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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For fiscal year ended December 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 1-2691.
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AMERICAN AIRLINES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1502798
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 963-1234
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
American Airlines, Inc. is a wholly-owned subsidiary of AMR Corporation, and
there is no market for the registrant's common stock. As of March 16, 2001,
1,000 shares of the registrant's common stock were outstanding.
The registrant meets the conditions set forth in, and is filing this form with
the reduced disclosure format prescribed by, General Instructions I(1)(a) and
(b) of Form 10-K.
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PART I
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ITEM 1. BUSINESS
American Airlines, Inc. (American or the Company), the principal subsidiary of
AMR Corporation (AMR), was founded in 1934.
American is one of the largest scheduled passenger airlines in the world.
At the end of 2000, American provided scheduled jet service to more than 169
destinations throughout North America, the Caribbean, Latin America, Europe and
the Pacific. American is also one of the largest scheduled air freight carriers
in the world, providing a full range of freight and mail services to shippers
throughout its system.
On January 10, 2001, the Company announced three transactions that are
expected to substantially increase the scope of its existing network. First, the
Company announced that it had agreed to purchase substantially all of the assets
of Trans World Airlines, Inc. (TWA) for approximately $500 million in cash and
to assume approximately $3.5 billion of TWA's obligations. The Company's
agreement with TWA contemplated that TWA would file for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code and conduct an auction of its
assets under the auspices of the Bankruptcy Court. During the auction, other
credible offers would compete with the Company's offer. TWA filed for bankruptcy
protection on January 10, 2001. In conjunction therewith, the Company also
agreed to provide TWA with up to $200 million in debtor-in-possession financing
to facilitate TWA's ability to maintain its operations until the completion of
this transaction. The amount available under this facility was later increased
to $330 million. As of March 19, 2001, approximately $289 million had been
provided via the debtor-in-possession financing.
The auction of TWA's assets was commenced on March 5, 2001, and recessed
to March 7, 2001. During the recess, the Company increased its cash bid to $625
million and agreed to leave in the TWA estate certain aircraft security
deposits, advance rental payments and rental rebates that were estimated to
bring approximately $117 million of value to TWA. The Company expects that the
increase in the Company's bid will be more than offset, however, by the benefit
to the Company of the reductions in rental rates the Company has negotiated with
TWA's aircraft lessors. On March 7, 2001, TWA's board selected the Company's bid
as the "highest and best" offer, and on March 12, 2001, the U.S. Bankruptcy
Court, District of Delaware, entered an order approving the sale of TWA's assets
to the Company. Consummation of the transaction is subject to several
contingencies, including the waiver by TWA's unions of certain provisions of
their collective bargaining agreements. The approval of the U.S. Department of
Justice (DOJ) was obtained on March 16, 2001. Certain parties have filed appeals
of the Bankruptcy Court's sale order, and have sought a stay of the transaction,
pending the appeals. A provision of the Bankruptcy Code will permit the Company
to close the transaction, despite pending appeals, unless a stay is granted. If
a stay is granted, the Company would anticipate that the appeal process would be
expedited. Upon the closing of the transaction, TWA will be integrated into
American's operations with a continued hub operation in St. Louis.
Secondly, the Company announced that it has agreed to acquire from United
Airlines, Inc. (United) certain key strategic assets (slots, gates and aircraft)
of US Airways, Inc. (US Airways) upon the consummation of the previously
announced merger between United and US Airways. In addition to the acquisition
of these assets, American will lease a number of slots and gates from United so
that American may operate half of the northeast Shuttle (New York/Washington
DC/Boston). United will operate the other half of the Shuttle. For these assets,
American will pay approximately $1.2 billion in cash to United and assume
approximately $300 million in aircraft operating leases. The consummation of
these transactions is contingent upon the closing of the proposed United/US
Airways merger. Also, the acquisition of aircraft is generally dependent upon a
certain number of US Airways' Boeing 757 cockpit crew members transferring to
American's payroll.
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Finally, American has agreed to acquire a 49 percent stake in, and to
enter into an exclusive marketing agreement with, DC Air LLC (DC Air). American
has agreed to pay $82 million in cash for its ownership stake. American will
have a right of first refusal on the acquisition of the remaining 51 percent
stake in DC Air. American will also lease to DC Air a certain number of Fokker
100 aircraft with necessary crews (known in the industry as a "wet lease").
These wet leased aircraft will be used by DC Air in its operations. DC Air is
the first significant new entrant at Ronald Reagan Washington National Airport
(DCA) in over a decade. DC Air will acquire the assets needed to begin its DCA
operations from United/US Airways upon the consummation of the merger between
the two carriers. American's investment in DC Air and the other arrangements
described above are contingent upon the consummation of the merger between
United and US Airways.
As a result of the above transactions, and for several other reasons,
American has initiated an impairment review of certain fleet types in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This review could result in an impairment charge to be taken by the Company in
2001. The size of any resulting 2001 charge is not presently known, but may be
significant.
COMPETITION
Most major air carriers have developed hub-and-spoke systems and schedule
patterns in an effort to maximize the revenue potential of their service.
American operates four hubs: Dallas/Fort Worth (DFW), Chicago O'Hare, Miami and
San Juan, Puerto Rico. Delta Air Lines and United Airlines also have hub
operations at DFW and Chicago O'Hare, respectively.
The American Eagle carriers, owned by AMR Eagle Holding Corporation, an
AMR subsidiary, increase the number of markets American serves by providing
connections at American's hubs and certain other major airports. The American
Eagle carriers serve smaller markets through Boston, DFW, Chicago, Miami, San
Juan, Los Angeles and New York's LaGuardia and John F. Kennedy International
Airports. American's competitors also own or have marketing agreements with
regional carriers which provide service at their major hubs.
In addition to its extensive domestic service, American provides
international service to the Caribbean, Canada, Latin America, Europe and the
Pacific. American's operating revenues from foreign operations were
approximately $5.7 billion in 2000, $5.0 billion in 1999 and $5.1 billion in
1998. Additional information about the Company's foreign operations is included
in Note 11 to the consolidated financial statements.
The domestic airline industry is fiercely competitive. Currently, any
carrier deemed fit by the U.S. Department of Transportation (DOT) is free to
operate scheduled passenger service between any two points within the U.S. and
its possessions. On most of its domestic non-stop routes, the Company faces
competing service from at least one, and sometimes more than one, major domestic
airline including: Alaska Airlines, America West Airlines, Continental Airlines,
Delta Air Lines, Northwest Airlines, Southwest Airlines, TWA, United, US Airways
and their affiliated regional carriers. Competition is even greater between
cities that require a connection, where as many as nine airlines may compete via
their respective hubs. The Company also competes with national, regional,
all-cargo and charter carriers and, particularly on shorter segments, ground
transportation. In addition, on all of its routes, pricing decisions are
affected, in part, by competition from other airlines, some of which have cost
structures significantly lower than American's and can therefore operate
profitably at lower fare levels.
The majority of the tickets for travel on American are sold by travel
agents. Domestic travel agents generally receive a base commission of five
percent of the price of the tickets they sell. This amount is capped at a
maximum of $50 for a domestic roundtrip itinerary and $100 for an international
roundtrip itinerary. Airlines often pay additional commissions in connection
with special revenue programs. Accordingly, airlines compete not only with
respect to the price of the tickets sold but also with respect to the amount of
commissions paid.
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The growing use of electronic distribution systems provides the Company
with an ever-increasing ability to lower its distribution costs. The Company
continues to expand the capabilities of its Internet website - AA.com - and the
use of electronic ticketing throughout the Company's network. In addition, the
Company has entered into various agreements with several Internet travel
providers, including Travelocity.com, Expedia, priceline.com and Hotwire. The
base commission for sales through Internet travel providers is significantly
lower than traditional travel agencies.
International air transportation is subject to extensive government
regulation. In providing international air transportation, American competes
with foreign investor-owned carriers, state-owned carriers and U.S. airlines
that have been granted authority to provide scheduled passenger and cargo
service between the U.S. and various overseas locations. American's operating
authority in these markets is subject to aviation agreements between the U.S.
and the respective countries, and in some cases, fares and schedules require the
approval of the DOT and/or the relevant foreign governments. Because
international air transportation is governed by bilateral or other agreements
between the U.S. and the foreign country or countries involved, changes in U.S.
or foreign government aviation policies could result in the alteration or
termination of such agreements, diminish the value of such route authorities, or
otherwise adversely affect American's international operations. Bilateral
agreements between the U.S. and various foreign countries served by American are
subject to frequent renegotiation. In addition, at most foreign airports, a
carrier needs slots (landing and take-off authorizations) before the carrier can
introduce new service or increase existing service. The availability of such
slots is not assured and can therefore inhibit a carrier's efforts to compete in
certain markets.
The major U.S. carriers have some advantage over foreign competitors in
their ability to generate traffic from their extensive domestic route systems.
In many cases, however, foreign governments, which own and subsidize some of
American's foreign competitors, limit U.S. carriers' rights to carry passengers
beyond designated gateway cities in foreign countries. To improve access to each
other's markets, various U.S. and foreign carriers -- including American -- have
established marketing relationships with other airlines. American currently has
code-sharing programs with Aer Lingus, Air Pacific, Alaska Airlines, Asiana
Airlines, China Eastern Airlines, EVA Air, Finnair, Gulf Air, Hawaiian Airlines,
Iberia, Japan Airlines, LanChile, LOT Polish Airlines, Qantas Airways, Sabena,
SNCF, Swissair, TACA Group, the TAM Group, TAP Air Portugal, Thalys and Turkish
Airlines. American Eagle also has code-sharing programs with Continental
Airlines, Northwest Airlines, TWA and Midwest Express, in addition to
code-sharing with some of American's code-share partners. Certain of these
relationships also include reciprocity between American and the other airlines'
frequent flyer programs. In addition, the Company expects to implement or expand
alliances with other international carriers, including British Airways, Cathay
Pacific Airways, China Eastern Airlines and Qantas New Zealand, pending
regulatory approval. In the coming years, the Company expects to develop these
programs further and to evaluate new alliances with other international
carriers.
In February 1999, American, British Airways, Canadian Airlines
International Limited (Canadian), Cathay Pacific Airways and Qantas Airways
formed the global alliance ONEworld(TM). In September 1999, these five founding
members were joined by Finnair and Iberia. Also, in June 2000, Aer Lingus and
LanChile joined the ONEworld alliance. The ONEworld alliance links the networks
of the member carriers to enhance customer service and smooth connections to the
destinations served by the alliance, including linking the carriers' frequent
flyer programs and access to the carriers' airport lounge facilities. Following
the acquisition of Canadian by Air Canada, Canadian terminated its membership in
ONEworld in June 2000.
The Company believes that it has several advantages relative to its
competition. Its fleet is efficient and quiet, and is one of the youngest fleets
in the U.S. airline industry. It has a comprehensive domestic and international
route structure, anchored by efficient hubs, which permit it to take full
advantage of whatever traffic growth occurs. The Company believes American's
AAdvantage frequent flyer program, which is the largest program in the industry,
its More Room Throughout Coach program and its superior service also give it a
competitive advantage to its competition.
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REGULATION
GENERAL The Airline Deregulation Act of 1978, as amended, eliminated most
domestic economic regulation of passenger and freight transportation. However,
the DOT and the Federal Aviation Administration (FAA) still exercise certain
regulatory authority over air carriers. The DOT maintains jurisdiction over the
approval of international codeshare agreements, international route authorities
and certain consumer protection matters, such as advertising, denied boarding
compensation and baggage liability.
The FAA regulates flying operations generally, including establishing
personnel, aircraft and security standards. As part of that oversight, the FAA
has implemented a number of requirements that American is incorporating into its
maintenance program. These matters relate to, among other things, inspection and
maintenance of aging aircraft, corrosion control, the installation of upgraded
digital flight data recorders, enhanced ground proximity warning systems, cargo
compartment smoke detection and fire suppression systems, McDonnell Douglas
MD-80 metal-mylar insulation replacement and required inspections of General
Electric compressor spools. Based on its current implementation schedule,
American expects to be in compliance with the applicable requirements within the
required time periods.
The DOJ has jurisdiction over airline antitrust matters. The U.S. Postal
Service has jurisdiction over certain aspects of the transportation of mail and
related services. Labor relations in the air transportation industry are
regulated under the Railway Labor Act, which vests in the National Mediation
Board certain regulatory functions with respect to disputes between airlines and
labor unions relating to union representation and collective bargaining
agreements. To the extent American continues to increase its alliances with
international carriers, American may be subject to certain regulations of
foreign agencies.
In April 1998, the DOT issued proposed pricing and capacity rules that
would severely limit major carriers' ability to compete with new entrant
carriers. In January 2001, following a multi-year investigation and public
docket concerning competition between major carriers and new entrant carriers,
the DOT restated its concerns with competitive practices in the industry, but
declined to issue specific competitive guidelines. In its statement of findings
and conclusions, the DOT reiterated its view that it had both the authority and
the obligation to prevent what it considers to be unfair competitive practices
in the industry, and indicated its intent to pursue enforcement actions on a
case-by-case basis. To the extent that future DOT enforcement actions either
directly or indirectly impose restrictions upon American's ability to respond to
competitors, American's business may be adversely impacted.
As described in Item 3. Legal Proceedings, the Antitrust Division of the
DOJ and several purported classes of private parties are pursuing litigation
alleging that American violated federal antitrust laws when competing with new
carriers. Although the Company believes that the litigation is without merit,
adverse court decisions could impose restrictions on American's ability to
respond to competitors, and American's business may be adversely impacted.
AIRLINE FARES Airlines are permitted to establish their own domestic fares
without governmental regulation, and the industry is characterized by
substantial price competition. The DOT maintains authority over international
fares, rates and charges. International fares and rates are also subject to the
jurisdiction of the governments of the foreign countries which American serves.
While air carriers are required to file and adhere to international fare and
rate tariffs, substantial commissions, overrides and discounts to travel agents,
brokers and wholesalers characterize many international markets.
Legislation (sometimes referred to as the "Passengers' Bill of Rights")
has been discussed in various legislatures (including the Congress). This
legislation could, if enacted, (i) place various limitations on airline fares
and/or (ii) affect operating practices such as baggage handling and overbooking.
Effective December 15, 1999, the Company, as well as other domestic airlines,
implemented a Customer Service Plan to address a number of service goals,
including, but not limited to (i) lowest fare availability, (ii) delays,
cancellations, and diversion events, (iii) baggage delivery and liability, (iv)
guaranteed fares, (v) ticket refunds, (vi) accommodation of customers with
special needs, (vii) essential customer needs during extraordinary delays,
(viii) flight oversales, (ix) Frequent Flyer Program - AAdvantage, (x) other
travel policies, (xi) service with domestic code share partners, and (xii)
handling of customer issues. In February 2001, the DOT Inspector General issued
a report on the various carriers' performance of their Customer Service Plans.
