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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 [Fee Required]
For fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
Commission file number 1-2691.
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 .
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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 9, 1998, 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
I(1)(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.
On July 2, 1996, AMR completed the reorganization of its information
technology businesses known as The SABRE Group into a separate, wholly-owned
subsidiary of AMR known as The SABRE Group Holdings, Inc. (the Reorganization).
Prior to the Reorganization, most of The SABRE Group's business units were
divisions of American. As part of the Reorganization, all of the businesses of
The SABRE Group, including American's SABRE Travel Information Network, SABRE
Computer Services, SABRE Development Services, and SABRE Interactive divisions
(collectively, the Information Services Group), and certain buildings,
equipment, and American's leasehold interest in certain other buildings used by
The SABRE Group were combined in subsidiaries of American, which were then
dividended to AMR.
Following the Reorganization, American operates in only one business
segment which consists primarily of American's Passenger and Cargo divisions.
AMERICAN'S PASSENGER DIVISION is one of the largest scheduled passenger airlines
in the world. At the end of 1997, American provided scheduled jet service to
more than 165 destinations throughout North America, the Caribbean, Latin
America, Europe and the Pacific.
AMERICAN'S CARGO DIVISION is one of the largest scheduled air freight carriers
in the world. It provides a full range of freight and mail services to shippers
throughout the airline's system. In addition, through cooperative agreements
with other carriers, it has the ability to transport shipments to virtually any
country in the world.
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, Chicago O'Hare, Miami and San
Juan, Puerto Rico. In 1995, American implemented schedule reductions which ended
the airline's hub operations at Raleigh/Durham and Nashville. Delta Air Lines
and United Airlines have hub operations at Dallas/Fort Worth and Chicago O'Hare,
respectively.
The AMR Eagle carriers owned by AMR Eagle Holding Corporation, an AMR
subsidiary, increase the number of markets AMR's Airline Group serves by
providing connections to American at American's hubs and certain other major
airports. The AMR Eagle carriers serve smaller markets through Dallas/Fort
Worth, Chicago, Miami, San Juan, Los Angeles and New York John F. Kennedy
International Airport. 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 $5.1 billion in 1997 and $4.7 billion in 1996 and 1995. Additional
information about the Company's foreign operations is included in Note 12 to the
consolidated financial statements.
Service over almost all of American's routes is highly 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 non-stop routes, American competes with
at least one, and usually more than one, major domestic airline including:
America West Airlines, Continental Airlines, Delta Air Lines, Northwest
Airlines, Southwest Airlines, Trans World Airlines, United Airlines, and US
Airways. Competition is even greater between cities that require a connection,
where as many as eight airlines may compete via their respective hubs. American
also competes with national, regional, all-cargo, and charter carriers and,
particularly on shorter segments, ground transportation.
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On all of its routes, pricing decisions are affected 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. As of
December 31, 1997, approximately 47 percent of American's bookings were impacted
by competition from lower-cost carriers. American and its principal competitors
use inventory management systems that permit them to vary the number of discount
seats offered on each flight in an effort to maximize revenues, yet still be
price competitive with lower-cost carriers.
Competition in many international markets is subject to extensive
government regulation. In these markets, American competes with foreign
investor-owned carriers, state-owned airlines and U.S. carriers 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 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 policy 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.
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, U.S. carriers are limited in their rights to carry
passengers beyond designated gateway cities in foreign countries. Some of
American's foreign competitors are owned and subsidized by foreign governments.
To improve their access to each others' markets, various U.S. and foreign
carriers -- including American -- have established marketing relationships with
other carriers. American currently has code-sharing programs with Aero
California, Aspen Mountain Air, British Midland, Business Express, Canadian
Airlines International Limited, China Airlines, Gulf Air, Hawaiian Airlines, LOT
Polish Airlines, Qantas Airways, Singapore Airlines, South African Airways and
the TAM Group. In addition, American plans to implement code-share alliances
with other international carriers, including Air Liberte, Asiana Airlines, China
Eastern Airlines, Iberia, Lan Chile, Philippine Airlines and the TACA Group,
pending regulatory approval. The Company has also agreed to acquire a minority
equity interest, pending regulatory approval by the Department of Justice, in
the Argentine holding company Interinvest, S.A. which owns a controlling
interest in the Argentine carriers Aerolineas Argentinas and Austral Lineas
Aereas. In the coming years, the Company expects to develop these code-sharing
programs further and to evaluate new alliances with other international
carriers.
In February 1998, the Company announced its plans to finalize an alliance
between American and Japan Airlines (JAL). Subject to regulatory approval of the
U.S. Department of Transportation and Japan's Ministry of Transport, the two
carriers will introduce extensive code sharing across each other's networks. The
two carriers already have in place full reciprocity between their frequent flyer
programs and an extensive cooperation agreement in air cargo.
