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 June 30, 2004.
[ ]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 by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes No X .
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 July 16, 2004.
The registrant meets the conditions set forth in, and is filing
this form with the reduced disclosure format prescribed by,
General Instructions H(1)(a) and (b) of Form 10-Q.
INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and six months ended
June 30, 2004 and 2003
Condensed Consolidated Balance Sheets -- June 30, 2004 and December 31,
2003
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements -- June 30,
2004
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
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Revenues
Passenger $ 3,895 $ 3,544 $7,573 $ 6,938
Regional Affiliates 505 387 925 713
Cargo 155 140 303 274
Other revenues 266 245 523 499
Total operating revenues 4,821 4,316 9,324 8,424
Expenses
Wages, salaries and benefits 1,580 1,761 3,101 3,750
Aircraft fuel 848 604 1,596 1,286
Regional payments 454 388 887 759
Commissions, booking fees and
credit card expense 287 261 574 515
Depreciation and amortization 278 301 563 598
Other rentals and landing fees 270 275 545 543
Maintenance, materials and repairs 210 150 406 345
Aircraft rentals 148 172 296 356
Food service 138 150 274 298
Other operating expenses 516 509 1,015 1,107
Special charges (31) 76 (31) 101
U. S. government grant - (315) - (315)
Total operating expenses 4,698 4,332 9,226 9,343
Operating Income (Loss) 123 (16) 98 (919)
Other Income (Expense)
Interest income 13 8 27 21
Interest expense (162) (147) (322) (296)
Interest capitalized 19 17 36 35
Related party interest - net - 2 - 5
Miscellaneous - net (6) 3 (34) (11)
(136) (117) (293) (246)
Loss Before Income Taxes (13) (133) (195) (1,165)
Income tax benefit - - - -
Net Loss $ (13) $(133) $ (195) $(1,165)
The accompanying notes are an integral part of these financial statements.
-1-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
June 30, December 31,
2004 2003
Assets
Current Assets
Cash $ 194 $ 118
Short-term investments 3,151 2,474
Restricted cash and short-term investments 489 527
Receivables, net 910 760
Inventories, net 464 475
Other current assets 229 232
Total current assets 5,437 4,586
Equipment and Property
Flight equipment, net 12,514 12,803
Other equipment and property, net 2,323 2,344
Purchase deposits for flight equipment 277 277
15,114 15,424
Equipment and Property Under Capital Leases
Flight equipment, net 1,212 1,279
Other equipment and property, net 81 86
1,293 1,365
Route acquisition costs and airport operating
and gate lease rights, net 1,207 1,221
Other assets 3,824 3,875
$26,875 $26,471
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 1,072 $ 910
Accrued liabilities 1,818 1,840
Air traffic liability 3,376 2,799
Payable to affiliates, net 238 153
Current maturities of long-term debt 464 465
Current obligations under capital leases 145 170
Total current liabilities 7,113 6,337
Long-term debt, less current maturities 9,058 9,073
Obligations under capital leases, less
current obligations 1,090 1,156
Pension and postretirement benefits 4,604 4,803
Other liabilities, deferred gains and
deferred credits 4,589 4,757
Stockholder's Equity
Common stock - -
Additional paid-in capital 3,312 3,023
Accumulated other comprehensive loss (911) (893)
Retained deficit (1,980) (1,785)
421 345
$26,875 $26,471
The accompanying notes are an integral part of these financial statements.
-2-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Six Months Ended June 30,
2004 2003
Net Cash Provided (Used) by Operating Activities $ 577 $ (69)
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (153) (173)
Net (increase) decrease in short-term investments (677) 172
Net decrease in restricted cash and short-term
investments 38 233
Proceeds from sale of equipment and property 26 33
Proceeds from sale of interest in Worldspan - 180
Other (9) 24
Net cash (used) provided by investing activities (775) 469
Cash Flow from Financing Activities:
Payments on long-term debt and capital lease
obligations (287) (466)
Proceeds from issuance of long-term debt 180 -
Funds transferred from affiliates, net 381 121
Net cash provided (used) by financing activities 274 (345)
Net increase in cash 76 55
Cash at beginning of period 118 100
Cash at end of period $ 194 $ 155
Activities Not Affecting Cash
Flight equipment acquired through seller financing $ - $ 458
Capital lease obligations incurred $ 10 $ 131
Reductions to capital lease obligations
due to lease modifications $ - $ (127)
The accompanying notes are an integral part of these financial statements.
-3-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals unless otherwise disclosed, necessary to present
fairly the financial position, results of operations and cash flows
for the periods indicated. Results of operations for the periods
presented herein are not necessarily indicative of results of
operations for the entire year. American Airlines, Inc. (American
or the Company) is a wholly owned subsidiary of AMR Corporation
(AMR). For further information, refer to the consolidated financial
statements and footnotes thereto included in the American Annual
Report on Form 10-K for the year ended December 31, 2003 (2003 Form
10-K). Certain amounts have been reclassified to conform with the
2004 presentation.
