1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1999.
[ ]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, (817) 963-1234
including area code
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of May 7, 1999.
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.
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INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three months ended March
31, 1999 and 1998
Condensed Consolidated Balance Sheets - March 31, 1999 and December
31, 1998
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements - March 31,
1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
Three Months Ended
March 31,
1999 1998
Revenues
Passenger $ 3,320 $ 3,578
Cargo 143 162
Other 245 220
Total operating revenues 3,708 3,960
Expenses
Wages, salaries and benefits 1,382 1,314
Aircraft fuel 336 402
Commissions to agents 272 285
Depreciation and amortization 226 235
Maintenance, materials and repairs 218 198
Other rentals and landing fees 211 191
Food service 165 163
Aircraft rentals 150 133
Other operating expenses 721 643
Total operating expenses 3,681 3,564
Operating Income 27 396
Other Income (Expense)
Interest income 18 27
Interest expense (51) (51)
Interest capitalized 31 17
Related party interest - net 11 (9)
Miscellaneous - net 31 (16)
40 (32)
Earnings Before Income Taxes 67 364
Income tax provision 32 143
Net Earnings $ 35 $ 221
The accompanying notes are an integral part of these financial statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
March 31, December 31,
1999 1998
(Note 1)
Assets
Current Assets
Cash $ 54 $ 85
Short-term investments 782 1,398
Receivables, net 1,254 1,152
Receivable from affiliates, net 757 884
Inventories, net 558 520
Deferred income taxes 426 426
Other current assets 200 167
Total current assets 4,031 4,632
Equipment and Property
Flight equipment, net 8,462 7,698
Other equipment and property, net 1,309 1,293
Purchase deposits for flight equipment 1,379 1,536
11,150 10,527
Equipment and Property Under Capital Leases
Flight equipment, net 1,746 1,732
Other equipment and property, net 95 94
1,841 1,826
Route acquisition costs, net 909 916
Other assets, net 1,362 1,323
$ 19,293 $19,224
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 1,018 $ 940
Amount due to affiliate under
credit agreement 300 -
Accrued liabilities 1,452 2,070
Air traffic liability 2,442 2,163
Current maturities of long-term debt 24 23
Current obligations under capital leases 141 129
Total current liabilities 5,377 5,325
Long-term debt, less current maturities 913 920
Obligations under capital leases,
less current obligations 1,494 1,542
Deferred income taxes 1,295 1,301
Other liabilities, deferred gains, deferred
credits and postretirement benefits 3,751 3,708
Stockholder's Equity
Common stock - -
Additional paid-in capital 1,743 1,743
Accumulated other comprehensive income (3) (3)
Retained earnings 4,723 4,688
6,463 6,428
$ 19,293 $ 19,224
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
Three Months Ended
March 31,
1999 1998
Net Cash Provided by (Used in)
Operating Activities $(231) $ 371
Cash Flow from Investing Activities:
Capital expenditures, including purchase
deposits for flight equipment (864) (299)
Net decrease in short-term investments 616 122
Proceeds from sale of other investments 31 -
Proceeds from sale of equipment and property 16 76
Net cash used for investing activities (201) (101)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (80) (78)
Sale-leaseback transactions 54 -
Funds transferred from (to) affiliates, net 427 (136)
Net cash provided by (used for)
financing activities 401 (214)
Net increase (decrease) in cash (31) 56
Cash at beginning of period 85 47
Cash at end of period $ 54 $ 103
Cash Payments For:
Interest $ 45 $ 65
Income taxes 9 25
Financing Activities Not Affecting Cash:
Capital lease obligations incurred $ 54 $ -
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. The balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the American Airlines, Inc.
(American or the Company) Annual Report on Form 10-K for the year
ended December 31, 1998.
2.Accumulated depreciation of owned equipment and property at March
31, 1999 and December 31, 1998, was $6.5 billion and $6.3 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at March 31, 1999 and December 31, 1998, was $1.1
billion.
Effective January 1, 1999, in order to more accurately reflect the
expected useful life of its aircraft, the Company changed its
estimate of the depreciable lives of certain aircraft types from 20
to 25 years and increased the residual value from five to 10
percent. As a result of this change, depreciation and amortization
expense was reduced by approximately $40 million, and net earnings
was increased by approximately $25 million for the three months
ended March 31, 1999.
