
disposition of these environmental issues is not expected to
materially affect the Company's consolidated financial position,
results of operations or cash flows. Amounts recorded for
environmental issues are based on the Company's current assessments
of the ultimate outcome and, accordingly, could increase or decrease
as these assessments change.
7.As of September 30, 2002, the Company had commitments to acquire
the following aircraft: 47 Boeing 737-800s, 11 Boeing 777-200ERs and 9
Boeing 767-300ERs. Deliveries of these aircraft are scheduled to
continue through 2010. Payments for these aircraft are expected to be
approximately $35 million during the remainder of 2002, $457 million
in 2003, $0 in 2004 and an aggregate of approximately $2.7 billion in
2005 through 2010. These commitments and cash flows reflect agreements
the Company has with Boeing to defer 34 of its 2003 through 2005
deliveries to 2007 and beyond.
In addition to these deferrals, Boeing has agreed to provide
backstop financing for certain aircraft deliveries in 2003. In
return, American has agreed to grant Boeing a security interest in
certain advance payments previously made and in certain rights under
the aircraft purchase agreement between American and Boeing.
-8-
11
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Approximately $740 million of special facility revenue bonds, issued by
local municipalities to purchase equipment and improve facilities that are
leased to American under operating lease agreements, contain mandatory tender
provisions that require American to repurchase the bonds at various times
through 2008, including $200 million in November 2003. These special
facility revenue bonds are guaranteed by American, AMR or both. Although
American has the right to remarket the bonds there can be no assurance
that these bonds will be successfully remarketed. Any payments to
purchase bonds that are not remarketed would be considered prepaid
facility rentals and would reduce future operating lease commitments.
8.In March 2002, the Regional Airports Improvement Corporation
issued facilities sublease revenue bonds at the Los Angeles
International Airport to provide reimbursement to American for certain
facility construction costs. The Company has recorded the total
amount of the issuance of $284 million (net of $13 million discount)
as long-term debt on the condensed consolidated balance sheets as of
September 30, 2002. These obligations bear interest at fixed rates,
with an average effective rate of 7.88 percent, and mature over
various periods of time, with a final maturity in 2024. The Company
has received approximately $237 million in reimbursements of facility
construction costs and other items through September 30, 2002. The
remaining $47 million of the bond issuance proceeds not yet received,
classified as Other assets on the condensed consolidated balance
sheets, are held by the trustee and will be available to the Company
in the future.
In July 2002, the New York City Industrial Development Agency issued
facilities sublease revenue bonds at the John F. Kennedy
International Airport to provide reimbursement to American for
certain facility construction costs. The Company has recorded the
total amount of the issuance of $475 million (net of $25 million
discount) as long-term debt on the condensed consolidated balance
sheets as of September 30, 2002. These obligations bear interest at
fixed rates, with an average effective rate of 8.97 percent, and
mature in 2012 and 2028. The Company has received approximately
$372 million in reimbursements of facility construction costs and
other items through September 30, 2002. The remaining $103 million
of the bond issuance proceeds not yet received, classified as Other
assets on the condensed consolidated balance sheets, are held by the
trustee and will be available to the Company in the future.
In September 2002, American issued $617 million of enhanced
equipment trust certificates secured by aircraft, with interest
based on London Interbank Offered Rate (LIBOR) plus a spread and
maturities over various periods, with a final maturity in 2007.
In addition, during the nine month period ended September 30, 2002,
American borrowed approximately $576 million under various debt
agreements which are secured by aircraft. Effective interest rates
on these agreements are fixed or variable based on LIBOR plus a
spread and mature over various periods of time through 2017. At
September 30, 2002, the effective interest rates on these debt
agreements and the enhanced equipment trust certificates described
above ranged up to 3.89 percent.
Including the impact of the above transactions, the Company's
maturities of total long-term debt (including sinking fund
requirements) for the next five years are: remainder of 2002 - $105
million; 2003 - $457 million; 2004 - $363 million; 2005 - $1.1
billion; 2006 - $873 million.
9.The Company includes unrealized gains and losses on available-for-
sale securities, changes in minimum pension liabilities and changes in
the fair value of certain derivative financial instruments that
qualify for hedge accounting in comprehensive loss. For the three
months ended September 30, 2002 and 2001, comprehensive loss was $825
million and $434 million, respectively. In addition, for the nine
months ended September 30, 2002 and 2001, comprehensive loss was
$2,667 million and $852 million, respectively. The difference between
net loss and comprehensive loss is due primarily to the accounting for
the Company's derivative financial instruments under SFAS 133. In
addition, the nine month period ended September 30, 2001 includes the
cumulative effect of the adoption of SFAS 133.
During the second quarter of 2002, the Company discontinued entering
into new foreign exchange currency put option agreements. All
remaining foreign currency put option agreements expired on or
before September 30, 2002.
-9-
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 2002 and 2001
Summary American's loss before cumulative effect of accounting
change for the nine months ended September 30, 2002 was $1.9 billion
as compared to a net loss of $827 million for the same period in 2001.
