View:
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, 2006.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to .
Commission file number 1-2691.
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1502798
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (817) 963-1234
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer" and "large
accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer
x Non-accelerated Filer
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of July 21, 2006.
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, 2006 and 2005
Condensed Consolidated Balance Sheets -- June 30, 2006 and December
31, 2005
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2006 and 2005
Notes to Condensed Consolidated Financial Statements -- June 30,
2006
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits
SIGNATURE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Revenues
Passenger $ 4,720 $ 4,264 $ 8,964 $ 8,106
Regional Affiliates 702 561 1,271 1,012
Cargo 206 197 392 380
Other revenues 331 274 659 535
Total operating revenues 5,959 5,296 11,286 10,033
Expenses
Wages, salaries and benefits 1,527 1,528 3,103 3,030
Aircraft fuel 1,544 1,224 2,876 2,220
Regional payments to AMR Eagle 554 510 1,086 983
Other rentals and landing fees 300 289 586 562
Commissions, booking fees
and credit card expense 286 286 555 557
Depreciation and amortization 243 240 483 485
Maintenance, materials and
repairs 187 210 374 402
Aircraft rentals 144 143 285 286
Food service 128 125 251 248
Other operating expenses 626 588 1,215 1,151
Total operating expenses 5,539 5,143 10,814 9,924
Operating Income 420 153 472 109
Other Income (Expense)
Interest income 67 28 119 63
Interest expense (200) (162) (401) (337)
Interest capitalized 7 24 14 46
Related party interest - net (11) (2) (17) (4)
Miscellaneous - net (3) - (13) (7)
(140) (112) (298) (239)
Income (Loss) Before Income Taxes 280 41 174 (130)
Income tax - - - -
Net Earnings (Loss) $ 280 $ 41 $ 174 $ (130)
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,
2006 2005
Assets
Current Assets
Cash $ 164 $ 133
Short-term investments 4,936 3,637
Restricted cash and short-term
investments 525 510
Receivables, net 1,097 967
Inventories, net 466 474
Other current assets 516 321
Total current assets 7,704 6,042
Equipment and Property
Flight equipment, net 11,695 11,696
Other equipment and property, net 2,326 2,352
Purchase deposits for flight equipment 176 277
14,197 14,325
Equipment and Property Under Capital Leases
Flight equipment, net 798 916
Other equipment and property, net 108 102
906 1,018
Route acquisition costs and airport
operating and gate lease rights, net 1,156 1,167
Other assets 3,414 3,489
$ 27,377 $ 26,041
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities
Accounts payable $ 1,178 $ 998
Accrued liabilities 2,193 2,205
Air traffic liability 4,440 3,615
Payable to affiliates, net 978 544
Current maturities of long-term debt 811 829
Current obligations under capital leases 97 138
Total current liabilities 9,697 8,329
Long-term debt, less current maturities 8,532 8,785
Obligations under capital leases, less
current obligations 861 922
Pension and postretirement benefits 4,956 4,998
Other liabilities, deferred gains and
deferred credits 4,088 4,186
Stockholder's Equity (Deficit)
Common stock - -
Additional paid-in capital 3,623 3,406
Accumulated other comprehensive loss (1,056) (1,087)
Accumulated deficit (3,324) (3,498)
(757) (1,179)
$ 27,377 $ 26,041
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,
2006 2005
Net Cash Provided by Operating Activities $ 1,452 $ 918
Cash Flow from Investing Activities:
Capital expenditures (238) (222)
Net increase in short-term investments (1,299) (415)
Net increase in restricted cash and short-
term investments (15) (14)
Proceeds from sale of equipment and property 9 13
Other (6) 1
Net cash used by investing activities (1,549) (637)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (380) (299)
Reimbursement from construction reserve
account 75 -
Funds transferred from affiliates, net 433 59
Net cash provided (used) by
financing activities 128 (240)
Net increase in cash 31 41
Cash at beginning of period 133 117
Cash at end of period $ 164 $ 158
The accompanying notes are an integral part of these financial statements.
3
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial
statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position, results
of operations and cash flows for the periods indicated. Results of
operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year. American
Airlines, Inc. (American or the Company) is a wholly owned subsidiary
of AMR Corporation (AMR). The condensed consolidated financial
statements also include the accounts of variable interest entities for
which the Company is the primary beneficiary. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the American Airlines, Inc. Annual Report on Form 10-K for
the year ended December 31, 2005, as amended on July 17, 2006 (2005
Form 10-K).
Cargo fuel and security surcharge revenues of $40 million and $72
million for the three months and six months ended June 30, 2005
have been reclassified from Other revenues to Cargo revenues in the
consolidated statement of operations to conform to the current year
presentation.
2. Under the 1998 Long Term Incentive Plan, as amended (the 1998
LTIP), officers and key employees of AMR and its subsidiaries may
be granted stock options, stock appreciation rights (SARs),
restricted stock, deferred stock, stock purchase rights, other
stock-based awards and/or performance-related awards, including
cash bonuses. The total number of common shares authorized for
distribution under the 1998 Long Term Incentive Plan is 23.7
million shares (after giving effect to a one-for-one stock dividend
in 1998 and the dividend of shares of The Sabre Group, Inc. via a
spin-off in 2000). The 1998 LTIP, the successor to the 1988 Long
Term Incentive Plan (1988 LTIP), will terminate no later than May
21, 2008.
In 2003, AMR established the 2003 Employee Stock Incentive Plan
(the 2003 Plan) to provide, among other things, equity awards to
employees as part of the 2003 restructuring process. Under the
2003 Plan, employees may be granted stock options, restricted stock
and deferred stock. As of April 19, 2006, no additional shares were
available for distribution under the 2003 Plan.
Options granted under the 1988 LTIP, 1998 LTIP and the 2003 Plan
are awarded with an exercise price equal to the fair market value
of the stock on date of grant, become exercisable in equal annual
installments over periods ranging from two to five years following
the date of grant and expire no later than ten years from the date
of grant. As of June 30, 2006, approximately 4.6 million options
outstanding under the 1998 LTIP and 2003 Plan had not vested.
Prior to January 1, 2006, American accounted 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 was recognized for stock option
grants if the exercise price of AMR's stock option grants was at or
above the fair market value of the underlying stock on the date of
grant. Effective January 1, 2006, AMR and American adopted the
fair value recognition provisions of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" (SFAS
123(R)) using the modified-prospective transition method. Under
this transition method, compensation cost recognized in 2006
includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based
on the grant-date fair value used for pro forma disclosures and (b)
compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for prior
periods have not been restated.
4
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As a result of adopting SFAS 123(R), American's net income for the
three months and six months ended June 30, 2006, was $5 million and
$16 million lower than if it had continued to account for share-
based compensation for stock options under APB 25.
Prior to January 1, 2006, AMR and American had 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
earnings (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, 2005 June 30, 2005
Net earnings (loss), as reported $ 41 $(130)
Add: Stock-based employee
compensation expense
included in reported net
earnings (loss) 11 17
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards (26) (48)
Pro forma net earnings (loss) $ 26 $(161)
On March 29, 2006, the AMR Board of Directors amended and restated
the 2003-2005 Performance Share Plan for Officers and Key
Employees, the 2004-2006 Performance Share Plan for Officers and
Key Employees, and the 2004 Agreements for Deferred Shares
(collectively, the Amended Plans). Before amendment, the plans
allowed for settlement only in cash. The three Amended Plans
permit settlement in a combination of cash and/or stock; however,
the amendments did not impact the fair value of the obligations
under the three Amended Plans. The Company anticipates using all
currently available shares under the 1998 LTIP and the 2003 Plan to
satisfy obligations under the three Amended Plans, but, based on
current estimates, a portion of the obligations will be settled in
cash. The Company will account for these obligations prospectively
as a combination of liability and equity grants. In accordance
with SFAS 123(R), the Company reclassified $187 million from
Accrued liabilities to Additional paid-in capital on March 29,
2006, representing the vested portions of the current estimated
fair value of obligations under all three of the Amended Plans that
are expected to be settled with stock.
5
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. As of June 30, 2006, the Company had commitments to acquire an
aggregate of 47 Boeing 737-800s and seven Boeing 777-200ERs in 2013
through 2016. Future payments for all aircraft, including the
estimated amounts for price escalation, will be approximately $2.8
billion in 2011 through 2016.
4. Accumulated depreciation of owned equipment and property at June
30, 2006 and December 31, 2005 was $9.8 billion and $9.4 billion,
respectively. Accumulated amortization of equipment and property
under capital leases was $1.0 billion and $1.1 billion at June 30,
2006 and December 31, 2005, respectively.
5. As discussed in Note 8 to the consolidated financial statements
in the 2005 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 decreased $77 million during the six
months ended June 30, 2006 to $1.7 billion as of June 30, 2006.
6. As of June 30, 2006, American has issued guarantees covering
approximately $1.1 billion of AMR's unsecured debt. In addition, as
of June 30, 2006, AMR and American have issued guarantees covering
approximately $408 million of AMR Eagle's secured debt.
On March 27, 2006, American refinanced its bank credit facility.
In general, the new credit facility adjusted the amounts borrowed
under the senior secured revolving credit facility and the senior
secured term loan facility, reduced the overall interest rate on
the combined credit facility and favorably modified certain debt
covenant requirements.
6
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. The following tables provide the components of net periodic
benefit cost for the three and six months ended June 30, 2006 and 2005
(in millions):
Pension Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Components of net periodic
benefit cost
Service cost $ 100 $ 93 $ 199 $ 185
Interest cost 160 153 321 305
Expected return on assets (167) (164) (335) (329)
Amortization of:
Prior service cost 4 4 8 8
Unrecognized net loss 20 13 40 26
Net periodic benefit cost $ 117 $ 99 $ 233 $ 195
Other Postretirement Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Components of net periodic
benefit cost
Service cost $ 20 $ 19 $ 38 $ 37
Interest cost 49 49 96 99
Expected return on assets (4) (4) (8) (7)
Amortization of:
Prior service cost (3) (3) (5) (5)
Unrecognized net loss - 1 1 1
Net periodic benefit cost $ 62 $ 62 $ 122 $ 125
The Company expects to contribute approximately $250 million to its
defined benefit pension plans in 2006. The Company's estimates of
its defined benefit pension plan contributions reflect the
provisions of the Pension Funding Equity Act of 2004. Of the $250
million the Company expects to contribute to its defined benefit
pension plans in 2006, the Company contributed $119 million during
the six months ended June 30, 2006 and contributed $65 million on
July 14, 2006.
7
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8. As a result of the events of September 11, 2001, the depressed
revenue environment, high fuel prices and the Company's
restructuring activities, the Company has recorded a number of
charges during the last few years. The following table summarizes
the changes since December 31, 2005 in the remaining accruals for
these charges (in millions):
Aircraft Facility
Charges Exit Costs Total
Remaining accrual
at December 31, 2005 $ 150 $ 36 $ 186
Adjustments (5) (11) (16)
Payments (9) (1) (10)
Remaining accrual
at June 30, 2006 $ 136 $ 24 $ 160
Cash outlays related to the accruals for aircraft charges and
facility exit costs will occur through 2017 and 2018, respectively.
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 income (loss). For
the three months ended June 30, 2006 and 2005, comprehensive income
was $291 million and $52 million, respectively, and for the six months
ended June 30, 2006 and 2005, comprehensive income (loss) was $205
million and $(74) million, respectively. The difference between net
earnings (loss) and comprehensive income (loss) for the three and six
months ended June 30, 2006 and 2005 is due primarily to the accounting
for the Company's derivative financial instruments.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related
commodities. As required by Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company assesses, both at the inception of
each hedge and on an on-going basis, whether the derivatives that
are used in its hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items. The Company
discontinues hedge accounting prospectively if it determines that a
derivative is no longer expected to be highly effective as a hedge
or if it decides to discontinue the hedging relationship. As a
result of its quarterly effectiveness assessment, the Company
determined that the majority of its derivatives settling during the
remainder of 2006 and in 2007 are no longer expected to be highly
effective in offsetting changes in forecasted jet fuel purchases.