3. As discussed in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, the Miami International Airport
Authority is currently remediating various environmental conditions at
Miami International Airport (Airport) and funding the remediation
costs through landing fee revenues. Future costs of the remediation
effort may be borne by carriers operating at the Airport, including
American, through increased landing fees and/or other charges.
4.In April 1999, the Company exercised its purchase rights to acquire
three Boeing 737-800s. The exercise of these aircraft purchase
rights will allow the Company to replace three aircraft from the
Reno Air (Reno) fleet that will not be permanently integrated into
American's fleet. In addition, the Company is continuing to
analyze which, if any, of the remaining Reno aircraft will be
replaced by additional aircraft orders or if the aircraft will
undergo modifications or enhancements to make them consistent with
American's fleet. As of April 30, 1999, the Company had
commitments to acquire the following aircraft: 96 Boeing 737-800s,
28 Boeing 777-200IGWs, one Boeing 767-300ER and one Boeing 757-200.
Deliveries of these aircraft commence in 1999 and will continue
through 2004. Payments for these aircraft will approximate $1.4
billion during the remainder of 1999, $1.8 billion in 2000, $1.1
billion in 2001 and an aggregate of approximately $750 million in
2002 through 2004.
In addition, in April 1999, the Company announced that it will
accelerate the retirement of nine McDonnell Douglas DC-10 and 16
Boeing 727-200 aircraft earlier than anticipated, thereby
eliminating American's entire DC-10 fleet by the end of 2000 and
advancing the retirement of the Boeing 727 fleet to the end of
2003.
5.In early February 1999, some members of the Allied Pilots
Association (APA) engaged in certain activities (increased sick
time and declining to fly additional trips) that resulted in
numerous cancellations across American's system. These actions
were taken in response to the acquisition of Reno in December 1998.
In an attempt to resolve the dispute, the Company and the APA have
agreed to non-binding mediation. These actions adversely impacted
the Company's first quarter 1999 net earnings.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6.In connection with a secondary offering by Equant N.V. in February
1999, the Company sold approximately 433,000 depository
certificates for proceeds of $31 million, excluding sales made on
behalf of Sabre, a majority-owned subsidiary of AMR Corporation.
The Company recorded a pre-tax gain of $31 million as a result of
this transaction.
7.On March 17, 1999, the Company and The Sabre Group Holdings, Inc.
entered into a short-term Credit Agreement pursuant to which
American may borrow from The Sabre Group Holdings, Inc. up to a
maximum of $300 million. The interest rate to be charged to
American is Sabre's average portfolio rate for each month in which
the borrowing is outstanding, plus an additional spread based upon
American's credit risk. The Sabre Group Holdings, Inc. has the
option to call the note with ten-business day's notice to American.
The principal amount is due no later than June 30, 1999. As of
March 31, 1999, American had borrowed $300 million under this
agreement. Upon entering into this short-term Credit Agreement
with The Sabre Group Holdings, Inc., American's ability to borrow
up to $100 million from Sabre under a separate credit agreement
entered into on July 1, 1996 was terminated.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and 1998
American recorded net earnings for the three months ended March 31,
1999 of $35 million. This compares to net earnings of $221 million
for the first quarter of 1998. American's operating income of $27
million decreased 93.2 percent, or $369 million, compared to $396
million for the same period in 1998.
American's net earnings were adversely impacted by an illegal job
action by members of the APA during the first quarter of 1999, which
negatively impacted the Company's net earnings by an estimated $140
million. This was partially offset by the gain from the sale of the
Equant N.V. depository certificates.
American's revenues decreased $252 million, or 6.4 percent, in the
first quarter of 1999 versus the same period last year. American's
passenger revenues decreased by 7.2 percent, or $258 million, largely
as a result of the illegal job action by members of the APA during
the first quarter of 1999. American's yield (the average amount one
passenger pays to fly one mile) of 13.13 cents decreased by 6.8
percent compared to the same period in 1998. Domestic yields
decreased 5.5 percent from the first quarter of 1998. International
yields decreased 7.5 percent, primarily due to a decrease of 19.5
percent, 11.0 percent and 6.8 percent in Pacific, Latin American, and
European yields, respectively. The decrease in yield was due to the
APA job action, and the continued effect of weak international
economies coupled with large industry capacity additions.