2.The Company accounts for its participation in AMR's stock-based
compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related Interpretations. Under APB 25, no compensation expense
is recognized for stock option grants if the exercise price of the
stock option grants is at or above the fair market value of the
underlying stock on the date of grant. The Company has adopted the
pro forma disclosure features of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." The following table illustrates the effect on net
loss if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation (in
millions):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Net loss, as reported $(13) $(133) $(195) $(1,165)
Add: Stock-based employee
compensation expense included
in reported net loss 5 8 16 5
Deduct: Total stock-based
employee compensation expense
determined under fair value
based methods for all awards (22) (23) (49) (30)
Pro forma net loss $(30) $(148) $(228) $(1,190)
3.As of June 30, 2004, the Company had commitments to acquire an
aggregate of 47 Boeing 737-800s and nine Boeing 777-200ERs in 2006
through 2010. Future payments for all aircraft, including the
estimated amounts for price escalation, will approximate $106 million
in 2005, $654 million in 2006 and an aggregate of approximately $2.0
billion in 2007 through 2010.
The Company is subject to environmental issues at various airport
and non-airport locations for which it has accrued, in Accrued
liabilities on the accompanying condensed consolidated balance
sheets, $73 million and $72 million at June 30, 2004 and December
31, 2003, respectively. 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.
-4-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In 2003, the Company reached concessionary agreements with certain
lessors. Certain of these agreements provide that the Company's
obligations under the related leases revert to the original terms
if certain events occur prior to December 31, 2005, including: (i)
an event of default under the related lease (which generally occurs
only if a payment default occurs), (ii) an event of loss with
respect to the related aircraft, (iii) rejection by the Company of
the lease under the provisions of Chapter 11 of the U.S. Bankruptcy
Code or (iv) the Company's filing for bankruptcy under Chapter 7 of
the U.S. Bankruptcy Code. If any one of these events were to
occur, the Company would be responsible for approximately $64
million in additional operating lease payments and $65 million in
additional payments related to capital leases as of June 30, 2004.
This amount will increase to approximately $119 million in
operating lease payments and $111 million in payments related to
capital leases prior to the expiration of the provision on December
31, 2005. These amounts are being accounted for as contingent
rentals and will only be recognized if they become payable.
Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
(Interpretation 45), requires disclosures in interim and annual
financial statements about obligations under certain guarantees
issued by the Company. The disclosures required by Interpretation
45 were included in Notes 4, 5 and 6 to the consolidated financial
statements in the 2003 Form 10-K. There have been no significant
changes to such disclosures except as disclosed in Note 6 in this
Form 10-Q.
4.Accumulated depreciation of owned equipment and property at June
30, 2004 and December 31, 2003 was $8.2 billion and $7.8 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at June 30, 2004 and December 31, 2003 was
$1.1 billion.
5.As discussed in Note 8 to the consolidated financial statements in
the 2003 Form 10-K, the Company has a valuation allowance against
the full amount of its net deferred tax asset. The Company's
deferred tax asset valuation allowance increased $72 million during
the six months ended June 30, 2004 to $1.1 billion as of June 30,
2004.
6.In February 2004, American issued $180 million of Fixed Rate
Secured Notes due 2009, which bear interest at 7.25 percent. As of
June 30, 2004, these notes are secured by certain spare parts (with
a net book value of $219 million), and by $37 million in cash
collateral (classified as Other assets on the accompanying condensed
consolidated financial statements).
Also in February 2004, AMR issued $324 million principal amount of
4.50 percent senior convertible notes due 2024 (the 4.50 Notes).
Each note is convertible into AMR common stock at a conversion rate
of 45.3515 shares per $1,000 principal amount of notes (which
represents an equivalent conversion price of $22.05 per share),
subject to adjustment in certain instances. The notes are
convertible under certain circumstances, including if (i) the
closing sale price of AMR's common stock reaches a certain level
for a specified period of time, (ii) the trading price of the notes
as a percentage of the closing sale price of AMR's common stock
falls below a certain level for a specified period of time, (iii)
AMR calls the notes for redemption, or (iv) certain corporate
transactions occur. Holders of the notes may require AMR to
repurchase all or any portion of the notes on February 15, 2009,
2014 and 2019 at a purchase price equal to the principal amount of
the notes being purchased plus accrued and unpaid interest to the
date of purchase. AMR may pay the purchase price in cash, common
stock or a combination of cash and common stock. After February
15, 2009, AMR may redeem all or any portion of the notes for cash
at a price equal to the principal amount of the notes being
redeemed plus accrued and unpaid interest as of the redemption
date. These notes are guaranteed by American. In February 2004,
AMR transferred $315 million in proceeds from the 4.50 Notes to
American. If the holders of the 4.50 Notes or AMR's 4.25 percent
senior convertible notes due 2023 (the 4.25 Notes) require AMR to
repurchase all or any portion of the notes on the repurchase dates,
it is AMR's present intention to satisfy the requirement in cash.
-5-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of June 30, 2004, AMR has issued guarantees covering
approximately $932 million of American's tax-exempt bond debt and
American has issued guarantees covering approximately $1.3 billion
of AMR's unsecured debt. In addition, as of June 30, 2004, AMR and
American have issued guarantees covering approximately $484 million
of AMR Eagle's secured debt.
7.The following tables provide the components of net periodic
benefit cost for the three and six months ended June 30, 2004 and 2003
(in millions):
Pension Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Components of net periodic
benefit cost
Service cost $ 90 $ 90 $ 179 $ 199
Interest cost 141 141 283 293
Expected return on assets (142) (118) (284) (236)
Amortization of:
Prior service cost 3 4 7 11
Unrecognized net loss 15 26 29 58
Curtailment loss * - 46 - 46
Net periodic benefit cost $ 107 $ 189 $ 214 $ 371
* Included in Special charges in the consolidated statement of operations.