Furthermore, in June 1996, the Company announced its plans to create a
worldwide alliance between American and British Airways Plc. Subject to
regulatory approval, which is still pending, the two carriers will introduce
extensive code sharing across each other's networks. Additionally, the carriers
will combine their passenger and cargo activities between the United States and
Europe and will share the resulting profits on these services. During 1997, a
frequent flyer program was introduced between the two carriers.
American 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,
and its superior service also give it a competitive advantage.
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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 under the Federal Aviation Act of 1958,
as amended. The DOT maintains jurisdiction over 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. In addition, 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 and the installation of upgraded digital
flight data recorders, enhanced ground proximity warning systems and cargo
compartment smoke detection and fire suppression systems. Based on its current
implementation schedule, American expects to be in compliance with the
applicable requirements within the required time periods.
The U.S. Department of Justice 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
relating to 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.
Several items of legislation have been introduced in the Congress that
would, if enacted; (i) authorize the withdrawal of slots from major carriers --
including American -- at key airports for redistribution to new entrants and
smaller carriers and/or (ii) provide financial assistance, in the form of
guarantees and/or subsidized loans, to smaller carriers for aircraft purchases.
In addition, the Departments of Justice and Transportation are investigating
competition at major hub airports. The outcomes of the proposed legislation and
the investigations are unknown. However, to the extent that (i) slots are taken
from American at key airports, (ii) restrictions are imposed upon American's
ability to respond to a competitor, or (iii) competitors have a financial
advantage in the purchase of aircraft because of federal assistance, 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, many international markets are characterized by substantial
commissions, overrides, and discounts to travel agents, brokers and wholesalers.
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 have begun to implement 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 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 National, Chicago O'Hare and Newark
airports as high density traffic airports. Newark was subsequently removed from
the high density airport classification. The rule adopted hourly take-off and
landing slot allocations for each of these airports. Currently, the FAA permits
the purchasing, selling, leasing and trading of these slots by airlines and
others, subject to certain restrictions. 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.
American 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
American will be able to obtain slots for these purposes in the future because,
among other factors, slot allocations are subject to changes in government
policies.
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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
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 has maintained compliance with such requirements without any material
adverse effect on its business.
For purposes of noise standards, jet aircraft are rated by categories or
"stages." The ANCA requires the phase-out by December 31, 1999, of Stage II
aircraft operations, subject to certain exceptions. Under final regulations
issued by the FAA in 1991, air carriers are required to reduce, by modification
or retirement, the number of Stage II aircraft in their fleets 50 percent by
December 31, 1996; 75 percent by December 31, 1998; and 100 percent by December
31, 1999. Alternatively, a carrier may satisfy the regulations by operating a
fleet that is at least 65 percent, 75 percent, and 100 percent Stage III by the
dates set forth in the preceding sentence, respectively. At December 31, 1997,
approximately 88 percent of American's active fleet was Stage III, the quietest
and most fuel efficient rating category.
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 night-time curfews. The
ANCA generally requires FAA approval of local noise restrictions on Stage III
aircraft first effective after October 1990, and establishes a regulatory notice
and review process for local restrictions on Stage II aircraft first proposed
after October 1990. 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's alleged waste disposal volumes are minor
compared to the other PRPs. 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.
American, along with most other tenants at the San Francisco
International Airport, 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.
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. 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.
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 or liquidity.
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LABOR
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 36 percent of American's consolidated operating
expenses for the year ended December 31, 1997.
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 before
the contract becomes amendable. 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, following
which the labor organization may strike and the airline may resort to
"self-help," including the imposition of its proposed amendments and the hiring
of replacement workers.
In 1995, American reached agreements with the members of the Association
of Professional Flight Attendants (APFA) and the Transport Workers Union (TWU)
on their labor contracts. American's collective bargaining agreements with the
APFA and the TWU become amendable on November 1, 1998 and March 1, 2001,
respectively.
American's collective bargaining agreement with the Allied Pilots
Association (APA) became amendable on August 31, 1994. On September 2, 1996,
American and the APA reached a tentative agreement on a new labor contract. The
tentative agreement was approved by the APA Board of Directors and sent out for
membership ratification, but subsequently rejected by the APA membership. On
January 10, 1997, the NMB proffered binding arbitration to the APA and American.