American's traffic or revenue passenger miles (RPMs) decreased 0.4
percent to 25.3 billion miles for the quarter ended March 31, 1999.
The decrease in RPMs was due primarily to the APA job action, which
was substantially offset by additional capacity as a result of new
aircraft deliveries in the first quarter of 1999. American's
capacity or available seat miles (ASMs) of 37.7 billion miles was
flat compared to the first quarter of 1998. American's domestic
traffic decreased 0.1 percent on capacity decreases of 1.0 percent
and international traffic decreased 1.1 percent on capacity growth of
2.3 percent. The decrease in international traffic was driven by a
4.2 percent decrease in traffic to Latin America on a capacity
reduction of 5.5 percent and a 3.0 percent decrease in traffic to
Europe on capacity growth of 3.2 percent. This was partially offset
by a 36.6 percent increase in traffic to the Pacific on capacity
growth of 74.0 percent, primarily due to the addition of several new
routes.
Cargo revenue decreased 11.7 percent, or $19 million, due primarily
to the impact of the APA illegal job action.
American's other revenues increased $25 million, or 11.4 percent,
primarily as a result of an increase in aircraft maintenance work
performed by American for other airlines and increased service
contracts, primarily related to ramp and consulting services.
American's operating expenses increased 3.3 percent, or $117 million.
American's Jet Operations cost per ASM increased 3.0 percent to 9.63
cents. Wages, salaries and benefits increased 5.2 percent, or $68
million, primarily due to an increase in the average number of
equivalent employees and contractual wage rate and seniority
increases that are built into the Company's labor contracts.
Aircraft fuel expense decreased 16.4 percent, or $66 million, due to
a 17.0 percent decrease in American's average price per gallon,
including taxes, partially offset by a 0.9 percent increase in
American's fuel consumption. Commissions to agents decreased 4.6
percent, or $13 million, due primarily to the decrease in passenger
revenues and the benefit from the international commission structure
change implemented in late 1998. Maintenance, materials and repairs
expense increased $20 million, or 10.1 percent, due primarily to
maintenance associated with the addition of Reno aircraft in December
1998 and the volume and timing of engine maintenance at American's
maintenance bases. Other rentals and landing fees increased $20
million, or 10.5 percent, due to higher facilities rent and landing
fees across American's system. Aircraft rentals increased $17
million, or 12.8 percent, due primarily to the addition of Reno
aircraft. Other operating expense increased $78 million, or 12.1
percent, due primarily to an increase in outsourced services, booking
fees, and travel and incidental costs.
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Other Income (Expense) increased $72 million primarily as a result of
an increase of $20 million in related party interest - net due
primarily to a decline in the balance of American's intercompany
balance with its parent company, an increase of $14 million in
capitalized interest on aircraft purchase deposits, and a $31 million
gain on the sale of a portion of American's interest in Equant N.V.
AIRCRAFT INFORMATION
In April 1999, the Company exercised its purchase rights to acquire
three Boeing 737-800s. The exercise of these aircraft purchase
rights will allow the Company to replace three aircraft from the Reno
fleet that will not be permanently integrated into American's fleet.
In addition, the Company is continuing to analyze which, if any, of
the remaining Reno aircraft will be replaced by additional aircraft
orders or if the aircraft will undergo modifications or enhancements
to make them consistent with American's fleet. As of April 30, 1999,
the Company had commitments to acquire the following aircraft: 96
Boeing 737-800s, 28 Boeing 777-200IGWs, one Boeing 767-300ER and one
Boeing 757-200. Deliveries of these aircraft commence in 1999 and
will continue through 2004. Payments for these aircraft will
approximate $1.4 billion during the remainder of 1999, $1.8 billion
in 2000, $1.1 billion in 2001 and an aggregate of approximately $750
million in 2002 through 2004. While the Company expects to fund the
majority of these capital expenditures from the Company's existing
cash balance and internally generated cash, some new financing may be
raised depending upon capital market conditions and the Company's
evolving view of its long-term needs.
Subsequent to March 31, 1999, the Company entered into six
aircraft mortgage agreements. As of May 12, 1999, the Company had
borrowed approximately $300 million under these agreements.