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The report included a number of recommendations which could limit American's
flexibility with respect to various operational practices. In February 2001, a
bill proposing an "Airline Customer Service Improvement Act" was introduced in
the United States Senate. In addition, other items of legislation have been
introduced that would limit hub concentration, reallocate slots at certain
airports and impose higher landing fees at certain hours. To the extent
legislation is enacted that would inhibit American's flexibility with respect to
fares, its revenue management system, its operations or other aspects of its
customer service operations, American's financial results could be adversely
affected.
Fare discounting by competitors has historically had a negative effect on
American's financial results because American is generally required to match
competitors' fares to maintain passenger traffic. During recent years, a number
of new low-cost airlines have entered the domestic market and several major
airlines, including American, implemented efforts to lower their cost
structures. Further fare reductions, domestic and international, may occur in
the future. If fare reductions are not offset by increases in passenger traffic,
cost reductions or changes in the mix of traffic that improves yields,
American's operating results will be negatively impacted.
AIRPORT ACCESS In 1968, the FAA issued a rule designating New York John F.
Kennedy, New York LaGuardia, Washington Reagan, Chicago O'Hare and Newark
airports as high-density traffic airports. Newark was subsequently removed from
the high-density airport classification. The high-density rule (HDR) limits the
number of Instrument Flight Rule (IFR) operations - take-offs and landings -
permitted per hour and requires that a slot support each operation. In April
2000, legislation was signed to (i) eliminate slot restrictions at New York's
John F. Kennedy and LaGuardia airports in 2007, (ii) shrink Chicago O'Hare's
slot day from 0645 - 2114 hours to 1445 - 2014 hours starting July 2001, and
(iii) eliminate Chicago O'Hare slots in July 2002. The Company does not expect
the elimination of slot restrictions to have a material adverse impact on the
Company's operations and its financial condition or result of operations.
Pursuant to the Wendell H. Ford Aviation Investment and Reform Act for
the 21st Century (Air 21 Act), slot restrictions were lifted for service to/from
LaGuardia and certain cities classified as small and non-hub airports (new
service cities). This increase in service is to be operated by regional jets. As
a consequence, the Company and other carriers increased their service at
LaGuardia to the new service cities. In December 2000, the DOT held a lottery
for LaGuardia slots for service to the new service cities in order to ease
congestion at the airport. The congestion was a direct result of the growth of
Air 21 Act slot operations. While the Company has scaled back its service to the
new service cities to/from LaGuardia, it is not anticipated that this reduction
will have a material impact on the Company's operations and its financial
condition or result of operations.
At December 31, 2000, the net book value of the Company's slots at New
York John F. Kennedy, New York LaGuardia and Chicago O'Hare airports was
approximately $150 million. Currently, the FAA permits the purchasing, selling,
leasing or transferring of slots except those slots designated as international,
essential air service or Air 21 Act. Trading of any slot is permitted subject to
certain parameters. Most foreign airports, including London Heathrow, a major
European destination for American, also have slot allocations. Most foreign
authorities do not permit the purchasing, selling or leasing of slots.
Although the Company is constrained by slots, it currently has sufficient
slot authorizations to operate its existing flights and has generally been able
to obtain slots to expand its operations and change its schedules. However,
there is no assurance that the Company will be able to obtain slots for these
purposes in the future because, among other factors, domestic slot allocations
are subject to changes in government policies.
ENVIRONMENTAL MATTERS The Company is subject to various laws and government
regulations concerning environmental matters and employee safety and health in
the U.S. and other countries. U.S. federal laws that have a particular impact on
the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean
Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the
Safe Drinking Water Act, and the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or the Superfund Act). The Company is
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency (EPA), OSHA, and other federal agencies have
been authorized to promulgate regulations that have an impact on the Company's
operations. In addition to these federal activities, various states have been
delegated certain authorities under the aforementioned federal statutes. Many
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state and local governments have adopted environmental and employee safety and
health laws and regulations, some of which are similar to federal requirements.
As a part of its continuing safety, health and environmental program, the
Company anticipates that it will comply with such requirements without any
material adverse effect on its business.
The ANCA recognizes the rights of airport operators with noise problems
to implement local noise abatement programs so long as they do not interfere
unreasonably with interstate or foreign commerce or the national air
transportation system. Authorities in several cities have promulgated aircraft
noise reduction programs, including the imposition of nighttime curfews. The
ANCA generally requires FAA approval of local noise restrictions on aircraft.
While American has had sufficient scheduling flexibility to accommodate local
noise restrictions imposed to date, American's operations could be adversely
affected if locally-imposed regulations become more restrictive or widespread.
American has been identified by the EPA as a potentially responsible
party (PRP) at the Operating Industries, Inc. Superfund Site in California.
American has signed a partial consent decree with respect to this site and is
one of several PRPs named. American has also been identified as a PRP at the
Beede Waste Oil Superfund Site in New Hampshire. American has responded to a
104(e) Request for Information regarding interaction with several companies
related to this site. At the Operating Industries, Inc. and the Beede Waste Oil
sites, American's alleged waste disposal volumes are minor compared to the other
PRP's at these sites. In 1998, the EPA named American a de minimis PRP at the
Casmalia Waste Disposal Site in California.
American, along with most other tenants at the San Francisco
International Airport (SFIA), has been ordered by the California Regional Water
Quality Control Board to engage in various studies of potential environmental
contamination at the airport and to undertake remedial measures, if necessary.
SFIA is also seeking to recover its past costs related to the contamination from
the tenants.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (the
Airport) and funding the remediation costs through landing fee revenues and
other cost recovery methods. 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 since certain of the PRPs are no longer in
business. The future increase in landing fees and/or other charges may be
material but cannot be reasonably estimated due to various factors, including
the unknown extent of the remedial actions that may be required, the proportion
of the cost that will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will ultimately
supervise the remedial activities and the nature of that supervision.
In 1999, American was ordered by the New York State Department of
Environmental Conservation to conduct remediation of environmental contamination
located at Terminal 8 and 9, at New York's John F. Kennedy International
Airport. American is seeking to recover a portion of the related costs from
previous users of the premises.
In 1999, AMR entered a plea agreement with the United States government
with respect to a one count indictment relating to the storage of hazardous
materials. As part of the plea agreement, AMR was placed on probation for three
years and has adopted a comprehensive compliance program. To the extent AMR
fails to abide by the terms of the probation or its compliance program,
American's operations may be adversely impacted.
American, along with other tenants at the Luis Munoz Marin International
Airport in San Juan, Puerto Rico, has been named as a PRP for environmental
claims at the airport.
American does not expect these matters, individually or collectively, to
have a material impact on its financial position, results of operations or
liquidity.
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LABOR
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 38 percent of American's consolidated operating
expenses for the year ended December 31, 2000.
The majority of American's employees are represented by labor unions and
covered by collective bargaining agreements. American's relations with such
labor organizations are governed by the Railway Labor Act. Under this act, the
collective bargaining agreements among American and these organizations do not
expire but instead become amendable as of a stated date. If either party
wishes to modify the terms of any such agreement, it must notify the other party
in the manner described in the agreement. After receipt of such notice, the
parties must meet for direct negotiations, and if no agreement is reached,
either party may request the National Mediation Board (NMB) to appoint a federal
mediator. If no agreement is reached in mediation, the NMB may determine, at any
time, that an impasse exists, and if an impasse is declared, the NMB proffers
binding arbitration to the parties. Either party may decline to submit to
arbitration. If arbitration is rejected, a 30-day "cooling off" period
commences. During that period, a Presidential Emergency Board (PEB) may be
established, which examines the parties' positions and recommends a solution.
The PEB process lasts for 30 days and is followed by a "cooling off" period of
30 days. At the end of a "cooling off" period, the labor organization may strike
and the airline may resort to "self-help", including the imposition of any or
all of its proposed amendments and the hiring of workers to replace strikers.
American's contract with the Association of Professional Flight
Attendants (APFA) became amendable on November 1, 1998. The parties reached a
tentative agreement in mid-1999 which the APFA membership did not ratify.
Negotiations between American and the APFA continue with the assistance of a
mediator appointed by the NMB. Those mediated negotiations will continue in
April 2001. At the request of the NMB, the parties have agreed to a blackout of
communications concerning the substance of the talks for the time being.
American's agreement with the Transport Workers Union (TWU) became
amendable on March 1, 2001. American and the TWU have been negotiating changes
to the agreement for several months. In response to the formal opening of
negotiations between the parties on February 27, 2001, certain members of the
TWU engaged in an illegal work action at New York's John F. Kennedy airport and,
to a lesser extent, New York LaGuardia. This illegal work action adversely
impacted American's operations. On March 1, 2001, American obtained a temporary
restraining order against the illegal work action, and subsequently operations
at those airports returned to normal. On March 13, 2001, the U.S. District
Court, Southern District of New York, refused to issue a preliminary injunction
against the TWU, but cautioned the parties that adherence to the law to avoid
unlawful service interruptions was required.
In 1997, American reached an agreement with the members of the Allied
Pilots Association (APA). The agreement becomes amendable August 31, 2001.
With respect to the series of transactions described on pages 1 and 2
involving TWA, United/US Airways and DC Air, certain aspects of those
transactions are dependent upon the resolution of matters with the unions
representing the affected employees. The transaction with TWA requires, among
other things, that TWA's unions agree to waive certain provisions of their
current collective bargaining agreements as a condition to American's purchase
of the TWA assets. The DC Air transaction contemplates that American's flight
attendants and pilots would crew the aircraft involved in the wet lease
arrangement. The APA filed a grievance on March 13, 2001 seeking to arbitrate
whether the DC Air transaction would violate certain provisions of the
collective bargaining agreement between American and the APA. Finally, the union
representing American's pilots will need to resolve seniority integration issues
concerning US Airways pilots in conjunction with the aircraft asset transfer
from United/US Airways to American.
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FUEL
American's operations are significantly affected by the availability and price
of jet fuel. American's fuel costs and consumption for the years 1998 through
2000 were:
Average
Cost Per
Average Gallon, Percent of
Gallons Cost Per Excluding American's
Consumed Total Cost Gallon Fuel Tax Operating
Year (in millions) (in millions) (in cents) (in cents) Expenses
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1998 2,826 $ 1,551 54.9 50.1 10.7
1999 2,957 1,622 54.8 50.1 10.6
2000 3,045 2,372 77.9 72.3 14.1
The impact of fuel price changes on the Company and its competitors is
dependent upon various factors, including hedging strategies. The Company has a
fuel hedging program in which it enters into fuel swap and option contracts to
protect against increases in jet fuel prices, which has had the effect of
dampening the Company's average cost per gallon. During 2000, the Company's fuel
hedging program reduced the Company's fuel expense by approximately $517
million. To reduce the impact of potential continuing fuel price increases in
2001, the Company has hedged approximately 40 percent of its 2001 fuel
requirements as of December 31, 2000. Based on projected fuel usage, the Company
estimates that a 10 percent increase in the price per gallon of fuel would
result in an increase to aircraft fuel expense of approximately $183 million in
2001, net of fuel hedge instruments outstanding at December 31, 2000. The above
analysis excludes any impact of the proposed transactions discussed on pages 1
and 2. Due to the competitive nature of the airline industry, in the event of
continuing increases in the price of jet fuel, there can be no assurance that
the Company will be able to pass on increased fuel prices to its customers by
increasing its fares. Likewise, any potential benefit of lower fuel prices may
be offset by increased fare competition and lower revenues for all air carriers.
While American does not anticipate a significant reduction in fuel
availability, dependency on foreign imports of crude oil and the possibility of
changes in government policy on jet fuel production, transportation and
marketing make it impossible to predict the future availability of jet fuel. If
there were major reductions in the availability of jet fuel, American's business
would be adversely affected.
Additional information regarding American's fuel program is included in
Item 7(A) - Quantitative and Qualitative Disclosures about Market Risk and in
Note 7 to the consolidated financial statements.
FREQUENT FLYER PROGRAM
American established the AAdvantage frequent flyer program (AAdvantage) to
develop passenger loyalty by offering awards to travelers for their continued
patronage. AAdvantage members earn mileage credits for flights on American,
American Eagle and certain other participating airlines, or by utilizing
services of other program participants, including hotels, car rental companies
and bank credit card issuers. American sells mileage credits and related
services to the other companies participating in the program. American reserves
the right to change the AAdvantage program rules, regulations, travel awards and
special offers at any time without notice. American may initiate changes
impacting, for example, participant affiliations, rules for earning mileage
credit, mileage levels and awards, blackout dates and limited seating for travel
awards, and the features of special offers. American reserves the right to end
the AAdvantage program with six months' notice.
Mileage credits can be redeemed for free, discounted or upgraded travel
on American, American Eagle or participating airlines, or for other travel
industry awards. Once a member accrues sufficient mileage for an award, the
member may request an award certificate from American. Award certificates may be
redeemed up to one year after issuance. Most travel awards are subject to
blackout dates and capacity controlled seating. In 1999, certain changes were
made to the AAdvantage program so that miles do not expire, provided a customer
has any type of qualifying activity at least once every 36 months.
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American accounts for its frequent flyer obligation on an accrual basis
using the incremental cost method. American's frequent flyer liability is
accrued each time a member accumulates sufficient mileage in his or her account
to claim the lowest level of free travel award (25,000 miles) and such award is
expected to be used for free travel. American includes fuel, food, and
reservations/ticketing costs, but not a contribution to overhead or profit, in
the calculation of incremental cost. The cost for fuel is estimated based on
total fuel consumption tracked by various categories of markets, with an amount
allocated to each passenger. Food costs are tracked by market category, with an
amount allocated to each passenger. Reservation/ticketing costs are based on the
total number of passengers, including those traveling on free awards, divided
into American's total expense for these costs. American defers the portion of
revenues received from companies participating in the AAdvantage program related
to the sale of mileage credits and recognizes such revenues over a period
approximating the period during which the mileage credits are used. The
remaining portion of the revenue is recognized upon receipt as the related
services have been provided.
At December 31, 2000 and 1999, American estimated that approximately 6.5
million and 5.4 million free travel awards, respectively, were expected to be
redeemed for free travel on American. In making this estimate of free travel
awards, American has excluded mileage in inactive accounts, mileage related to
accounts that have not yet reached the lowest level of free travel award, and
mileage in active accounts that have reached the lowest level of free travel
award but which are not expected to ever be redeemed for free travel on
American. The liability for the program mileage that has reached the lowest
level of free travel award and is expected to be redeemed for free travel on
American or other participating airlines and deferred revenues for mileage
credits sold to others participating in the program was $976 million and $827
million, representing 14.4 percent and 15.6 percent of American's total current
liabilities, at December 31, 2000 and 1999, respectively.
The number of free travel awards used for travel on American was 2.8
million in 2000, 2.7 million in 1999 and 2.3 million in 1998, representing 9.2
percent of total revenue passenger miles in 2000, 9.3 percent in 1999 and 8.8
percent in 1998. American believes displacement of revenue passengers is minimal
given American's load factors, its ability to manage frequent flyer seat
inventory, and the relatively low ratio of free award usage to revenue passenger
miles.