Other Postretirement Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Components of net periodic
benefit cost
Service cost $ 19 $ 21 $ 38 $ 45
Interest cost 50 54 101 110
Expected return on assets (3) (3) (6) (5)
Amortization of:
Prior service cost (2) (2) (5) (4)
Unrecognized net loss 2 5 4 10
Net periodic benefit cost $ 66 $ 75 $ 132 $ 156
As of June 30, 2004, the Company had contributed the entire $461
million minimum amount it expects to contribute to its defined
benefit pension plans in 2004. The Company expects to contribute a
minimum of $450 million to its defined benefit pension plans in
2005. The Company's estimates of its defined benefit pension plan
contributions reflect the provisions of the Pension Funding Equity
Act of 2004, which was enacted in April 2004.
-6-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In December 2003, the President signed the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Modernization
Act), which introduced a prescription drug benefit under Medicare
into law. In January 2004, the Financial Accounting Standards Board
(FASB) issued a FASB Staff Position, which permitted companies to
elect to defer accounting for the effects of the Modernization Act.
The Company did not elect this deferral and recognized the effect
of the Modernization Act in the calculation of its postretirement
benefit liability as of December 31, 2003. In May 2004, the FASB
issued a FASB Staff Position with final authoritative guidance on
accounting for the Modernization Act. This final authoritative
guidance had no impact on the Company's accounting for the
Modernization Act.
The effect of the Modernization Act was (i) to reduce the Company's
accumulated postretirement benefit obligation (APBO) as of December
31, 2003 by $415 million by decreasing unrecognized net actuarial
losses and (ii) to decrease the Company's full year 2004
postretirement benefits expense by approximately $60 million. The
decrease in the Company's APBO is due to a reduction in the
expected per capita claims cost along with a reduction in the
expected rates of participation in the plan and is reflected in the
Company's 2004 postretirement benefits expense through amortization
of unrecognized gains/losses. Additionally, the service and
interest cost components of the Company's 2004 postretirement
benefits expense have been reduced as a result of the Modernization
Act.
8.During the last few years, as a result of the events of September
11, 2001 and the Company's restructuring activities, the Company
has recorded a number of special charges. During the six months
ended June 30, 2004 and 2003, the Company recorded the following to
Special charges:
Amount
Description of Charge (millions)
2004
Aircraft charges
Adjusted prior accruals for lease return and
other costs initially recorded as a component
of Special charges due to lower than
anticipated lease return costs $ (20)
Employee charges
Adjusted prior accruals for severance costs
related to the 2003 Management Reductions and
Labor Agreements* due to fewer furloughs than
anticipated resulting from the Company's
operational requirements and the volume of
pilot retirements $ (11)
2003
Aircraft charges
Adjusted prior accruals for lease return and
other costs initially recorded as a component
of Special charges $ (20)
-7-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Amount
Description of Charge (millions)
2003 (continued)
Employee charges
Reduced approximately 8,000 jobs across all
work groups in conjunction with the Management
Reductions and the Labor Agreements. Accrued
primarily severance costs. $ 60
Recognized curtailment loss** 46
Accrued severance charges related to the 2002
workforce reduction 25
Reduced vacation accrual to reflect new lower
pay scales and maximum vacation caps and wrote-
off a note receivable from one of the Ccompany's
three major unions in conjunction with the Labor
Agreements and the Management Reductions (59)
$ 72
Facility exit costs
Accrued the fair value of future lease
commitments and wrote-off certain prepaid
rental amounts and leasehold improvements
related to certain excess airport space $ 45
Other 4
$ 49
*In February 2003, American asked its employees for
approximately $1.8 billion in annual savings through a
combination of changes in wages, benefits and work rules. In
April 2003, American reached agreements with its three major
unions (the Labor Agreements) and also implemented various
reductions in the pay plans and benefits for non-unionized
personnel, including officers and other management (the
Management Reductions).
**As result of workforce reductions related to the Labor
Agreements and Management Reductions, the Company recognized
a curtailment loss of $46 million related to its defined
benefit pension plans, in accordance with Statement of
Financial Accounting Standards No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits" (SFAS 88).
The following table summarizes the changes in the remaining
accruals for special charges (in millions):
Aircraft Facility Employee
Charges Exit Costs Charges Total
Remaining accrual
at December 31, 2003 $ 194 $ 56 $ 26 $ 276
Adjustments (20) - (11) (31)
Payments (42) (4) (8) (54)
Remaining accrual
at June 30, 2004 $ 132 $ 52 $ 7 $ 191
Cash outlays related to the accruals, as of June 30, 2004, for
aircraft charges, facility exit costs and employee charges will
occur through 2014, 2018 and 2004, respectively.
-8-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In April 2003, the President signed the Emergency Wartime
Supplemental Appropriations Act, 2003 (the Appropriations Act),
which included provisions authorizing payment of $2.3 billion to
reimburse air carriers for increased security costs in proportion
to the amounts each carrier had paid in passenger security and air
carrier security fees to the Transportation Security Administration
(the Security Fee Reimbursement). The Company's Security Fee
Reimbursement was $315 million (net of payments to American Eagle
Airlines, Inc., Executive Airlines, Inc. and independent regional
affiliates) and is included in U.S. government grant in the
accompanying consolidated statement of operations.
9.The Company includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting,
changes in minimum pension liabilities and unrealized gains and
losses on available-for-sale securities in comprehensive loss. In
the second quarter of 2003, as a result of the Labor Agreements and
Management Reductions discussed in Note 8 in this Form 10-Q, the
Company remeasured its defined benefit plans. In conjunction with
the remeasurement the Company recorded an increase in its minimum
pension liability, which resulted in an additional charge to
stockholder's equity as a component of other comprehensive loss of
$334 million.