As a result, effective on July 1, 2006, all subsequent changes in
the fair value of those particular hedge contracts will be
recognized directly in earnings rather than being deferred in
Accumulated other comprehensive loss. On an economic basis, these
derivatives will continue to largely offset potential changes in
the price of jet fuel. Hedge accounting will continue to be
applied to derivatives used to hedge forecasted jet fuel purchases
that are expected to remain highly effective.
8
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10.On March 31, 2006, the Financial Accounting Standards Board
(FASB) issued an exposure draft "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R)". The proposed
standard would, among other things, require the Company to:
- Recognize the funded status of the Company's defined benefit
plans in its consolidated financial statements.
- Recognize as a component of Other comprehensive income (loss) the
actuarial gains and losses and the prior service costs and credits
that arise during the period but are not immediately recognized as
components of net periodic benefit cost.
The proposed standard would be effective for fiscal years ending
after December 15, 2006. As of December 31, 2005, the required
adjustment to the Company's balance sheet would increase the
liability for pension and postretirement benefits and increase
Accumulated other comprehensive loss by approximately $1.0 billion;
however, increases in interest rates since December 31, 2005 would
offset some portion of the required adjustment to the 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," "indicates," "believes," "forecast," "guidance,"
"outlook," "may," "will," "should," and similar expressions are
intended to identify forward-looking statements. Similarly, statements
that describe the Company's objectives, plans or goals are forward
looking statements. Forward-looking statements include, without
limitation, the Company's expectations concerning operations and
financial conditions, including changes in capacity, revenues, and
costs, future financing plans and needs, overall economic and industry
conditions, plans and objectives for future operations, and the impact
on the Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate
solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events, or otherwise.
Forward-looking statements are subject to a number of factors that
could cause the Company's actual results to differ materially from the
Company's expectations. The following factors, in addition to other
possible factors not listed, could cause the Company's actual results
to differ materially from those expressed in forward-looking
statements: the materially weakened financial condition of the
Company, resulting from its significant losses in recent years; the
ability of the Company to generate additional revenues and
significantly reduce its costs; changes in economic and other
conditions beyond the Company's control, and the volatile results of
the Company's operations; the Company's substantial indebtedness and
other obligations; the ability of the Company to satisfy existing
financial or other covenants in certain of its credit agreements;
continued high fuel prices and further increases in the price of fuel,
and the availability of fuel; the fiercely competitive business
environment faced by the Company, and historically low fare levels;
competition with reorganized and reorganizing carriers; the Company's
reduced pricing power; the Company's likely need to raise additional
funds and its ability to do so on acceptable terms; changes in the
Company's business strategy; government regulation of the Company's
business; conflicts overseas or terrorist attacks; uncertainties with
respect to the Company's international operations; outbreaks of a
disease (such as SARS or avian flu) that affects travel behavior;
uncertainties with respect to the Company's relationships with
unionized and other employee work groups; increased insurance costs
and potential reductions of available insurance coverage; the
Company's ability to retain key management personnel; potential
failures or disruptions of the Company's computer, communications or
other technology systems; changes in the price of AMR's common stock;
and the ability of the Company to reach acceptable agreements with
third parties. Additional information concerning these and other
factors is contained in the Company's Securities and Exchange
Commission filings, including but not limited to the Company's 2005
Form 10-K (see in particular Item 1A "Risk Factors" in the 2005 Form
10-K).
Overview
The Company recorded net earnings of $280 million during the second
quarter of 2006 compared to $41 million in the same period last year.
The Company's second quarter 2006 results were impacted by the
continuing increase in fuel prices, offset by an improvement in unit
revenues (passenger revenue per available seat mile).
The price of jet fuel increased by 46.1 cents per gallon compared to
the second quarter of 2006. This price increase negatively impacted
fuel expense by $340 million during the quarter based on fuel
consumption of 737 million gallons. Continuing high fuel prices,
additional increases in the price of fuel, and/or disruptions in the
supply of fuel would further adversely affect the Company's financial
condition and its results of operations.
10
Mainline passenger unit revenues increased 11.7 percent for the
second quarter due to a 3.1 point load factor increase and a 7.6
percent increase in passenger yield (passenger revenue per passenger
mile) compared to the same period in 2005. The load factor increase
reflects an overall reduction in domestic capacity and an improvement
in economic conditions. Passenger yield showed significant year-over-
year improvement as the Company has been successful in implementing
limited fare increases to partially offset the continuing rise in the
cost of fuel; however, passenger yield remains depressed by
historical standards. The Company believes this depressed passenger
yield is due in large part to a corresponding decline in the
Company's pricing power. The Company's reduced pricing power is the
product of several factors, including: greater cost sensitivity on
the part of travelers (particularly business travelers); pricing
transparency resulting from the use of the Internet; greater
competition from low-cost carriers and from carriers that have
recently reorganized or are reorganizing, including under the
protection of Chapter 11 of the U.S. Bankruptcy Code; other carriers
that are better hedged against rising fuel costs and able to better
absorb the current high jet fuel prices; and, more recently, fare
simplification efforts by certain carriers. The Company believes that
its reduced pricing power will persist indefinitely and possibly
permanently.
The Company's ability to become consistently profitable and its
ability to continue to fund its obligations on an ongoing basis will
depend on a number of factors, many of which are largely beyond the
Company's control. Some of the risk factors that affect the
Company's business and financial results are referred to under
"Forward-Looking Information" above and are discussed in the Risk
Factors listed in Item 1A (on pages 11-16) in the 2005 Form 10-K. As
the Company seeks to improve its financial condition, it must
continue to take steps to generate additional revenues and to
significantly reduce its costs. Although the Company has a number of
initiatives underway to address its cost and revenue challenges, the
ultimate success of these initiatives is not known at this time and
cannot be assured. It will be very difficult, absent continued
restructuring of its operations, for the Company to continue to fund
its obligations on an ongoing basis, or to become consistently
profitable, if the overall industry revenue environment does not
continue to improve and fuel prices remain at historically high
levels for an extended period.
On June 15, 2006, the cities of Dallas and Fort Worth, Texas, DFW
International Airport, Southwest Airlines, and the Company announced
an agreement in principle to modify the Wright Amendment, which
authorizes certain flight operations at Dallas Love Field within
limited geographic areas. Southwest Airlines had been actively
seeking repeal of the Wright Amendment, with the goal of eliminating
the geographic restrictions on operations at Love Field, and the
Company had opposed those efforts. The initial agreement was later
reduced to a contract among the five parties, which became finalized
and effective on June 29, 2006. Among other things, the agreement
eventually eliminates geographic restrictions on operations while
limiting the maximum number of gates at Love Field. The Company
believes the proposed modifications are a pragmatic resolution of the
issues related to the Wright Amendment and the use of Love Field.
Because the Wright Amendment is a federal law, Congress must approve
legislation for the proposed changes to be enacted.
11
LIQUIDITY AND CAPITAL RESOURCES
Significant Indebtedness and Future Financing
The Company remains heavily indebted and has significant obligations
(including substantial pension funding obligations), as described more
fully under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2005 Form 10-K. As of the
date of this Form 10-Q, the Company believes it should have sufficient
liquidity to fund its operations for the foreseeable future, including
repayment of debt and capital leases, capital expenditures and other
contractual obligations. However, to maintain sufficient liquidity as
the Company continues to implement its restructuring and cost
reduction initiatives, and because the Company has significant debt,
lease and other obligations in the next several years, as well as
substantial pension funding obligations, the Company will likely need
access to additional funding. The Company's possible financing sources
primarily include: (i) a limited amount of additional secured aircraft
debt (a very large majority of the Company's owned aircraft, including
virtually all of the Company's Section 1110-eligible aircraft, are
encumbered) or sale-leaseback transactions involving owned aircraft;
(ii) debt secured by new aircraft deliveries; (iii) debt secured by
other assets; (iv) securitization of future operating receipts; (v)
the sale or monetization of certain assets; and (vi) unsecured debt.
However, the availability and level of these financing sources cannot
be assured, particularly in light of the Company's recent financial
results, substantial indebtedness, reduced credit ratings, high fuel
prices, historically weak revenues and the financial difficulties
being experienced in the airline industry. The inability of the
Company to obtain any necessary funding on acceptable terms would have
a material adverse impact on the ability of the Company to sustain its
operations over the long-term.
The Company's substantial indebtedness and other obligations could
have important consequences. For example, they could: (i) limit the
Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes, or
adversely affect the terms on which such financing could be obtained;
(ii) require the Company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness and other
obligations, thereby reducing the funds available for other purposes;
(iii) make the Company more vulnerable to economic downturns; (iv)
limit its ability to withstand competitive pressures and reduce its
flexibility in responding to changing business and economic
conditions; and (v) limit the Company's flexibility in planning for,
or reacting to, changes in its business and the industry in which it
operates.
Credit Facility Covenants
American has a credit facility (the Credit Facility) consisting of a
fully drawn $315 million senior secured revolving credit facility with
a final maturity on June 17, 2009 and a fully drawn $447 million term
loan facility with a final maturity on December 17, 2010. The Credit
Facility contains a covenant (the Liquidity Covenant) requiring
American to maintain, as defined, unrestricted cash, unencumbered
short term investments and amounts available for drawing under
committed revolving credit facilities of not less than $1.25 billion
for each quarterly period through the life of the Credit Facility. In
addition, the Credit Facility contains a covenant (the EBITDAR
Covenant) requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized
interest), income taxes, depreciation and amortization and rentals,
adjusted for certain gains or losses and non-cash items) to fixed
charges (comprising interest expense (less capitalized interest) and
rentals). The required ratio was 1.00 to 1.00 for the four quarter
period ending June 30, 2006 and will increase gradually to 1.50 to
1.00 for the four quarter period ending June 30, 2009 and for each
four quarter period ending on each fiscal quarter thereafter. AMR and
American were in compliance with the Liquidity Covenant and the
EBITDAR covenant as of June 30, 2006 and expect to be able to continue
to comply with these covenants. However, given the historically high
price of fuel and the volatility of fuel prices and revenues, it is
difficult to assess whether AMR and American will, in fact, be able to
continue to comply with the Liquidity Covenant and, in particular, the
EBITDAR Covenant, and there are no assurances that AMR and American
will be able to comply with these covenants. Failure to comply with
these covenants would result in a default under the Credit Facility
which - - if the Company did not take steps to obtain a waiver of, or
otherwise mitigate, the default - - could result in a default under a
significant amount of the Company's other debt and lease obligations
and otherwise adversely affect the Company.
12
Pension Funding Obligation
The Company expects to contribute approximately $250 million to its
defined benefit pension plans in 2006. The Company's estimates of its
defined benefit pension plan contributions reflect the provisions of
the Pension Funding Equity Act of 2004. Of the $250 million the
Company expects to contribute to its defined benefit pension plans in
2006, the Company contributed $119 million during the six months ended
June 30, 2006 and contributed $65 million on July 14, 2006.
Under Generally Accepted Accounting Principles, the Company's defined
benefit plans were underfunded as of December 31, 2005 by $3.2 billion
based on the Projected Benefit Obligation (PBO) and by $2.3 billion
based on the Accumulated Benefit Obligation (ABO) (refer to Note 10 to
the consolidated financial statements in the 2005 Form 10-K). The
Company's funded status at December 31, 2005 under the relevant
Government funding standard is similar to its funded status using the
ABO methodology. Due to uncertainties regarding significant
assumptions involved in estimating future required contributions to
its defined benefit pension plans, such as interest rate levels, the
amount and timing of asset returns, and, in particular, the impact of
proposed legislation currently pending the reconciliation process of
the U.S. Congress, the Company is not able to reasonably estimate its
future required contributions beyond 2006. However, absent significant
legislative relief or significant favorable changes in market
conditions, or both, the Company could be required to fund in 2007 a
majority of the underfunded balance under the relevant Government
funding standard. Even with significant legislative relief (including
proposed airline-specific relief), the Company's 2007 required minimum
contributions are expected to be higher than the Company's 2006
contributions.