OTHER MATTERS
SEASONALITY AND OTHER FACTORS American's results of operations for any interim
period are not necessarily indicative of those for the entire year, since the
air transportation business is subject to seasonal fluctuations. Higher demand
for air travel has traditionally resulted in more favorable operating results
for the second and third quarters of the year than for the first and fourth
quarters.
The results of operations in the air transportation business have also
significantly fluctuated in the past in response to general economic conditions.
In addition, fare initiatives, fluctuations in fuel prices, labor actions and
other factors could impact this seasonal pattern. Unaudited quarterly financial
data for the two-year period ended December 31, 2000, is included in Note 12 to
the consolidated financial statements.
No material part of the business of American is dependent upon a single
customer or very few customers. Consequently, the loss of the Company's largest
few customers would not have a materially adverse effect upon American.
INSURANCE American carries insurance for public liability, passenger liability,
property damage and all-risk coverage for damage to its aircraft, in amounts
which, in the opinion of management, are adequate.
OTHER GOVERNMENT MATTERS In time of war or during an unlimited national
emergency or civil defense emergency, American and other major air carriers may
be required to provide airlift services to the Military Airlift Command under
the Civil Reserve Air Fleet program.
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ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
Owned and leased aircraft operated by American at December 31, 2000,
included:
Weighted
Average
Current Seating Capital Operating Age
Equipment Type Capacity(1) Owned Leased Leased Total (Years)
- ---------------------------------- ---------------- ----- ------- --------- ----- --------
Airbus A300-600R 192/250/251 10 -- 25 35 11
Boeing 727-200 138 55 5 -- 60 24
Boeing 737-800(2) 134 51 -- -- 51 1
Boeing 757-200 176 58 13 31 102 8
Boeing 767-200 165 8 -- -- 8 18
Boeing 767-200 Extended Range 158 9 13 -- 22 14
Boeing 767-300 Extended Range 190/207/228 32 7 10 49 8
Boeing 777-200 Extended Range 230/237/252/254 27 -- -- 27 1
Fokker 100 56/87 66 5 4 75 8
McDonnell Douglas MD-11 238 7 -- -- 7 8
McDonnell Douglas MD-80 112/125/127/129 128 22 126 276 13
McDonnell Douglas MD-90 135 -- -- 5 5 4
----- ----- ----- ----- -----
Total 451 65 201 717 11
===== ===== ===== ===== =====
(1) American's current seating capacity includes the effect of aircraft
reconfigured under the Company's More Room Throughout Coach program.
(2) The Boeing 727-200 fleet will be removed from service by the end of 2003.
For information concerning the estimated useful lives and residual values
for owned aircraft, lease terms for leased aircraft and amortization relating to
aircraft under capital leases, see Notes 1 and 5 to the consolidated financial
statements.
The Company has agreed to sell its McDonnell Douglas MD-11 aircraft to
FedEx Corporation (FedEx). The remaining seven MD-11 aircraft will be removed
from service by December 31, 2001 and delivered to FedEx in 2001 and 2002.
Lease expirations for the leased aircraft included in the preceding table
as of December 31, 2000, were:
2006
and
Equipment Type 2001 2002 2003 2004 2005 Thereafter
- ----------------------------- ---- ---- ---- ---- ---- ----------
Airbus A300-600R -- -- -- -- -- 25
Boeing 727-200 -- 2 3 -- -- --
Boeing 757-200 2 2 -- 3 -- 37
Boeing 767-200 Extended Range -- -- -- -- -- 13
Boeing 767-300 Extended Range -- 1 -- -- 4 12
Fokker 100 2 3 -- -- -- 4
McDonnell Douglas MD-80 11 13 5 2 14 103
McDonnell Douglas MD-90 5 -- -- -- -- --
---- ---- ---- ---- ---- ----
20 21 8 5 18 194
==== ==== ==== ==== ==== ====
Substantially all of American's aircraft leases include an option to
purchase the aircraft or to extend the lease term, or both, with the purchase
price or renewal rental to be based essentially on the market value of the
aircraft at the end of the term of the lease or at a predetermined fixed amount.
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GROUND PROPERTIES
American leases, or has built as leasehold improvements on leased property, most
of its airport and terminal facilities; certain corporate office, maintenance
and training facilities in Fort Worth, Texas; its principal overhaul and
maintenance base at Tulsa International Airport, Tulsa, Oklahoma; its regional
reservation offices; and local ticket and administration offices throughout the
system. American has entered into agreements with the Tulsa Municipal Airport
Trust; the Alliance Airport Authority, Fort Worth, Texas; and the Dallas/Fort
Worth, Chicago O'Hare, Raleigh/Durham, Nashville, San Juan, New York, and Los
Angeles airport authorities to provide funds for constructing, improving and
modifying facilities and acquiring equipment which are or will be leased to
American. American also utilizes public airports for its flight operations under
lease or uses arrangements with the municipalities or governmental agencies
owning or controlling them and leases certain other ground equipment for use at
its facilities. During 1999, the Company began construction of an approximate
$1.3 billion terminal facility at New York's John F. Kennedy International
Airport, which the Company expects to fund primarily through future tax-exempt
financing.
For information concerning the estimated lives and residual values for
owned ground properties, lease terms and amortization relating to ground
properties under capital leases, and acquisitions of ground properties, see
Notes 1, 4 and 5 to the consolidated financial statements.
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ITEM 3. LEGAL PROCEEDINGS
In connection with its frequent flyer program, American was sued in several
purported class action cases currently pending in the Circuit Court of Cook
County, Illinois. In Wolens et al. v. American Airlines, Inc. and Tucker v.
American Airlines, Inc. (hereafter, "Wolens"), plaintiffs seek money damages and
attorneys' fees claiming that a change made to American's AAdvantage program in
May 1988, which limited the number of seats available to participants traveling
on certain awards, breached American's agreement with its AAdvantage members.
(Although the Wolens complaint originally asserted several state law claims,
only the plaintiffs' breach of contract claim remains after the U.S. Supreme
Court ruled that the Airline Deregulation Act preempted the other claims). In
Gutterman et al. v. American Airlines, Inc. (hereafter, "Gutterman"), plaintiffs
also seek money damages and attorneys' fees claiming that the February 1995
increase in the award mileage required to claim a certain AAdvantage travel
award breached the agreement between American and its AAdvantage members. On
June 23, 1998, the court certified the Gutterman case as a class action.
In February 2000, American and the Wolens and Gutterman plaintiffs
reached a settlement of both lawsuits. Pursuant to the agreement, American and
the plaintiffs agreed to ask the court to consolidate the Wolens and Gutterman
lawsuits for purposes of settlement. Further, American and the Wolens plaintiffs
agreed to ask the court to certify a Wolens class of AAdvantage members who had
at least 35,000 unredeemed AAdvantage miles as of December 31, 1988. In
addition, American and the Gutterman plaintiffs agreed to ask the court to
decertify the existing Gutterman class and to certify a new Gutterman class of
AAdvantage members who as of December 31, 1993 (a) had redeemed 25,000 or 50,000
AAdvantage miles for certain AAdvantage awards and/or (b) had between 4,700 and
24,999 unredeemed miles in his or her account that were earned in 1992 or 1993.
Depending upon certain factors, Wolens and Gutterman class members will be
entitled to receive certificates entitling them to mileage off certain
AAdvantage awards or dollars off certain American fares.
As part of the settlement, American agreed to pay the Wolens and
Gutterman plaintiffs' attorneys fees and the cost of administering the
settlement, which amounts were accrued as of December 31, 1999. In consideration
for the relief provided in the settlement agreement, Wolens and Gutterman class
members will release American from all claims arising from any changes that
American has made to the AAdvantage program and reaffirming American's right to
make changes to the AAdvantage program in the future. On May 2, 2000, the court
preliminarily approved the settlement and authorized sending notice of the
settlement to class members. On September 28, 2000 and February 23, 2001, the
court heard arguments and took evidence concerning the fairness of the
settlement and the request for fees by the plaintiffs' attorneys. The court has
not yet finally approved the settlement agreement or the plaintiffs' fee
request.
On July 26, 1999, a class action lawsuit was filed, and in November 1999
an amended complaint was filed, against AMR Corporation, American Airlines,
Inc., AMR Eagle Holding Corporation, Airlines Reporting Corporation, and the
Sabre Group Holdings, Inc. in the United States District Court for the Central
District of California, Western Division (Westways World Travel, Inc. v. AMR
Corp., et al.). The lawsuit alleges that requiring travel agencies to pay debit
memos to American for violations of American's fare rules (by customers of the
agencies) (1) breaches the Agent Reporting Agreement between American and
American Eagle and plaintiffs, (2) constitutes unjust enrichment, and (3)
violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
The as yet uncertified class includes all travel agencies who have been or will
be required to pay monies to American for debit memos for fare rules violations
from July 26, 1995 to the present. Plaintiffs seek to enjoin American from
enforcing the pricing rules in question and to recover the amounts paid for
debit memos, plus treble damages, attorneys' fees, and costs. Defendants' motion
to dismiss all claims is pending. American intends to vigorously defend the
lawsuit. Although the Company believes that the litigation is without merit,
adverse court decisions could impose restrictions on American's ability to
respond to competitors, and American's business may be adversely impacted.
12
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On May 13, 1999, the United States (through the Antitrust Division of the
Department of Justice) sued AMR Corporation, American Airlines, Inc., and AMR
Eagle Holding Corporation in federal court in Wichita, Kansas. The lawsuit
alleges that American unlawfully monopolized or attempted to monopolize airline
passenger service to and from Dallas/Fort Worth International Airport (DFW) by
increasing service when new competitors began flying to DFW, and by matching
these new competitors' fares. The Department of Justice seeks to enjoin American
from engaging in the alleged improper conduct and to impose restraints on
American to remedy the alleged effects of its past conduct. The case has been
set for trial on May 22, 2001. American intends to defend the lawsuit
vigorously.
Between May 14, 1999 and June 7, 1999, seven class action lawsuits were
filed against AMR Corporation, American Airlines, Inc., and AMR Eagle Holding
Corporation in the United States District Court in Wichita, Kansas seeking
treble damages under federal and state antitrust laws, as well as injunctive
relief and attorneys' fees. (King v. AMR Corp., et al.; Smith v. AMR Corp., et
al.; Team Electric v. AMR Corp., et al.; Warren v. AMR Corp., et al.; Whittier
v. AMR Corp., et al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp.,
et al.). Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to and from DFW
by increasing service when new competitors began flying to DFW, and by matching
these new competitors' fares. Two of the suits (Smith and Wright) also allege
that American unlawfully monopolized or attempted to monopolize airline
passenger service to and from DFW by offering discounted fares to corporate
purchasers, by offering a frequent flyer program, by imposing certain conditions
on the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several classes of
consumers, the broadest of which is all persons who purchased tickets for air
travel on American into or out of DFW since 1995 to the present. On November 10,
1999, the District Court stayed all of these actions pending developments in the
case brought by the Department of Justice. As a result, to date no class has
been certified. American intends to defend these lawsuits vigorously.
On March 1, 2000, American was served with a federal grand jury subpoena
calling for American to produce documents relating to de-icing operations at DFW
since 1992. American has produced documents to the grand jury, but is not able
at this time to determine either the full scope of the grand jury's
investigation or American's role in the investigation. American intends to
cooperate fully with the government's investigation.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
American is a wholly-owned subsidiary of AMR Corporation and there is no market
for the Registrant's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Abbreviated pursuant to General Instruction I(2)(a) of Form 10-K).
RESULTS OF OPERATIONS
American recorded net earnings in 2000 of $778 million. The results for 2000
include the a gain of $57 million ($36 million after tax) from the sale of the
Company's warrants to purchase 5.5 million shares of priceline.com Incorporated
(priceline) common stock and a charge of $50 million ($32 million after tax) for
the Company's employee home computer program.
American's net earnings in 1999 were $627 million. A labor disagreement
that disrupted operations during the first quarter of 1999 negatively impacted
1999 results by an estimated $225 million ($140 million after tax). The results
for 1999 also include American's December 1998 acquisition of Reno Air, Inc.
(Reno), a gain of approximately $75 million ($47 million after tax) resulting
from the sale of a portion of the Company's holding in Equant N.V. (Equant) and
a charge of approximately $37 million ($25 million after tax) relating to the
provision for certain litigation items.
REVENUES
2000 COMPARED TO 1999 American's operating revenues of $18.1 billion in 2000
were up $1.8 billion, or 10.9 percent, versus 1999. American's passenger
revenues increased 11.4 percent, or $1.7 billion. American's yield (the average
amount one passenger pays to fly one mile) of 14.05 cents increased by 7.1
percent compared to 1999. For the year, domestic yields increased 7.5 percent
while European, Latin American and Pacific yields increased 9.9 percent, 4.2
percent and 3.8 percent, respectively. The increase in revenues was due
primarily to a strong U.S. economy, which led to strong demand for air travel
both domestically and internationally, a favorable pricing climate, the impact
of a domestic fuel surcharge implemented in January 2000 and increased in
September 2000, a labor disruption at one of the Company's competitors which
positively impacted the Company's revenues by approximately $80 to $100 million,
and a schedule disruption which negatively impacted the Company's operations in
1999.
American's domestic traffic increased 2.7 percent to 78.5 billion revenue
passenger miles (RPMs), while domestic capacity, as measured by available seat
miles (ASMs), decreased 1.6 percent. The decrease in domestic traffic was due
primarily to the Company's More Room Throughout Coach program. (The Company's
More Room Throughout Coach program will reconfigure American's entire fleet to
increase the seat pitch from the present industry standard of 31 and 32 inches
to a predominant seat pitch of 34 and 35 inches.) International traffic grew 6.8
percent to 38.1 billion RPMs on capacity growth of 3.1 percent. The increase in
international traffic was led by a 12.2 percent increase in the Pacific on
capacity growth of 2.5 percent, an 8.5 percent increase in Europe on capacity
growth of 6.7 percent, and a 4.1 percent increase in Latin America on capacity
growth of 0.4 percent. In 2000, American derived approximately 70 percent of its
passenger revenues from domestic operations and approximately 30 percent from
international operations.
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Cargo revenues increased 12.4 percent, or $79 million, due primarily to a
fuel surcharge implemented in February 2000 and increased in October 2000 and
the increase in cargo capacity from the addition of 16 Boeing 777-200ER aircraft
in 2000.
OPERATING EXPENSES
2000 COMPARED TO 1999 American's operating expenses of $16.9 billion in 2000
were up $1.6 billion, or 10.2 percent, versus 1999. American's cost per ASM
increased 10.5 percent to 10.38 cents partially driven by a reduction in ASMs
due to the Company's More Room Throughout Coach program. Adjusting for this
program, American's cost per ASM grew approximately 7.2 percent. Wages, salaries
and benefits increased $607 million, or 10.6 percent, due primarily 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, an
increase of approximately $94 million in the provision for profit-sharing and a
charge of approximately $50 million related to the Company's employee home
computer program. Aircraft fuel expense increased $750 million, or 46.2 percent,
due to an increase of 42.2 percent increase in American's average price per
gallon and a 3.0 percent increase in the American's fuel consumption. The
increase in fuel expense is net of gains of approximately $517 million
recognized during 2000 related to the Company's fuel hedging program.