American's operating loss for the nine months ended September 30, 2002
was $2.6 billion, compared to an operating loss of $1.2 billion for
the same period in 2001. The Company's 2002 results continue to be
adversely impacted by the September 11, 2001 terrorist attacks and the
resulting effect on the economy and the air transportation industry.
On April 9, 2001, Trans World Airlines LLC (TWA LLC, a wholly owned
subsidiary of AMR) purchased substantially all of the assets and
assumed certain liabilities of Trans World Airlines, Inc. (TWA).
Accordingly, the operating results of TWA LLC are included in the
accompanying condensed consolidated financial statements for the nine
month period ended September 30, 2002 whereas for 2001 the results of
TWA LLC were included only for the period April 10, 2001 through
September 30, 2001. All references to American Airlines, Inc. include
the operations of TWA LLC since April 10, 2001 (collectively,
American). On August 13, 2002, the Company announced a series of
initiatives to reduce its costs, reduce capacity, simplify its
aircraft fleet, and enhance productivity. These initiatives include,
among other things, de-peaking of the Company's Dallas/Fort Worth
International Airport hub; gradually phasing out operation of its
Fokker aircraft fleet; reducing capacity in the fourth quarter of
2002; and reducing an estimated 7,000 jobs by March 2003. As a
result, during 2002, the Company recorded approximately $625 million
of charges relating to this announcement and related revisions to the
Company's fleet plan. In addition, the Company recorded a one-time,
non-cash charge of $889 million (net of tax), effective January 1,
2002, reflected as a cumulative effect of accounting change, to write-
off all of American's goodwill. On September 11, 2001, two of
American's aircraft were hijacked and destroyed in terrorist attacks
on The World Trade Center in New York City and the Pentagon in
northern Virginia. On the same day, two United Air Lines aircraft
were also hijacked and used in terrorist attacks. In response to the
terrorist attacks, the Federal Aviation Administration (FAA) issued a
federal ground stop order on September 11, 2001, prohibiting all
flights to, from, and within the United States. Airports did not
reopen until September 13, 2001 (except for Washington Reagan National
Airport, which was partially reopened on October 4, 2001). The
Company was able to operate only a portion of its scheduled flights
for several days thereafter. When flights were permitted to resume,
passenger traffic and yields on the Company's flights were
significantly lower than prior to the attacks. As a result, the
Company announced that it would reduce its operating schedule to
approximately 80 percent of the schedule it flew prior to September
11, 2001. Therefore, the Company's 2001 results include approximately
$531 million of charges related to the events of September 11, 2001.
In addition, the Company's 2001 results include a $780 million benefit
recognized for the reimbursement from the U.S. Government under the
Act, a $586 million asset impairment charge (recorded in the second
quarter of 2001) and a $45 million dollar gain (recorded in the second
quarter of 2001) from the settlement of a legal matter related to the
Company's 1999 labor disruption. For additional information related
to the August 13, 2002 announcement, the events of September 11, 2001,
and the second quarter 2001 asset impairment charge, see Note 2 in the
condensed consolidated financial statements.
Although traffic has continued to increase on significantly reduced
capacity since the events of September 11, 2001, the Company's 2002
revenues were down significantly year-over-year. In addition to the
residual effects of September 11, the Company's revenues continue to
be negatively impacted by the economic slowdown, seen largely in
business travel declines, the geographic distribution of the Company's
network and reduced fares. In total, the Company's revenues decreased
$1,935 million, or 13.8 percent, in 2002 versus the same period in
2001. American's passenger revenues decreased by 12.9 percent, or
$1,626 million in 2002 as compared to the same period in 2001.
American's domestic RASM decreased 11.1 percent, to 8.30 cents, on a
capacity decrease of 0.5 percent, to 94.3 billion ASMs. International
RASM decreased to 8.84 cents, or 5.5 percent, on a capacity decrease
of 11.1 percent. The decrease in international RASM was due to a 9.8
percent and 3.0 percent decrease in Latin American and European RASM,
respectively, slightly offset by a 6.0 percent increase in Pacific
RASM. The decrease in international capacity was driven by a 29.9
percent, 13.1 percent and 5.2 percent reduction in Pacific, European
and Latin American ASMs, respectively.
-10-
13
RESULTS OF OPERATIONS (Continued)
Cargo revenues decreased $108 million, or 20.8 percent, primarily due
to the same reasons as noted above.
Other revenues decreased 23.6 percent, or $201 million, due primarily
to decreases in contract maintenance work that American performs for
other airlines, and decreases in codeshare revenue and employee travel
service charges.