For the three months ended June 30, 2004 and 2003, comprehensive
loss was $14 million and $475 million, respectively, and for the
six months ended June 30, 2004 and 2003, comprehensive loss was
$213 million and $1.5 billion, respectively. The difference between
net loss and comprehensive loss for the six months ended June 30,
2004 is due primarily to the accounting for the Company's
derivative financial instruments. The difference between net loss
and comprehensive loss for the three and six months ended June 30,
2003 is due primarily to the adjustment to the Company's minimum
pension liability.
10.American classifies certain receivables from its parent and
affiliates against Additional paid-in-capital. In February 2004,
AMR transferred the proceeds from the 4.50 Notes to American,
reducing American's receivable from AMR by approximately $315
million. As of June 30, 2004, the Company classified a $95 million
receivable from its parent against Additional paid-in-capital on
the accompanying condensed consolidated balance sheet.
Comparatively, as of December 31, 2003, the Company classified a
$383 million receivable from its parent against Additional paid-in-
capital on the accompanying condensed consolidated balance sheet.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Information
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in documents
incorporated herein by reference, the words "expects," "plans,"
"anticipates," "believes," and similar expressions are intended to
identify forward-looking statements. Forward-looking statements
include, without limitation, the Company's expectations concerning
operations and financial conditions, including changes in capacity,
revenues, and costs, future financing needs, overall economic
conditions, plans and objectives for future operations, and the impact
on the Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate
solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events, or otherwise.
Forward-looking statements are subject to a number of risk factors
that could cause actual results to differ materially from our
expectations. The following factors, in addition to other possible
factors not listed, could cause the Company's actual results to differ
materially from those expressed in forward-looking statements: changes
in economic, business and financial conditions; the Company's
substantial indebtedness; continued high fuel prices and the
availability of fuel; the residual effects of the war in Iraq;
conflicts in the Middle East or elsewhere; the highly competitive
business environment faced by the Company, with increasing competition
from low cost carriers and historically low fare levels (which could
result in a deterioration in the revenue environment); the ability of
the Company to implement its restructuring program and the effect of
the program on operational performance and service levels;
uncertainties with respect to the Company's international operations;
changes in the Company's business strategy; actions by U.S. or foreign
government agencies; the possible occurrence of additional terrorist
attacks; another outbreak of a disease (such as SARS) that affects
travel behavior; uncertainties with respect to the Company's
relationships with unionized and other employee work groups; the
inability of the Company to satisfy existing financial or other
covenants in certain of its credit agreements; the availability of
future financing; and increased insurance costs and potential
reductions of available insurance coverage. Additional information
concerning these and other factors is contained in the Company's
Securities and Exchange Commission filings, including but not limited
to the 2003 Form 10-K.
Overview
American ended the quarter with $3.3 billion of cash and short-term
investments (and an additional $489 million in restricted cash and
short-term investments). As of the date of this Form 10-Q, the
Company believes it has sufficient liquidity to fund its operations
for the foreseeable future. Nevertheless, American remains heavily
indebted and has significant obligations due in 2005 and thereafter,
as described more fully under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 2003
Form 10-K. Also see the discussion of the Company's credit facility
covenants on page 11 of this Form 10-Q.
American's operating income and net loss improved during the three and
the six months ended June 30, 2004 compared to the same periods in
2003. The improvement in the second quarter operating results
occurred despite the receipt of a U.S. government grant of $315
million in the second quarter of 2003 (as discussed in Note 8 to the
accompanying condensed consolidated financial statements).
(in millions) Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 Change 2004 2003 Change
Operating Income (Loss) $ 123 $ (16) $ 139 $ 98 $ (919) $1,017
Net Loss $ (13) $(133) $ 120 $(195) $(1,165) $ 970
-10-
The year-over-year improvement in the Company's operating results
reflects the benefit of the cost reduction initiatives in the
Company's restructuring program, which is described more fully under
Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 2003 Form 10-K. As a result of its
restructuring efforts, American's unit costs are currently among the
lowest of the traditional hub and spoke carriers.
Although the Company has made significant progress in restructuring
its operations, external factors continue to create a challenging
financial environment for the Company and the U.S. airline industry in
general. The Company's operating and financial results are
significantly affected by the price and availability of jet fuel.
Persistent fuel price increases resulted in a year-over-year increase
of 28.2 cents per gallon for American's mainline operations for the
second quarter. This price increase negatively impacted fuel expense
by $215 million during the quarter, based on mainline fuel consumption
of 762 million gallons. Continuing high fuel prices, additional
increases in the price of fuel, or limits in the supply of fuel, would
further adversely affect the Company's financial condition and results
of operations.
Mainline unit revenues (passenger revenues per available seat mile)
improved 1.3 percent during the second quarter of 2004 due to a 1.3
point increase in American's load factor compared to the same period
in 2003. However, passenger yield (passenger revenue per passenger
mile) remained depressed relative to historical measures because of
the Company's reduced pricing power, resulting mainly from greater
cost sensitivity on the part of travelers, especially business
travelers, and intensifying competition arising in part from the
growth of low-cost carriers and in part from the effects of
significant increases in overall industry capacity in 2004.