In addition, in April 1999, the Company announced that it will
accelerate the retirement of nine McDonnell Douglas DC-10 and 16
Boeing 727-200 aircraft earlier than anticipated, thereby eliminating
American's entire DC-10 fleet by the end of 2000 and advancing the
retirement of the Boeing 727 fleet to the end of 2003. The
accelerated retirement of these aircraft will allow American to keep
capacity growth in line with global economic growth.
YEAR 2000 READINESS
State of Readiness In 1995, the Company, in conjunction with Sabre,
which operates and maintains substantially all of the computer systems
and applications utilized by the Company, implemented a project (the
Year 2000 Project) to ensure that hardware and software systems
operated by the Company are designed to operate and properly manage
dates beyond December 31, 1999 (Year 2000 Readiness). The Company has
assessed (i) the Company's over 1,000 information technology and
operating systems that will be utilized after December 31, 1999 (IT
Systems); (ii) non-information technology systems, including embedded
technology, facilities, and other systems (Non-IT Systems); and (iii)
the Year 2000 Readiness of its critical third party service providers.
The Year 2000 Project consists of six phases: (i) awareness,
(ii) assessment, (iii) analysis, design and remediation, (iv) testing
and validation, (v) quality assurance review (to ensure consistency
throughout the Year 2000 Project) and (vi) creation of business
continuity strategy, including plans in the event of Year 2000
failures. In developing the Company's proprietary software analysis,
remediation and testing methodology for Year 2000 Readiness, it
studied the best practices of the Institute of Electrical and
Electronics Engineers and the British Standards Institution.
IT Systems The Company has completed the first three phases of the
Year 2000 Project for all of its IT Systems. The Company has
completed the testing and validation phase and quality assurance
review phase for 99 percent of its IT Systems, including its computer
reservations and flight operating systems that perform such "mission
critical" functions as passenger bookings, ticketing, passenger check-
in, aircraft weight and balance, flight planning and baggage and cargo
processing. As of May 1, 1999, approximately 34 percent of the IT
Systems (including the computer reservations systems) are already
processing Year 2000 dates correctly.
Using dedicated testing environments and applying rigorous test
standards, the Company is actively testing its other IT Systems to
determine if they are Year 2000 ready or if further remediation is
necessary. The Company expects to complete the testing and validation
phase and quality assurance review phase for its remaining IT Systems,
and the upgrading of certain hardware and software that supports its
IT Systems by June 30, 1999.
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Non-IT Systems The Company has substantially completed the testing
and validation phase of its critical Non-IT Systems, such as aircraft
avionics and flight simulators, and expects to complete the remainder
of the testing and validation and the quality assurance review phase
by June 30, 1999. In addition, the Company expects to complete the
quality assurance review phase for substantially all of its other Non-
IT Systems by June 30, 1999. The Company believes that its business,
financial condition, and results of operations would not be materially
adversely affected, and that it has adequate contingency plans to
ensure business continuity if its other Non-IT Systems are not Year
2000 ready.
Third Party Services The Company relies on third party service
providers for many services, such as telecommunications, electrical
power, and data and credit card transaction processing. In addition,
the Company's business is dependent upon entities which supply
critical infrastructure to the airline industry, such as the air
traffic control and related systems of the Federal Aviation
Administration and international aviation authorities, the Department
of Transportation, and airport authorities. Those service providers
depend on their hardware and software systems and on interfaces with
the Company's IT Systems. The Company has polled its critical service
providers regarding their Year 2000 plans and state of readiness. The
Company has received responses from approximately 82 percent of its
critical service providers, other than providers of discretionary
services that will not materially adversely affect the Company's
business, financial condition, and results of operations. Most of the
respondees assured the Company that their software and hardware is or
will be Year 2000 ready. To the extent practical, the Company intends
to seek alternatives for third party service providers that have not
responded to their Year 2000 Readiness by June 30, 1999.
Costs of Year 2000 Project The Company expects to incur significant
hardware, software and labor costs, as well as consulting and other
expenses, in its Year 2000 Project. The Company's total estimated cost
of the project is $125 to $160 million, of which approximately
$113 million was incurred as of March 31, 1999. Costs associated with
the Year 2000 Project are expensed as incurred, other than capitalized
hardware costs, and have been funded through cash from operations.