The Company's operating expenses decreased 3.4 percent, or
approximately $515 million. American's cost per ASM decreased by 1.7
percent to 10.80 cents, excluding the impact of 2002 and 2001 special
charges - net of U.S. Government grant. Wages, salaries and benefits
increased 6.2 percent, or $349 million, reflecting (i) a decrease in
the average number of equivalent employees, somewhat offset by higher
salaries, and (ii) increases in the Company's pension and health
insurance costs, the latter reflecting rapidly rising medical care and
prescription drug costs. Aircraft fuel expense decreased 19.7
percent, or $436 million, due primarily to an 11.9 percent decrease in
the Company's average price per gallon of fuel and a 6.5 percent
decrease in the Company's fuel consumption. Aircraft rentals
increased $49 million, or 8.4 percent, due primarily the addition of
TWA aircraft. Food service decreased 11.4 percent, or $69 million,
due primarily to the Company's reduced operating schedule and change
in level of food service. Commissions to agents decreased 38.6
percent, or $251 million, due primarily to a 12.9 percent decrease in
passenger revenues and commission structure changes implemented in
March 2002. Special charges - net of U.S. Government grant for 2002
include: (i) approximately $565 million related to aircraft charges,
including a charge of $277 million related to aircraft impairments,
(ii) approximately $57 million in employee charges and $3 million in
other charges, and (iii) a $10 million benefit recognized for the
reimbursement from the U.S. Government under the Act. Comparatively,
the 2001 amounts include: (i) a $586 million asset impairment charge
recorded in the second quarter of 2001 related to the write-down of
the carrying value of its Fokker 100 aircraft and related rotables;
(ii) third quarter 2001 charges including approximately $398 million
related to aircraft impairments and groundings, (ii) $60 million in
facility exit costs, approximately $53 million in employee charges,
$20 million in other charges, and (iii) a $780 million benefit
recognized for the reimbursement from the U.S. Government under the
Act. For additional information, see Note 2 in the condensed
consolidated financial statements. Other operating expenses decreased
14.8 percent, or $384 million, due primarily to decreases in contract
maintenance work that American performs for other airlines, and
decreases in travel and incidental costs, credit card and booking
fees, advertising and promotion costs, and data processing expenses,
which were partially offset by higher insurance and security costs.
Other income (expense) increased $155 million due to the following:
Interest income decreased 10.0 percent, or $6 million, due primarily
to decreases in interest rates. Interest expense increased $127
million, or 50.2 percent, resulting primarily from the increase in the
Company's long-term debt. Interest capitalized decreased $47 million,
or 43.1 percent, due primarily to a decrease in purchase deposits for
flight equipment. Miscellaneous-net decreased $22 million due
primarily to a $45 million gain recorded during the second quarter of
2001 from the settlement of a legal matter related to the Company's
1999 labor disruption and the write-down of certain investments held
by the Company during the first quarter of 2001.
The effective tax rate for the nine months ended September 30, 2002
was impacted by a $57 million charge resulting from a provision in
Congress' economic stimulus package that changes the period for
carrybacks of net operating losses (NOLs). This change allows the
Company to carry back 2001 and 2002 NOLs for five years, rather than
two years under the existing law, allowing the Company to more quickly
recover its NOLs. The extended NOL carryback did however, result in
the displacement of foreign tax credits taken in prior years. These
credits are now expected to expire before being utilized by the
Company, resulting in this charge.
-11-
14
OTHER INFORMATION
Net cash used by operating activities in the nine month period ended
September 30, 2002 was $629 million, compared to net cash provided by
operating activities of $1.1 billion for the same period in 2001, a
decrease of $1.8 billion, due primarily to an increase in the
Company's net loss. Included in net cash provided by operating
activities during the first nine months of 2002 was approximately $658
million received by the Company as a result of the utilization of its
2001 NOL's. Capital expenditures for the first nine months of 2002
were $1.2 billion, and included the acquisition of seven Boeing 757-
200s and three Boeing 777-200ERs aircraft. These capital expenditures
were financed primarily through secured mortgage and debt agreements.
Proceeds from the sale of equipment and property of $188 million
include the proceeds received upon delivery of three McDonnell Douglas
MD-11 aircraft to FedEx.
As of September 30, 2002, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 11 Boeing 777-200ERs and 9
Boeing 767-300ERs. Deliveries of these aircraft are scheduled to
continue through 2010. Payments for these aircraft are expected to be
approximately $35 million during the remainder of 2002, $457 million
in 2003, $0 in 2004 and an aggregate of approximately $2.7 billion in
2005 through 2010. These commitments and cash flows reflect agreements
the Company has with Boeing to defer 34 of its 2003 through 2005
deliveries to 2007 and beyond.
In addition to these deferrals, Boeing has agreed to provide backstop
financing for certain aircraft deliveries in 2003. In return,
American has agreed to grant Boeing a security interest in certain
advance payments previously made and in certain rights under the
aircraft purchase agreement between American and Boeing.
In June 2002, Standard & Poor's downgraded the credit ratings of
American, and the credit ratings of a number of other major airlines.