The Company needs improvement in the revenue environment, additional
cost reductions and further productivity improvements before it can
return to sustained profitability at acceptable levels. In addition,
the Company's ability to return to sustained profitability at
acceptable levels will depend on a number of risk factors, many of
which are largely beyond the Company's control. Some of the risk
factors that have had and/or may have a negative impact on the
Company's business and financial results are referred to under
"Forward-Looking Information" above and are discussed in the Risk
Factors listed in Item 7 (on pages 36-38) in the 2003 Form 10-K. In
particular, if the revenue environment deteriorates beyond normal
seasonal trends, fuel prices remain at historically high levels for an
extended period of time or the Company is unable to access the capital
markets to raise additional capital, it may be unable to fund its
obligations and sustain its operations in the long-term.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility Covenants
American has a fully drawn $834 million bank credit facility secured
by aircraft that expires December 15, 2005, which contains a liquidity
covenant and an EBITDAR (generally, earnings before interest, taxes,
depreciation, amortization and rentals, adjusted for certain non-cash
items) to fixed charges (generally, interest and total rentals) ratio
covenant (the EBITDAR Covenant). The liquidity covenant requires
American to maintain a minimum level of $1.0 billion of unrestricted
cash and short-term investments (the Liquidity Covenant). The Company
was in compliance with the Liquidity Covenant at June 30, 2004 and
expects to continue to comply with this covenant. The required EBITDAR
to fixed charges ratio was 1.2 to 1.0 for the six-month period ending
June 30, 2004, and increases to 1.3 to 1.0 for the nine-month period
ending September 30, 2004, to 1.4 to 1.0 for the twelve-month period
ending December 31, 2004 and to 1.5 to 1.0 for each four consecutive
quarters ending after December 31, 2004. The Company was in compliance
with the EBITDAR Covenant as of June 30, 2004 and expects to comply
with this covenant as of September 30, 2004. Continuation of current
high fuel prices and/or, to a lesser degree, deterioration in the
revenue environment could adversely affect the Company's continued
compliance with this covenant for periods ending after September 30,
2004. As a result, there are no assurances that the Company will
continue to be able to comply with this covenant through the
expiration of the facility. Failure to comply with either of these
covenants would result in a default under this facility and - - if the
Company did not take steps to cure, obtain a waiver of, or otherwise
mitigate the default - - could result in a default under a significant
amount of the Company's other debt.
-11-
Significant Indebtedness and Future Financing
During 2001, 2002 and 2003, the Company raised an aggregate of
approximately $8.4 billion of financing mostly to fund capital
commitments (mainly for aircraft and ground properties) and operating
losses. During the six months ended June 30, 2004, the Company raised
an additional $180 million of financing to fund capital commitments
and for general corporate purposes, and ended the period with $3.3
billion of unrestricted cash and short-term investments compared with
$2.6 billion at December 31, 2003. As of the date of this Form 10-Q,
the Company believes that it has sufficient liquidity to fund its
operations for the foreseeable future, including capital expenditures
and other contractual obligations. However, to maintain sufficient
liquidity over the long-term as the Company seeks to return to
sustained profitability at acceptable levels, the Company will need
continued access to additional funding. The Company's possible future
financing sources include: (i) a limited amount of additional secured
aircraft debt (virtually all of the Company's Section 1110-eligible
aircraft are encumbered), (ii) debt secured by other assets, (iii)
securitization of future operating receipts, (iv) sale-leaseback
transactions of owned aircraft and (v) the potential sale of certain
non-core assets. However, the availability and level of these
financing sources cannot be assured, particularly in light of high
fuel prices, historically weak revenues and the fact that the Company
has far fewer unencumbered assets available than it has had in the
past.
The Company's significant indebtedness could have important future
consequences, such as (i) limiting the Company's ability to obtain
additional financing for working capital, capital expenditures,
acquisitions and general corporate purposes, (ii) requiring the
Company to dedicate a substantial portion of its cash flow from
operations to payments on its indebtedness, (iii) making the Company
more vulnerable to economic downturns, (iv) limiting its ability to
withstand competitive pressures and reducing its flexibility in
responding to changing business and economic conditions, and (v)
limiting the Company's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates.
Financing Activity
In February 2004, American issued $180 million of Fixed Rate Secured
Notes due 2009. These notes are secured by certain spare parts and
cash collateral and bear interest at 7.25 percent.
In addition, in February 2004, AMR transferred $315 million in
proceeds from the 4.50 Notes to American.
See Note 6 to the accompanying condensed consolidated financial
statements for additional information regarding debt guarantees.
Other Operating and Investing Activities
The Company's cost savings initiatives resulted in improved cash flow
from operations during the six months ended June 30, 2004, compared
to the same period in 2003. Net cash provided by operating activities
in the six-month period ended June 30, 2004 was $577 million, an
increase of $646 million over the same period in 2003. Net cash used
by operating activities for the six months ended June 30, 2003
included the receipt of a $515 million federal tax refund and the
receipt of $315 million from the U.S. government under the
Appropriations Act, offset by $216 million of redemption payments
under operating leases for special facility revenue bonds.
Pension Funding Obligation
As of June 30, 2004, the Company had contributed the entire $461
million minimum amount it expects to contribute to its defined benefit
pension plans in 2004. The Company expects to contribute a minimum of
$450 million to its defined benefit pension plans in 2005. The
Company's estimates of its defined benefit pension plan contributions
reflect the provisions of the Pension Funding Equity Act of 2004,
which was enacted in April 2004.