Depreciation and amortization expense increased $91 million, or 9.3 percent, due
primarily to the addition of new aircraft, many of which replaced older
aircraft. Commissions to agents decreased 10.7 percent, or $117 million, despite
an 11.4 percent increase in passenger revenues, due primarily to commission
structure changes implemented in October 1999 and January 2000, and a decrease
in the percentage of commissionable transactions. Materials, maintenance and
repairs increased $66 million, or 7.9 percent due primarily to an increase in
airframe and engine maintenance volumes at the Company's maintenance bases and
an approximate $17 million one-time credit the Company received in 1999.
OTHER INCOME (EXPENSE)
2000 COMPARED TO 1999 Interest income increased $58 million, or 72.5 percent,
due primarily to higher investment balances throughout most of 2000. Interest
expense increased $66 million, or 30.7 percent, resulting primarily from
financing new aircraft deliveries. Interest capitalized increased 28.8 percent,
or $32 million, due to an increase in purchase deposits for flight equipment.
Related party interest - net decreased $41 million due primarily to lower
affiliate intercompany balances with American throughout most of the year.
Miscellaneous - net increased $21 million due primarily to the $57 million gain
on sale of the Company's warrants to purchase 5.5 million shares of priceline
common stock in the second quarter of 2000. During 1999, the Company recorded a
gain of approximately $75 million from the sale of a portion of American's
interest in Equant which was partially offset by the provision for the
settlement of litigation items.
OTHER INFORMATION
PROPOSED TRANSACTIONS On January 10, 2001, the Company announced three
transactions that are expected to substantially increase the scope of its
existing network. First, the Company announced that it had agreed to purchase
substantially all of the assets of Trans World Airlines, Inc. (TWA) for
approximately $500 million in cash and to assume approximately $3.5 billion of
TWA's obligations. The Company's agreement with TWA contemplated that TWA would
file for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and
conduct an auction of its assets under the auspices of the Bankruptcy Court.
During the auction, other credible offers would compete with the Company's
offer. TWA filed for bankruptcy protection on January 10, 2001. In conjunction
therewith, the Company also agreed to provide TWA with up to $200 million in
debtor-in-possession financing to facilitate TWA's ability to maintain its
operations until the completion of this transaction. The amount available under
this facility was later increased to $330 million. As of March 19, 2001,
approximately $289 million had been provided via the debtor-in-possession
financing.
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The auction of TWA's assets was commenced on March 5, 2001, and recessed
to March 7, 2001. During the recess, the Company increased its cash bid to $625
million and agreed to leave in the TWA estate certain aircraft security
deposits, advance rental payments and rental rebates that were estimated to
bring approximately $117 million of value to TWA. The Company expects that the
increase in the Company's bid will be more than offset, however, by the benefit
to the Company of the reductions in rental rates the Company has negotiated with
TWA's aircraft lessors. On March 7, 2001, TWA's board selected the Company's bid
as the "highest and best" offer, and on March 12, 2001, the U.S. Bankruptcy
Court, District of Delaware, entered an order approving the sale of TWA's assets
to the Company. Consummation of the transaction is subject to several
contingencies, including the waiver by TWA's unions of certain provisions of
their collective bargaining agreements. The approval of the U.S. Department of
Justice was obtained on March 16, 2001. Certain parties have filed appeals of
the Bankruptcy Court's sale order, and have sought a stay of the transaction,
pending the appeals. A provision of the Bankruptcy Code will permit the Company
to close the transaction, despite pending appeals, unless a stay is granted. If
a stay is granted, the Company would anticipate that the appeal process would be
expedited. Upon the closing of the transaction, TWA will be integrated into
American's operations with a continued hub operation in St. Louis. The Company
expects to fund the acquisition of TWA's assets with its existing cash and
short-term investments, internally generated cash or new financing depending on
market conditions and the Company's evolving view of its long-term needs.
Secondly, the Company announced that it has agreed to acquire from United
Airlines, Inc. (United) certain key strategic assets (slots, gates and aircraft)
of US Airways, Inc. (US Airways) upon the consummation of the previously
announced merger between United and US Airways. In addition to the acquisition
of these assets, American will lease a number of slots and gates from United so
that American may operate half of the northeast Shuttle (New York/Washington
DC/Boston). United will operate the other half of the Shuttle. For these assets,
American will pay approximately $1.2 billion in cash to United and assume
approximately $300 million in aircraft operating leases. The consummation of
these transactions is contingent upon the closing of the proposed United/US
Airways merger. Also, the acquisition of aircraft is generally dependent upon a
certain number of US Airways' Boeing 757 cockpit crew members transferring to
American's payroll.
Finally, American has agreed to acquire a 49 percent stake in, and to
enter into an exclusive marketing agreement with, DC Air LLC (DC Air). American
has agreed to pay $82 million in cash for its ownership stake. American will
have a right of first refusal on the acquisition of the remaining 51 percent
stake in DC Air. American will also lease to DC Air a certain number of Fokker
100 aircraft with necessary crews (known in the industry as a "wet lease").
These wet leased aircraft will be used by DC Air in its operations. DC Air is
the first significant new entrant at Ronald Reagan Washington National Airport
(DCA) in over a decade. DC Air will acquire the assets needed to begin its DCA
operations from United/US Airways upon the consummation of the merger between
the two carriers. American's investment in DC Air and the other arrangements
described above are contingent upon the consummation of the merger between
United and US Airways.
As a result of the above transactions, and for several other reasons,
American has initiated an impairment review of certain fleet types in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This review could result in an impairment charge to be taken by the Company in
2001. The size of any resulting 2001 charge is not presently known, but may be
significant.
DIVIDEND TO AMR On October 18, 2000, the Board of Directors of American declared
a $1.5 billion cash dividend which was paid on November 1, 2000 to AMR. The
purpose of the dividend was to establish a cash management function at AMR to
implement future decisions regarding uses of cash and to improve efficiency.
ENVIRONMENTAL MATTERS American has been notified of potential liability with
regard to several environmental cleanup sites and certain airport locations. At
sites where remedial litigation has commenced, potential liability is joint and
several. American's alleged volumetric contributions at these sites are minimal.
American does not expect these matters, individually or collectively, to have a
significant impact on its results of operations, financial position or
liquidity. Additional information is included in Note 4 to the consolidated
financial statements.
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NEW ACCOUNTING PRONOUNCEMENT Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended (SFAS 133), was adopted by the Company on
January 1, 2001. SFAS 133 requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The adoption of SFAS 133 did not have a material impact on the Company's net
earnings. However, the Company recorded a transition adjustment of approximately
$100 million in accumulated other comprehensive income in the first quarter of
2001.
WORKING CAPITAL American historically operates with a working capital deficit as
do most other airline companies. The existence of such a deficit has not in the
past impaired the Company's ability to meet its obligations as they become due
and is not expected to do so in the future.
CREDIT FACILITIES American has $1.0 billion in credit facility agreements that
expire December 15, 2005, subject to certain conditions. At American's option,
interest on these agreements can be calculated on one of several different
bases. For most borrowings, American would anticipate choosing a floating rate
based upon the London Interbank Offered Rate (LIBOR). At December 31, 2000, no
borrowings were outstanding under these agreements.
AIRCRAFT COMMITMENTS At December 31, 2000, the Company had commitments to
acquire the following aircraft: 66 Boeing 737-800s, 23 Boeing 757-200s and 20
Boeing 777-200ERs. Deliveries of these aircraft commence in 2001 and will
continue through 2004. Future payments, including estimated amounts for price
escalation, will approximate $2.2 billion in 2001, $1.1 billion in 2002, $345
million in 2003 and approximately $60 million in 2004. In addition to these
commitments for aircraft, the Company expects to spend approximately $1.0
billion in 2001 for modifications to aircraft, renovations of - and additions to
- - airport and off-airport facilities, and the acquisition of various other
equipment and assets, of which approximately $840 million has been authorized by
the Company's Board of Directors. The Company expects to fund its 2001 capital
expenditures from the Company's existing cash and short-term investments,
internally generated cash or new financing depending upon market conditions and
the Company's evolving view of its long-term needs.
FORWARD-LOOKING INFORMATION
The preceding discussions under Business, Properties, Legal Proceedings and
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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," and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, expectations
as to results of operations and financial condition, including changes in
capacity, revenues and costs, expectations as to future financing needs, overall
economic projections and the Company's plans and objectives for future
operations, including its ability to successfully integrate into its operations
assets the Company may acquire in its previously announced transactions with
TWA, United/US Airways and DC Air, and plans to develop future code-sharing
programs and to evaluate new alliances. 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. 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:
17
19
UNCERTAINTY OF FUTURE COLLECTIVE BARGAINING AGREEMENTS AND EVENTS The Company's
operations could be adversely affected by failure of the Company to reach
agreement with any labor union representing the Company's employees or by an
agreement with a labor union representing the Company's employees that contains
terms which prevent the Company from competing effectively with other airlines.
In addition, a dispute between the Company and an employee work group (outside
the confines of a collective bargaining agreement) could adversely impact the
Company's operations.
ECONOMIC AND OTHER CONDITIONS The airline industry is affected by changes in
international, national, regional and local economic conditions, inflation, war
or political instability (or the threat thereof), consumer preferences and
spending patterns, demographic trends, disruptions to the air traffic control
system, consumer perceptions of airline safety, costs of safety, security and
environmental measures, and the weather.
COMMODITY PRICES Due to the competitive nature of the airline industry, in the
event of any increase in the price of jet fuel, there can be no assurance that
American would be able to pass on increased fuel prices to its customers by
increasing fares.
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of American's routes
is highly competitive. American faces vigorous competition from major domestic
airlines, national, regional, all-cargo and charter carriers, foreign carriers,
low-cost carriers and, particularly on shorter segments, ground transportation.
Pricing decisions are affected by competition from other airlines. Fare
discounting by competitors has historically had a negative effect on American's
financial results because American is generally required to match competitors'
fares to maintain passenger traffic. No assurance can be given that any future
fare reduction would be offset by increases in passenger traffic, a reduction in
costs or changes in the mix of traffic that improves yields.
CHANGING BUSINESS STRATEGY Although it has no current plan to do so, the Company
may change its business strategy in the future and may not pursue some of the
goals stated herein.
GOVERNMENT REGULATION Future results of the Company's operations may vary based
upon any actions which the governmental agencies with jurisdiction over the
Company's operations may take, including the granting and timing of certain
governmental approvals (including foreign government approvals) needed for
code-sharing alliances and other arrangements with other airlines, restrictions
on competitive practices (e.g., Court Orders, or Agency regulations or orders,
that would curtail an airline's ability to respond to a competitor), the
adoption of regulations that impact customer service standards, and the adoption
of more restrictive locally-imposed noise restrictions.
UNCERTAINTY IN INTERNATIONAL OPERATIONS The Company's current international
activities and prospects could be adversely affected by factors such as
reversals or delays in the opening of foreign markets, exchange controls,
currency and political risks, taxation and changes in international government
regulation of the Company's operations.
INDUSTRY CONSOLIDATION The Company has announced a series of transactions with
TWA, United/US Airways and DC Air (see pages 15-16). These transactions are
subject to a number of conditions and there can be no assurance that they will
occur as planned. If these transactions do not occur and yet other U.S. carriers
merge or create or expand marketing alliances, such mergers or new or expanded
marketing alliances could adversely affect the Company.
18
20
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
fuel, foreign currency exchange rates and interest rates as discussed below. 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 its exposure to such changes. Actual
results may differ. See Note 7 to the consolidated financial statements for
accounting policies and additional information. In addition, the following
analyses exclude any impact of the proposed transactions discussed on pages
15-16.
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 utilizing swap and option contracts. Market risk is
estimated as a hypothetical 10 percent increase in the December 31, 2000 and
1999 cost per gallon of fuel. Based on projected 2001 fuel usage, such an
increase would result in an increase to aircraft fuel expense of approximately
$183 million in 2001, net of fuel hedge instruments outstanding at December 31,
2000. Comparatively, based on projected 2000 fuel usage, such an increase would
have resulted in an increase to aircraft fuel expense of approximately $125
million in 2000, net of fuel hedge instruments outstanding at December 31, 1999.
The change in market risk is due primarily to the increase in fuel prices. As of
December 31, 2000, the Company had hedged approximately 40 percent of its 2001
fuel requirements, approximately 15 percent of its 2002 fuel requirements, and
approximately seven percent of its 2003 fuel requirements, compared to
approximately 48 percent of its 2000 fuel requirements and 10 percent of its
2001 fuel requirements hedged at December 31, 1999.
FOREIGN CURRENCY The Company is exposed to the effect of foreign exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated operating
revenues and expenses. The Company's largest exposure comes from the Canadian
dollar, British pound, Japanese yen, Euro and various Latin and South American
currencies. The Company uses options to hedge a portion of its anticipated
foreign currency-denominated ticket sales. The result of a uniform 10 percent
strengthening in the value of the U.S. dollar from December 31, 2000 and 1999
levels relative to each of the currencies in which the Company has foreign
currency exposure would result in a decrease in operating income of
approximately $33 million and $39 million for the years ending December 31, 2000
and 1999, respectively, net of hedge instruments outstanding at December 31,
2000 and 1999, due to the Company's foreign-denominated revenues exceeding its
foreign-denominated expenses. This sensitivity analysis was prepared based upon
projected 2001 and 2000 foreign currency-denominated revenues and expenses as of
December 31, 2000 and 1999.
INTEREST The Company's earnings are also affected by changes in interest rates
due to the impact those changes have on its interest income from cash and
short-term investments and its interest expense from variable-rate debt
instruments. The Company has variable-rate debt instruments representing
approximately 51 percent and 39 percent of its total long-term debt,
respectively, at December 31, 2000 and 1999, and interest rate swaps on notional
amounts of approximately $158 million and $696 million, respectively, at
December 31, 2000 and 1999. During 2000, the Company terminated interest rate
swap agreements on notional amounts of approximately $425 million. The cost of
terminating these interest rate swap agreements was not material. If interest
rates average 10 percent more in 2001 than they did at December 31, 2000, the
Company's interest expense would increase by approximately $11 million and
interest income from cash and short-term investments would increase by
approximately $11 million. In comparison, at December 31, 1999, the Company
estimated that if interest rates averaged 10 percent more in 2000 than they did
at December 31, 1999, the Company's interest expense would have increased by
approximately $10 million and interest income from cash and short-term
investments would have increased by approximately $10 million. These amounts are
determined by considering the impact of the hypothetical interest rates on the
Company's variable-rate long-term debt, interest rate swap agreements, and cash
and short-term investment balances at December 31, 2000 and 1999.