American agreed to arbitration but because the APA did not also agree, the
proffer was rejected and on January 15, 1997, the APA and American were notified
(i) that the NMB was terminating its services and (ii) that beginning February
15, 1997, either party could resort to self-help remedies, including a strike by
the members of the APA. On February 15, 1997, the APA did initiate a strike
against American but immediately thereafter President Clinton intervened and
appointed a Presidential Emergency Board (PEB), pursuant to his authority under
the Railway Labor Act. The effect of President Clinton's actions was to stop the
strike and begin a process during which the PEB reviewed the positions advocated
by both parties. On March 17, 1997, American and the APA reached a second
tentative agreement on a new contract. The tentative agreement was ratified by
the APA membership on May 5, 1997. The new contract becomes amendable August 31,
2001. Among other provisions, the agreement granted pilots options to buy 5.75
million shares of AMR stock at $83.375, $10 less than the average fair market
value of the stock on the date of grant, May 5, 1997. The options became
immediately exercisable on the date the new contract was ratified.
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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 1993 through
1997 were:
Average
Price Per
Average Gallon, Percent of
Gallons Price 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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1993 2,939 1,818 61.8 59.1 13.2
1994 2,741 1,556 56.7 54.2 11.7
1995 2,749 1,565 56.9 53.8 11.3
1996 2,734 1,866 68.2 63.3 13.5
1997 2,773 1,860 67.1 62.1 12.9
Based upon American's 1997 fuel consumption, a one cent increase in the
average annual price-per-gallon of jet fuel would increase American's monthly
fuel costs by approximately $2.3 million, not considering the offsetting effect
of American's fuel cost hedging program.
The impact of fuel price changes on the Company's competitors is
dependent upon various factors, including hedging strategies. However, lower
fuel prices may be offset by increased fare competition and lower revenues for
all air carriers. Conversely, there can be no assurance that American will be
able to pass fuel cost increases on to its customers by increasing fares in the
future.
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.
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. All miles earned after July 1989
must be redeemed within three years or they expire.
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
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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.
At December 31, 1997 and 1996, American estimated that approximately 5.6
million and 5.3 million free travel awards, respectively, were eligible for
redemption. At December 31, 1997 and 1996, American estimated that approximately
4.8 million and 4.5 million free travel awards, respectively, were expected to
be redeemed for free travel. In making this estimate, American has excluded
mileage in inactive accounts, mileage related to accounts that has not yet
reached the lowest level of free travel award, and mileage in active accounts
that has reached the lowest level of free travel award but which is not expected
to ever be redeemed for free travel. 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 and deferred revenues for mileage credits sold to others
participating in the program was $628 million and $469 million, representing
11.7 percent and 7.7 percent of American's total current liabilities at December
31, 1997 and 1996, respectively.
The number of free travel awards used for travel on American during the
years ended December 31, 1997, 1996 and 1995, was approximately 2.2 million each
year, representing 8.6 percent of total revenue passenger miles at December 31,
1997 and 8.4 percent at December 31, 1996 and 1995. 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, 1997, is included in Note 13 to
the consolidated financial statements.
No material part of the business of American and its subsidiaries 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, 1997, included:
Weighted-
Current Average
Seating Capital Operating Age
Equipment Type Capacity Owned Leased Leased Total (Years)
- -------------------------------- ------------ ---------- ---------- ---------- ---------- ----------
Airbus A300-600R 192/266/267 10 - 25 35 8
Boeing 727-200 150 65 14 - 79 21
Boeing 757-200 188 50 9 31 90 6
Boeing 767-200 172 8 - - 8 15
Boeing 767-200 Extended Range 165 9 13 - 22 12
Boeing 767-300 Extended Range 207 16 15 10 41 7
Fokker 100 97 66 5 4 75 5
McDonnell Douglas DC-10-10 237/290/297 13 - - 13 20
McDonnell Douglas DC-10-30 271/282 4 1 - 5 23
McDonnell Douglas MD-11 238/255 13 - - 13 5
McDonnell Douglas MD-80 139 119 25 116 260 10
---------- ---------- ---------- ---------- ----------
Total 373 82 186 641 10
========== ========== ========== ========== ==========
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.
In April 1995, American announced an agreement to sell 12 of its
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). In
addition, in March 1998, the Company exercised its option to sell its remaining
seven MD-11 aircraft to FedEx. Six aircraft had been delivered as of December
31, 1997. The remaining 13 aircraft will be delivered between 1998 and 2003.