Cash Flow Activity
At June 30, 2006, the Company had $5.1 billion in unrestricted cash
and short-term investments, an increase of $1.3 billion from December
31, 2005. Net cash provided by operating activities in the six
months ended June 30, 2006 was $1.5 billion, an increase of $534
million over the same period in 2005 primarily due to an increase in
the Air traffic liability resulting from improved economic
conditions. The Company contributed $119 million to its defined
benefit pension plans in the first six months of 2006 compared to
$213 million during the first six months of 2005.
Capital expenditures for the first six months of 2006 were $238
million and primarily included the acquisition of two Boeing 777-
200ER aircraft and the cost of improvements at New York's John F.
Kennedy airport (JFK). Substantially all of the Company's
construction costs at JFK will be reimbursed through a fund
established from a previous financing transaction.
13
RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2006 and 2005
Revenues
The Company's revenues increased approximately $1.3 billion, or 12.5
percent, to $11.3 billion for the six months ended June 30, 2006 from
the same period last year. American's passenger revenues increased
by 10.6 percent, or $858 million, while capacity (available seat
mile) (ASM) decreased by 0.6 percent. American's passenger load
factor increased 2.5 points to 80.0 percent and passenger revenue
yield per passenger mile increased by 7.8 percent to 12.83 cents.
This resulted in an increase in American's passenger revenue per
available seat mile (RASM) of 11.3 percent to 10.26 cents. Following
is additional information regarding American's domestic and
international RASM and capacity based on geographic areas defined by
the Department of Transportation (DOT):
Six Months Ended June 30, 2006
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 10.40 13.3% 56.1 (2.8)%
International 10.02 7.6 31.3 3.7
DOT Latin America 10.50 14.1 15.0 (2.7)
DOT Atlantic 10.09 3.3 12.2 6.4
DOT Pacific 8.03 (2.5) 4.1 24.2
Regional Affiliates include two AMR wholly owned subsidiaries,
American Eagle Airlines, Inc. and Executive Airlines, Inc.
(collectively, AMR Eagle), and two independent carriers with which
American has capacity purchase agreements, Trans States Airlines,
Inc. (Trans States) and Chautauqua Airlines, Inc. (Chautauqua).
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $259 million, or 25.6 percent, to $1.3 billion as
a result of increased capacity, load factors and passenger yield.
Regional Affiliates' traffic increased 17.6 percent to 4.9 billion
revenue passenger miles (RPMs), while capacity increased 9.3 percent
to 6.7 billion ASMs, resulting in a 5.3 point increase in the
passenger load factor to 73.9 percent.
Cargo revenues increased 3.2 percent, or $12 million, to $392 million
as a result of a $20 million increase in fuel surcharges offset by a
1.4 percent decrease in cargo ton miles.
Other revenues increased 23.2 percent, or $124 million, to $659
million due in part to increased third-party maintenance contracts
obtained by the Company's maintenance and engineering group and
increases in certain passenger fees.
14
Operating Expenses
The Company's total operating expenses increased 9.0 percent, or $890
million, to $10.8 billion for the six months ended June 30, 2006
compared to the same period in 2005. American's mainline operating
expenses per ASM in the six months ended June 30, 2006 increased 9.3
percent compared to the same period in 2005 to 10.84 cents. These
increases are due primarily to a 32.8 percent increase in American's
price per gallon of fuel in the first half of 2006 relative to the
same period in 2005, including the impact of a $55 million fuel excise
tax refund received in March 2005.
(in millions) Six Months
Ended Change Percentage
Operating Expenses June 30,2006 from 2005 Change
Wages, salaries and benefits $ 3,103 $ 73 2.4%
Aircraft fuel 2,876 656 29.5 (a)
Regional payments to AMR Eagle 1,086 103 10.5 (b)
Other rentals and landing fees 586 24 4.3
Commissions, booking fees
and credit card expense 555 (2) (0.4)
Depreciation and amortization 483 (2) (0.4)
Maintenance, materials
and repairs 374 (28) (7.0)
Aircraft rentals 285 (1) (0.3)
Food service 251 3 1.2
Other operating expenses 1,215 64 5.6
Total operating expenses $ 10,814 $ 890 9.0%
(a) Aircraft fuel expense increased primarily due to a 32.8 percent
increase in American's price per gallon of fuel (including the benefit
of a $55 million fuel excise tax refund received in March 2005 and the
impact of fuel hedging) offset by a 2.4 percent decrease in American's
fuel consumption.
(b) Regional payment to AMR Eagle increased primarily as a result of
increased capacity and fuel costs.
Other Income (Expense)
Other income (expense), historically a net expense, increased $59
million due primarily to a decrease in interest capitalized of $32
million due to the capitalization of certain construction costs at JFK
in 2005. Both interest income and interest expense increased during
2006 versus 2005. Interest income increased due to increases in
interest rates and cash and short-term investment balances. Interest
expense increased due to an increase in interest rates.
Income Tax
The Company did not record a net tax provision (benefit) associated
with its earnings (loss) for the six months ended June 30, 2006 and
2005 due to the Company providing a valuation allowance, as discussed
in Note 5 to the condensed consolidated financial statements.
15
Regional Affiliates
The following table summarizes the combined capacity purchase activity
for the American Connection carriers and AMR Eagle for the six months
ended June 30, 2006 and 2005 (in millions):
Six Months Ended
June 30,
2006 2005
Revenues:
Regional Affiliates $1,271 $1,012
Other 50 43
$1,321 $1,055
Expenses:
Payment to Regional Affiliates $1,184 $1,073
Other incurred expenses 159 137
$1,343 $1,210
In addition, passengers connecting to American's flights from American
Connection and AMR Eagle flights generated passenger revenues for
American flights of $867 million and $744 million for the six months
ended June 30, 2006 and 2005, respectively, which are included in
Revenues - Passenger in the consolidated statements of operations.
Outlook
The Company currently expects third quarter 2006 mainline unit costs
to increase nearly seven percent year over year. Full year 2006
mainline unit costs are also expected to increase approximately seven
percent versus 2005.
Capacity for American's mainline jet operations is expected to decline
more than two percent in the third quarter of 2006 compared to the
third quarter of 2005. Mainline capacity is expected to decline
approximately one percent in the full year 2006 compared to 2005.
16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the Company's 2005 Form 10-K. The
change in market risk for aircraft fuel is discussed below for
informational purposes due to the sensitivity of the Company's
financial results to changes in fuel prices.
The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analyses presented do
not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management
may take to mitigate the Company's exposure to such changes.
Therefore, actual results may differ. The Company does not hold or
issue derivative financial instruments for trading purposes.
Aircraft Fuel The Company's earnings are affected by changes in the
price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships
fuel and maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel, heating oil, and crude oil hedging
contracts. Market risk is estimated as a hypothetical 10 percent
increase in the June 30, 2006 cost per gallon of fuel. Based on
projected 2006 and 2007 fuel usage through June 30, 2007, such an
increase would result in an increase to aircraft fuel expense of
approximately $489 million in the twelve months ended June 30, 2007,
inclusive of the impact of fuel hedge instruments outstanding at June
30, 2006. Comparatively, based on projected 2006 fuel usage, such an
increase would have resulted in an increase to aircraft fuel expense
of approximately $477 million in the twelve months ended December 31,
2006, inclusive of the impact of fuel hedge instruments outstanding at
December 31, 2005. The change in market risk is primarily due to the
increase in fuel prices.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in crude oil or other crude oil related commodities.
As required by Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the
Company assesses, both at the inception of each hedge and on an on-
going basis, whether the derivatives that are used in its hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items. The Company discontinues hedge accounting
prospectively if it determines that a derivative is no longer expected
to be highly effective as a hedge or if it decides to discontinue the
hedging relationship. As a result of its quarterly effectiveness
assessment, the Company determined that more than 65 percent of its
derivatives, based on market value, settling during the remainder of
2006 and in 2007 are no longer expected to be highly effective in
offsetting changes in forecasted jet fuel purchases. As a result,
effective on July 1, 2006, all subsequent changes in the fair value of
those particular hedge contracts will be recognized directly in
earnings rather than being deferred in Accumulated other comprehensive
loss. On an economic basis, these derivatives will continue to largely
offset potential changes in the price of jet fuel. Hedge accounting
will continue to be applied to derivatives used to hedge forecasted
jet fuel purchases that are expected to remain highly effective.
As of June 30, 2006, the Company had effective hedges, including
option contracts and collars, covering approximately 34 percent of its
estimated remaining 2006 fuel requirements and an insignificant amount
of its estimated fuel requirements thereafter. The consumption hedged
for the remainder of 2006 is capped at an average price of
approximately $66 per barrel of crude oil. As discussed above, the
majority of these contracts were determined to be ineffective
beginning July 1, 2006. A deterioration of the Company's financial
position could negatively affect the Company's ability to hedge fuel
in the future.
17
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, 2006. 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, 2006. During the
quarter ending on June 30, 2006, 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.
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, American, AMR Eagle,
Airlines Reporting Corporation, and the Sabre Group Holdings, Inc. in
the United States District Court for the Central District of
California, Western Division (Westways World Travel, Inc. v. AMR
Corp., et al.). The lawsuit alleges that requiring travel agencies to
pay debit memos to American for violations of American's fare rules
(by customers of the agencies): (1) breaches the Agent Reporting
Agreement between American and AMR Eagle and the plaintiffs;
(2) constitutes unjust enrichment; and (3) violates the Racketeer
Influenced and Corrupt Organizations Act of 1970 (RICO). On July 9,
2003, the court certified a class that included all travel agencies
who have been or will be required to pay money to American for debit
memos for fare rules violations from July 26, 1995 to the present.
The plaintiffs sought to enjoin American from enforcing the pricing
rules in question and to recover the amounts paid for debit memos,
plus treble damages, attorneys' fees, and costs. On February 24, 2005,
the court decertified the class. The claims against Airlines
Reporting Corporation have been dismissed, and in September 2005, the
Court granted Summary Judgment in favor of the Company and all other
defendants. Plaintiffs have filed an appeal to the United States
Court of Appeals for the Ninth Circuit. Although the Company believes
that the litigation is without merit, a final adverse court decision
could impose restrictions on the Company's relationships with travel
agencies, which could have a material adverse impact on the Company.
Between April 3, 2003 and June 5, 2003, three lawsuits were filed by
travel agents some of whom opted out of a prior class action (now
dismissed) to pursue their claims individually against American, other
airline defendants, and in one case against certain airline defendants
and Orbitz LLC. (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 a material 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 claims against Delta Air Lines have been
dismissed, and the case is stayed as to United Airlines and Northwest
Airlines since they filed for bankruptcy. On April 19, 2006, a
stipulation was filed dismissing American from the lawsuit with
prejudice.
19
Miami-Dade County (the County) is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American and AMR
Eagle have been named as potentially responsible parties (PRPs) for
the contamination at MIA. During the second quarter of 2001, the
County filed a lawsuit against 17 defendants, including American, in
an attempt to recover its past and future cleanup costs (Miami-Dade
County, Florida v. Advance Cargo Services, Inc., et al. in the Florida
Circuit Court). The Company is vigorously defending the lawsuit. In
addition to the 17 defendants named in the lawsuit, 243 other agencies
and companies were also named as PRPs and contributors to the
contamination. The case is currently stayed while the parties pursue
an alternative dispute resolution process. The County has proposed
draft allocation models for remedial costs for the Terminal and Tank
Farm areas of MIA. While it is anticipated that American and AMR
Eagle will be allocated equitable shares of remedial costs, the
Company does not expect the allocated amounts to have a material
adverse effect on the Company.