Risks of Year 2000 Non- readiness The economy in general, and the
travel and transportation industries in particular, may be adversely
affected by risks associated with the Year 2000. The Company's
business, financial condition, and results of operations could be
materially adversely affected if systems that it operates or systems
that are operated by third party service providers upon which the
Company relies are not Year 2000 ready in time. There can be no
assurance that these systems will continue to properly function and
interface and will otherwise be Year 2000 ready. Management believes
that its most likely Year 2000 risks relate to the failure of third
parties with whom it has material relationships to be Year 2000 ready.
Business Continuity Plans To the extent practical, the Company is
identifying the most likely Year 2000 failures in an effort to develop
and refine plans to continue its business in the event of failures of
the Company's or third parties' systems to be Year 2000 ready. These
plans include performing certain processes manually; maintaining
dedicated staff to be available at crucial dates to remedy unforeseen
problems; installing defensive code to protect real-time systems from
improperly formatted date data supplied by third parties; repairing or
obtaining replacement systems; and reducing or suspending certain
aspects of the Company's services or operations. Because of the
pervasiveness and complexity of the Year 2000 issue, and in particular
the uncertainty concerning the efforts and success of third parties to
be Year 2000 ready, the Company will continue to refine its
contingency plans during 1999.
The costs of the project and the date on which the Company plans to
complete the Year 2000 Readiness program are based on management's
best estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from these estimates. Specific
factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes,
the failure of third parties to be Year 2000 ready and similar
uncertainties.
DALLAS LOVE FIELD
In 1968, as part of an agreement between the cities of Fort Worth and
Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond
ordinance was enacted by both cities (the Bond Ordinance). The Bond
Ordinance
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required both cities to direct all scheduled interstate passenger
operations to DFW and was an integral part of the bonds issued for the
construction and operation of DFW. In 1979, as part of a settlement
to resolve litigation with Southwest Airlines, the cities agreed to
expand the scope of operations allowed under the Bond Ordinance at
Dallas' Love Field. Congress enacted the Wright Amendment to prevent
the federal government from acting inconsistent with this agreement.
The Wright Amendment limited interstate operations at Love Field to
the four states contiguous to Texas (New Mexico, Oklahoma, Arkansas
and Louisiana) and prohibited through ticketing to any destination
outside that perimeter. In 1997, without the consent of either city,
Congress amended the Wright Amendment by (i) adding three states
(Kansas, Mississippi and Alabama) to the perimeter and (ii) removing
some federal restrictions on large aircraft configured with 56 seats
or less (the 1997 Amendment). In October 1997, the City of Fort Worth
filed suit in state district court against the City of Dallas and
others seeking to enforce the Bond Ordinance. Fort Worth contends
that the 1997 Amendment does not preclude the City of Dallas from
exercising its proprietary rights to restrict traffic at Love Field in
a manner consistent with the Bond Ordinance and, moreover, that Dallas
has an obligation to do so. American joined in this litigation. On
October 15, 1998, the state district court granted summary judgment in
favor of Fort Worth and American, which summary judgment is being
appealed to the Fort Worth Court of Appeals. In the same lawsuit, DFW
filed claims alleging that irrespective of whether the Bond Ordinance
is enforceable, the DFW Use Agreement prohibits American and other DFW
signatory airlines from moving any interstate operations to Love
Field. These claims remain unresolved. Dallas filed a separate
declaratory judgment action in federal district court seeking to have
the court declare that, as a matter of law, the 1997 Amendment
precludes Dallas from exercising any restrictions on operations at
Love Field. Further, in May 1998, Continental Airlines and
Continental Express filed a lawsuit in federal court seeking a
judicial declaration that the Bond Ordinance cannot be enforced to
prevent them from operating flights from Love Field to Cleveland using
regional jets. In December 1998, the Department of Transportation
(DOT) issued an order on the federal law questions concerning the Bond
Ordinance, local proprietary powers, DFW's Use Agreement with DFW
carriers such as American, and the Wright and 1997 Amendments, and
concluded that the Bond Ordinance was preempted by federal law and was
therefore, not enforceable. The DOT also found that the DFW Use
Agreement did not preclude American from conducting interstate
operations at Love Field. Fort Worth, American and DFW have appealed
the DOT's order to the Fifth Circuit Court of Appeals.
As a result of the foregoing, the future of interstate flight
operations at Love Field and American's DFW hub are uncertain. An
increase in operations at Love Field to new interstate destinations
could adversely impact American's business.