The long-term credit ratings of American were removed from Standard &
Poor's Credit Watch with negative implications and were given a
negative outlook. Furthermore, in September 2002, Moody's downgraded
the unsecured credit ratings of American and has a negative outlook on
these ratings. These reductions in the Company's credit ratings have
increased its borrowing costs. Any additional reductions in
American's credit ratings could further increase its borrowing costs
and might limit the availability of future financing.
In the aftermath of the events of September 11, 2001, the Company has
raised substantial amounts of funding to finance capital commitments
and day-to-day operations. The Company expects that it will continue
to need to raise significant additional financing in the future to
cover its liquidity needs. In addition to the Company's approximately
$2.8 billion in cash and short-term investments as of September 30,
2002, the Company has available a variety of future financing sources,
including, but not limited to: (i) additional secured aircraft debt,
(ii) sale-leaseback transactions of owned property, including aircraft
and real estate, (iii) the recovery of a $522 million receivable from
the U.S. Government related to a provision in the recently passed
economic stimulus package regarding NOL carrybacks, (iv) tax-exempt
borrowings for airport facilities, (v) securitization of future
operating receipts, (vi) unsecured borrowings, and (vii) the potential
sale of certain non-core assets. No assurance can be given that any
of these financing sources will be available or will be available on
terms acceptable to the Company. However, the Company believes it
will meet its current financing needs.
During 2002, American issued $617 million of enhanced equipment trust
certificates secured by aircraft, with interest based on London
Interbank Offered Rate (LIBOR) plus a spread and maturities over
various periods, with a final maturity in 2007. Upon completion of
this financing, a $1 billion credit facility, established in late 2001
to serve as a bridge for this financing, expired undrawn on September
30, 2002. Also during 2002, American borrowed approximately $576
million under various debt agreements which are secured by aircraft.
Effective interest rates on these agreements are fixed or variable
based on LIBOR plus a spread and mature over various periods of time
through 2017. At September 30, 2002, the effective interest rates on
these debt agreements and the enhanced equipment trust certificates
described above ranged up to 3.89 percent.
-12-
15
OTHER INFORMATION (Continued)
During March 2002, the Regional Airports Improvement Corporation
issued facilities sublease revenue bonds at the Los Angeles
International Airport to provide reimbursement to American for certain
facility construction costs. The Company has recorded the total
amount of the issuance of $284 million (net of $13 million discount)
as long-term debt on the condensed consolidated balance sheets as of
September 30, 2002. These obligations bear interest at fixed rates,
with an average effective rate of 7.88 percent, and mature over
various periods of time, with a final maturity in 2024. The Company
has received approximately $237 million in reimbursements of facility
construction costs and other items through September 30, 2002. The
remaining $47 million of the bond issuance proceeds not yet received,
classified as Other assets on the condensed consolidated balance
sheets, are held by the trustee and will be available to the Company
in the future. In addition, in July 2002, the New York City
Industrial Development Agency issued facilities sublease revenue bonds
at the John F. Kennedy International Airport to provide reimbursement
to American for certain facility construction costs. The Company has
recorded the total amount of the issuance of $475 million (net of $25
million discount) as long-term debt on the condensed consolidated
balance sheets as of September 30, 2002. These obligations bear
interest at fixed rates, with an average effective rate of 8.97
percent, and mature in 2012 and 2028. The Company has received
approximately $372 million in reimbursements of facility construction
costs and other items through September 30, 2002. The remaining $103
million of the bond issuance proceeds not yet received, classified as
Other assets on the condensed consolidated balance sheets, are held by
the trustee and will be available to the Company in the future.
Pursuant to the Act, the Government made available to air carriers,
subject to certain conditions, up to $10 billion in federal government
guarantees of certain loans. American did not seek such loan
guarantees.
As a result of the September 11, 2001 events, aviation insurers have
significantly reduced the maximum amount of insurance coverage
available to commercial air carriers for liability to persons other
than employees or passengers for claims resulting from acts of
terrorism, war or similar events (war-risk coverage). At the same
time, they significantly increased the premiums for such coverage as
well as for aviation insurance in general. Pursuant to authority
granted in the Act, the Government has supplemented the commercial war-
risk insurance until December 15, 2002 with a third party liability
policy to cover losses to persons other than employees or passengers.
In the event the commercial insurance carriers reduce further the
amount of insurance coverage available to the Company or further
significantly increase the cost of aviation insurance, or if the
Government fails to renew the war-risk insurance that it provides, the
Company's operations and/or financial position and results of
operations would be materially adversely affected.
As discussed in the Company's 2001 Form 10-K, a provision in the
current Allied Pilots Association (APA) contract freezes the number of
ASMs and block hours flown under American's two letter marketing code
(AA) by American's regional carrier partners when American pilots are
on furlough (the ASM cap). As AMR Eagle continues to accept
previously ordered regional jets, this ASM cap was reached in 2002,
necessitating actions to insure compliance with the ASM cap. These
actions as well as additional potential actions in respect to the ASM
cap are discussed in the Company's 2001 Form 10-K. In addition,
American has removed its code from some flights of the
AmericanConnection carriers, which are independent carriers that
provide feed to American's St. Louis hub, and will continue to remove
its codes from additional flights of the carriers as warranted.