19
21
Market risk for fixed-rate long-term debt is estimated as the potential
increase in fair value resulting from a hypothetical 10 percent decrease in
interest rates, and amounts to approximately $59 million and $71 million as of
December 31, 2000 and 1999, respectively. The fair values of the Company's
long-term debt were estimated using quoted market prices or discounted future
cash flows based on the Company's incremental borrowing rates for similar types
of borrowing arrangements.
INVESTMENTS American is subject to market risk related to its ownership of
approximately 1.2 million depository certificates convertible, subject to
certain restrictions, into the common stock of Equant, as of December 31, 2000
and 1999. The estimated fair value of these depository certificates was
approximately $32 million and $136 million as of December 31, 2000 and 1999,
respectively, based upon the market value of Equant common stock.
In addition, the Company holds investments in certain other entities
which are subject to market risk. However, the impact of such market risk on
earnings is not significant due to the immateriality of the carrying value and
the geographically diverse nature of these holdings.
20
22
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 22
Consolidated Statements of Operations 23
Consolidated Balance Sheets 24
Consolidated Statements of Cash Flows 26
Consolidated Statements of Stockholder's Equity 27
Notes to Consolidated Financial Statements 28
21
23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited the accompanying consolidated balance sheets of American
Airlines, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Airlines, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 16, 2001, except for Note 13,
for which the date is March 19, 2001.
22
24
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
REVENUES
Passenger $ 16,377 $ 14,707 $ 14,695
Cargo 714 635 649
Other 1,026 996 965
-------- -------- --------
Total operating revenues 18,117 16,338 16,309
-------- -------- --------
EXPENSES
Wages, salaries and benefits 6,354 5,747 5,487
Aircraft fuel 2,372 1,622 1,551
Depreciation and amortization 1,068 977 941
Commissions to agents 973 1,090 1,159
Other rentals and landing fees 919 867 778
Maintenance, materials and repairs 899 833 803
Food service 769 734 671
Aircraft rentals 561 582 532
Other operating expenses 2,958 2,866 2,618
-------- -------- --------
Total operating expenses 16,873 15,318 14,540
-------- -------- --------
OPERATING INCOME 1,244 1,020 1,769
OTHER INCOME (EXPENSE)
Interest income 138 80 109
Interest expense (281) (215) (197)
Interest capitalized 143 111 97
Related party interest - net 7 48 (11)
Miscellaneous - net 31 10 (22)
-------- -------- --------
38 34 (24)
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 1,282 1,054 1,745
Income tax provision 504 427 682
-------- -------- --------
NET EARNINGS $ 778 $ 627 $ 1,063
======== ======== ========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
25
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
- --------------------------------------------------------------------------------
December 31,
----------------------
2000 1999
-------- --------
ASSETS
CURRENT ASSETS
Cash $ 86 $ 72
Short-term investments 1,549 1,645
Receivables, less allowance for uncollectible
accounts (2000 - $26; 1999 - $53) 1,242 1,124
Receivable from affiliates, net -- 651
Inventories, less allowance for obsolescence
(2000 - $302; 1999 - $255) 656 616
Deferred income taxes 675 597
Other current assets 186 176
-------- --------
Total current assets 4,394 4,881
EQUIPMENT AND PROPERTY
Flight equipment, at cost 17,984 15,149
Less accumulated depreciation 5,903 5,233
-------- --------
12,081 9,916
Purchase deposits for flight equipment 1,590 1,495
Other equipment and property, at cost 3,503 3,131
Less accumulated depreciation 1,896 1,748
-------- --------
1,607 1,383
-------- --------
15,278 12,794
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 2,233 2,731
Other equipment and property 159 155
-------- --------
2,392 2,886
Less accumulated amortization 1,044 1,165
-------- --------
1,348 1,721
OTHER ASSETS
Route acquisition costs and airport operating and gate lease rights,
less accumulated amortization (2000 - $470; 1999 - $425) 1,103 1,148
Other 1,038 1,175
-------- --------
2,141 2,323
-------- --------
TOTAL ASSETS $ 23,161 $ 21,719
======== ========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
26
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
- --------------------------------------------------------------------------------
December 31,
-----------------------
2000 1999
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,178 $ 991
Accrued salaries and wages 924 821
Accrued liabilities 1,143 969
Air traffic liability 2,696 2,258
Payable to affiliates, net 511 --
Current maturities of long-term debt 108 61
Current obligations under capital leases 201 210
-------- --------
Total current liabilities 6,761 5,310
LONG-TERM DEBT, LESS CURRENT MATURITIES 2,601 2,231
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,163 1,414
OTHER LIABILITIES AND CREDITS
Deferred income taxes 2,080 1,581
Deferred gains 508 613
Postretirement benefits 1,706 1,669
Other liabilities and deferred credits 1,907 1,751
-------- --------
6,201 5,614
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock - $1 par value;
1,000 shares authorized, issued and outstanding -- --
Additional paid-in capital 1,847 1,840
Accumulated other comprehensive income (2) (2)
Retained earnings 4,590 5,312
-------- --------
6,435 7,150
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 23,161 $ 21,719
======== ========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
27
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
2000 1999 1998
------- ------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 778 $ 627 $ 1,063
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 829 776 722
Amortization 239 201 219
Deferred income taxes 426 216 243
Gain on sale of other investments (57) (75) --
Gain on disposition of equipment and property -- (15) (18)
Change in assets and liabilities:
Decrease (increase) in receivables (118) 41 (94)
Increase in inventories (95) (123) (24)
Increase (decrease) in accounts payable
and accrued liabilities 583 (212) 524
Increase in air traffic liability 438 84 128
Other, net 29 214 80
------- ------- -------
Net cash provided by operating activities 3,052 1,734 2,843
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including purchase deposits for
flight equipment (3,280) (3,066) (1,942)
Dividend to Parent (1,500) -- --
Net decrease (increase) in short-term investments 96 (247) 364
Proceeds from:
Sale of equipment and property 212 77 225
Sale of other investments 94 85 --
Acquisitions and other investments (23) (44) (110)
------- ------- -------
Net cash used for investing activities (4,401) (3,195) (1,463)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of long-term debt 513 1,388 --
Short-term loan from affiliate -- 300 --
Funds transferred from affiliates, net 1,162 (69) (1,479)
Payments on long-term debt and capital lease obligations (312) (226) (133)
Sale-leaseback transactions -- 54 270
------- ------- -------
Net cash provided by (used for) financing activities 1,363 1,447 (1,342)
------- ------- -------
Net increase (decrease) in cash 14 (14) 38
Cash at beginning of year 72 86 48
------- ------- -------
Cash at end of year $ 86 $ 72 $ 86
======= ======= =======
ACTIVITIES NOT AFFECTING CASH
Sale-leaseback transactions $ -- $ 54 $ 270
======= ======= =======
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
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AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in millions)
- --------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income Earnings Total
------ ---------- ------------- -------- -------
Balance at January 1, 1998 $ -- $ 1,732 $ (3) $ 3,622 $ 5,351
Net earnings and total
comprehensive income -- -- -- 1,063 1,063
Other -- 11 -- -- 11
------ ------- ------- ------- -------
Balance at December 31, 1998 -- 1,743 (3) 4,685 6,425
Net earnings -- -- -- 627 627
Adjustment for minimum pension
liability, net of tax expense
of $1 -- -- 2 -- 2
Unrealized loss on investments,
net of tax benefit of $1 -- -- (1) -- (1)
-------
Total comprehensive income -- -- -- -- 628
-------
Contribution of assets from
Parent -- 94 -- -- 94
Other -- 3 -- -- 3
------ ------- ------- ------- -------
Balance at December 31, 1999 -- 1,840 (2) 5,312 7,150
Net earnings -- -- -- 778 778
Adjustment for minimum pension
liability, net of tax benefit of $3 -- -- (5) -- (5)
Unrealized gain on investments,
net of tax expense of $2 -- -- 5 -- 5
-------
Total comprehensive income -- -- -- -- 778
-------
Cash dividend to Parent -- -- -- (1,500) (1,500)
Other -- 7 -- -- 7
------ ------- ------- ------- -------
Balance at December 31, 2000 $ -- $ 1,847 $ (2) $ 4,590 $ 6,435
====== ======= ======= ======= =======
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION American Airlines, Inc. (American or the Company) is a
wholly-owned subsidiary of AMR Corporation (AMR). The consolidated financial
statements include the accounts of American and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated. Certain amounts
from prior years have been reclassified to conform with the 2000 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES Spare parts, materials and supplies relating to flight equipment are
carried at average acquisition cost and are expensed when incurred in
operations. Allowances for obsolescence are provided, over the estimated useful
life of the related aircraft and engines, for spare parts expected to be on hand
at the date aircraft are retired from service, plus allowances for spare parts
currently identified as excess. These allowances are based on management
estimates, which are subject to change.
EQUIPMENT AND PROPERTY The provision for depreciation of operating equipment and
property is computed on the straight-line method applied to each unit of
property, except major rotable parts, avionics and assemblies are depreciated on
a group basis. The depreciable lives and residual values used for the principal
depreciable asset classifications are:
Depreciable Life
----------------------------
Boeing 727-200 aircraft 2003(1)
Other aircraft 20 - 30 years
Major rotable parts, avionics and assemblies Life of equipment to which
applicable
Improvements to leased flight equipment Term of lease
Buildings and improvements (principally on 10-30 years or term of lease
leased land)
Furniture, fixtures and other equipment 3-20 years
Capitalized software 3-10 years
(1) Approximate final aircraft retirement date.
Residual values for aircraft, engines, major rotable parts, avionics and
assemblies are generally five to 10 percent, except when a guaranteed residual
value or other agreements exist to better estimate the residual value.
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. It also established a 30-year life
for its new Boeing 777 aircraft, first delivered in the first quarter of 1999.
As a result of this change, depreciation and amortization expense was reduced by
approximately $158 million and net earnings were increased by approximately $99
million for the year ended December 31, 1999.
Equipment and property under capital leases are amortized over the term
of the leases or, in the case of certain aircraft, over their expected useful
lives, and such amortization is included in depreciation and amortization. Lease
terms vary but are generally 10 to 25 years for aircraft and seven to 40 years
for other leased equipment and property.
28
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1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
MAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased
flight equipment are charged to operating expense as incurred, except costs
incurred for maintenance and repair under power by the hour maintenance contract
agreements, which are accrued on the basis of hours flown.
INTANGIBLE ASSETS Route acquisition costs and airport operating and gate lease
rights represent the purchase price attributable to route authorities, airport
take-off and landing slots and airport gate leasehold rights acquired. These
assets are being amortized on a straight-line basis over 40 years for route
authorities, primarily 25 years for airport take-off and landing slots, and over
the term of the lease for airport gate leasehold rights.
PASSENGER REVENUES Passenger ticket sales are initially recorded as a component
of air traffic liability. Revenue derived from ticket sales is recognized at the
time service is provided. However, due to various factors, including the complex
pricing structure and interline agreements throughout the industry, certain
amounts are recognized in revenue using estimates regarding both the timing of
the revenue recognition and the amount of revenue to be recognized. Actual
results could differ from those estimates.
ADVERTISING COSTS The Company expenses the costs of advertising as incurred.
Advertising expense was $218 million, $201 million and $192 million for the
years ended December 31, 2000, 1999 and 1998, respectively.
FREQUENT FLYER PROGRAM The estimated incremental cost of providing free travel
awards is accrued when such award levels are reached. American sells mileage
credits and related services to companies participating in its frequent flyer
program. The portion of the revenue related to the sale of mileage credits is
deferred and recognized over a period approximating the period during which the
mileage credits are used. The remaining portion of the revenue is recognized
upon receipt as the related services have been provided.
STATEMENTS OF CASH FLOWS Short-term investments, without regard to remaining
maturity at acquisition, are not considered as cash equivalents for purposes of
the statements of cash flows.
2. TRANSACTIONS WITH RELATED PARTIES
American is a party to various agreements with Sabre Holdings Corporation
(Sabre), a former 83 percent owned subsidiary of AMR. Effective after the close
of business on March 15, 2000, AMR distributed its entire ownership interest in
Sabre as a dividend on all outstanding shares of its common stock. In connection
with the spin-off, AMR, American and Sabre amended certain of these agreements.
The significant agreements with Sabre and the effect of these amendments are
described below.
INFORMATION TECHNOLOGY SERVICES AGREEMENT American is party to the Information
Technology Services Agreement with Sabre dated July 1, 1996 (the Technology
Services Agreement), whereby Sabre provides American with certain information
technology services, including data center and data network services, services
relating to client server operations and distributed systems and voice network
services.
In connection with the spin-off of Sabre from AMR, American and Sabre
agreed to certain amendments to the Technology Services Agreement. These
amendments include the following: (i) Sabre will provide services relating to
American's real time environment until June 30, 2008, (ii) Sabre will provide
services relating to American's client server operations until June 30, 2002,
(iii) American will have the right to hire up to 25 of Sabre's operations
research personnel, (iv) Sabre's obligations to pay certain ongoing royalty
payments to American were terminated in exchange for a one time payment of $10
million made in 2000, (v) the intellectual property rights of Sabre and American
were modified to provide American additional rights in certain software
applications, and (vi) American is granted access to Sabre's commercial
portfolio of software on a license fee free basis. American and Sabre began
negotiations in 2000 regarding market-based pricing and market-based terms and
conditions and will continue to negotiate these items in 2001.
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31
2. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
American paid Sabre approximately $130 million, (prior to the Sabre
spin-off in March 2000) $521 million and $523 million in 2000, 1999 and 1998,
respectively, for services provided under the Technology Services Agreement, as
well as airline booking fees, for which American is billed by Sabre at rates
similar to those charged to other carriers.
MARKETING COOPERATION AGREEMENT Sabre and American are parties to the Marketing
Cooperation Agreement dated as of July 1, 1996 (the Marketing Cooperation
Agreement), pursuant to which American will provide marketing support for
Sabre's products targeted to travel agencies and Sabre's promotion of certain
other products. For such support, Sabre will pay American a fee based upon
booking volumes. That fee was approximately $18 million and $17 million in 1999
and 1998, respectively. Additionally, American will support Sabre's promotion of
certain other products until 2001, for which Sabre will pay American a marketing
fee based upon booking volume. With limited exceptions, the Marketing
Cooperation Agreement does not restrict American from distributing its airline
products and services directly to corporate or individual consumers.
TRAVEL AGREEMENTS American and Sabre are parties to travel agreements dated July
1, 1996, pursuant to which Sabre is entitled to purchase personal travel for its
employees and retirees at reduced fares, and business travel at a discount for
certain flights on American. The Travel Privileges Agreement expires on June 30,
2008 and the Corporate Travel Agreement expires on June 30, 2001. Sabre paid
American approximately $45 million in 1999 and 1998 pursuant to these
agreements.
In connection with the spin-off of Sabre from AMR, the Company and Sabre
agreed to allow American to provide certain Sabre employees with additional
limited travel privileges and required Sabre to indemnify American for costs
related to Sabre's continued use of the Travel Privileges Agreement.