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 report, the words
"expects," "plans," "anticipates," and similar expressions are
intended to identify forward-looking statements. All forward-looking
statements in this report are based upon information available to the
Company on the date of this report. The Company undertakes no
obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expectations.
Additional information concerning these and other factors is contained
in the Company's Securities and Exchange Commission filings, included
but not limited to the Form 10-K for the year ended December 31, 1998.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information provided in
Item 7A of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In January 1985, American announced a new fare category, the "Ultimate
SuperSaver," a discount, advance purchase fare that carried a 25
percent penalty upon cancellation. On December 30, 1985, a class
action lawsuit was filed in Circuit Court, Cook County, Illinois
entitled Johnson vs. American Airlines, Inc. The Johnson plaintiff
alleges that the 10 percent federal excise transportation tax should
have been excluded from the "fare" upon which the 25 percent penalty
was assessed. Summary judgment was granted in favor of American but
subsequently reversed and vacated by the Illinois Appellate Court. In
August 1997, the Court denied the plaintiffs' motion for class
certification. American is vigorously defending the lawsuit.
In connection with its frequent flyer program, American was sued in
two purported class action cases (Wolens et al v. American Airlines,
Inc. and Tucker v. American Airlines, Inc.) that were consolidated and
are currently pending in the Circuit Court of Cook County, Illinois.
The litigation arises from certain changes made to American's
AAdvantage frequent flyer program in May 1988 which limited the number
of seats available to participants traveling on certain awards. In the
consolidated action, the plaintiffs seek to represent all persons who
joined the AAdvantage program before May 1988 and accrued mileage
credits before the seat limitations were introduced and allege that
these changes breached American's contract with AAdvantage members.
Plaintiffs seek money damages and attorney's fees. The complaint
originally asserted several state law claims, however only the
plaintiffs' breach of contract claim remains after the U. S. Supreme
Court ruled that the Airline Deregulation Act preempted the other
claims. Although the case has been pending for numerous years, it
still is in its preliminary stages. The court has not ruled on the
plaintiffs' motion for class certification. American is vigorously
defending the lawsuit.
Gutterman et al. v. American Airlines, Inc. is also pending in the
Circuit Court of Cook County, Illinois. In December 1993, American
announced that the number of miles required to claim a certain travel
award under American's AAdvantage frequent flyer program would be
increased effective February 1, 1995, giving rise to the Gutterman
litigation filed on that same date. The Gutterman plaintiffs claim
that the increase in award mileage level violated the terms and
conditions of the agreement between American and AAdvantage members.
On June 23, 1998, the Court certified the case as a class action,
although to date no notice has been sent to the class. The class
consists of all members who earned miles between January 1, 1992 and
February 1, 1995 (the date the change became effective). On July 13,
1998, the Court denied American's motion for summary judgment as to
the claims brought by plaintiff Steven Gutterman. On July 30, 1998,
the plaintiffs filed a motion for summary judgment as to liability,
which motion has not been ruled upon. American is vigorously
defending the lawsuit.
A federal grand jury in Miami is investigating whether American
and American Eagle handled hazardous materials and processed courier
shipments, cargo and excess baggage in accordance with applicable
laws and regulations. In connection with this investigation, federal
agents executed a search warrant at American's Miami facilities on
October 22, 1997. Since that time, a number of employees have
testified before the grand jury. In addition, American has been
served with three subpoenas calling for the production of documents
relating to the handling of courier shipments, cargo, excess baggage
and hazardous materials handling and spills. American produced
documents responsive to the three subpoenas. American intends to
cooperate fully with the government's investigation.
On August 7, 1998, a purported class action was filed against
American Airlines in state court in Travis County, Texas (Boon Ins.
Agency v. American Airlines, Inc., et al.) claiming that the $75
reissuance fee for changes to non-refundable tickets is an
unenforceable liquidated damages clause and seeking a refund of the
fee on behalf of all passengers who paid it, as well as interest and
attorneys' fees. On September 23, 1998, Continental, Delta and
America West were added as defendants to the lawsuit. On February 2,
1999, prior to any discovery being taken and a class being certified,
the court granted the defendants' motion for summary judgment holding
that Plaintiff's claims are preempted by the Airline Deregulation
Act. Plaintiff has filed an appeal of the dismissal of the lawsuit.