American believes that the combination of these actions will enable
it to continue to comply with this ASM cap through 2002 and for
sometime beyond.
In addition, another provision in the current APA contract limits the
total number of regional jets with more than 44 seats flown under the
American code by American's regional carrier partners to 67 aircraft.
Similar to the above, as AMR Eagle continues to accept previously
ordered Bombardier CRJ aircraft, this cap would be reached in early
2003. In order to ensure American remains in compliance with this
provision, AMR Eagle has reached an agreement in principle to dispose
of 14 Embraer 145 aircraft. Ultimately, these airplanes will be
acquired by Trans States Airlines, an AmericanConnection carrier.
Trans States Airlines will operate these aircraft under its two letter
airline code (AX) and expects to deploy these aircraft at its St.
Louis hub where it feeds American. The potential transaction still
requires the consent of certain third parties, including the companies
financing these aircraft, and is subject to the negotiation of final
documentation.
-13-
16
OTHER INFORMATION (Continued)
The Company believes that if actual investment returns continue at
current levels and interest rates remain unchanged through the rest of
the year, it will be required to record a significant minimum pension
liability as of December 31, 2002. The minimum pension liability would
reflect the amount that the pension plans' accumulated benefit
obligation exceeds the plans' assets in excess of amounts previously
accrued for pension costs. A large portion of the charge would be
recorded as a reduction to stockholder's equity, as a component of
accumulated comprehensive loss, net of any available tax benefit.
Although the exact amount of the charge to stockholder's equity is not
known at this time, it will likely exceed $1 billion (before tax). As
of December 31, 2001, the Company's minimum pension liability reduced
stockholder's equity by approximately $172 million (before tax). This
charge to stockholder's equity will not affect the Company's financial
covenants in any of its credit agreements.
Furthermore, given the Company's current financial situation, a
deferred tax asset valuation allowance may be necessary. In
determining whether a deferred tax asset valuation allowance is
necessary, the Company considers whether it is more likely than not
that some portion or all of the Company's deferred tax assets will not
be realized. Although a valuation allowance is not necessary as of
September 30, 2002, due to the existence of available deferred tax
liabilities, it is likely that beginning late in the fourth quarter of
2002 or early in the first quarter of 2003 a valuation allowance will
be necessary. In effect the Company would not be able to recognize a
tax benefit of losses incurred, resulting in larger reported net
losses.
FOURTH QUARTER OUTLOOK
Capacity for American is expected to be up approximately six percent
in the fourth quarter of 2002 compared to last year's fourth quarter
levels, and down 13 percent from the fourth quarter of 2000. For
the fourth quarter of 2002, the Company expects traffic to be up
approximately thirteen percent from last year's fourth quarter levels,
and down 15 percent from the fourth quarter of 2000. Pressure to
reduce costs will continue, although the Company will continue to see
higher benefit and security costs, increased insurance premiums, and
greater interest expense. In addition, the Company expects to see a 23
percent increase in fuel prices as compared to the fourth quarter of
2001 and a continued decline in commission expense due to the
commission changes implemented earlier in 2002. In total, American's
unit costs, excluding special charges, for the fourth quarter of 2002
are expected to be down approximately three percent from last year's
fourth quarter level. Notwithstanding the expected decrease in unit
costs however, given the revenue pressures expected to continue into
the fourth quarter and the current level of fuel prices, the Company
expects to incur a significant loss in the fourth quarter, likely in
excess of the third quarter loss excluding special charges.
In response to these financial challenges, the Company is continuing
its comprehensive review of its business to better align its cost
structure with the current revenue environment, aimed at improving
productivity, simplifying operations and reducing costs.
In addition, on August 13, 2002, the Company announced a series of
short- and long- term initiatives to reduce its costs, reduce
capacity, simplify its aircraft fleet, and enhance productivity.
These initiatives include, among other things, de-peaking of the
Company's Dallas/Fort Worth International Airport hub (following the
de-peaking of its Chicago hub in April 2002) by scheduling flights
into and out of the hub more continuously, with flights spread out
more evenly through the day; gradually phasing out operation of its
Fokker aircraft fleet by 2005; and reducing capacity in the fourth
quarter of 2002. By de-peaking its Dallas/Fort Worth and Chicago hubs
the Company believes it can more productively use its employees,
gates, and aircraft. In addition, the Company announced that it would
reduce an estimated 7,000 jobs by March 2003 to realign its workforce
with the planned capacity reductions, fleet simplification, and hub
restructurings. American subsequently announced that it expects full
year capacity for 2003 to be down over three percent from 2002, giving
effect to the capacity reduction described above. Although American
expects these initiatives to improve efficiency and reduce operating
costs, there can be no assurance that these initiatives will be
successful or sufficient.