Four cases (each being a purported class action) were 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), Rosenberg v. AMR, et al. (U. S. District Court, New York) and
Anapolsky v. AMR, et al. (U.S. District Court, New York). The Kimmell
suit was filed in April 2004. The Baldwin and Rosenberg cases were
filed in May 2004. The Anapolsky suit was filed in September 2004.
The suits allege various causes of action, including but not limited
to, violations of the Electronic Communications Privacy Act, negligent
misrepresentation, 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 Court dismissed the cases but allowed leave to amend, and the
plaintiffs in the Kimmell and Rosenberg cases filed amended complaints
on June 24, 2005. The Kimmell and Rosenberg plaintiffs have
voluntarily dismissed with prejudice the remaining claims and waived
their right to appeal on all issues.
American is defending an appeal of a lawsuit, filed as a class action
but not certified as such, arising from allegedly improper failure to
refund certain governmental taxes and fees collected by American upon
the sale of nonrefundable tickets when such tickets are not used for
travel. In Harrington v. Delta Air Lines, Inc., et al., (filed
November 24, 2004 in the United States District Court for the District
of Massachusetts), the plaintiffs sought unspecified actual damages
(trebled), declaratory judgment, injunctive relief, costs, and
attorneys' fees. The suit asserted various causes of action,
including breach of contract, conversion, and unjust enrichment
against American and numerous other airline defendants. The defendants
filed a motion to dismiss which was granted. Plaintiffs have filed a
notice of appeal with the First Circuit Court of Appeals. American is
vigorously defending the suit and believes it to be without merit.
However, a final adverse court decision requiring American to refund
collected taxes and/or fees could have a material adverse impact on
the Company. Additionally, the same attorneys representing the
Harrington plaintiffs filed a qui tam suit entitled Teitelbaum v.
Alaska Airlines, et al. in the United States District Court for the
District of Massachusetts. American was notified that it was a
defendant in this case in December 2005. This case asserted
essentially the same claims as in the Harrington case, and asserted
that the United States had been damaged and requested essentially the
same relief on behalf of the United States. The Teitelbaum plaintiffs
have voluntarily dismissed the case.
On March 11, 2004, a patent infringement lawsuit was filed against
AMR, American, AMR Eagle Holding Corporation, and American Eagle in
the United States District Court for the Eastern District of Texas
(IAP Intermodal, L.L.C. v. AMR Corp., et al.). The case was
consolidated with eight similar lawsuits filed against a number of
other unaffiliated airlines, including Continental, Northwest, British
Airways, Air France, Pinnacle Airlines, Korean Air and Singapore
Airlines (as well as various regional affiliates of the foregoing).
The plaintiff alleges that the airline defendants infringe three
patents, each of which relates to a system of scheduling vehicles
based on freight and passenger transportation requests received from
remote computer terminals. The plaintiff is seeking past and future
royalties of over $30 billion dollars, injunctive relief, costs and
attorneys' fees. On September 7, 2005, the court issued a memorandum
opinion that interpreted disputed terms in the patents. The plaintiff
dismissed its claims without prejudice to its right to appeal the
September 7, 2005 opinion, and the plaintiff is pursuing such an
appeal. Although the Company believes that the plaintiff's claims are
without merit and is vigorously defending the lawsuit, a final adverse
court decision awarding substantial money damages or placing material
restrictions on existing scheduling practices would have a material
adverse impact on the Company.
20
On July 12, 2004, a consolidated class action complaint, that was
subsequently amended on November 30, 2004, was filed against American
and the Association of Professional Flight Attendants (APFA), the
Union which represents the Company's flight attendants (Ann M.
Marcoux, et al., v. American Airlines Inc., et al. in the United
States District Court for the Eastern District of New York). While a
class has not yet been certified, the lawsuit seeks on behalf of all
of American's flight attendants or various subclasses to set aside,
and to obtain damages allegedly resulting from, the April 2003
Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor
agreements the Company successfully reached with its unions in order
to avoid filing for bankruptcy in 2003. In a related case (Sherry
Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States
District Court for the Eastern District of New York), the court denied
a preliminary injunction against implementation of the RPA on June 30,
2003. The Marcoux suit alleges various claims against the Union and
American relating to the RPA and the ratification vote on the RPA by
individual Union members, including: violation of the Labor Management
Reporting and Disclosure Act (LMRDA) and the APFA's Constitution and
By-laws, violation by the Union of its duty of fair representation to
its members, violation by the Company of provisions of the Railway
Labor Act (RLA) through improper coercion of flight attendants into
voting or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). On
March 28, 2006, the district court dismissed all of various state law
claims against the Company, all but one of the LMRDA claims against
the APFA, and the claimed violations of RICO. This leaves the
claimed violations of the RLA and the duty of fair representation
against the Company and the APFA (as well as one LMRDA claim and one
claim against the APFA of a breach of the union constitution).
Although the Company believes the case against it is without merit and
both the Company and the Union are vigorously defending the lawsuit, a
final adverse court decision invalidating the RPA and awarding
substantial money damages would have a material adverse impact on the
Company.
On February 14, 2006, the Antitrust Division of the United States
Department of Justice (the "DOJ") served the Company with a grand jury
subpoena as part of an ongoing investigation into possible criminal
violations of the antitrust laws by certain domestic and foreign air
cargo carriers. At this time, the Company does not believe it is a
target of the DOJ investigation. The New Zealand Commerce Commission
notified the Company on February 17, 2006 that it is also
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges. On
February 22, 2006, the Company received a letter from the Swiss
Competition Commission informing the Company that it too is
investigating whether the Company and certain other cargo carriers
entered into agreements relating to fuel surcharges, security
surcharges, war risk surcharges, and customs clearance surcharges.
The Company intends to cooperate fully with these investigations. In
the event that these investigations uncover violations of the U.S.
antitrust laws or the competition laws of some other jurisdiction,
such findings and related legal proceedings could have a material
adverse impact on the Company.
21
Approximately 38 purported class action lawsuits (Animal Land, Inc. v.
Air Canada et al. filed in the United States District Court for the
Eastern District of New York on February 17, 2006; Joan Adams v.
British Airways et al. filed in the United States District Court for
the Eastern District of New York on February 22, 2006; Rock
International Transport v. Air Canada et al. filed in the United
States District Court for the Eastern District of New York on February
24, 2006; Helen's Wooden Crafting Co. v. Air Canada et al. filed in
the United States District Court for the Eastern District of New York
on February 24, 2006; ABM Int'l, Inc. v. Ace Aviation Holdings, Inc.
et al. filed in the United States District Court for the Eastern
District of New York on February 28, 2006; Blumex USA, Inc. v. Air
Canada et al. filed in the United States District Court for the
Northern District of Illinois on March 1, 2006; Mamlaka Video v. Air
Canada et al. filed in the United States District Court for the
Eastern District of New York on March 3, 2006; Spraying Systems Co. v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the Eastern District of New York on March 3, 2006; Mitchell
Spitz v. Air France-KLM et al. filed in the United States District
Court for the Eastern District of New York on March 6, 2006; JCK
Industries, Inc. v. British Airways, PLC et al. filed in the United
States District Court for the Eastern District of New York on March 6,
2006; Marc Seligman v. Air Canada et al. filed in the United States
District Court for the Southern District of Florida on March 6, 2006;
CID Marketing and Promotion Inc. v. AMR Corporation et al. filed in
the United States District Court for the Eastern District of
Pennsylvania on March 7, 2006; Lynn Culver v. Air Canada et al. filed
in the United States District Court for the District of Columbia on
March 8, 2006; JSL Carpet Corp. v. ACE Aviation Holdings, Inc. et al.
filed in the United States District Court for the Eastern District of
New York on March 10, 2006; Y. Hata & Co, Ltd. v. Air France-KLM et
al. filed in the United States District Court for the Northern
District of California on March 13, 2006; FTS International Express v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the District of Columbia on March 15, 2006; Thule, Inc. v.
Air Canada et al. filed in the United States District Court for the
Eastern District of New York on March 28, 2006; Rosetti Handbags and
Accessories, Ltd. v. Air France ADS et al. filed in the United States
District Court for the Eastern District of New York on March 31, 2006;
W.I.T. Entertainment Inc. v. AMR Corporation et al. filed in the
United States District Court for the Southern District of Florida on
April 3, 2006; Jeff Rapps v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
April 7, 2006; Funke Design Build, Inc. v. AMR Corporation et al.
filed in the United States District Court for the Northern District of
Illinois on April 7, 2006; Sul-American Export Inc. v. Air France ADS
et al. filed in the United States District Court for the Eastern
District of New York on April 7, 2006; La Regale Ltd. v. British
Airways PLC et al. filed in the United States District Court for the
Eastern District of New York on April 12, 2006; J.A. Transport Inc. v.
ACE Aviation Holdings, Inc. et al. filed in the United States District
Court for the District of Columbia on April 12, 2006; Caribe Air
Cargo, Inc. v. ACE Aviation Holdings, Inc. et al. filed in the United
States District Court for the District of Columbia on April 13, 2006;
Gold Eye Distributors, Inc. v. Air France ADS et al. filed in the
United States District Court for the Eastern District of New York on
April 14, 2006; Ralph Olarte v. British Airways PLC et al. filed in
the United States District Court for the District of Columbia on April
19, 2006; Capogiro LLC v. ACE Aviation Holdings, Inc. et al. filed in
the United States District Court for the District of Columbia on April
20, 2006; Ali Fayazi v. British Airways PLC et al. filed in the United
States District Court for the Eastern District of New York on April
26, 2006; Janice Perlman v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
May 9, 2006; Leslie Young v. British Airways PLC et al. filed in the
United States District Court for the Eastern District of New York on
May 12, 2006; Craig Antell, M.D. v. British Airways PLC et al. filed
in the United States District Court for the Eastern District of New
York on May 16, 2006; Eurotrendz v. British Airways PLC et al. filed
in the United States District Court for the Eastern District of New
York on May 18, 2006; David Asher Rakoff v. British Airways PLC et al.
filed in the United States District Court for the Eastern District of
New York on May 22, 2006; Kalla Hirschbein v. British Airways PLC et
al. filed in the United States District Court for the Eastern District
of New York on June 1, 2006; Association des Utilisateurs du Transport
de Fret v. ACE Aviation Holdings, Inc. et al. filed in the United
States District Court for the District of Columbia on June 6, 2006;
and McDuffee New York, Inc. v. ACE Aviation Holdings, Inc. et al.
filed in the United States District Court for the Northern District of
Illinois on June 27, 2006) have been filed against the Company and
certain foreign and domestic air carriers alleging that the defendants
violated U.S. antitrust laws by illegally conspiring to set prices and
surcharges on cargo shipments. These cases have been consolidated in
the United States District Court for the Eastern District of New York,
together with approximately 46 other class action lawsuits in which
the Company has not been named as a defendant. Plaintiffs are seeking
trebled money damages and injunctive relief. American will vigorously
defend these lawsuits; however, any adverse judgment could have a
material adverse impact on the Company.
On June 20, 2006, DOJ served the Company with a grand jury subpoena as
part of an ongoing investigation into possible criminal violations of
the antitrust laws by certain domestic and foreign passenger carriers.
At this time, the Company does not believe it is a target of the DOJ
investigation. The Company intends to cooperate fully with this
investigation. In the event that these investigations uncover
violations of the U.S. antitrust laws or the competition laws of some
other jurisdiction, such findings and related legal proceedings could
have a material adverse impact on the Company.