-12-
RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2004 and 2003
Revenues
The Company's revenues increased approximately $900 million, or 10.7
percent, to $9.3 billion for the six months ended June 30, 2004 from
the same period last year. American's passenger revenues increased
by 9.2 percent, or $635 million, on a capacity (available seat mile)
(ASM) increase of 7.1 percent. American's passenger load factor
increased 1.7 points to 73.5 percent while passenger revenue yield
per passenger mile decreased by 0.5 percent to 11.90 cents. This
resulted in an increase in passenger revenue per available seat mile
(RASM) of 2.0 percent to 8.75 cents. Following is additional
information regarding American's domestic and international RASM and
capacity:
Six Months Ended June 30, 2004
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
Domestic 8.66 0.5% 59.4 2.9%
International 8.94 5.2 27.2 17.6
Latin America 8.98 (0.7) 13.9 22.0
Europe 8.97 8.7 10.7 10.4
Pacific 8.59 30.3 2.6 28.4
Regional affiliates' passenger revenues, which are based on industry
standard mileage proration agreements for flights connecting to
American flights, increased $212 million, or 29.7 percent, to $925
million as a result of increased capacity and load factors. Regional
affiliates' traffic increased 33.0 percent to 3.4 billion revenue
passenger miles (RPMs), while capacity increased 25.0 percent to 5.1
billion ASMs, resulting in a 4.0 point increase in passenger load
factor to 66.3 percent.
Cargo revenues increased 10.6 percent, or $29 million, primarily due
to a 10.7 percent increase in cargo ton miles.
Operating Expenses
The Company's total operating expenses decreased 1.3 percent, or $117
million, to $9.2 billion for the six months ended June 30, 2004
compared to the same period in 2003. American's mainline operating
expenses per ASM in the six months ended June 30, 2004 decreased 9.5
percent compared to the same period in 2003 to 9.49 cents. This
decrease in operating expenses per ASM is due primarily to the
Company's cost savings initiatives and occurred despite the receipt of
a grant from the U.S. government in 2003 and a 20.0 percent increase
in American's price per gallon of fuel in the six months ended June
30, 2004 relative to the same period in 2003. This decrease was offset
somewhat by $101 million in special charges in the six months ended
June 30, 2003.
-13-
(in millions) Six Months
Ended Change Percentage
Operating Expenses June 30, 2004 from 2003 Change
Wages, salaries and benefits $ 3,101 $(649) (17.3)% (a)
Aircraft fuel 1,596 310 24.1 (b)
Regional payments 887 128 16.9 (c)
Commissions, booking fees and
credit card expense 574 59 11.5 (d)
Depreciation and amortization 563 (35) (5.9)
Other rentals and landing fees 545 2 0.4
Maintenance, materials and repairs 406 61 17.7 (e)
Aircraft rentals 296 (60) (16.9) (f)
Food service 274 (24) (8.1)
Other operating expenses 1,015 (92) (8.3)
Special charges (31) (132) NM (g)
U.S. government grant - 315 NM (h)
Total operating expenses $ 9,226 $(117) (1.3)%
(a)Wages, salaries and benefits decreased due to lower wage rates
and reduced headcount primarily as a result of the Labor Agreements
and Management Reductions, discussed in the Company's 2003 Form 10-K,
which became effective in the second quarter of 2003. This decrease
was somewhat offset by increased headcount related to capacity
increases.
(b)Aircraft fuel expense increased due to a 20.0 percent increase in
American's price per gallon of fuel (net of the impact of fuel
hedging) and a 3.4 percent increase in American' s fuel consumption.
(c)Regional payments increased primarily due to the 25.0 percent
increase in Regional Affiliates' capacity.
(d)Commissions, booking fees and credit card expense increased due
primarily to a 9.2 percent increase in the Company's passenger
revenues, particularly the 23.7 percent increase in American's
international passenger revenue, and a 29.7 percent increase in
Regional Affiliates' revenue.
(e)Maintenance, materials and repairs increased primarily due to
increased aircraft utilization, the benefit from retiring aircraft
subsiding and increases in contractual rates in certain flight hour
agreements for outsourced aircraft engine maintenance.
(f)Aircraft rentals decreased primarily due to the removal of leased
aircraft from the fleet in the second half of 2003 as part of the
Company's restructuring initiatives and concessionary agreements with
certain lessors, which reduced future lease payment amounts and
resulted in the conversion of 30 operating leases to capital leases in
the second quarter of 2003.
(g)Special charges for 2004 included the reversal of reserves
previously established for (i) aircraft return costs of $20 million
and (ii) employee severance of $11 million. Special charges for 2003
included $72 million in employee charges and $49 million in facility
exit costs offset by a $20 million aircraft related credit to adjust
prior accruals.
(h)U.S. government grant for 2003 included the receipt of $315
million from the U.S. government under the Appropriations Act.
Other Income (Expense)
Other income (expense), historically a net expense, increased $47
million due primarily to the following: Interest expense increased
$26 million, or 8.8 percent, resulting primarily from the increase in
the Company's long-term debt. Miscellaneous-net increased $23 million,
due primarily to the accrual during the first quarter of 2004 of a $23
million award rendered by an independent arbitrator and relating to a
grievance filed by the Allied Pilots Association.
Income Tax Benefit
The Company did not record a net tax benefit associated with its
losses for the six months ended June 30, 2004 and 2003 due to the
Company providing a valuation allowance, as discussed in Note 5 to the
accompanying condensed consolidated financial statements.