American intends to vigorously defend the granting of the summary
judgment on appeal.
-10-
13
PART II
Item 1. Legal Proceedings (Continued)
On April 13, 1999, an antitrust class action lawsuit was filed
against American Airlines, Inc., AMR Corporation and AMR Eagle Holding
Corp. in the United States District Court for the Southern District of
Florida (Zifrony v. American Airlines, Inc., et al.). The lawsuit
alleges that American has illegally monopolized or attempted to
monopolize the market for passenger air travel into and out of DFW
International Airport (DFW) and Miami International Airport (MIA) by
engaging in a wide array of exclusionary, anticompetitive and
predatory practices and arrangements in violation of the federal
antitrust laws. The as yet uncertified class includes all persons who
purchased tickets for air travel on defendants into or out of DFW or
MIA from April 1995 to the present. The relief sought is treble
damages, injunctive relief, attorneys' fees, and costs. To date,
defendants have not been served with the lawsuit. Defendants intend
to defend vigorously the case.
On May 13, 1999, the Department of Justice sued AMR Corporation,
American Airlines, Inc., and AMR Eagle Holding Corporation in federal
court in Wichita, Kansas. The lawsuit alleges that American violated
federal antitrust law by monopolizing and attempting to monopolize
airline passenger service to and from Dallas/Fort Worth International
Airport. The Department of Justice seeks to enjoin American from
engaging in the alleged improper conduct and to impose restraints on
American to remedy the alleged effects of its past conduct. American
intends to defend the lawsuit vigorously.
Item 5. Other Information
Legislation has been introduced in Congress that would, if enacted,
provide financial assistance, in the form of guarantees and/or
subsidized loans, to smaller carriers for aircraft purchases. In
addition, the Department of Justice is investigating the competitive
practices of major carriers at major hub airports, including
American's practices at DFW (for further information, see Item 1.
Legal Proceedings). Also, in April 1998, the DOT issued proposed
pricing and capacity rules that would severely limit major carriers'
ability to compete with new entrant carriers. The outcomes of the
proposed legislation, the investigations and the proposed DOT rules
are unknown. However, to the extent that (i) restrictions are imposed
upon American's ability to respond to a competitor, or (ii)
competitors have a financial advantage in the purchase of aircraft
because of federal assistance, American's business may be adversely
impacted.
-11-
14
PART II
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
12 Computation of ratio of earnings to fixed charges for the three
months ended March 31, 1999 and 1998.
27 Financial Data Schedule
On February 18, 1999, American filed a report on Form 8-K relative
to a press release issued by American Airlines, Inc. to report certain
of the estimated damages it had suffered as a consequence of the
illegal job actions of the Allied Pilots Association.
On February 24, 1999, American filed a report on Form 8-K to
announce the completion of the merger of American Airlines, Inc. and
Reno Air, Inc.
On March 18, 1999, American filed a report on Form 8-K to announce
the completion of the merger of American Airlines, Inc. and Reno Air,
Inc.
On April 22, 1999, American filed a report on Form 8-K relative to
a press release issued by AMR to report AMR's first quarter 1999
earnings and to announce the acceleration of the retirement of nine DC-
10 widebody aircraft and 16 Boeing 727 narrowbody aircraft.
-12-
15
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: May 14, 1999 BY: /s/ Gerard J. Arpey
Gerard J. Arpey
Senior Vice President - Finance and
Planning and Chief Financial Officer
16
Exhibit 12
AMERICAN AIRLINES, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions)
Three Months Ended March 31,
1999 1998
Earnings:
Earnings from continuing operations
before income taxes $ 67 $ 364
Add: Total fixed charges (per below) 246 230
Less: Interest capitalized 31 17
Total earnings $ 282 $ 577
Fixed charges:
Interest $ 51 $ 60
Portion on rental expense
representative of the interest factor 195 170
Amortization of debt expense - -
Total fixed charges $ 246 $ 230
Ratio of earnings to fixed charges 1.15 2.51
5
1,000,000
3-MOS
DEC-31-1999
MAR-31-1999
54
782
2,027
16
558
4,031
20,543
7,552
19,293
5,377
2,407
0
0
1,743
4,720
19,293
0
3,708
0
3,681
0
0
51
67
32
35
0
0
0
35
0
0