22
Approximately 17 purported class action lawsuits (Saldana v. American
Airlines, Inc. et al. filed in the United States District Court for
the Southern District of New York on June 23, 2006; McGovern v. AMR
Corporation, et al. filed in the United States District Court for the
Northern District of Illinois on June 23, 2006; Baharani v. British
Airways PLC et al. filed in the United States District Court for the
Southern District of Florida on June 23, 2006; Boccara v. British
Airways PLC et al. filed in the United States District Court for the
Northern District of Florida on June 23, 2006; Chin v. AMR Corporation
et al. filed in the United States District Court for the Northern
District of Illinois on June 26, 2006; McDuffee New York, Inc. v. ACE
Aviation Holdings, Inc. et al. filed in the United States District
Court for the Northern District of Illinois on June 27, 2006; McGrath
v. AMR Corporation et al. filed in the United States District Court
for the Northern District of Illinois on June 27, 2006; Fadden v. AMR
Corporation et al. filed in the United States District Court for the
Northern District of Illinois on June 28, 2006; Szeleqski v. AMR
Corporation et al. filed in the United States District Court for the
Northern District of Illinois on June 28, 2006; Golin v. AMR
Corporation et al. filed in the United States District Court for the
Northern District of California on June 29, 2006; Mazzocco v. AMR
Corporation et al. filed in the United States District Court for the
Eastern District of New York on June 29, 2006; McIntyre Group, Ltd. v.
AMR Corporation et al. filed in the United States District Court for
the Northern District of California on June 29, 2006; Miller v.
British Airways PLC et al. filed in the United States District Court
for the Eastern District of Pennsylvania on June 29, 2006; Nelson v.
AMR Corporation filed in the United States District Court for the
Eastern District of New York on June 29, 2006; Weiss v. British
Airways PLC et al. filed in the United States District Court for the
Eastern District of Pennsylvania on June 30, 2006; Marco v. American
Airlines, Inc. et al. filed in the United States District Court for
the Central District of California on June 30, 2006; and Finegan v.
British Airways PLC et al., filed in the United States District Court
for the Eastern District of New York on July 6, 2006) have been filed
against the Company and certain foreign and domestic air carriers
alleging that the defendants violated U.S. antitrust laws by illegally
conspiring to set prices and surcharges for passenger transportation.
These cases are expected to be consolidated in an as yet undetermined
court together with approximately 32 other class action lawsuits in
which the Company has not been named as a defendant. Plaintiffs are
seeking trebled money damages and injunctive relief. American will
vigorously defend these lawsuits; however, any adverse judgment could
have a material adverse impact on the Company.
23
Item 5. Other Information
As discussed in the AMR Proxy Statement, the Compensation
Committee of the AMR Board of Directors conducts annually a
comprehensive review of compensation for the executive officers of
AMR and American with independent compensation consultants engaged
by the Committee. At the July 2006 meetings of the Compensation
Committee and the Board, the following compensation initiatives were
approved (effective July 24, 2006):
- Grants of stock-settled stock appreciation rights pursuant to the
form of Stock Appreciation Right Agreement ("SAR Agreement"), attached
as Exhibit 10.1 to this Form 10-Q, and the corresponding Amendment to
the AMR Corporation 1998 Long Term Incentive Plan, as Amended, dated
as of July 19, 2006, attached as Exhibit 10.2 to this Form 10-Q. An
attachment to the form SAR Agreement notes the stock-settled stock
appreciation right grants to the executive officers, effective July
24, 2006.
- Grants of deferred shares pursuant to the form of Deferred Share
Award Agreement for 2006 ("Deferred Share Agreement"). The form of
the Deferred Share Agreement is attached as Exhibit 10.3 to this Form
10-Q, and an attachment to the form Deferred Share Agreement notes the
deferred share grants to the executive officers, effective July 24,
2006.
- Grants of performance shares pursuant to the form of Performance
Share Agreement ("Performance Share Agreement") under the 2006 - 2008
Performance Share Plan for Officers and Key Employees. The form of
the Performance Share Agreement is attached as Exhibit 10.4 to this
Form 10-Q, and an attachment to the form Performance Share Agreement
notes the performance share grants to the executive officers,
effective July 24, 2006.
For Gerard J. Arpey, the Committee determined that an increase of Mr.
Arpey's compensation was necessary based on several considerations,
including:
- According to the data and recommendations of the Committee's
independent compensation consultants, the adjustments were required to
begin to bring Mr. Arpey's compensation more in-line with median CEO
compensation at comparably-sized companies and other airlines.
- The need to retain Mr. Arpey over the long-term.
- Mr. Arpey declined base salary increases upon his promotion to
CEO in 2003, and in each of 2004 and 2005 (other than the 1.5% pay
increase offered to all management employees).
- Internal equity related to the market-rate salary of the
Company's new Chief Financial Officer.
At the July 2006 meetings of the Committee and the Board, the
following compensation initiatives were therefore approved for Mr.
Arpey:
- Base salary increase to $650,000.
- Long-term incentive grants (effective July 24, 2006), comprised of:
- 77,500 stock-settled Stock Appreciation Rights
- 22,000 Deferred Shares
- 100,000 Performance Shares
- 58,000 career performance shares (pursuant to the terms of the
Career Performance Shares, Deferred Stock Award Agreement between the
Company and Mr. Arpey, dated as of July 25, 2005. The form of this
agreement is attached as Exhibit 10.6 to AMR's report on Form
10-Q for the quarterly period ended June 30, 2005.)
24
Item 6. Exhibits
The following exhibits are included herein:
10.1 Form of Stock Appreciation Right Agreement under the 1998 Long
Term Incentive Plan, as Amended (with awards to executive officers
noted)
10.2 Amendment to the 1998 Long Term Incentive Plan, as Amended, dated
as of July 19, 2006
10.3 Form of 2006 Deferred Share Award Agreement (with awards to
executive officers noted)
10.4 Form of Performance Share Agreement under the 2006 - 2008
Performance Share Plan for Officers and Key Employees (with awards
to executive officers noted)
12 Computation of ratio of earnings to fixed charges for the three
and six months ended June 30, 2006 and 2005.
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).
25
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 25, 2006 BY: /s/Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
26
Exhibit 10.1
STOCK APPRECIATION RIGHT AGREEMENT UNDER THE
AMR CORPORATION 1998 LONG TERM INCENTIVE PLAN, AS AMENDED
STOCK APPRECIATION RIGHT AGREEMENT (this "Agreement")
granted effective as of July 24, 2006, by AMR Corporation, a
Delaware corporation (the "Corporation"), to
______________________, employee number 000000, an employee
of the Corporation or one of its Subsidiaries or Affiliates
(the "Grantee").
W I T N E S S E T H:
WHEREAS, the stockholders of the Corporation approved
the AMR Corporation 1998 Long Term Incentive Plan at the
Corporation's annual meeting held on May 20, 1998 (such
plan, as may be amended from time to time, to be referenced
the "1998 Plan");
WHEREAS, the 1998 Plan provides for the grant of stock
appreciation rights in respect of shares of the
Corporation's Common Stock (as later defined) to those
individuals selected by the Compensation Committee or, in
lieu thereof, the Board of Directors of the Corporation (the
"Board"); and
WHEREAS, the Board has determined that the Grantee is
eligible under the 1998 Plan and that it is to the advantage
and interest of the Corporation to grant the stock
appreciation right provided for herein to the Grantee as an
incentive for Grantee to remain in the employ of the
Corporation or one of its Subsidiaries or Affiliates, and to
provide Grantee an incentive to increase the value of the
Corporation's Common Stock, $1 par value (the "Common
Stock").
NOW, THEREFORE:
1. Stock Appreciation Right Grant. The Corporation hereby
grants to the Grantee effective the date of this Agreement a
stock appreciation right, subject to the terms and
conditions hereinafter set forth, in respect of an aggregate
of xx,000 shares of Common Stock. The base price ("Base
Price") of each such stock appreciation right is $23.21 per
share (which is the Fair Market Value of the Common Stock on
the date hereof). The stock appreciation right granted
hereby is exercisable in approximately equal installments on
and after the following dates and with respect to the
following number of shares of Common Stock:
Exercisable On and After Aggregate Number of Shares
First Anniversary of Grant Date 20% of total award
Second Anniversary of Grant Date 40% of total award
Third Anniversary of Grant Date 60% of total award
Fourth Anniversary of Grant Date 80% of total award
Fifth Anniversary of Grant Date 100% of total award
1
provided, that in no event shall this stock appreciation
right be exercisable in whole or in part ten years from the
date hereof. The right to exercise this stock appreciation
right and to purchase the number of shares comprising each
such installment shall be cumulative, and once such right
has become exercisable it may be exercised in whole at any
time and in part from time to time until the date of
termination of the Grantee's rights hereunder.
2. Restriction on Exercise. Notwithstanding any other
provision hereof, this stock appreciation right shall not be
exercised if at such time such exercise or the delivery of
certificates representing shares of Common Stock purchased
pursuant hereto shall constitute a violation of any rule of
the Corporation, any provision of any applicable Federal or
State statute, rule or regulation, or any rule or regulation
of any securities exchange on which the Common Stock may be
listed.
3. Exercise. This stock appreciation right may be
exercised with respect to all or any part of the shares of
Common Stock then subject to such exercise in accordance
with Section 1 pursuant to whatever procedures may be
adopted from time to time by the Corporation. Upon the
exercise of this stock appreciation right, in whole or in
part, the Grantee shall be entitled to receive from the
Corporation a number of shares of Stock equal in value to
the excess of the Fair Market Value (on the date of
exercise) of one share of Stock over the Base Price,
multiplied by the number of shares in respect of which the
stock appreciation right is being exercised. The number of
shares to be issued shall be calculated on the basis of the
Fair Market Value of the shares on the date of exercise,
with any fractional share being payable in cash based on the
Fair Market Value on the date of exercise. Notwithstanding
the foregoing, the Committee may elect, at any time and from
time to time, in lieu of issuing all or any portion of the
shares of Stock otherwise issuable upon any exercise of any
portion of this stock appreciation right, to pay the Grantee
an amount in cash or other marketable property of a value
equivalent to the aggregate Fair Market Value on the date of
exercise of the number of shares of Stock that the Committee
is electing to settle in cash or other marketable property.
4. Termination of Stock Appreciation Right. This stock
appreciation right shall terminate and may no longer be
exercised if (i) the Grantee ceases to be an employee of the
Corporation or one of its Subsidiaries or Affiliates; or
(ii) the Grantee becomes an employee of a Subsidiary that is
not wholly owned, directly or indirectly, by the
Corporation; or (iii) the Grantee takes a leave of absence
without reinstatement rights, unless otherwise agreed in
writing between the Corporation (or one of its Subsidiaries
or Affiliates) and the Grantee; except that
(a) If the Grantee's employment by the Corporation (or
any Subsidiary or Affiliate) terminates by reason of
death, the vesting of the stock appreciation right will
be accelerated and the stock appreciation right will
remain exercisable until its expiration;
2
(b) If the Grantee's employment by the Corporation (or
any Subsidiary or Affiliate) terminates by reason of
Disability, the stock appreciation right will continue
to vest in accordance with its terms and may be
exercised until its expiration; provided, however, that
if the Grantee dies after such Disability the vesting
of the stock appreciation right will be accelerated and
the stock appreciation right will remain exercisable
until its expiration;
(c) Subject to Section 7(c), if the Grantee's
employment by the Corporation (or any Subsidiary or
Affiliate) terminates by reason of Normal or Early
Retirement, the stock appreciation right will continue
to vest in accordance with its terms and may be
exercised until its expiration; provided, however, that
if the Grantee dies after Retirement the vesting of the
stock appreciation right will be accelerated and the
stock appreciation right will remain exercisable until
its expiration;
(d) If the Grantee's employment by the Corporation (or
any Subsidiary or Affiliate) is involuntarily
terminated by the Corporation or a Subsidiary or
Affiliate (as the case may be) without Cause, the stock
appreciation right may thereafter be exercised, to the
extent it was exercisable at the time of termination,
for a period of three months from the date of such
termination of employment or until the stated term of
such stock appreciation right, whichever period is
shorter; and
(e) In the event of a Change in Control or a Potential
Change in Control of the Corporation, this stock
appreciation right shall become exercisable in
accordance with the 1998 Plan, or its successor.