-14-
Outlook
Capacity for American's mainline jet operations is expected to
increase about 4.5 percent in the third quarter of 2004 compared to
the third quarter of 2003, and about 5.8 percent for the full year
2004 compared to 2003.
Based on various factors, including primarily the Company's
expectation that fuel prices will remain high during 2004 compared to
2003, the Company now expects that its mainline unit costs for the
full year 2004 will be approximately 9.6 cents. This represents a 5.5
percent improvement over 2003 mainline unit costs. The Company will
have a full year of labor savings from its Labor Agreements and
Management Reductions and will more fully realize the savings from its
other strategic cost savings initiatives. However, in addition to high
fuel prices, there are significant cost challenges in 2004 that affect
the Company's cost reduction efforts including medical benefits costs,
airport fees and maintenance, materials and repairs costs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Except as discussed below, there have been no material changes in
market risk from the information provided in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk of the Company's 2003 Form
10-K.
The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analyses presented do
not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management
may take to mitigate the Company's exposure to such changes.
Therefore, actual results may differ. The Company does not hold or
issue derivative financial instruments for trading purposes.
Aircraft Fuel The Company's earnings are affected by changes in the
price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships
fuel and maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel, heating oil, and crude oil swap and
option contracts. Market risk is estimated as a hypothetical 10
percent increase in the June 30, 2004 cost per gallon of fuel. Based
on projected 2004 and 2005 fuel usage through June 30, 2005, such an
increase would result in an increase to aircraft fuel expense of
approximately $312 million in the remainder of 2004 and the first six
months of 2005, inclusive of the impact of fuel hedge instruments
outstanding at June 30, 2004, and assumes the Company's fuel hedging
program remains effective under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Comparatively, based on projected 2004 fuel usage, such
an increase would have resulted in an increase to aircraft fuel
expense of approximately $247 million in 2004, inclusive of fuel hedge
instruments outstanding as of December 31, 2003. The change in market
risk is due to the increase in fuel prices and a decrease in the
amount of fuel hedged.
As of June 30, 2004, the Company had hedged, with option contracts,
approximately nine percent of its estimated third quarter 2004 fuel
requirements, four percent of its estimated fourth quarter 2004 fuel
requirements and an insignificant percentage of its estimated 2005,
2006 and 2007 fuel requirements.
Item 4. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
Exchange Act. This term refers to the controls and procedures of a
company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Company's disclosure controls and procedures as
of June 30, 2004. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2004. During
the quarter ending on June 30, 2004, there was no change in the
Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-15-
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 certified class includes all travel agencies
who have been or will be required to pay money to American for debit
memos for fare rules violations from July 26, 1995 to the present.
The plaintiffs 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, a final adverse court decision could
impose restrictions on the Company's relationships with travel
agencies, which could have an adverse impact on the Company.
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
plaintiffs are seeking monetary damages and injunctive relief. The
court granted class action certification to the plaintiffs 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. The case is stayed as to US
Airways and United Airlines, since they filed for bankruptcy.
American is vigorously defending the lawsuit. Defendant carriers
filed a motion for summary judgment on December 10, 2002, which the
court granted on October 30, 2003. Plaintiffs have appealed that
order to the 4th Circuit Court of Appeals, and that appeal remains
pending. 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.
Between April 3, 2003 and June 5, 2003, three lawsuits were filed by
travel agents some of whom have opted out of the Hall class action
(above) to pursue their claims individually against American Airlines,
Inc., other airline defendants, and in one case against certain
airline defendants and Orbitz LLC. (Tam Travel et. al., v. Delta Air
Lines et. al., in the United States District Court for the Northern
District of California - San Francisco (51 individual agencies), Paula
Fausky d/b/a Timeless Travel v. American Airlines, et. al, in the
United States District Court for the Northern District of Ohio Eastern
Division (29 agencies) and Swope Travel et al. v. Orbitz et. al. in
the United States District Court for the Eastern District of Texas
Beaumont Division (6 agencies)). Collectively, these lawsuits seek
damages and injunctive relief alleging that the certain airline
defendants and Orbitz LLC: (i) conspired to prevent travel agents from
acting as effective competitors in the distribution of airline tickets
to passengers in violation of Section 1 of the Sherman Act; (ii)
conspired to monopolize the distribution of common carrier air travel
between airports in the United States in violation of Section 2 of the
Sherman Act; and that (iii) between 1995 and the present, the airline
defendants conspired to reduce commissions paid to U.S.-based travel
agents in violation of Section 1 of the Sherman Act. These cases have
been consolidated in the United States District Court for the Northern
District of Ohio Eastern Division. American is vigorously defending
these lawsuits. 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.
-16-
On April 25, 2002, a Quebec travel agency filed a motion seeking a
declaratory judgment of the Superior Court in Montreal, Canada
(Voyages Montambault (1989) Inc. v. International Air Transport
Association, et al.), that American and the other airline defendants
owe a "fair and reasonable commission" to the agency, and that
American and the other airline defendants breached alleged contracts
with the agency by adopting policies of not paying base commissions.
The motion was subsequently amended to add 40 additional travel
agencies as petitioners. The current defendants are the International
Air Transport Association, the Air Transport Association of Canada,
Air Canada, American, America West Airlines, Delta Air Lines, Grupo
TACA, Northwest Airlines/KLM Airlines, and Continental Airlines.
American is vigorously defending the lawsuit. Although the Company
believes that the litigation is without merit, 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 June 9, 2004, the court dismissed the motion, and the
petitioners did not file an appeal.