Lease expirations for American's leased aircraft included in the above
table as of December 31, 1997, were:
2003
and
Equipment Type 1998 1999 2000 2001 2002 Thereafter
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Airbus A300-600R - - - - - 25
Boeing 727-200 - 2 4 8 - -
Boeing 757-200 - - 2 2 2 34
Boeing 767-200 Extended Range - - - - - 13
Boeing 767-300 Extended Range - - 8 - 1 16
Fokker 100 - - - 2 3 4
McDonnell Douglas DC-10-30 - - - 1 - -
McDonnell Douglas MD-80 - - 3 9 14 115
---------- ---------- ---------- ---------- ---------- ----------
- 2 17 22 20 207
========== ========== ========== ========== ========== ==========
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 use arrangements with the municipalities or governmental agencies
owning or controlling them and leases certain other ground equipment for use at
its facilities.
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.
ITEM 3. LEGAL PROCEEDINGS
In January 1985, American announced a new fare category, the "Ultimate
SuperSaver," a discount, advance purchase fare that carried a 25 percent penalty
upon cancellation. On December 30, 1985, a class action lawsuit was filed in
Circuit Court, Cook County, Illinois entitled Johnson vs. American Airlines,
Inc. The Johnson plaintiffs allege that the 10 percent federal excise
transportation tax should have been excluded from the "fare" upon which the 25
percent penalty was assessed. Summary judgment was granted in favor of American
but subsequently reversed and vacated by the Illinois Appellate Court. In August
1997, the Court denied the plaintiffs' motion for class certification. American
is vigorously defending the lawsuit.
In connection with its frequent flyer program, American was sued in two
cases (Wolens et al v. American Airlines, Inc. and Tucker v. American Airlines,
Inc.) seeking class action certification that were consolidated and are
currently pending in the Circuit Court of Cook County, Illinois. The litigation
arises from certain changes made to American's AAdvantage frequent flyer program
in May 1988 which limited the number of seats available to participants
traveling on certain awards and established blackout dates during which no
AAdvantage seats would be available for certain awards. In the consolidated
action, the plaintiffs allege that these changes breached American's contract
with AAdvantage members, seek money damages for the alleged breach and
attorney's fees and seek to represent all persons who joined the AAdvantage
program before May 1988 and accrued mileage credits before the seat limitations
were introduced. The complaint originally asserted several state law claims,
however only the plaintiffs' breach of contract claim remains after the U. S.
Supreme Court ruled that federal law preempted the other claims. Although the
case has been pending for numerous years, it still is in its preliminary stages.
The court has not ruled as to whether the case should be certified as a class
action. American is vigorously defending the lawsuit.
Gutterman et al. v. American Airlines, Inc. is also pending in the
Circuit Court of Cook County, Illinois, arising from an announced increase in
AAdvantage mileage credits required for free travel. In December 1993, American
announced that the number of miles required to claim a certain travel award
under American's AAdvantage frequent flyer program would be increased effective
February 1, 1995, giving rise to the Gutterman litigation filed on that same
date. The Gutterman plaintiffs claim that the announced increase in award
mileage level violated the terms and conditions of the agreement between
American and AAdvantage members. The plaintiffs seek class certification of this
action, although the court has yet to rule on the issue. To date, only limited
discovery has been undertaken. American is vigorously defending the lawsuit.
On October 22, 1997, federal agents executed a search warrant at
American's Miami facilities. American has learned that a federal grand jury is
investigating whether American handled hazardous materials and processed courier
shipments, cargo and excess baggage in accordance with applicable laws and
regulations. In connection with this investigation, American has been served
with a subpoena calling for the production of documents relating to the handling
of courier shipments, cargo, excess baggage and hazardous materials. American
has produced documents responsive to the subpoena and 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).
American Airlines, Inc., the principal subsidiary of AMR, was founded in 1934.
On July 2, 1996, AMR completed the reorganization of its information
technology businesses known as The SABRE Group into a separate, wholly-owned
subsidiary of AMR known as The SABRE Group Holdings, Inc. (the Reorganization).
Prior to the Reorganization, most of The SABRE Group's business units were
divisions of American. As part of the Reorganization, all of the businesses of
The SABRE Group, including American's SABRE Travel Information Network, SABRE
Computer Services, SABRE Development Services, and SABRE Interactive divisions
(collectively, the Information Services Group), and certain buildings,
equipment, and American's leasehold interest in certain other buildings used by
The SABRE Group were combined in subsidiaries of American, which were then
dividended to AMR.
Following the Reorganization, American operates in only one business
segment which consists primarily of American's Passenger and Cargo divisions.
AMERICAN'S PASSENGER DIVISION is one of the largest scheduled passenger airlines
in the world. At the end of 1997, American provided scheduled jet service to
more than 165 destinations throughout North America, the Caribbean, Latin
America, Europe and the Pacific.
AMERICAN'S CARGO DIVISION is one of the largest scheduled air freight carriers
in the world. It provides a full range of freight and mail services to shippers
throughout the airline's system. In addition, through cooperative agreements
with other carriers, it has the ability to transport shipments to virtually any
country in the world.