-14-
17
OTHER RISK FACTORS
As a result of weak domestic and international economic conditions,
reduced fares, and the terrorist attacks of September 11, 2001, the
airline industry as a whole suffered substantial losses in 2001, and
is expected to suffer significant losses for 2002. Many airlines, in
addition to American, have announced reductions in capacity, service
and workforce in response to the industry-wide reductions in passenger
demand and yields. In addition, since September 11, 2001 several air
carriers have sought to reorganize under Chapter 11 of the United
States Bankruptcy Code, including US Airways, Inc. (US Airways), the
seventh largest domestic air carrier. More recently, United Air
Lines, Inc. (United), the second largest domestic air carrier, has
publicly stated that, if it is not able to realize substantial cost
savings from its current cost savings initiatives, it may be forced to
reorganize under the Bankruptcy Code. Successful completion of such
reorganizations could present American with competitors with
significantly lower operating costs derived from labor, supply, and
financing contracts renegotiated under the protection of the
Bankruptcy Code. In addition, historically, air carriers involved in
reorganizations have undertaken substantial fare discounting in order
to maintain cash flows and to enhance continued customer loyalty.
Such fare discounting could further lower yields for all carriers,
including American. Further, the market value of aircraft would
likely be negatively impacted if a number of air carriers, including
US Airways and United, seek to reduce capacity by eliminating aircraft
from their fleets.
Moreover, the increased threat of U.S. military involvement in
overseas operations (including, for example, the hostilities in
Afghanistan and the threat of war with Iraq) could have a material
adverse impact on the Company's business, financial position
(including access to capital markets) and results of operations and on
the airline industry in general.
FORWARD-LOOKING INFORMATION
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in documents
incorporated herein by reference, the words "expects," "plans,"
"anticipates," "believes," and similar expressions are intended to
identify forward-looking statements. Other forward-looking statements
include statements which do not relate solely to historical facts,
such as, without limitation, statements which discuss the possible
future effects of current known trends or uncertainties, or which
indicate that the future effects of known trends or uncertainties
cannot be predicted, guaranteed or assured. All forward-looking
statements in this report are based upon information available to the
Company on the date of this report. The Company undertakes no
obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expectations.
Additional information concerning these and other factors is contained
in the Company's Securities and Exchange Commission filings, including
but not limited to the 2001 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the 2001 Form 10-K.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days before the filing date of this
quarterly report. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent
to their evaluation.
-15-
18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1999, a class action lawsuit was filed, and in November
1999 an amended complaint was filed, against AMR Corporation, American
Airlines, Inc., AMR Eagle Holding Corporation, Airlines Reporting
Corporation, and the Sabre Group Holdings, Inc. in the United States
District Court for the Central District of California, Western
Division (Westways World Travel, Inc. v. AMR Corp., et al.). The
lawsuit alleges that requiring travel agencies to pay debit memos to
American for violations of American's fare rules (by customers of the
agencies) (1) breaches the Agent Reporting Agreement between American
and AMR Eagle and the plaintiffs, (2) constitutes unjust enrichment,
and (3) violates the Racketeer Influenced and Corrupt Organizations
Act of 1970 (RICO). The as yet uncertified class includes all travel
agencies who have been or will be required to pay monies to American
for debit memos for fare rules violations from July 26, 1995 to the
present. The plaintiffs seek to enjoin American from enforcing the
pricing rules in question and to recover the amounts paid for debit
memos, plus treble damages, attorneys' fees, and costs. The Company
intends to vigorously defend the lawsuit. Although the Company
believes that the litigation is without merit, an adverse court
decision could impose restrictions on the Company's relationships with
travel agencies which restrictions could have an adverse impact on the
Company.
On May 13, 1999, the United States (through the Antitrust Division of
the Department of Justice) sued AMR Corporation, American Airlines,
Inc., and AMR Eagle Holding Corporation in federal court in Wichita,
Kansas. The lawsuit alleges that American unlawfully monopolized or
attempted to monopolize airline passenger service to and from
Dallas/Fort Worth International Airport (DFW) by increasing service
when new competitors began flying to DFW, and by matching these new
competitors' fares. The Department of Justice seeks to enjoin
American from engaging in the alleged improper conduct and to impose
restraints on American to remedy the alleged effects of its past
conduct. On April 27, 2001, the U.S. District Court for the District
of Kansas granted American's motion for summary judgment. On June 26,
2001, the U.S. Department of Justice appealed the granting of
American's motion for summary judgment, and on September 23, 2002, the
parties presented oral arguments to the 10th Circuit Court of Appeals,
which has not yet issued its decision. The Company intends to defend
the lawsuit vigorously. A final adverse court decision imposing
restrictions on the Company's ability to respond to competitors would
have an adverse impact on the Company.