CREDIT AGREEMENT On July 1, 1996, Sabre and American entered into a Credit
Agreement pursuant to which Sabre was required to borrow from American, and
American was required to lend to Sabre, amounts required by Sabre to fund its
daily cash requirements. In addition, American could, but was not required to,
borrow from Sabre to fund its daily cash requirements. The maximum amount Sabre
could borrow at any time from American under the Credit Agreement was $300
million. The maximum amount that American could borrow at any time from Sabre
under the Credit Agreement was $100 million.
On March 17, 1999, the Company and Sabre entered into a short-term Credit
Agreement pursuant to which American could borrow from Sabre up to a maximum of
$300 million. Upon entering into this agreement, American's ability to borrow up
to $100 million from Sabre under a separate Credit Agreement was terminated.
In connection with the spin-off of Sabre from AMR, American and Sabre
terminated the Credit Agreement on April 15, 2000.
OTHER AGREEMENTS WITH SABRE American and Sabre are also parties to a Management
Services Agreement dated July 1, 1996, pursuant to which American performs
various management services for Sabre, including treasury, risk management and
other administrative services. Sabre paid American approximately $6 million and
$10 million in 1999 and 1998, respectively, pursuant to the Management Services
Agreement.
In connection with the spin-off of Sabre from AMR, American and Sabre
agreed to the early termination of certain services effective March 2000 and the
continuation of certain services with termination dates through June 30, 2001.
American and Sabre also negotiated separate agreements for payroll-related
services and workers compensation administration.
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32
2. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
AMR, American and Sabre have also entered into a Non-Competition
Agreement dated July 1, 1996, pursuant to which AMR and American, on behalf of
themselves and certain of their subsidiaries, have agreed to limit their
competition with Sabre's businesses of (i) electronic travel distribution; (ii)
development, maintenance, marketing and licensing of software for travel agency,
travel, transportation and logistics management; (iii) computer system
integration; (iv) development, maintenance and operation of a data processing
center providing data processing services to third parties; and (v) travel
industry, transportation and logistics consulting services relating primarily to
computer technology and automation. The Non-Competition Agreement expires on
December 31, 2001.
INDEMNIFICATION AGREEMENTS Airline Management Services Holdings, Inc. (AMS), a
subsidiary of AMR, and Canadian Airlines International Limited (Canadian)
entered into an agreement pursuant to which AMR and American supplied to
Canadian various services, including technology services. American subsequently
entered into the Canadian Technical Services Subcontract (the Canadian
Subcontract) with Sabre to provide data processing and network distributed
systems services to Canadian. Under the terms of the Canadian Subcontract,
American guaranteed full payment for services actually performed by Sabre and
deferred costs associated with the installation and implementation of certain
systems. Additionally, AMS guaranteed full payment to American for any services
actually performed by American in connection with the Canadian services
agreement, certain deferred costs incurred by American, and any amounts paid by
American to Sabre under the indemnification provisions of the Canadian
Subcontract.
In connection with the spin-off of Sabre from AMR, American and Sabre
agreed to terminate the Canadian Sub-Contract. Following the acquisition of
Canadian by Air Canada, effective February 5, 2001, the Company terminated its
agreement to provide services to Canadian.
Additionally, during 1999, AMR contributed certain assets related to its
investment in Canadian with a net book value of approximately $94 million to
American and the AMS guarantee to American was terminated.
OTHER RELATED PARTY TRANSACTIONS American invests funds, including funds of
certain affiliates, if any, in a combined short-term investment portfolio and
passes through interest income on such funds at the average rate earned on the
portfolio. These amounts are classified as Payable to affiliate, net on the
accompanying consolidated balance sheets. In December 2000, AMR paid American
approximately $980 million in settlement of its balance due American.
American issues tickets for flights on its American Eagle affiliate
regional carriers, owned by AMR Eagle Holding Corporation, a subsidiary of AMR.
As a result, the revenue collected for such tickets is prorated between American
and the American Eagle carriers based on the segments flown by the respective
carriers. The aggregate amount prorated for the segments flown by the American
Eagle carriers was approximately $1.2 billion, $1.0 billion and $956 million for
2000, 1999 and 1998, respectively. In 2000, 1999 and 1998, American paid fees of
$178 million, $160 million and $165 million, respectively, recorded as a
reduction in passenger revenues, to American Eagle primarily for passengers
connecting with American flights. In addition, American provides each of the
regional carriers, among other things, communication and reservation services
and other services, including yield management and participation in American's
frequent flyer program. In consideration for certain services provided, each
regional carrier pays American a service charge, based primarily on passengers
boarded, which approximated $86 million, $72 million and $66 million for 2000,
1999 and 1998, respectively.
American paid subsidiaries of AMR approximately $13 million, $32 million
and $113 million in 2000, 1999 and 1998, respectively, for ground handling
services provided at selected airports, consulting services and investment
management and advisory services with respect to short-term investments and the
assets of its retirement benefit plans. The decrease in amounts American paid to
subsidiaries of AMR in 2000 and 1999 is due to AMR's sale of AMR Services, which
prior to March of 1999, was a wholly-owned subsidiary of AMR that provided
ground handling services to American.
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2. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
American recognizes compensation expense associated with certain AMR
common stock-based awards for employees of American (see Note 9). In addition,
American incurs pension and postretirement benefit expense for American
employees working at affiliates of the Company. American transfers pension and
postretirement benefit expense for these employees to its affiliates based on a
percentage of salaries and cost per employee, respectively (see Note 10).
On July 1, 2000, American and AMR Investment Services, Inc. (AMRIS), a
subsidiary of AMR, entered into a five-year Credit Agreement. The maximum amount
American can advance AMRIS is $100 million and the maximum amount AMRIS can
advance American is $40 million. The interest rate is equal to the lending
party's cost of funds for the current month. Payments are due when the borrowing
company has excess cash. As of December 31, 2000, no borrowings were outstanding
under this Credit Agreement.
On October 18, 2000, the Board of Directors of American declared a $1.5
billion cash dividend which was paid on November 1, 2000 to AMR. The purpose of
the dividend was to establish a cash management function at AMR to implement
future decisions regarding uses of cash and to improve efficiency. The dividend
was recorded as a reduction to American's retained earnings.
3. INVESTMENTS
Short-term investments consisted of (in millions):
December 31,
------------------
2000 1999
------ ------
Overnight investments and time deposits $ 269 $ --
Corporate and bank notes 851 1,173
U. S. Government agency mortgages 220 94
Asset backed securities 209 144
U. S. Government agency notes -- 234
------ ------
$1,549 $1,645
====== ======
Short-term investments at December 31, 2000, by contractual maturity
included (in millions):
Due in one year or less $ 494
Due between one year and three years 1,009
Due after three years 46
------
$1,549
======
All short-term investments are classified as available-for-sale and
stated at fair value. Unrealized gains and losses, net of deferred taxes, are
reflected as an adjustment to stockholder's equity.
During 1999, the Company entered into an agreement with priceline.com
Incorporated (priceline) whereby ticket inventory provided by the Company may be
sold through priceline's e-commerce system. In conjunction with this agreement,
the Company received warrants to purchase approximately 5.5 million shares of
priceline common stock. In the second quarter of 2000, the Company sold these
warrants for proceeds of approximately $94 million, and recorded a gain of $57
million, which is included in Miscellaneous - net on the accompanying
consolidated statements of operations.
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3. INVESTMENTS (CONTINUED)
At December 31, 1998, the Company owned approximately 3.1 million
depository certificates convertible, subject to certain restrictions, into the
common stock of Equant N.V. (Equant), which completed an initial public offering
in July 1998. Approximately 1.7 million of the certificates were held for the
benefit of Sabre. During 1999, the Company acquired approximately 400,000 Equant
depository certificates from other airlines. In addition, based upon a
reallocation between the owners of the certificates in July 1999, the Company
received an additional 2.6 million certificates, of which approximately 2.2
million certificates were held for the benefit of Sabre. In connection with two
secondary offerings by Equant in February and December 1999, the Company sold
approximately 1.0 million depository certificates, excluding sales made on
behalf of Sabre, for a pre-tax gain of approximately $75 million, which is
included in Miscellaneous - net on the accompanying consolidated statements of
operations ($47 million after tax).
As of December 31, 2000 and 1999, the Company holds approximately 1.2
million depository certificates with an estimated market value of approximately
$32 million and $136 million, respectively. The carrying value of the Company's
investment in the depository certificates as of December 31, 2000 and 1999, was
approximately $20 million, and is included in other assets on the accompanying
consolidated balance sheets.
4. COMMITMENTS AND CONTINGENCIES
At December 31, 2000, the Company had commitments to acquire the
following aircraft: 66 Boeing 737-800s, 23 Boeing 757-200s and 20 Boeing
777-200ERs. Deliveries of these aircraft commence in 2001 and will continue
through 2004. Future payments, including estimated amounts for price escalation,
will approximate $2.2 billion in 2001, $1.1 billion in 2002, $345 million in
2003, and approximately $60 million in 2004. In addition to these commitments
for aircraft, the Company's Board of Directors has authorized expenditures of
approximately $2.7 billion over the next five years for modifications to
aircraft, renovations of - and additions to - airport and off-airport
facilities, and the acquisition of various other equipment and assets. American
expects to spend approximately $840 million of this authorized amount in 2001.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (the
Airport) and funding the remediation costs through landing fee revenues and
other cost recovery methods. 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 since certain of the potentially responsible
parties are no longer in business. The future increase in landing fees and/or
other charges may be material but cannot be reasonably estimated due to various
factors, including the unknown extent of the remedial actions that may be
required, the proportion of the cost that will ultimately be recovered from the
responsible parties, and uncertainties regarding the environmental agencies that
will ultimately supervise the remedial activities and the nature of that
supervision. In addition, the Company is subject to environmental issues at
various other airport and non-airport locations. Management believes, after
considering a number of factors, that the ultimate disposition of these
environmental issues is not expected to materially affect the Company's
consolidated financial position, results of operations or cash flows. Amounts
recorded for environmental issues are based on the Company's current assessments
of the ultimate outcome and, accordingly, could increase or decrease as these
assessments change.
The Company has agreed to sell its McDonnell Douglas MD-11 aircraft to
FedEx Corporation (FedEx). No significant gain or loss is expected to be
recognized as a result of this transaction. As of December 31, 2000, the
carrying value of the remaining aircraft American has committed to sell was
approximately $462 million.
American has included event risk covenants in approximately $2.2 billion
of indebtedness. These covenants permit the holders of such indebtedness to
receive a higher rate of return (between 75 and 650 basis points above the
stated rate) if a designated event, as defined, should occur and the credit
rating of such indebtedness is downgraded below certain levels within a certain
period of time following the event.
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4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Special facility revenue bonds have been issued by certain
municipalities, primarily to purchase equipment and improve airport facilities
that are leased by American. In certain cases, the bond issue proceeds were
loaned to American and are included in long-term debt. Certain bonds have rates
that are periodically reset and are remarketed by various agents. In certain
circumstances, American may be required to purchase up to $544 million of the
special facility revenue bonds prior to scheduled maturity, in which case
American has the right to resell the bonds or to use the bonds to offset its
lease or debt obligations. American may borrow the purchase price of these bonds
under standby letter of credit agreements. At American's option, certain letters
of credit are secured by funds held by bond trustees and by approximately $540
million of short-term investments.
5. LEASES
American leases various types of equipment and property, including
aircraft, and airport and off-airport facilities. The future minimum lease
payments required under capital leases, together with the present value of such
lease payments, and future minimum lease payments required under operating
leases that have initial or remaining non-cancelable lease terms in excess of
one year as of December 31, 2000, were (in millions):
Capital Operating
Year Ending December 31, Leases Leases
------- ---------
2001 $ 280 $ 950
2002 236 898
2003 154 910
2004 206 893
2005 135 880
2006 and subsequent 835 11,268
------- -------
1,846(1) $15,799(2)
=======
Less amount representing interest 482
-------
Present value of net minimum lease payments $ 1,364
=======
(1) Includes $191 million guaranteed by AMR relating to special facility
revenue bonds issued by municipalities.
(2) Includes $6.4 billion guaranteed by AMR relating to special facility
revenue bonds issued by municipalities.
At December 31, 2000, the Company had 201 aircraft under operating leases
and 65 aircraft under capital leases. The aircraft leases can generally be
renewed at rates based on fair market value at the end of the lease term for one
to five years. Most aircraft leases have purchase options at or near the end of
the lease term at fair market value, but generally not to exceed a stated
percentage of the defined lessor's cost of the aircraft or at a predetermined
fixed amount.
During 1996, American made prepayments on the cancelable operating leases
it had on 12 of its Boeing 767-300 aircraft. Upon the expiration of the amended
leases, American can purchase the aircraft for a nominal amount. As a result,
the aircraft were recorded as flight equipment under capital leases. During 2000
and 1999, the Company exercised its option to purchase six and two of the Boeing
767-300 aircraft for a nominal fee, respectively. As such, these aircraft were
reclassified from flight equipment under capital leases to owned flight
equipment.
Rent expense, excluding landing fees, was $1.2 billion in 2000 and 1999,
and $1.1 billion in 1998.
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6. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted of
(in millions):
December 31,
------------------
2000 1999
------ ------
Secured variable and fixed rate indebtedness due through 2015
(effective rates from 6.86% - 9.597% at December 31, 2000) $2,316 $1,940
6.0% - 7.1% bonds due through 2031 176 176
Unsecured variable rate indebtedness due through 2024
(3.55% at December 31, 2000) 86 86
Other 23 29
------ ------
Long-term debt, less current maturities $2,601 $2,231
====== ======
Maturities of long-term debt (including sinking fund requirements) for
the next five years are: 2001 - $108 million; 2002 - $101 million; 2003 - $107
million; 2004 - $163 million; 2005 - $265 million.
American has $1.0 billion in credit facility agreements that expire
December 15, 2005, subject to certain conditions. At American's option, interest
on these agreements can be calculated on one of several different bases. For
most borrowings, American would anticipate choosing a floating rate based upon
the London Interbank Offered Rate (LIBOR). At December 31, 2000, no borrowings
were outstanding under these agreements.
Certain debt is secured by aircraft, engines, equipment and other assets
having a net book value of approximately $2.4 billion. In addition, certain of
American's debt and credit facility agreements contain restrictive covenants,
including a minimum net worth requirement, which could limit American's ability
to pay dividends. At December 31, 2000, under the most restrictive provisions of
those debt and credit facility agreements, approximately $1.5 billion of the
retained earnings of American were available for payment of dividends to AMR.
Cash payments for interest, net of capitalized interest, were $196
million, $123 million and $145 million for 2000, 1999 and 1998, respectively.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, AMR uses a variety of
financial instruments, including interest rate swaps, fuel swap and option
contracts, and currency exchange agreements. The Company does not hold or issue
derivative financial instruments for trading purposes.