HIGHLIGHTS
SUMMARY American recorded net earnings in 1997 of $780 million. The Company's
results were adversely affected by a brief strike and the strike threat from
members of the Allied Pilots Association (APA) during the first quarter of 1997,
which negatively impacted the Company's net earnings by an estimated $70
million, and the reinstatement of the airline transportation tax in March of
1997.
American recorded income from continuing operations in 1996 of $569
million. In the fourth quarter of 1996, American recorded a $26 million charge
($16 million after tax) to write down the value of aircraft interiors the
Company planned to refurbish. Excluding this special charge, income from
continuing operations was $585 million.
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REVENUES
1997 COMPARED TO 1996 American's operating revenues increased 4.8 percent to
$15.9 billion in 1997, compared to $15.1 billion in 1996. American's passenger
revenues increased 4.9 percent, or $665 million. The increase in passenger
revenues resulted from a 2.6 percent increase in passenger yield (the average
amount one passenger pays to fly one mile) from 13.03 to 13.37 cents and a 2.2
percent increase in passenger traffic. For the year, domestic yields increased
1.8 percent, Latin American yields increased 4.5 percent, European yields
increased 3.8 percent and Pacific yields increased 1.0 percent. In 1997,
American derived 69 percent of its passenger revenues from domestic operations
and 31 percent from international operations.
American's domestic traffic increased 2.0 percent to 74.3 billion revenue
passenger miles (RPMs), while domestic capacity, as measured by available seat
miles (ASMs), increased 0.8 percent. International traffic grew 2.6 percent to
32.7 billion RPMs on a capacity increase of 0.4 percent. The increase in
international traffic was led by a 7.2 percent increase in Latin America on
capacity growth of 5.5 percent. This increase was partially offset by a 1.7
percent decrease in the Pacific on a capacity decline of 2.9 percent and a 1.5
percent decrease in Europe on a capacity decline of 5.3 percent, primarily due
to the cancellation of several routes during 1997.
American benefited from several external factors in 1997. First, a
healthy U.S. economy produced strong demand for air travel. Second, industry
capacity grew at a more modest rate than demand, which led to higher industry
load factors and a healthy pricing environment. However, these benefits were
adversely impacted by a brief strike and the strike threat by members of the APA
during the first quarter of 1997, which negatively impacted the Company's net
earnings by an estimated $70 million.
OPERATING EXPENSES
1997 COMPARED TO 1996 American's operating expenses of $14.4 million in 1997
were up $604 million, or 4.4 percent, versus 1996. American's cost per ASM
increased 4.0 percent to 9.27 cents.
Wages, salaries and benefits increased $286 million, or 5.8 percent, due
primarily to an increase in the average number of equivalent employees,
contractual wage rate and seniority increases that are built into the Company's
labor contracts, including a three percent rate increase granted to pilots
effective August 31, 1997, and an increase in the provision for profit sharing.
Fuel expense decreased $6 million, or 0.3 percent, due to a 1.6 percent
decrease in American's average price per gallon, including taxes, partially
offset by a 1.4 percent increase in American's fuel consumption.
Commissions to agents increased 2.5 percent, or $30 million, due
primarily to increased passenger revenues. This increase was offset by changes
in the Company's travel agency commission payment structure implemented in
September 1997 which lowered the base commission paid to travel agents from 10
percent to eight percent on all tickets purchased in the U.S. and Canada for
both domestic and international travel.
Maintenance materials and repairs expense increased 31.4 percent, or $176
million, due to an increase in airframe and engine maintenance check volumes at
American's maintenance bases as a result of the maturing of its fleet.
Other operating expenses increased $99 million, or 4.2 percent, due
primarily to an increase in outsourced services, additional airport security
requirements, and higher costs, such as credit card fees, resulting from higher
passenger revenues. Other operating expenses in 1996 included a $26 million
charge to write down the value of aircraft interiors.
OTHER INCOME (EXPENSE)
1997 COMPARED TO 1996 Interest income increased $105 million due primarily to
higher investment balances. Related party interest - net decreased 46.5 percent,
or $73 million, due primarily to the decline in the balance of American's
intercompany subordinated note with AMR during 1997. Miscellaneous - net for
1996 included a $21 million provision for a cash payment representing American's
share of a multi-carrier travel agency class action litigation
11
13
OTHER INFORMATION
In March 1998, the Company exercised its purchase rights to acquire two
additional Boeing 777-200IGWs for deliveries in 1999. Depending upon the
Company's fleet requirements, the Company may exercise additional aircraft
purchase rights throughout the remainder of 1998. Also in March 1998, the
Company exercised its option to sell its remaining seven MD-11 aircraft to
Federal Express with deliveries between 2000 and 2002.