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
monetary damages and injunctive relief and seek to certify a
nationwide class of travel agents. Plaintiffs have filed a motion for
class certification, but that motion has not yet been decided.
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 alleged 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
resumption of air carrier service after the tragedies on September 11,
2001. On April 1, 2004, the court denied plaintiff's motion for class
certification. 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, a final adverse court decision could
impose restrictions on the Company's relationships with travel
agencies which could have an adverse impact on the Company.
On August 19, 2002, a class action lawsuit seeking monetary damages
was filed, and on May 7, 2003 an amended complaint was filed in the
United States District Court for the Southern District of New York
(Power Travel International, Inc. v. American Airlines, Inc., et al.)
against American, Continental Airlines, Delta Air Lines, United
Airlines, and Northwest Airlines, alleging that American and the other
defendants breached their contracts with the agency and were unjustly
enriched when these carriers at various times reduced their base
commissions to zero. The as yet uncertified class includes all travel
agencies accredited by the Airlines Reporting Corporation "whose base
commissions on airline tickets were unilaterally reduced to zero by"
the defendants. The case is stayed as to United Airlines, since it
filed for bankruptcy. American is vigorously defending the lawsuit.
Although the Company believes that the litigation is without merit, 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.
-17-
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). The Company is vigorously
defending the lawsuit. In addition to the 17 defendants named in the
lawsuit, 243 other agencies and companies were also named as PRPs and
contributors to the contamination. The case is currently stayed while
the parties pursue an alternative dispute resolution process. The
County has proposed draft allocation models for remedial costs for the
Terminal and Tank Farm areas of MIA. While it is anticipated that
American and AMR Eagle will be allocated equitable shares of remedial
costs, the Company does not expect the allocated amounts to have a
material adverse effect on the Company.
Three cases (each being a purported class action) have been filed
against American arising from the disclosure of passenger name records
by a vendor of American. The cases are: Kimmell v. AMR, et al. (U.
S. District Court, Texas), Baldwin v. AMR, et al. (U. S. District
Court, Texas) and Rosenberg v. AMR, et al. (U. S. District Court New
York). The Kimmel suit was filed in April 2004 and the Baldwin and
Rosenberg cases were filed in May 2004. The suits allege various
causes of action, including but not limited to, violations of the
Electronic Communications Privacy Act, negligent mispresentation,
breach of contract and violation of alleged common law rights of
privacy. In each case plaintiffs seek statutory damages of $1000 per
passenger, plus additional unspecified monetary damages. The Company
is vigorously defending these suits and believes the suits are without
merit.
-18-
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 six months ended June 30, 2004 and 2003.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32 Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code).
Form 8-Ks filed under Item 5 - Other Events
On April 2, 2004, American filed a report on Form 8-K to provide a
press release issued to report March traffic.
On May 5, 2004, American filed a report on Form 8-K to provide a press
release issued to report April traffic.
On May 19, 2004, American filed a report on Form 8-K to announce that
the Company's Board of Directors named Gerard J. Arpey as its
Chairman.
On June 3, 2004, American filed a report on Form 8-K to provide a
press release issued to report May traffic.
On June 18, 2004, American filed a report on Form 8-K to provide
actual fuel cost, unit cost, capacity and traffic information for
April and May as well as current fuel cost, unit cost, capacity and
traffic expectations for June, the second quarter and the full year
2004.
Form 8-Ks filed under Item 12 - Disclosure of Results of Operations
and Financial Condition
On April 22, 2004, American furnished a report on Form 8-K to furnish
a press release issued by AMR to announce AMR's first quarter 2004
results.
-19-
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: July 22, 2004 BY: /s/ James A. Beer
James A. Beer
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
-20-
Exhibit 12
AMERICAN AIRLINES, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions)
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
Earnings:
Loss before income taxes $ (13) $(133) $(195) $(1,165)
Add: Total fixed charges (per below) 372 378 740 761
Less: Interest capitalized 19 17 36 35
Total loss before income taxes $ 340 $ 228 $ 509 $ (439)
Fixed charges:
Interest, including interest capitalized $ 162 $ 147 $ 322 $ 296
Portion of rental expense
representative of the interest factor 207 229 413 462
Amortization of debt expense 3 2 5 3
Total fixed charges $ 372 $ 378 $ 740 $ 761
Coverage deficiency $ 32 $ 150 $ 231 $ 1,200
Note:As of June 30, 2004, American has guaranteed approximately $1.3
billion of AMR's unsecured debt and approximately $484 million of AMR
Eagle's secured debt. The impact of these unconditional guarantees is
not included in the above computation.
Exhibit 31.1
I, Gerard J. Arpey, certify that:
1.I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2.Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3.Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5.The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a)All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 22, 2004 /s/ Gerard J. Arpey
Gerard J. Arpey
President, Chairman and
Chief Executive Officer
Exhibit 31.2
I, James A. Beer, certify that:
1.I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2.Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4.The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 22, 2004 /s/ James A. Beer
James A. Beer
Senior Vice President and
Chief Financial Officer
Exhibit 32
American Airlines, Inc.
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code), each of the undersigned officers of American
Airlines, Inc., a Delaware corporation (the Company), does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
(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: July 22, 2004 /s/ Gerard J. Arpey
Gerard J. Arpey
President, Chairman and
Chief Executive Officer
Date: July 22, 2004 /s/ James A. Beer
James A. Beer
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.