NOTIONAL AMOUNTS AND CREDIT EXPOSURES OF DERIVATIVES
The notional amounts of derivative financial instruments summarized in
the tables which follow do not represent amounts exchanged between the parties
and, therefore, are not a measure of the Company's exposure resulting from its
use of derivatives. The amounts exchanged are calculated based on the notional
amounts and other terms of the instruments, which relate to interest rates,
exchange rates or other indices.
The Company is exposed to credit losses in the event of non-performance
by counterparties to these financial instruments, but it does not expect any of
the counterparties to fail to meet its obligations. The credit exposure related
to these financial instruments is represented by the fair value of contracts
with a positive fair value at the reporting date, reduced by the effects of
master netting agreements. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position of the
program and its relative market position with each counterparty. The Company
also maintains industry-standard security agreements with the majority of its
counterparties which may require the Company or the counterparty to post
collateral if the value of these instruments falls below certain mark-to-market
thresholds. As of December 31, 2000, no collateral was required under these
agreements, and the Company does not expect to post collateral in the near
future.
INTEREST RATE RISK MANAGEMENT
American utilizes interest rate swap contracts to effectively convert a
portion of its fixed-rate obligations to floating-rate obligations. These
agreements involve the exchange of amounts based on a floating interest rate for
amounts based on fixed interest rates over the life of the agreement without an
exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the obligation. The
related amount payable to or receivable from counterparties is included in
current liabilities or assets. The fair values of the swap agreements are not
recognized in the financial statements. Gains and losses on terminations of
interest rate swap agreements are deferred as an adjustment to the carrying
amount of the outstanding obligation and amortized as an adjustment to interest
expense related to the obligation over the remaining term of the original
contract life of the terminated swap agreement. In the event of the early
extinguishment of a designated obligation, any realized or unrealized gain or
loss from the swap would be recognized in income coincident with the
extinguishment.
During 2000, the Company terminated interest rate swap agreements on
notional amounts of approximately $425 million which had effectively converted a
portion of its fixed-rate obligations to floating-rate obligations. The cost of
terminating these interest rate swap agreements was not material.
The following table indicates the notional amounts and fair values of the
Company's interest rate swap agreements (in millions):
December 31,
---------------------------------------------
2000 1999
-------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
-------- ---------- ---------- ----------
Interest rate swap agreements $158 $ 4 $696 $ (9)
The fair values represent the amount the Company would receive or pay if
the agreements were terminated at December 31, 2000 and 1999, respectively.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
At December 31, 2000, the weighted-average remaining duration of the
interest rate swap agreements in effect was 9.7 years. The weighted-average
floating rates and fixed rates on the contracts outstanding were:
December 31,
-------------------
2000 1999
------ ------
Average floating rate 6.798% 5.855%
Average fixed rate 6.631% 6.593%
Floating rates are primarily based on LIBOR and may change significantly,
affecting future cash flows.
FUEL PRICE RISK MANAGEMENT
American enters into fuel swap and option contracts to protect against
increases in jet fuel prices. Under the fuel swap agreements, American receives
or makes payments based on the difference between a fixed price and a variable
price for certain fuel commodities. Under the fuel option agreements, American
pays a premium to cap prices at a fixed level. The changes in market value of
such agreements have a high correlation to the price changes of the fuel being
hedged. Effective gains or losses on fuel hedging agreements are recognized as a
component of fuel expense when the underlying fuel being hedged is used. Any
premiums paid to enter into option contracts are recorded as assets. Gains and
losses on fuel hedging agreements would be recognized immediately should the
changes in the market value of the agreements cease to have a high correlation
to the price changes of the fuel being hedged. At December 31, 2000, American
had fuel hedging agreements with broker-dealers on approximately 2.3 billion
gallons of fuel products, which represented approximately 40 percent of its
expected 2001 fuel needs, approximately 15 percent of its expected 2002 fuel
needs, and approximately seven percent of its expected 2003 fuel needs. The fair
value of the Company's fuel hedging agreements at December 31, 2000,
representing the amount the Company would receive to terminate the agreements,
totaled $223 million. At December 31, 1999, American had fuel hedging agreements
with broker-dealers on approximately 2.0 billion gallons of fuel products, which
represents approximately 48 percent of its expected 2000 fuel needs and
approximately 10 percent of its expected 2001 fuel needs. The fair value of the
Company's fuel hedging agreements at December 31, 1999, representing the amount
the Company would receive to terminate the agreements, totaled $232 million.
FOREIGN EXCHANGE RISK MANAGEMENT
To hedge against the risk of future exchange rate fluctuations on a
portion of American's foreign cash flows, the Company enters into various
currency put option agreements on a number of foreign currencies. The option
contracts are denominated in the same foreign currency in which the projected
foreign cash flows are expected to occur. These contracts are designated and
effective as hedges of probable quarterly foreign cash flows for various periods
through December 31, 2001, which otherwise would expose the Company to foreign
currency risk. Realized gains on the currency put option agreements are
recognized as a component of passenger revenues. At December 31, 2000 and 1999,
the notional amount related to these options totaled approximately $456 million
and $445 million, respectively, and the fair value, representing the amount AMR
would receive to terminate the agreements, totaled approximately $20 million and
$14 million, respectively.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
The Company has entered into Japanese yen currency exchange agreements to
effectively convert certain yen-based lease obligations into dollar-based
obligations. Changes in the value of the agreements due to exchange rate
fluctuations are offset by changes in the value of the yen-denominated lease
obligations translated at the current exchange rate. Discounts or premiums are
accreted or amortized as an adjustment to interest expense over the lives of the
underlying lease obligations. The related amounts due to or from counterparties
are included in other liabilities or other assets. The net fair values of the
Company's yen currency exchange agreements, representing the amount the Company
would pay or receive to terminate the agreements, were (in millions):
December 31,
------------------------------------------------------------------
2000 1999
----------------------------- ------------------------------
Notional Notional
Amount Fair Value Amount Fair Value
------------ ---------- ------------ ----------
Japanese yen 31.0 billion $(5) 33.6 billion $41
The exchange rates on the Japanese yen agreements range from 66.5 to
113.5 yen per U.S. dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt were estimated using
quoted market prices where available. For long-term debt not actively traded,
fair values were estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts and estimated fair values of the Company's
long-term debt, including current maturities, were (in millions):
December 31,
--------------------------------------------------------
2000 1999
------------------------ -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ -------- ------
Secured variable and fixed rate
indebtedness $2,416 $2,500 $1,997 $2,022
6.0% - 7.1 % bonds 176 179 176 175
Unsecured variable rate indebtedness
86 86 86 86
Other 31 31 33 33
------ ------ ------ ------
$2,709 $2,796 $2,292 $2,316
====== ====== ====== ======
All other financial instruments, except for the investment in Equant, are
either carried at fair value or their carrying value approximates fair value.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended (SFAS 133), was adopted by the Company on January 1,
2001. SFAS 133 requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The adoption of SFAS 133 did not have a material impact on the Company's net
earnings. However, the Company recorded a transition adjustment of approximately
$100 million in accumulated other comprehensive income in the first quarter of
2001.
8. INCOME TAXES
American, as a wholly-owned subsidiary, is included in AMR's consolidated
tax return. Under the terms of American's tax sharing agreement with AMR,
American's provision for income taxes has been computed on the basis that
American files separate consolidated income tax returns with its subsidiaries.
The significant components of the income tax provision were (in
millions):
Year Ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Current $ 78 $211 $439
Deferred 426 216 243
---- ---- ----
$504 $427 $682
==== ==== ====
The income tax provision includes a federal income tax provision of $453
million, $376 million and $602 million and a state income tax provision of $46
million, $44 million and $73 million for the years ended December 31, 2000, 1999
and 1998, respectively.
The income tax provision differed from amounts computed at the statutory
federal income tax rate as follows (in millions):
Year Ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Statutory income tax provision $449 $369 $612
State income tax provision, net of federal benefit 30 29 47
Meal expense 17 17 16
Change in valuation allowance -- -- 3
Other, net 8 12 4
---- ---- ----
Income tax provision $504 $427 $682
==== ==== ====
The change in the valuation allowance in 1998 relates to the utilization
of foreign tax credits.
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8. INCOME TAXES (CONTINUED)
The components of American's deferred tax assets and liabilities were (in
millions):
December 31,
-------------------------
2000 1999
------- -------
Deferred tax assets:
Postretirement benefits other than pensions $ 644 $ 627
Rent expense 452 387
Frequent flyer obligation 366 310
Gains from lease transactions 229 243
Alternative minimum tax credit carryforwards 124 238
Other 533 508
------- -------
Total deferred tax assets 2,348 2,313
------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization (3,348) (2,983)
Pensions (90) (51)
Other (315) (263)
------- -------
Total deferred tax liabilities (3,753) (3,297)
------- -------
Net deferred tax liability $(1,405) $ (984)
======= =======
At December 31, 2000, American had available under the terms of its tax
sharing agreement with AMR approximately $124 million of alternative minimum tax
credit carryforwards which are available for an indefinite period.
Cash payments for income taxes were $79 million, $232 million and $434
million for 2000, 1999 and 1998, respectively.
9. STOCK AWARDS AND OPTIONS
The Company participates in AMR's 1998 and 1988 Long Term Incentive
Plans, as amended, (collectively, the Plans) whereby officers and key employees
of AMR and its subsidiaries may be granted stock options, stock appreciation
rights, restricted stock, deferred stock, stock purchase rights, other
stock-based awards and/or performance-related awards, including cash bonuses.
The Company also participates in AMR's Pilot Stock Option Plan (The Pilot Plan).
The Pilot Plan granted members of the Allied Pilots Association the option to
purchase 11.5 million shares of AMR stock at $41.69 per share, $5 less than the
average fair market value of the stock on the date of grant, May 5, 1997. These
shares were exercisable immediately. In conjunction with the Sabre spin-off, the
exercise price of The Pilot Plan options was adjusted to $17.59 per share.
The Company accounts for participation in AMR's stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations. In 2000, 1999 and
1998, the total charge for stock compensation expense included in wages,
salaries and benefits expense was $50 million, $52 million and $51 million,
respectively. No compensation expense was recognized for stock option grants
under the Plans since the exercise price was the fair market value of the
underlying stock on the date of grant.
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9. STOCK AWARDS AND OPTIONS (CONTINUED)
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As required by SFAS 123, pro forma information
regarding net earnings has been determined as if the Company had accounted for
employee stock options and awards granted by AMR subsequent to December 31, 1994
using the fair value method prescribed by SFAS 123. The fair value for the stock
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2000, 1999 and 1998:
risk-free interest rates of 5.01% to 6.15%; dividend yields of 0%; expected
stock volatility ranging from 29.9% to 43.5%; and expected life of the options
of 4.5 years for the Plans and 1.5 years for The Pilot Plan.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because SFAS 123 is applicable only to options and stock-based awards granted
subsequent to December 31,1994, its pro forma effect is not fully reflected in
years prior to 1999.
The Company's pro forma net earnings assuming the Company had accounted
for employee stock options issued by AMR to employees of American using the fair
value method would have resulted in 2000, 1999 and 1998 net earnings of $771
million, $622 million and $1,063 million, respectively.
10. RETIREMENT BENEFITS
All regular employees of American are eligible to participate in pension
plans. The defined benefit plans provide benefits for participating employees
based on years of service and average compensation for a specified period of
time before retirement. Airline pilots and flight engineers also participate in
defined contribution plans for which Company contributions are determined as a
percentage of participant compensation.
In addition to pension benefits, other postretirement benefits, including
certain health care and life insurance benefits, are also provided to retired
employees. The amount of health care benefits is limited to lifetime maximums as
outlined in the plan. All regular employees of American may become eligible for
these benefits if they satisfy eligibility requirements during their working
lives.
Certain employee groups make contributions toward funding a portion of
their retiree health care benefits during their working lives. American funds
benefits as incurred and makes contributions to match employee prefunding.
American incurs pension and postretirement benefit expense for American
employees working at affiliates of the Company. American transfers pension and
postretirement benefit expense for these employees to its affiliates based on a
percentage of salaries and cost per employee, respectively.
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10. RETIREMENT BENEFITS (CONTINUED)
The following table provides a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended December
31, 2000 and 1999, and a statement of funded status as of December 31, 2000 and
1999 (in millions):
Pension Benefits Other Benefits
------------------------- -------------------------
2000 1999 2000 1999
------- ------- ------- -------
Reconciliation of benefit obligation
Obligation at January 1 $ 5,628 $ 6,117 $ 1,306 $ 1,526
Service cost 213 236 43 56
Interest cost 467 433 108 108
Actuarial loss (gain) 499 (849) 328 (311)
Plan amendments -- 75 -- --
Benefit payments (373) (388) (77) (70)
Curtailments/ Special termination benefits -- 4 -- --
------- ------- ------- -------
Obligation at December 31 $ 6,434 $ 5,628 $ 1,708 $ 1,306
======= ======= ======= =======
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 5,282 $ 5,564 $ 72 $ 62
Actual return on plan assets 735 7 5 1
Employer contributions 85 100 88 79
Benefit payments (373) (388) (77) (70)
Transfer to affiliates 2 (1) -- --
------- ------- ------- -------
Fair value of plan assets at December 31 $ 5,731 $ 5,282 $ 88 $ 72
======= ======= ======= =======
Funded status
Accumulated benefit obligation (ABO) $ 5,306 $ 4,700 $ 1,708 $ 1,306
Projected benefit obligation (PBO) 6,434 5,628 -- --
Fair value of assets 5,731 5,282 88 72
Funded status at December 31 (703) (346) (1,620) (1,234)
Unrecognized loss (gain) 523 288 (51) (395)
Unrecognized prior service cost 129 139 (35) (40)
Unrecognized transition asset (6) (7) -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost $ (57) $ 74 $(1,706) $(1,669)
======= ======= ======= =======
At December 31, 2000 and 1999, plan assets of approximately $88 million
and $71 million, respectively, were invested in shares of mutual funds managed
by an affiliate of American.