YEAR 2000 COMPLIANCE The Company has implemented a Year 2000 compliance program
designed to ensure that the Company's computer systems and applications will
function properly beyond 1999. The SABRE Group, which operates and maintains
substantially all of the computer systems and applications utilized by the
Company, has also implemented a Year 2000 compliance program. The Company and
The SABRE Group believe adequate resources have been allocated for this purpose
and expect their Year 2000 date conversion programs to be completed on a timely
basis. Testing on certain systems and applications has commenced and will
continue throughout the course of the Year 2000 programs. However, there can be
no assurance that the systems of other parties (e.g., Federal Aviation
Administration, Department of Transportation, airport authorities, data
providers) upon which the Company's businesses also rely will be converted on a
timely basis. The Company's business, financial condition, or results of
operations could be materially adversely affected by the failure of its systems
and applications or those operated by other parties to properly operate or
manage dates beyond 1999.
The Company expects to incur significant costs from The SABRE Group,
internal staff costs and consulting and other expenses related to infrastructure
and facilities enhancements necessary to prepare its system for the Year 2000.
The Company's total estimated cost of the Year 2000 compliance program is
approximately $125 million to $160 million, of which approximately $50 million
was incurred as of December 31, 1997. The remaining expenses are expected to be
incurred primarily in 1998. A significant portion of these costs are not likely
to be incremental costs to the Company, but rather will represent the
redeployment of current information technology spending. Maintenance or
modification costs associated with making existing computer systems Year 2000
compliant will be expensed as incurred.
The costs of the project and the date on which the Company plans to
complete the Year 2000 compliance program are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
DALLAS LOVE FIELD In 1968, as part of an agreement between the cities of Fort
Worth and Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond
ordinance was enacted by both cities (the Bond Ordinance). The Bond Ordinance
required both cities to direct all scheduled interstate passenger operations to
DFW and was an integral part of the bonds issued for the construction and
operation of DFW. In 1979, as part of a settlement to resolve litigation with
Southwest Airlines, the cities agreed to expand the scope of operations allowed
under the Bond Ordinance at Dallas' Love Field. This settlement was codified by
Congress and became known as the Wright Amendment. The Wright Amendment limited
interstate operations at Love Field to the four states contiguous to Texas (New
Mexico, Oklahoma, Arkansas and Louisiana) and prohibited through ticketing to
any destination outside that perimeter. In 1997, without the consent of either
city, Congress amended the Wright Amendment by (i) adding three states (Kansas,
Mississippi and Alabama) to the perimeter and (ii) removing all federal
restrictions on large aircraft configured with 56 seats or less (the 1997
Amendment). In October 1997, the City of Fort Worth filed suit in state district
court against the City of Dallas and others seeking to enforce the Bond
Ordinance. Fort Worth contends that the 1997 Amendment does not preclude the
City of Dallas from exercising its proprietary rights to restrict traffic at
Love Field in a manner consistent with the Bond Ordinance and, moreover, that it
has an obligation to do so. American has joined in this litigation. Thereafter,
Dallas filed a declaratory judgment action in federal district court seeking to
have the court declare that, as a matter of law, the 1997 Amendment precludes
Dallas from exercising any restrictions on operations at Love Field. As a result
of the foregoing, the future of flight operations at Love Field and American's
DFW hub is uncertain. To the extent that operations at Love Field to new
destinations increase, American may be compelled for competitive reasons to
divert resources from DFW to Love Field. This diversion could adversely impact
American's business.
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14
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.
AIRLINE TRANSPORTATION TAXES The Federal airline passenger excise tax, which was
reimposed in the first quarter of 1997, expired on September 30, 1997. A
replacement tax mechanism took effect on October 1, 1997. Over a five year
period on a sliding scale, the airline ticket tax will be reduced from 10
percent to 7.5 percent and a $3 per passenger segment fee will be phased in.
Additionally, the fee for international arrivals and departures was increased
from $6 per departure to $12 for each arrival and departure and a 7.5 percent
tax was added on the purchase of frequent flyer miles.
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 FACILITY American has a $1.0 billion credit facility agreement which
expires December 19, 2001. At American's option, interest on the agreement 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, 1997, no borrowings were outstanding under
the agreement.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The adoption of SFAS 130 will have no
impact on the Company's results of operations.
FORWARD-LOOKING INFORMATION
The preceding discussions under 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, projections relating to results of operations and
financial condition, including increases in revenues and unit costs, Year 2000
compliance, overall economic projections and the Company's plans and objectives
for future operations, including 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:
UNCERTAINTY OF FUTURE COLLECTIVE BARGAINING AGREEMENTS 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.