5. Adjustments in Common Stock. In the event of a Stock
dividend, Stock split, merger, consolidation,
reorganization, recapitalization or other change in the
corporate structure, appropriate adjustments may be made by
the Board in the number of shares, class or classes of
securities and the base price per share applicable in
respect to the stock appreciation rights subject to this
Agreement.
6. Non-Transferability of Stock Appreciation Right.
Unless the Board shall permit (on such terms and conditions
as it shall establish), a stock appreciation right may not
be transferred except by will or the laws of descent and
distribution to the extent provided herein. During the
lifetime of the Grantee this stock appreciation right may be
exercised only by him or her (unless otherwise determined by
the Board).
3
7. Miscellaneous.
(a) This stock appreciation right (i) shall be binding
upon and inure to the benefit of any successor of the
Corporation, (ii) shall be governed by the laws of the State
of Texas, and any applicable laws of the United States, and
(iii) may not be amended without the written consent of both
the Corporation and the Grantee. Notwithstanding the
foregoing, this Agreement may be amended from time to time
without the written consent of the Grantee pursuant to
Section 10 below and as permitted by the 1998 Plan (or its
successor). No contract or right of employment shall be
implied by this stock appreciation right.
(b) If this stock appreciation right is assumed or a
new stock appreciation right is substituted therefor in
any corporate reorganization (including, but not
limited to, any transaction of the type referred to in
Section 424(a) of the Internal Revenue Code of 1986, as
amended), employment by such assuming or substituting
corporation or by a parent corporation or a subsidiary
thereof shall be considered for all purposes of this
stock appreciation right to be employment by the
Corporation.
(c) In the event the Grantee's employment is
terminated by reason of Early or Normal Retirement and
the Grantee subsequently is employed by a competitor of
the Corporation, the Corporation reserves the right,
upon notice to the Grantee, to declare the stock
appreciation right forfeited and of no further
validity.
(d) In consideration of the Grantee's privilege to
participate in the 1998 Plan, the Grantee agrees (i)
not to disclose any trade secrets of, or other
confidential/restricted information of, American
Airlines, Inc. ("American") or its Affiliates to any
unauthorized party and (ii) not to make any
unauthorized use of such trade secrets or confidential
or restricted information during his or her employment
with American or its Affiliates or after such
employment is terminated, and (iii) not to solicit any
then current employees of American or any other
subsidiaries of the Corporation to join the Grantee at
his or her new place of employment after his or her
employment with American or its Affiliates is
terminated.
8. Securities Law Requirements. The Corporation shall not
be required to issue shares upon the exercise of this stock
appreciation right unless and until (a) such shares have
been duly listed upon each stock exchange on which the
Corporation's Stock is then registered and (b) a
registration statement under the Securities Act of 1933 with
respect to such shares is then effective. The Board may
require the Grantee to furnish to the Corporation, prior to
the issuance of any shares of Stock in connection with the
exercise of this stock appreciation right, an agreement, in
such form as the Board may from time to time deem
appropriate, in which the Grantee represents that the shares
acquired by him upon such exercise are being acquired for
investment and not with a view to the sale or distribution
thereof.
4
9. Stock Appreciation Right Subject to 1998 Plan. This
stock appreciation right shall be subject to all the terms
and provisions of the 1998 Plan and the Grantee shall abide
by and be bound by all rules, regulations and determinations
of the Board now or hereafter made in connection with the
administration of the 1998 Plan. Capitalized terms not
otherwise defined herein shall have the meanings set forth
for such terms in the 1998 Plan.
10. American Jobs Creation Act. In addition to amendments
permitted by Section 7(a) above, amendments to this
Agreement may be made by the Corporation, without the
Grantee's consent, in order to ensure compliance with the
American Jobs Creation Act of 2004. And, further, amendments
may be made to the 1998 Plan to ensure such compliance,
which amendments may impact this Agreement.
IN WITNESS WHEREOF, the Corporation has executed this
stock appreciation right as of the day and year first above
written.
AMR Corporation
- --------------------------- ----------------------------
Grantee Kenneth W. Wimberly
Corporate Secretary
5
Grant of Stock Appreciation Rights
July 24, 2006
# of Stock
Appreciation
Officer Name Rights
G. J. Arpey 77,500
D.P. Garton 38,500
T.W. Horton 38,500
G.F. Kennedy 21,800
R.W. Reding 21,800
6
Exhibit 10.2
AMENDMENT TO THE
AMR CORPORATION 1998 LONG TERM INCENTIVE PLAN, AS AMENDED
WHEREAS, AMR Corporation (the "Corporation") adopted
the AMR Corporation 1998 Long Term Incentive Plan, as
Amended (the "LTIP") to foster and promote the long-term
financial success of the Company;
WHEREAS, when the LTIP was initially adopted, the grant
of stock appreciation rights would have resulted in adverse
financial accounting charges for the Corporation as compared
to the grant of stock options;
WHEREAS, such stock appreciation rights had
historically been used primarily in connection with stock
options grants to executive officers subject to the
reporting requirements under Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), who prior
to amendments to the rules under such Section 16 of the 1934
Act adopted in the 1990s, were generally required to hold
the stock received upon the exercise of an option for a
period of at least six months to avoid being subject to the
disgorgement requirements under the short-swing profit
provisions of such Section 16;
1
WHEREAS, for the above reasons, the LTIP currently
permits the grant of stock appreciation rights in tandem
with a grant of stock options, such that an employee may be
granted a stock appreciation right to the extent that the
employee has also been granted a corresponding stock option;
WHEREAS, due to changes in the financial accounting
rules that took effect as of January 1, 2006, there is no
longer any difference between the accounting treatment of a
stock option and a stock appreciation right settled in
shares of stock;
WHEREAS, because the use of stock settled stock
appreciation rights would convey a substantially comparable
incentive for the recipient of a stock option award, the
Corporation believes that affording the Compensation
Committee of the Board of Directors the right to award stock
appreciation rights independently of any stock option would
be in the best interests of the Corporation, its
shareholders and its employees; and
WHEREAS, the Company has reserved the right to amend
the LTIP under Section 13 thereof.
NOW, THEREFORE, the Plan is hereby amended in the
manner set forth below:
1. Section 1(v) of the LTIP is amended to delete the
definition of Stock Appreciation Right, and to insert in
lieu thereof a new definition of such term, to read as
follows:
"Stock Appreciation Right" means the right pursuant to
an award granted under Section 6 below which entitles
the grantee to receive, upon the exercise thereof in
whole or in part, an amount in shares of Stock equal in
value to the excess of the Fair Market Value (on the
date of exercise) of one share of Stock over the base
price per share specified with respect to the Stock
Appreciation Right, multiplied by the number of shares
in respect of which the Stock Appreciation Right shall
have been exercised. The number of shares to be issued
shall be calculated on the basis of the Fair Market
Value of the shares on the date of exercise, with any
fractional share being payable in cash based on the
Fair Market Value on the date of exercise.
Notwithstanding the foregoing, the Committee may elect,
at any time and from time to time, in lieu of issuing
all or any portion of the shares of Stock otherwise
issuable upon any exercise of any such Stock
Appreciation Right, to pay the grantee an amount in
cash or other marketable property of a value equivalent
to the aggregate Fair Market Value on the date of
exercise of the number of shares of Stock that the
Committee is electing to settle in cash or other
marketable property.
2. Section 6 of the LTIP is amended to delete such
section in its entirety, and to insert in lieu thereof a new
Section 6, to read as follows:
Section 6. Stock Appreciation Rights.
(a) Stock Appreciation Rights may be granted
alone, in addition to, or in tandem with, other awards
granted under the Plan. Any Stock Appreciation Right
granted under the Plan shall be in such form as the
Committee may from time to time approve. Stock
Appreciation Rights may be granted in conjunction with
all or part of any Stock Option granted under the Plan.
In the case of a Non-Qualified Stock Option, such
rights may be granted either at or after the time of
the grant of such Stock Option. In the case of an
Incentive Stock Option, such rights may be granted only
at the time of grant of such Stock Option.
2
A Stock Appreciation Right or applicable portion
thereof granted with respect to a given Stock Option
shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify
at grant where a Stock Appreciation Right is granted
with respect to less than the full number of shares
covered by a related Stock Option.
A Stock Appreciation Right may be exercised by a
grantee, subject to Section 6(b), in accordance with
the procedures established by the Committee from time
to time for such purposes. Upon such exercise, the
grantee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b).
Stock Options relating to exercised Stock Appreciation
Rights, and Stock Appreciation Rights related to any
exercised Stock Option, shall no longer be exercisable
to the extent that the related Stock Appreciation
Rights or Stock Option, as the case may be, have been
exercised.
(b) Terms and Conditions. Stock Appreciation
Rights shall be subject to such terms and conditions,
not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee,
including the following:
(i) Stock Appreciation Rights shall be
exercisable at such time and subject to such
conditions as the Committee shall specify, except
that any Stock Appreciation Right granted in
tandem with a Stock Option (or portion thereof)
shall be exercisable only at such time or times
and to the extent that the Stock Options to which
they relate shall be exercisable in accordance
with the provisions of Section 5 and this
Section 6 of the Plan.
(ii) Upon the exercise of a Stock
Appreciation Right, a grantee shall be entitled to
receive an amount in shares of Stock (or, solely
to the extent determined by the Committee, cash)
equal in value to the excess of the Fair Market
Value (on the date of exercise) of one share of
Stock over the base price per share specified with
respect to the Stock Appreciation Right,
multiplied by the number of shares in respect of
which the Stock Appreciation Right shall have been
exercised. When payment is to be made in shares,
the number of shares to be paid shall be
calculated on the basis of the Fair Market Value
of the shares on the date of exercise, with any
fractional share being payable in cash based on
the Fair Market Value on the date of exercise.
Notwithstanding anything in this Section 6(b)(ii)
to the contrary, the base price in respect of any
Stock Appreciation Right shall not be less than
the Fair Market Value of the Stock on the date the
Stock Appreciation Right is granted, or in the
case of a Stock Appreciation Right granted in
tandem with a Stock Option, the Fair Market Value
on the date the related Stock Option was granted.
3
(iii) Stock Appreciation Rights shall be
transferable only to the extent that Stock Options
may be transferable under Section 5(e) of the
Plan.
(iv) Upon the exercise of a Stock
Appreciation Right, regardless of whether granted
on a stand-alone basis or in tandem with any Stock
Option, only the number of shares of Stock
actually issued in connection with the exercise of
such Stock Appreciation Right (and not the
corresponding number of shares of Stock related to
the Stock Appreciation Right (or portion thereof)
being exercised) shall be treated as issued under
the Plan and, for the purpose of the limitation
set forth in Section 3 of the Plan on the number
of shares of Stock issuable under the Plan, the
remaining number of shares of Stock related to
such exercised Stock Appreciation Right (or
portion thereof), including the corresponding
number of shares related to any tandem Stock
Option cancelled upon such exercise, shall again
be available for issuance under the Plan.
3. The amendment made hereby shall be effective as of
July 19, 2006. Except as otherwise modified herein, the
provisions of the LTIP shall continue in full force and
effect, without amendment.
4
Exhibit 10.3
DEFERRED SHARE AWARD AGREEMENT
This Deferred Share Award Agreement (this "Agreement")
is effective as of July 24, 2006, and is by and between AMR
Corporation, a Delaware corporation (the "Corporation") and
an officer or a key employee of one of the Corporation's
Subsidiaries (the "Employee") as identified in the
notification sent to the Employee described below (the
"Notification").