42
44
10. RETIREMENT BENEFITS (CONTINUED)
The following tables provide the components of net periodic benefit cost
for the years ended December 31, 2000, 1999 and 1998 (in millions):
Pension Benefits
------------------------------------
2000 1999 1998
----- ----- -----
Components of net periodic benefit cost
Defined benefit plans:
Service cost $ 213 $ 236 $ 213
Interest cost 467 433 418
Expected return on assets (490) (514) (478)
Amortization of:
Transition asset (1) (4) (11)
Prior service cost 10 5 4
Unrecognized net loss 17 21 22
Settlement loss -- -- 6
----- ----- -----
Net periodic benefit cost for defined
benefit plans 216 177 174
Defined contribution plans 170 151 153
----- ----- -----
Total $ 386 $ 328 $ 327
===== ===== =====
Other Benefits
------------------------------------
2000 1999 1998
----- ----- -----
Components of net periodic benefit cost
Service cost $ 43 $ 56 $ 52
Interest cost 108 108 99
Expected return on assets (7) (6) (5)
Amortization of:
Prior service cost (5) (5) (5)
Unrecognized net gain (14) -- (2)
----- ----- -----
Net periodic benefit cost $ 125 $ 153 $ 139
===== ===== =====
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 2000 and 1999 (in millions):
Pension Benefits Other Benefits
------------------------- -------------------------
2000 1999 2000 1999
------- ------- ------- -------
Prepaid benefit cost $ 107 $ 244 $ -- $ --
Accrued benefit liability (225) (170) (1,706) (1,669)
Additional minimum liability (21) (15) -- --
Intangible asset 72 13 -- --
Accumulated other comprehensive income
10 2 -- --
------- ------- ------- -------
Net amount recognized $ (57) $ 74 $(1,706) $(1,669)
======= ======= ======= =======
43
45
10. RETIREMENT BENEFITS (CONTINUED)
The following assumptions were used by the Company in the measurement of
the benefit obligation as of December 31:
Pension Benefits Other Benefits
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Weighted-average assumptions
Discount rate 7.75% 8.25% 7.75% 8.25%
Salary scale 4.26 4.26 -- --
Expected return on plan assets 9.50 9.50 9.50 9.50
The assumed health care cost trend rate was changed to seven percent
effective December 31, 2000, decreasing gradually to an ultimate rate of four
percent by 2004. The previously assumed health care cost trend rate was five
percent in 1999, decreasing gradually to an ultimate rate of four percent by
2001.
A one percentage point change in the assumed health care cost trend rates
would have the following effects (in millions):
One percent One percent
increase decrease
---------------- ---------------
Impact on 2000 service and interest cost $ 20 $ (19)
Impact on postretirement benefit obligation
as of December 31, 2000 $ 137 $(131)
Effective January 1, 2001, American established a defined contribution
plan for non-contract employees in which the Company will contribute a match up
to 5.5 percent on employee contributions of pensionable earnings to the
Company's existing 401(k) plan. During 2000, American provided a one-time
election for current non-contract employees to remain in the defined benefit
plan or to discontinue accruing future credited service in the defined benefit
plan as of January 1, 2001 and begin participation in the defined contribution
plan.
11. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", as amended (SFAS 131),
requires that a public company report annual and interim financial and
descriptive information about its reportable operating segments. Operating
segments, as defined, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. American has one reportable segment.
American is one of the largest scheduled passenger airlines in the world.
At the end of 2000, American provided scheduled jet service to more than 169
destinations throughout North America, the Caribbean, Latin America, Europe and
the Pacific. American is also one of the largest scheduled air freight carriers
in the world, providing a full range of freight and mail services to shippers
throughout its system.
44
46
11. SEGMENT REPORTING (CONTINUED)
American's operating revenues by geographic region are summarized below
(in millions):
Year Ended December 31,
-----------------------------------------
2000 1999 1998
------- ------- -------
Domestic $12,444 $11,311 $11,176
Latin America 2,758 2,557 2,709
Europe 2,338 1,984 2,039
Pacific 577 486 385
------- ------- -------
Total operating revenues $18,117 $16,338 $16,309
======= ======= =======
The Company attributes operating revenues by geographic region based upon
the origin and destination of each flight segment. The Company's tangible assets
consist primarily of flight equipment which is mobile across geographic markets
and, therefore, has not been allocated.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 2000 and 1999 (in
millions):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
Operating revenues $4,202 $4,610 $4,833 $4,472
Operating income 186 471 517 70
Net earnings 105 324 316 33
1999
Operating revenues $3,709 $4,177 $4,317 $4,135
Operating income 27 364 380 249
Net earnings 35 216 220 156
During the second quarter of 2000, the Company recorded an after-tax gain
of approximately $36 million from the sale of the Company's warrants to purchase
5.5 million shares of priceline common stock (see Note 3). Results for the
fourth quarter of 2000 include an after-tax charge of approximately $32 million
for the Company's employee home computer program.
During the first quarter of 1999, the Company recorded an after-tax gain
of approximately $19 million from the sale of a portion of the Company's
holdings in Equant (see Note 3). Results for the fourth quarter of 1999 include
the following: (i) an after-tax gain of approximately $28 million from the sale
of a portion of the Company's holdings in Equant (see Note 3), (ii) a $28
million after-tax increase in passenger revenue resulting from a change in
estimate related to certain passenger revenues earned during the first nine
months of 1999, and (iii) a $25 million after-tax provision for certain
litigation settlements.
45
47
13. SUBSEQUENT EVENTS
On January 10, 2001, the Company announced three transactions that are
expected to substantially increase the scope of its existing network. First, the
Company announced that it had agreed to purchase substantially all of the assets
of Trans World Airlines, Inc. (TWA) for approximately $500 million in cash and
to assume approximately $3.5 billion of TWA's obligations. The Company's
agreement with TWA contemplated that TWA would file for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code and conduct an auction of its
assets under the auspices of the Bankruptcy Court. During the auction, other
credible offers would compete with the Company's offer. TWA filed for bankruptcy
protection on January 10, 2001. In conjunction therewith, the Company also
agreed to provide TWA with up to $200 million in debtor-in-possession financing
to facilitate TWA's ability to maintain its operations until the completion of
this transaction. The amount available under this facility was later increased
to $330 million. As of March 19, 2001, approximately $289 million had been
provided via the debtor-in-possession financing.
The auction of TWA's assets was commenced on March 5, 2001, and recessed
to March 7, 2001. During the recess, the Company increased its cash bid to $625
million and agreed to leave in the TWA estate certain aircraft security
deposits, advance rental payments and rental rebates that were estimated to
bring approximately $117 million of value to TWA. On March 7, 2001, TWA's board
selected the Company's bid as the "highest and best" offer, and on March 12,
2001, the U.S. Bankruptcy Court, District of Delaware, entered an order
approving the sale of TWA's assets to the Company. Consummation of the
transaction is subject to several contingencies, including the waiver by TWA's
unions of certain provisions of their collective bargaining agreements. The
approval of the U.S. Department of Justice was obtained on March 16, 2001.
Certain parties have filed appeals of the Bankruptcy Court's sale order, and
have sought a stay of the transaction, pending the appeals. A provision of the
Bankruptcy Code will permit the Company to close the transaction, despite
pending appeals, unless a stay is granted. If a stay is granted, the Company
would anticipate that the appeal process would be expedited. Upon the closing of
the transaction, TWA will be integrated into American's operations with a
continued hub operation in St. Louis.
Secondly, the Company announced that it has agreed to acquire from United
Airlines, Inc. (United) certain key strategic assets (slots, gates and aircraft)
of US Airways, Inc. (US Airways) upon the consummation of the previously
announced merger between United and US Airways. In addition to the acquisition
of these assets, American will lease a number of slots and gates from United so
that American may operate half of the northeast Shuttle (New York/Washington
DC/Boston). United will operate the other half of the Shuttle. For these assets,
American will pay approximately $1.2 billion in cash to United and assume
approximately $300 million in aircraft operating leases. The consummation of
these transactions is contingent upon the closing of the proposed United/US
Airways merger. Also, the acquisition of aircraft is generally dependent upon a
certain number of US Airways' Boeing 757 cockpit crew members transferring to
American's payroll.
Finally, American has agreed to acquire a 49 percent stake in, and to
enter into an exclusive marketing agreement with, DC Air LLC (DC Air). American
has agreed to pay $82 million in cash for its ownership stake. American will
have a right of first refusal on the acquisition of the remaining 51 percent
stake in DC Air. American will also lease to DC Air a certain number of Fokker
100 aircraft with necessary crews (known in the industry as a "wet lease").
These wet leased aircraft will be used by DC Air in its operations. DC Air is
the first significant new entrant at Ronald Reagan Washington National Airport
(DCA) in over a decade. DC Air will acquire the assets needed to begin its DCA
operations from United/US Airways upon the consummation of the merger between
the two carriers. American's investment in DC Air and the other arrangements
described above are contingent upon the consummation of the merger between
United and US Airways.
As a result of the above transactions, and for several other reasons,
American has initiated an impairment review of certain fleet types in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This review could result in an impairment charge to be taken by the Company in
2001. The size of any resulting 2001 charge is not presently known, but may be
significant.
46
48
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and Independent Auditors' Report are
filed as part of this report:
Page
----
Report of Independent Auditors 22
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 23
Consolidated Balance Sheets at December 31, 2000 and 1999 24-25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 26
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2000, 1999 and 1998 27
Notes to Consolidated Financial Statements 28-46
(2) The following financial statement schedule and Independent Auditors'
Report are filed as part of this report:
Page
-----
Report of Independent Auditors 50
Schedule II Valuation and Qualifying Accounts and Reserves 51
47
49
Schedules not included have been omitted because they are not
applicable or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K. (Where the
amount of securities authorized to be issued under any of American's
long-term debt agreements does not exceed 10 percent of American's
assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S-K, in
lieu of filing such as an exhibit, American hereby agrees to furnish to
the Commission upon request a copy of any agreement with respect to
such long-term debt.)
EXHIBIT
3.1 Composite of the Certificate of Incorporation of American,
incorporated by reference to Exhibit 3(a) to American's report
on Form 10-K for the year ended December 31, 1982.
10.3 Bylaws of American Airlines, Inc., amended November 18, 1998.
10.1 Aircraft Sales Agreement by and between American Airlines,
Inc. and Federal Express Corporation, dated April 7, 1995,
incorporated by reference to Exhibit 10(ee) to American's
report on Form 10-K for the year ended December 31, 1995.
Confidential treatment was granted as to a portion of this
document.
10.2 Information Technology Services Agreement, dated July 1, 1996,
between American and The Sabre Group, Inc., incorporated by
reference to Exhibit 10.6 to The Sabre Group Holdings, Inc.'s
Registration Statement on Form S-1, file number 333-09747.
Confidential treatment was granted as to a portion of this
document.
10.3 Aircraft Purchase Agreement by and between American Airlines,
Inc. and The Boeing Company, dated October 31, 1997,
incorporated by reference to Exhibit 10.48 to AMR
Corporation's report on Form 10-K for the year ended December
31, 1997. Confidential treatment was granted as to a portion
of this document.
12 Computation of ratio of earnings to fixed charges for the
years ended December 31, 1996, 1997, 1998, 1999 and 2000.
23 Consent of Independent Auditors.
(b) Reports on Form 8-K:
On October 19, 2000, American filed a report on Form 8-K relative to a
press release issued to report the Company's third quarter 2000 earnings,
information relating to American's hosting of its biennial Analyst & Investor
Conference, the dates of the AMR's earnings report for the preceding quarter,
and information on how to access AMR's web site.
On November 1, 2000, American filed a report on Form 8-K relative to
certain data regarding its parent company's, AMR Corporation, fleet plan, unit
costs, capacity, traffic and fuel.
48
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Donald J. Carty
- ---------------------------------------------------
Donald J. Carty
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas W. Horton
- ---------------------------------------------------
Thomas W. Horton
Senior Vice President - Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date: March 22, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates noted:
Directors:
/s/ David L. Boren /s/ Michael A. Miles
- ----------------------------- --------------------------
David L. Boren Michael A. Miles
/s/ Edward A. Brennan /s/ Charles H. Pistor, Jr.
- ----------------------------- --------------------------
Edward A. Brennan Charles H. Pistor, Jr.
/s/ Armando M. Codina /s/ Philip J. Purcell
- ----------------------------- --------------------------
Armando M. Codina Philip J. Purcell
/s/ Earl G. Graves /s/ Joe M. Rodgers
- ----------------------------- --------------------------
Earl G. Graves Joe M. Rodgers
/s/ Ann McLaughlin Korologos /s/ Judith Rodin
- ----------------------------- --------------------------
Ann McLaughlin Korologos Judith Rodin
Date: March 22, 2001
49
51
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited the consolidated financial statements of American
Airlines, Inc. as of December 31, 2000 and 1999, and for each of the three years
in the period ended December 31, 2000, and have issued our report thereon dated
January 16, 2001, except for Note 13, for which the date is March 19, 2001. Our
audits also included Schedule II - Valuation and Qualifying Accounts and
Reserves. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this schedule based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 16, 2001, except for Note 13,
for which the date is March 19, 2001.
50
52
AMERICAN AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
INCREASES SALES,
BALANCE CHARGED TO RETIRE- BALANCE
AT INCOME WRITE-OFFS MENTS AT
BEGINNING STATEMENT (NET OF AND END OF
OF YEAR ACCOUNTS PAYMENTS RECOVERIES) TRANSFERS YEAR
--------- ---------- -------- ----------- --------- -------
YEAR ENDED DECEMBER 31, 2000
Allowance for
obsolescence of inventories $255 $ 54 $ -- $ -- $ (7) $302
Allowance for
uncollectible accounts 53 18 -- (45) -- 26
Reserves for environmental
remediation costs 65 24 (19) -- -- 70
Reserves for litigation 31 -- (2) -- -- 29
YEAR ENDED DECEMBER 31, 1999
Allowance for
obsolescence of inventories 196 54 -- -- 5 255
Allowance for
uncollectible accounts 17 34 -- 2 -- 53
Reserves for environmental
remediation costs 23 48 (6) -- -- 65
Reserves for litigation -- 39 (8) -- -- 31
YEAR ENDED DECEMBER 31, 1998
Allowance for
obsolescence of inventories 189 35 -- -- (28) 196
Allowance for
uncollectible accounts 8 12 -- (3) -- 17
Reserves for environmental
remediation costs 14 12 (3) -- -- 23
51
53
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
12 Computation of ratio of earnings to fixed charges for the
years ended December 31, 1996, 1997, 1998, 1999 and 2000.
23 Consent of Independent Auditors.
1
EXHIBIT 12
AMERICAN AIRLINES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
Earnings:
Earnings from continuing operations before
income taxes and extraordinary loss
$ 957 $1,287 $1,745 $1,054 $1,282
Add: Total fixed charges (per below) 1,076 995 906 989 1,068
Less: Interest capitalized 10 19 97 111 143
------ ------ ------ ------ ------
Total earnings $2,023 $2,263 $2,554 $1,932 $2,207
====== ====== ====== ====== ======
Fixed charges:
Interest $ 371 $ 297 $ 208 $ 215 $ 281
Portion on rental expense representative
of the interest factor 704 697 697 773 785
Amortization of debt expense 1 1 1 1 2
------ ------ ------ ------ ------
Total fixed charges $1,076 $ 995 $ 906 $ 989 $1,068
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 1.88 2.27 2.82 1.95 2.07
====== ====== ====== ====== ======
1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post Effective Amendment No. 2
to the Registration Statement (Form S-3 No. 33-42998 and Form S-3 No. 333-74937)
of American Airlines, Inc., and in the related Prospectuses, of our reports
dated January 16, 2001, except for Note 13, for which the date is March 19,
2001, with respect to the consolidated financial statements and schedule of
American Airlines, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 2000.
ERNST & YOUNG LLP
Dallas, Texas
March 22, 2001