Between May 14, 1999 and June 7, 1999, seven class action lawsuits
were filed against AMR Corporation, American Airlines, Inc., and AMR
Eagle Holding Corporation in the United States District Court in
Wichita, Kansas seeking treble damages under federal and state
antitrust laws, as well as injunctive relief and attorneys' fees (King
v. AMR Corp., et al.; Smith v. AMR Corp., et al.; Team Electric v. AMR
Corp., et al.; Warren v. AMR Corp., et al.; Whittier v. AMR Corp., et
al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp., et al.).
Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by increasing service when new competitors began flying
to DFW, and by matching these new competitors' fares. Two of the
suits (Smith and Wright) also allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by offering discounted fares to corporate purchasers, by
offering a frequent flyer program, by imposing certain conditions on
the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several
classes of consumers, the broadest of which is all persons who
purchased tickets for air travel on American into or out of DFW from
1995 to the present. On November 10, 1999, the District Court stayed
all of these actions pending developments in the case brought by the
Department of Justice (see above description). As a result, to date
no class has been certified. The Company intends to defend these
lawsuits vigorously. One or more final adverse court decisions
imposing restrictions on the Company's ability to respond to
competitors or awarding substantial money damages would have an
adverse impact on the Company.
-16-
19
Item 1. Legal Proceedings (Continued)
On May 17, 2002, the named plaintiffs in Hall, et al. v. United
Airlines, et al., pending in the United States District Court for the
Eastern District of North Carolina, filed an amended complaint
alleging that between 1995 and the present, American and over 15 other
defendant airlines conspired to reduce commissions paid to U.S.-based
travel agents in violation of Section 1 of the Sherman Act. The court
granted class action certification to the plaintiff on September 17,
2002, defining the plaintiff class as all travel agents in the United
States, Puerto Rico, and the United States Virgin Islands, who, at any
time from October 1, 1997, to the present, issued tickets,
miscellaneous change orders, or prepaid ticket advices for travel on
any of the defendant airlines. American is vigorously defending the
lawsuit. Trial is set for April 29, 2003. A final adverse court
decision awarding substantial money damages or placing restrictions on
the Company's commission policies or practices would have an adverse
impact on the Company.
On April 26, 2002, six travel agencies filed Albany Travel Co., et al.
v. Orbitz, LLC, et al., in the United States District Court for the
Central District of California against American, United Air Lines,
Delta Air Lines, and Orbitz, LLC, alleging that American and the other
defendants: (i) conspired to prevent travel agents from acting as
effective competitors in the distribution of airline tickets to
passengers in violation of Section 1 of the Sherman Act; and
(ii) conspired to monopolize the distribution of common carrier air
travel between airports in the United States in violation of Section 2
of the Sherman Act. The named plaintiffs seek to certify a nationwide
class of travel agents, but no class has yet been certified. American
is vigorously defending the lawsuit, which is set for trial July 9,
2003. A final adverse court decision awarding substantial money
damages or placing restrictions on the Company's distribution
practices would have an adverse impact on the Company.
On April 25, 2002, a collection of 38 Quebec travel agencies filed
Voyages Montambault (1989), Inc. v. International Air Transport
Association, et al., seeking a declaratory judgment of the Superior
Court in Montreal, Canada that American and the other airline
defendants owe a "fair and reasonable commission" to the agencies, and
that American and the other airline defendants breached alleged
contracts with these agencies by adopting policies of not paying base
commissions. The defendants are the International Air Transport
Association, the Air Transport Association, Air Canada, American,
America West, Delta Air Lines, Grupo TACA, Northwest Airlines/KLM
Airlines, United Air Lines, US Airways, and Continental Airlines.
American is vigorously defending the lawsuit. A final adverse court
decision granting declaratory relief could expose the Company to
claims for substantial money damages or force the Company to pay
agency commissions, either of which would have an adverse impact on
the Company.
On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air
Canada, et. al., pending in the Federal Court of Canada, Trial
Division, Montreal, filed a statement of claim alleging that between
1995 and the present, American, the other defendant airlines, and the
International Air Transport Association conspired to reduce
commissions paid to Canada-based travel agents in violation of
Section 45 of the Competition Act of Canada. The named plaintiffs
seek to certify a nationwide class of travel agents, but no class has
yet been certified. American is vigorously defending the lawsuit. A
final adverse court decision awarding substantial money damages or
placing restrictions on the Company's commission policies would have
an adverse impact on the Company.
On August 14, 2002, a class action lawsuit was filed against American
Airlines, Inc. in the United States District Court for the Central
District of California, Western Division (All World Professional
Travel Services, Inc. v. American Airlines, Inc.). The lawsuit
alleges that requiring travel agencies to pay debit memos for
refunding tickets after September 11, 2001: (1) breaches the Agent
Reporting Agreement between American and plaintiff; (2) constitutes
unjust enrichment; and (3) violates the Racketeer Influenced and
Corrupt Organizations Act of 1970 (RICO). The as yet uncertified
class includes all travel agencies who have or will be required to pay
moneys to American for an "administrative service charge," "penalty
fee," or other fee for processing refunds on behalf of passengers who
were unable to use their tickets in the days immediately following the
tragedies on September 11, 2001. The plaintiff seeks to enjoin
American from collecting the debit memos and to recover the amounts
paid for the debit memos, plus treble damages, attorneys' fees, and
costs. The Company intends to vigorously defend the lawsuit.