WHEREAS, pursuant to the AMR Corporation 1998 Long Term
Incentive Plan, as amended (the "LTIP"), the Compensation
Committee of the Board of Directors (the "Committee") has
determined that the Employee is an officer or key employee
and has further determined to make an award of Deferred
Shares from and pursuant to the LTIP to the Employee as an
inducement for the Employee to remain with one of the
Corporation's Subsidiaries and to motivate the Employee
during such employment.
NOW, THEREFORE, the Corporation and the Employee hereby
agree as follows:
1. Grant of Award.
The Employee is hereby granted effective as of July 24,
2006 (the "Grant Date") a deferred share award (the
"Award"), subject to the terms and conditions of this
Agreement, with respect to the number of shares of Common
Stock set forth in the Notification (the "Shares"). Subject
to the terms and conditions of this Agreement, the Shares
covered by the Award will vest, if at all, in accordance
with Section 2 hereof, on July 24, 2009 (such date hereby
established as the "Vesting Date" of the Award).
2. Distribution of Award.
Distribution with respect to the Award, on the Vesting
Date, will occur, if at all, in accordance with the
following terms and conditions:
(a) If the Employee is on the payroll of a Subsidiary
that is wholly owned by the Corporation as of the Vesting
Date, the Shares will be distributed to the Employee on July
24, 2009.
(b) In the event the Employee's employment with a
Subsidiary of the Corporation is terminated prior to the
Vesting Date due to the Employee's death, Disability (as
defined in section 409A(a)(2)(C) of the Internal Revenue
Code of 1986, as amended, (the "Code")), Retirement or
termination not for Cause (each an "Early Termination"), the
Shares covered by the Award will vest on a pro-rata basis
and will be paid to the Employee (or, in the event of the
Employee's death, the Employee's designated beneficiary for
the purposes of the Award, or in the absence of an effective
beneficiary designation, the Employee's estate). The pro-
1
rata basis will be a percentage where the denominator is 36
and the numerator is the number of months from the Grant
Date through the month of Early Termination, inclusive. The
pro-rata Award will be paid (subject to Section 2(e) hereof)
to the Employee (or, in the event of the Employee's death,
the Employee's designated beneficiary for the purposes of
the Award, or in the absence of an effective beneficiary
designation, the Employee's estate) within 60 days after the
Employee's death, Disability, Retirement or termination not
for Cause.
(c) In the event of a Change in Control of the
Corporation (as defined in Section 5 hereof) after the
Vesting Date but prior to the distribution of the Award, the
Award will be distributed in accordance with the terms of
the LTIP.
(d) Notwithstanding the terms of Section 2(a), (b) and
(c), the Award will be forfeited in its entirety if prior to
the Vesting Date:
(i) The Employee's employment with the
Corporation (or a Subsidiary or Affiliate
thereof) is terminated for Cause, or if the
Employee terminates his/her employment with a
Subsidiary of the Corporation;
(ii) The Employee becomes an employee of a
Subsidiary that is not wholly owned by the
Corporation; or
(iii) The Employee takes a leave of absence without
reinstatement rights, unless otherwise agreed in writing
between the Corporation and the Employee.
(e) Notwithstanding the provisions of Section 2(b) hereof,
if the Employee is a person subject to section
409A(a)(2)(B)(i) of the Code, any payment on account of
Retirement or termination not for Cause of the Employee
shall be delayed until the sixth month anniversary of the
date of separation from employment due to Retirement or
termination not for Cause.
3. Transfer Restrictions.
Unless otherwise permitted by the Corporation, the
Award is non-transferable other than by will or by the laws
of descent and distribution, and may not be assigned,
pledged or hypothecated and will not be subject to
execution, attachment or similar process. Upon any attempt
by the Employee (or the Employee's successor in interest
after the Employee's death) to effect any such disposition,
or upon the levy of any such process, the Award may
immediately become null and void, at the discretion of the
Corporation.
4. [Intentionally omitted]
2
5. Miscellaneous.
This Agreement (a) will be binding upon and inure to
the benefit of any successor of the Corporation, (b) will be
governed by the laws of the State of Texas and any
applicable laws of the United States, and (c) may not be
amended without the written consent of both the Corporation
and the Employee. Notwithstanding the foregoing, this
Agreement may be amended from time to time without the
written consent of the Grantee pursuant to Section 7 below
and as permitted by the LTIP (or its successor). No
contract or right of employment will be implied by this
Agreement.
In consideration of the Employee's privilege to
participate in the Plan, the Employee agrees (i) not to
disclose any trade secrets of, or other
confidential/restricted information of, American Airlines,
Inc. ("American") or its Affiliates to any unauthorized
party and (ii) not to make any unauthorized use of such
trade secrets or confidential or restricted information
during his or her employment with American or its Affiliates
or after such employment is terminated, and (iii) not to
solicit any then current employees of American or any other
Subsidiaries of the Corporation to join the Employee at his
or her place of employment after his or her employment with
American or its Affiliates is terminated. The failure by the
Employee to abide by the foregoing obligations shall result
in the Award being immediately forfeited in its entirety.
For purposes of Section 2(c) hereof, the term "Change
in Control" will mean a "change in ownership" or "change in
effective control", or "change in ownership of the assets"
of the Corporation, as determined pursuant to Internal
Revenue Service Notice 2005-1 (or successor guidance thereto
under section 409A of the Code).
The Employee will not have the right to defer
distribution of the Award. Except as provided in this
Agreement, the Committee and the Corporation will not
accelerate distribution of the Award.
Notwithstanding anything in this Agreement to the
contrary, the Committee may elect, at any time and from time
to time, in lieu of issuing all or any portion of the
Shares, to make substitutions for such Shares, all to the
effect that the employee will receive cash or other
marketable property of a value equivalent to what the
Employee would have received in a stock distribution.
Capitalized terms not otherwise defined herein
shall have the meanings set forth for such terms in the
LTIP.
3
6. Adjustments in Awards.
In the event of a Stock dividend, Stock split, merger,
consolidation, re-organization, re-capitalization or other
change in the corporate structure of the Corporation,
appropriate adjustments may be made by the Board of
Directors in the number of Shares awarded.
7. American Jobs Creation Act.
In addition to amendments permitted by Section 5
above, amendments to this Agreement may be made by the
Corporation, without the Employee's consent, in order to
ensure compliance with the American Jobs Creation Act of
2004.
IN WITNESS HEREOF, the Employee and the Corporation
have executed this Agreement as of the day and year first
above written.
Employee AMR CORPORATION
______________________________ __________________________
Kenneth W. Wimberly
Corporate Secretary
4
Grant of Deferred Shares
July 24, 2006
# Deferred
Shares
Officer Name Granted
G. J. Arpey 22,000
D.P. Garton 11,950
T.W. Horton 8,400
G.F. Kennedy 4,700
R.W. Reding 4,700
5
Exhibit 10.4
2006 - 2008 PERFORMANCE SHARE AGREEMENT
This 2006 - 2008 Performance Share Agreement ("Agreement")
effective as of July 24, 2006, by and between AMR Corporation, a
Delaware corporation (the "Corporation"), and an officer or key
employee of one of the Corporation's Subsidiaries (the "Employee"
or the "Recipient") as identified in the notification sent to the
Employee described below (the "Notification").
WHEREAS, pursuant to the 2006 - 2008 Performance Share Plan
for Officers and Key Employees, as adopted by the Board of
Directors of the Corporation (the "Board"), the Compensation
Committee of the Board (the "Committee") has determined to make an
award (the "Award", as set forth in the Notification) to the
Employee (subject to the terms of the Plan and this Agreement), as
an inducement for the Employee to remain an employee of one of the
Corporation's Subsidiaries during the time frame of 2006 - 2008
and to retain and motivate such Employee during his/her
employment.
This Agreement sets forth the terms and conditions attendant
to the Award under the Plan.
1. Grant of Award. Subject to the terms and conditions of
this Agreement, the Recipient is hereby granted an Award as of
July 24, 2006 (the "Grant Date"). The Award shall vest, if at
all, in accordance with Section 2 of this Agreement. On the date
the Award vests (if at all), Recipient will receive a combination
of cash and the Corporation's Common Stock. The Committee will
determine the amount of the Award to be paid in cash (the "Cash
Award") and the amount of the Award to be settled in shares of the
Corporation's Common Stock (the "Stock Distribution"). The Cash
Award will be paid on April 30, 2009 (such Cash Award will be made
pursuant to the Annual Incentive Plan). The Stock Distribution
will occur on April 16, 2009 (such Stock Distribution will be made
from and pursuant to the AMR Corporation 1998 Long Term Incentive
Plan, as amended (the "LTIP")). The sum of the Cash Award and the
Stock Distribution will equal the product of (a) the Fair Market
Value of the Common Stock on April 15, 2009, and (b) the number of
shares of Common Stock comprising the Award.
2. Vesting.
(a) The Award will vest, if at all, in accordance with
Schedule A, attached hereto and made a part of this Agreement.
(b) In the event Recipient's employment with one of the
Corporation's Subsidiaries is terminated prior to the end of the
three year measurement period set forth in Schedule A (the
"Measurement Period") due to the Recipient's death, Disability (as
defined in section 409A(a)(2)(C) of the Internal Revenue Code of
1986, as amended, (the "Code")), Retirement (subject to the second
paragraph of Section 4) or termination not for Cause (each an
"Early Termination") the Award will vest, if at all, on a pro-rata
basis and will be paid to the Employee (or, in the event of the
Employee's death, the Employee's designated beneficiary for
purposes of the Award, or in the absence of an effective
1
beneficiary designation, the Employee's estate). The pro-rata
basis will be a percentage where the denominator is 36 and the
numerator is the number of months from January 1, 2006 through the
month of Early Termination, inclusive. This pro-rata basis will
be paid to the Recipient at the same time as Cash Awards and Stock
Distributions are made to then current employees who have Awards
under the Plan, subject to Section 2(f) of this Agreement.
(c) In the event Recipient's employment with one of the
Corporation's Subsidiaries is terminated for Cause, or if the
Recipient terminates his/her employment with such Subsidiary, each
occurring prior to April 15, 2009, the Award shall be forfeited in
its entirety.
(d) If prior to April 15, 2009, the Recipient becomes an employee
of a Subsidiary that is not wholly owned, directly or indirectly,
by the Corporation, or if the Recipient begins a leave of absence
without reinstatement rights, then in each case the Award shall be
forfeited in its entirety.
(e) In the event of a Change in Control of the Corporation prior
to the distribution of the Award, the Award will be paid within 60
days of the date of the Change in Control. In such event, the
vesting date will be the date of the Change in Control. The term
"Change in Control" is defined for purposes of this Agreement in
Section 7.
(f) Notwithstanding the provisions of Section 2(b), if the
Employee is a person subject to section 409A(a)(2)(B)(i) of the
Code, any payment on account of Retirement or termination not for
Cause of the Employee shall be delayed until the sixth month
anniversary of the date of separation from employment due to
Retirement or termination not for Cause.
3. Transfer Restrictions. This Award is non-transferable
otherwise than by will or by the laws of descent and distribution,
and may not otherwise be assigned, pledged or hypothecated and
shall not be subject to execution, attachment or similar process.
Upon any attempt by the Recipient (or the Recipient's successor in
interest after the Recipient's death) to effect any such
disposition, or upon the levy of any such process, the Award may
immediately become null and void, at the discretion of the
Committee.