ECONOMIC AND OTHER CONDITIONS The airline industry is affected by changes in
national, regional and local economic conditions, inflation, war (or the threat
thereof), consumer preferences and spending patterns, demographic trends,
consumer perceptions of airline safety, costs of safety and security measures
and 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.
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15
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of American's routes
is highly competitive. On most of its non-stop routes, American competes with at
least one, and usually more than one, major domestic airline, as well as
lower-cost carriers. American also competes with national, regional, all-cargo
and charter 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 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 needed for code-sharing alliances and other arrangements
with other airlines, restrictions on competitive practices (e.g., new
regulations which would curtail an airlines ability to respond to a competitor)
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.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Page
------------
Report of Independent Auditors 16
Consolidated Statement of Operations 17
Consolidated Balance Sheet 18
Consolidated Statement of Cash Flows 20
Consolidated Statement of Stockholder's Equity 21
Notes to Consolidated Financial Statements 22
15
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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, 1997 and 1996, 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, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 19, 1998
16
18
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions)
- --------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
--------------- -------------- --------------
REVENUES
Passenger $ 14,310 $ 13,645 $ 13,134
Cargo 678 672 668
Other 868 819 701
--------------- -------------- --------------
Total operating revenues 15,856 15,136 14,503
--------------- -------------- --------------
EXPENSES
Wages, salaries and benefits 5,220 4,934 4,818
Aircraft fuel 1,860 1,866 1,565
Commissions to agents 1,212 1,182 1,236
Depreciation and amortization 950 930 975
Other rentals and landing fees 787 762 754
Food service 672 667 675
Aircraft rentals 531 562 604
Maintenance materials and repairs 736 560 494
Other operating expenses 2,441 2,342 2,296
Restructuring costs -- -- 485
--------------- -------------- --------------
Total operating expenses 14,409 13,805 13,902
--------------- -------------- --------------
OPERATING INCOME 1,447 1,331 601
OTHER INCOME (EXPENSE)
Interest income 109 4 7
Interest expense (194) (203) (273)
Related party interest - net (84) (157) (259)
Miscellaneous - net 9 (19) (56)
--------------- -------------- --------------
(160) (375) (581)
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,287 956 20
Income tax provision 507 387 31
--------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 780 569 (11)
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAXES (1996 - $82; 1995 - $141) - 136 232
--------------- -------------- --------------
EARNINGS BEFORE EXTRAORDINARY LOSS 780 705 221
EXTRAORDINARY LOSS, NET OF TAX BENEFIT (1995 - $8) -- -- (13)
--------------- -------------- --------------
NET EARNINGS $ 780 $ 705 $ 208
=============== ============== ==============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
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AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
- --------------------------------------------------------------------------------
December 31,
------------------------------------
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 47 $ 37
Short-term investments 1,762 1,312
Receivables, less allowance for uncollectible
accounts (1997 - $8; 1996 - $6) 1,057 1,087
Inventories, less allowance for obsolescence
(1997 - $189; 1996 - $197) 555 559
Deferred income taxes 360 328
Other current assets 201 221
-------------- --------------
Total current assets 3,982 3,544
EQUIPMENT AND PROPERTY
Flight equipment, at cost 11,981 12,166
Less accumulated depreciation 4,191 3,687
-------------- --------------
7,790 8,479
Purchase deposits for flight equipment 695 --
Other equipment and property, at cost 2,729 2,611
Less accumulated depreciation 1,497 1,371
-------------- --------------
1,232 1,240
-------------- --------------
9,717 9,719
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 2,570 2,589
Other equipment and property 139 135
-------------- --------------
2,709 2,724
Less accumulated amortization 965 842
-------------- --------------
1,744 1,882
OTHER ASSETS
Route acquisition costs, less accumulated amortization
(1997 - $211; 1996 - $182) 945 974
Airport operating and gate lease rights, less accumulated amortization
(1997 - $123; 1996 - $106) 289 306
Prepaid pension cost 382 446
Other 694 691
-------------- --------------
2,310 2,417
-------------- --------------
TOTAL ASSETS $ 17,753 $ 17,562
============== ==============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
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20
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEET
(in millions, except shares and par value)
- --------------------------------------------------------------------------------
December 31,
------------------------------------
1997 1996
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 855 $ 914
Payables to affiliates 595 1,410