Although the Company believes that the litigation is without merit, an
adverse court decision could impose restrictions on the Company's
relationships with travel agencies which restrictions could have an
adverse impact on the Company.
-17-
20
Item 1. Legal Proceedings (Continued)
On August 19, 2002, a U.S. travel agency filed Power Travel
International, Inc. v. American Airlines, Inc., et al., in New York
state court against American, Continental Airlines, Delta Air Lines,
JetBlue Airways, United Air Lines, and Northwest Airlines, alleging
that American and the other defendants breached their contracts with
the agency as well as the duty of good faith and fair dealing when
these carriers at various times reduced base commissions to zero. The
plaintiff seeks to certify a nationwide class of travel agents, but no
class has yet been certified. The plaintiff dismissed JetBlue from the
lawsuit, and the remaining defendants removed the lawsuit to the
United States District Court for the Southern District of New York.
American is vigorously defending the lawsuit. A final adverse court
decision awarding substantial money damages or forcing the Company to
pay agency commissions would have an adverse impact on the Company.
Miami-Dade County (the County) is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American Airlines,
Inc. and AMR Eagle have been named as potentially responsible parties
(PRPs) for the contamination at MIA. During the second quarter of
2001, the County filed a lawsuit against 17 defendants, including
American Airlines, Inc., in an attempt to recover its past and future
cleanup costs (Miami-Dade County, Florida v. Advance Cargo Services,
Inc., et al. in the Florida Circuit Court). In addition to the 17
defendants named in the lawsuit, 243 other agencies and companies were
also named as PRPs and contributors to the contamination. American's
and AMR Eagle's portion of the cleanup costs 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 Company is vigorously defending the lawsuit.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
12 Computation of ratio of earnings to fixed charges for the three
and nine months ended September 30, 2002 and 2001.
99 Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title
18, United States Code).
Form 8-Ks filed under Item 5 - Other Events
On August 13, 2002, American Airlines, Inc. filed a report on
Form 8-K to provide a press release issued on August 13, 2002 to
announce the next series of short- and long-term initiatives to
further position American for long-term competitiveness and
profitability.
On September 13, 2002, American Airlines, Inc. filed a report on
Form 8-K to provide actual unit cost, fuel, traffic and capacity
results for the months of July and August 2002, along with current
expectations for September and the fourth quarter of 2002.
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure
On August 22, 2002, American Airlines, Inc. furnished a report on
Form 8-K to provide an update of system capacity expectations for the
remainder of 2002 by month in addition to the full year expectation
for 2003.
-18-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: October 18, 2002 BY: /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and Chief
Financial Officer
-19-
22
CERTIFICATIONS
I, Donald J. Carty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 18, 2002 /s/ Donald J. Carty
Donald J. Carty
Chairman and Chief Executive Officer
-20-
23
CERTIFICATIONS (Continued)
I, Jeffrey C. Campbell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 18, 2002 /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and Chief
Financial Officer
-21-
Exhibit 12
AMERICAN AIRLINES, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Earnings:
Loss before income taxes and
cumulative effect of accounting
change $(1,336) $(525) $(2,856) $(1,281)
Add: Total fixed charges
(per below) 385 379 1,156 1,045
Less: Interest capitalized 21 35 62 109
Total loss before income taxes
and cumulative effect of
accounting change $ (972) $(181) $(1,762) $ (345)
Fixed charges:
Interest, including interest
capitalized $ 129 $ 96 $ 379 $ 286
Portion of rental expense
representative of the interest
factor 254 281 773 756
Amortization of debt expense 2 2 4 3
Total fixed charges $ 385 $ 379 $ 1,156 $ 1,045
Coverage deficiency $ 1,357 $ 560 $ 2,918 $ 1,390
Note: In April 2001, the Board of Directors of American
approved the guarantee by American of AMR's existing
debt obligations. As of September 30, 2002, this
guarantee covered approximately $634 million of
unsecured debt and approximately $573 million of secured
debt. The impact of these unconditional guarantees is
not included in the above computation.
Exhibit 99
AMERICAN AIRLINES, INC.
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of
title 18, United States Code), each of the undersigned
officers of American Airlines, Inc., a Delaware corporation
(the Company), does hereby certify, to such officer's
knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (the Form 10-Q) of the Company fully
complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information
contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations
of the Company.
Date: October 18, 2002 /s/ Donald J. Carty
Donald J. Carty
Chairman and Chief Executive
Officer
Date: October 18, 2002 /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and
Chief Financial Officer
The foregoing certification is being furnished solely
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of
title 18, United States Code) and is not being filed as
part of the Form 10-Q or as a separate disclosure document.