4. Miscellaneous. This Agreement (a) shall be binding upon and
inure to the benefit of any successor of the Corporation, (b)
shall be governed by the laws of the State of Texas and any
applicable laws of the United States, and (c) may not be amended
without the written consent of both the Corporation and the
Recipient. Notwithstanding the foregoing, this Agreement may be
amended from time to time without the written consent of the
Grantee pursuant to Section 8 below and pursuant to the Plan. No
contract or right of employment shall be implied by this
Agreement.
In the event the Employee's employment is terminated by
reason of Early or Normal Retirement and the Employee is
subsequently employed by a competitor of the Corporation, the
Corporation reserves the right, upon notice to the Employee, to
declare the Award forfeited and of no further validity.
2
In consideration of the Employee's privilege to
participate in the Plan, the Employee agrees (i) not to disclose
any trade secrets of, or other confidential/restricted information
of, American Airlines, Inc. ("American") or its Affiliates to any
unauthorized party and (ii) not to make any unauthorized use of
such trade secrets or confidential or restricted information
during his or her employment with American or its Affiliates or
after such employment is terminated, and (iii) not to solicit any
then current employees of American or any other Subsidiaries of
the Corporation to join the Employee at his or her new place of
employment after his or her employment with American or its
Affiliates is terminated. The failure by the Employee to abide by
the foregoing obligations shall result in the Award being
forfeited in its entirety.
The Employee shall not have the right to defer any of
the Cash Payment or the Stock Distribution. Except as provided in
this Agreement, the Committee and Corporation shall not accelerate
the Cash Payment or the Stock Distribution.
Any Cash Award will be net of applicable withholding and
social security taxes. The Employee will pay to the Corporation
timely any and all such taxes on account of the Stock
Distribution. The failure by the Employee to pay timely such taxes
will result in a withholding from any and all payments from the
Corporation or any Subsidiary to the Employee in order to satisfy
such taxes.
Notwithstanding anything in this Agreement to the
contrary, the Committee may elect, at any time and from time to
time, in lieu of issuing all or any portion of the stock
comprising the Stock Distribution, to make substitutions for such
stock, all to the effect that the employee will receive cash or
other marketable property of a value equivalent to what the
Employee would have received in a stock distribution.
5. [Intentionally Omitted]
6. Adjustments in Awards. In the event of a Stock
dividend, Stock split, merger, consolidation, re-organization, re-
capitalization or other change in the corporate structure of the
Corporation, appropriate adjustments may be made by the Board of
Directors to the Award.
7. Incorporation of LTIP Provisions. Capitalized terms not
otherwise defined herein (inclusive of Schedule A) shall have the
meanings set forth for such terms in the LTIP. For purposes of
Section 2(e), the term "Change in Control" will mean a "change in
ownership" or "change in effective control" or "change in
ownership of the assets" of the Corporation, as determined
pursuant to Internal Revenue Service Notice 2005-1 (or successor
guidance thereto under section 409A of the Code).
8. American Jobs Creation Act. In addition to amendments
permitted by Section 4 above, amendments to this Agreement may be
made by the Corporation, without the Employee's consent, in order
to ensure compliance with the American Jobs Creation Act of 2004.
3
IN WITNESS HEREOF, the Recipient and the Corporation
have executed this Performance Share Agreement as of the day,
month and year set forth above.
RECIPIENT AMR CORPORATION
_____________________________ _____________________
Kenneth W. Wimberly
Corporate Secretary
4
Schedule A
2006 - 2008 PERFORMANCE SHARE PLAN
FOR OFFICERS AND KEY EMPLOYEES
Purpose
The purpose of the 2006 - 2008 AMR Corporation Performance Share
Plan ("Plan") for Officers and Key Employees is to provide greater
incentive to officers and key employees of the subsidiaries and
affiliates of AMR Corporation ("AMR" or "the Corporation") to
achieve the highest level of individual performance and to meet or
exceed specified goals which will contribute to the success of the
Corporation.
Definitions
For purposes of the Plan, the following definitions will control:
"Affiliate" is defined as a subsidiary of AMR or any entity that
is designated by the Committee as a participating employer under
the Plan, provided that AMR directly or indirectly owns at least
20% of the combined voting power of all classes of stock of such
entity.
"Committee" is defined as the Compensation Committee, or its
successor, of the AMR Board of Directors.
"Comparator Group" is defined as the following seven U.S. based
carriers including, AirTran Airways, Alaska Airlines, AMR
Corporation, Continental Airlines, Inc., JetBlue Airways,
Southwest Airlines Co. and US Airways, Inc.
"Corporate Objectives" is defined as being the objectives
established by the Committee at the beginning of each fiscal year
during the Measurement Period.
"Measurement Period" is defined as the three year period beginning
January 1, 2006 and ending December 31, 2008.
"Total Shareholder Return (TSR)" is defined as the rate of return
reflecting stock price appreciation plus reinvestment of dividends
over the Measurement Period. The average Daily Closing Stock
Price (adjusted for splits and dividends) for the three months
prior to the beginning and ending points of the Measurement Period
will be used to smooth out market fluctuations.
"Daily Closing Stock Price" is defined as the stock price at the
close of trading (4:00 PM EST) of the National Exchange on which
the stock is traded.
"National Exchange" is defined as either the New York Stock
Exchange (NYSE), the National Association of Stock Dealers and
Quotes (NASDAQ), or the American Stock Exchange (AMEX).
5
Accumulation of Shares
Any distribution under the Plan with respect to the shares
will be determined by (i) the Corporation's TSR rank within the
Comparator Group and/or (ii) the Corporation's attainment of the
Corporate Objectives during each year of the Measurement Period
and (iii) the terms and conditions of the award agreement between
the Corporation and the employee. The distribution percentage of
shares pursuant to the TSR metric and based on rank, is specified
below:
Granted Shares - Percent of Target Based on Rank
Rank 7 6 5 4 3 2 1
Payout% 0% 25% 50% 75% 100% 135% 175%
In the event that a carrier (or carriers) in the Comparator Group
ceases to trade on a National Exchange at any point in the
Measurement Period, the following distribution percentage of
target shares, based on rank and the number of remaining
comparators, will be used accordingly.
6 Comparators
Granted Shares - Percent of Target Based on Rank
Rank 6 5 4 3 2 1
Payout % 0% 50% 75% 100% 135% 175%
5 Comparators
Granted Shares - Percent of Target Based on Rank
Rank 5 4 3 2 1
Payout % 50% 75% 100% 135% 175%
6
4 Comparators
Granted Shares - Percent of Target Based on Rank
Rank 4 3 2 1
Payout % 75% 100% 135% 175%
3 Comparators
Granted Shares - Percent of Target Based on Rank
Rank 3 2 1
Payout % 50% 135% 175%
At the end of each fiscal year during the Measurement Period, the
Committee will determine whether the Corporate Objectives have
been achieved. At the end of the Measurement Period the Committee
will determine the distribution of shares based upon the TSR
metric and, with respect to senior officer awards, the Corporate
Objectives. The number of shares that may vest will range from 0%
to 175% of the target award.
Administration
The Committee shall have authority to administer and interpret the
Plan, establish administrative rules, approve eligible
participants, and take any other action necessary for the proper
and efficient operation of the Plan. The TSR metric will be
determined based on an audit of AMR's TSR rank by the General
Auditor of American Airlines, Inc. A summary of awards under the
Plan shall be provided to the Board of Directors at the first
regular meeting following determination of the awards. The awards
will be distributed on April 16, 2008, or such date the award is
approved for distribution by the Committee.
The distribution of any shares under this Plan is subject to the
Corporation having sufficient stock in a stock plan to make such a
distribution. In the event the Corporation does not have
sufficient shares of stock in such a stock plan for the
distribution contemplated by this Plan, the Committee will have
the authority and discretion to make substitutions for such
shares, all to the effect that the employee will receive cash or
other marketable property of a value equivalent to what the
employee would have received in a stock distribution.
7
Corporate Objectives will be used as a metric for determining the
distribution of shares only for senior officers of the Corporation
(or a Subsidiary thereof) unless the Committee determines
otherwise.
General
Neither this Plan nor any action taken hereunder shall be
construed as giving any employee or participant the right to be
retained in the employ of American Airlines, Inc. or an Affiliate.
Nothing in the Plan shall be deemed to give any employee any
right, contractually or otherwise, to participate in the Plan or
in any benefits hereunder, other than the right to receive an
award as may have been expressly awarded by the Committee subject
to the terms and conditions of the award agreement between the
Corporation and the employee.
In the event of any act of God, war, natural disaster, aircraft
grounding, revocation of operating certificate, terrorism, strike,
lockout, labor dispute, work stoppage, fire, epidemic or
quarantine restriction, act of government, critical materials
shortage, or any other act beyond the control of the Corporation,
whether similar or dissimilar, (each a "Force Majeure Event"),
which Force Majeure Event affects the Corporation or its
Subsidiaries or its Affiliates, the Committee, in its sole
discretion, may (i) terminate or (ii) suspend, delay, defer (for
such period of time as the Committee may deem necessary), or
substitute any awards due currently or in the future under the
Plan, including, but not limited to, any awards that have accrued
to the benefit of participants but have not yet been paid, in any
case to the extent permitted under proposed Treasury Regulation
1.409A-3(d) and/or 1.409A-3(e), or successor guidance thereto.
In consideration of the employee's privilege to participate in the
Plan, the employee agrees (i) not to disclose any trade secrets
of, or other confidential/restricted information of, American
Airlines, Inc. or its Affiliates to any unauthorized party and,
(ii) not to make any unauthorized use of such trade secrets or
confidential or restricted information during his or her
employment with American Airlines, Inc. or its Affiliates or after
such employment is terminated, and (iii) not to solicit any then
current employees of American Airlines, Inc. or any other
Subsidiaries of AMR to join the employee at his or her new place
of employment after his or her employment with American Airlines,
Inc. or its Affiliates is terminated. The failure by the employee
to abide by the foregoing obligations shall result in the award
being forfeited in its entirety.
The Committee may amend, suspend, or terminate the Plan at any
time.
8
Grant of 2006/2008 Performance Shares
July 24, 2006
# 2006/2008
Performance
Officer Name Shares Granted
G. J. Arpey 100,000
D.P. Garton 61,000
T.W. Horton 61,000
G.F. Kennedy 35,000
R.W. Reding 35,000
9
Exhibit 12
AMERICAN AIRLINES, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Earnings (loss):
Earnings (loss) before income taxes $ 280 $ 41 $ 174 $ (130)
Add: Total fixed charges (per below) 426 368 845 751
Less: Interest capitalized 7 24 14 46
Total earnings before income taxes $ 699 $ 385 $1,005 $ 575
Fixed charges:
Interest $ 211 $ 164 $ 418 $ 341
Portion of rental expense
representative of the interest factor 212 201 419 405
Amortization of debt expense 3 3 8 5
Total fixed charges $ 426 $ 368 $ 845 $ 751
Ratio of earnings to fixed charges 1.64 1.05 1.19 -
Coverage deficiency $ - $ - $ - $ 176
Note: As of June 30, 2006, American has guaranteed approximately
$1.1 billion of AMR's unsecured debt and approximately $408
million of AMR Eagle's secured debt. The impact of these
unconditional guarantees is not included in the above computation.
Exhibit 31.1
I, Gerard J. Arpey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 25, 2006 /s/ Gerard J. Arpey
Gerard J. Arpey
Chairman, President and Chief Executive Officer
Exhibit 31.2
I, Thomas W. Horton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Airlines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 25, 2006 /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
Exhibit 32
American Airlines, Inc.
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code), each of the undersigned officers of American
Airlines, Inc., a Delaware corporation (the Company), does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2006
(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 25, 2006 /s/ Gerard J. Arpey
Gerard J. Arpey
Chairman, President and Chief
Executive Officer
Date: July 25, 2006 /s/ Thomas W. Horton
Thomas W. Horton
Executive Vice President and Chief
Financial Officer
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and
is not being filed as part of the Form 10-Q or as a separate
disclosure document.