Accrued salaries and wages 805 733
Accrued liabilities 915 1,005
Air traffic liability 2,044 1,889
Current maturities of long-term debt 21 22
Current obligations under capital leases 112 109
-------------- --------------
Total current liabilities 5,347 6,082
LONG-TERM DEBT, LESS CURRENT MATURITIES 937 983
LONG-TERM DEBT DUE TO PARENT, LESS CURRENT MATURITIES -- 118
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,382 1,520
OTHER LIABILITIES AND CREDITS
Deferred income taxes 999 680
Deferred gains 610 647
Postretirement benefits 1,524 1,481
Other liabilities and deferred credits 1,600 1,523
-------------- --------------
4,733 4,331
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock - $1 par value;
1,000 shares authorized, issued and outstanding -- --
Additional paid-in capital 1,732 1,717
Minimum pension liability adjustment (3) (22)
Retained earnings 3,625 2,833
-------------- --------------
5,354 4,528
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 17,753 $ 17,562
============== ==============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
21
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
- --------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 780 $ 705 $ 208
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 744 815 925
Deferred income taxes 286 215 54
Amortization 206 198 213
Provision for restructuring costs -- -- 485
Provisions for losses -- -- 41
Change in assets and liabilities:
Decrease (increase) in receivables 30 (354) (136)
Increase in inventories (30) (61) (15)
Increase in accounts payable
and accrued liabilities 60 174 408
Increase (decrease) in air traffic liability 155 422 (6)
Other, net 35 25 (181)
--------------- --------------- ---------------
Net cash provided by operating activities 2,266 2,139 1,996
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (973) (409) (842)
Net increase in short-term investments (450) (496) (72)
Proceeds from sale of equipment and property 258 268 59
--------------- --------------- ---------------
Net cash used for investing activities (1,165) (637) (855)
CASH FLOW FROM FINANCING ACTIVITIES:
Funds transferred to affiliates, net (933) (399) (686)
Payments on long-term debt and capital lease obligations (158) (1,136) (582)
Proceeds from:
Issuance of long-term debt -- -- 184
--------------- --------------- ---------------
Net cash used for financing activities (1,091) (1,535) (1,084)
--------------- --------------- ---------------
Net increase (decrease) in cash 10 (33) 57
Cash at beginning of year 37 70 13
--------------- --------------- ---------------
Cash at end of year $ 47 $ 37 $ 70
=============== =============== ===============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
22
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in millions)
- --------------------------------------------------------------------------------
Minimum
Additional Pension
Common Paid-in Liability Retained
Stock Capital Adjustment Earnings Total
------------- --------------- -------------- -------------- --------------
Balance at January 1, 1995 $ -- $ 1,699 $ (199) $ 1,733 $ 3,233
Net earnings -- -- -- 208 208
Adjustment for minimum
pension liability -- -- 198 -- 198
Other -- -- -- 7 7
------------- --------------- -------------- -------------- --------------
Balance at December 31, 1995 -- 1,699 (1) 1,948 3,646
Net earnings -- -- -- 705 705
Reorganization of The SABRE
Group:
Dividend of Assets of The
SABRE Group to Parent -- 18 -- (669) (651)
Transfer of debenture to
Parent -- -- -- 850 850
Adjustment for minimum
pension liability -- -- (21) -- (21)
Other -- -- -- (1) (1)
------------- --------------- -------------- -------------- --------------
Balance at December 31, 1996 -- 1,717 (22) 2,833 4,528
Net earnings -- -- -- 780 780
Adjustment for minimum
pension liability -- -- 19 -- 19
Transfer of net pension obligation
of The SABRE Group to Parent -- -- -- 12 12
Other -- 15 -- -- 15
------------- --------------- -------------- -------------- --------------
Balance at December 31, 1997 $ -- $ 1,732 $ (3) $ 3,625 $ 5,354
============= =============== ============== ============== ==============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF CONSOLIDATION 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 1997 presentation.
GENERAL American's Passenger Division is one of the largest scheduled passenger
airlines in the world. At the end of 1997, American provided scheduled jet
service to more than 165 destinations throughout North America, the Caribbean,
Latin America, Europe and the Pacific. American's Cargo Division is one of the
largest scheduled air freight carriers in the world, providing a full range of
freight and mail services to shippers throughout the airline's system.
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 that spare assemblies are depreciated on a group basis. The
depreciable lives and residual values used for the principal depreciable asset
classifications are:
Residual
Depreciable Life Value
----------------------------------- -------------
Boeing 727-200 (Stage II) December 31, 1999(1) None
Boeing 727-200 (to be converted to Stage III) December 31, 2003(1) None
DC-10 December 31, 2002(2) None
Other aircraft 20 years 5%
Major rotable parts, avionics and assemblies Life of equipment to which 0-10%
applicable
Improvements to leased flight equipment Term of lease None
Buildings and improvements (principally on 10-30 years or term of lease None
leased land)
Furniture, fixtures and other equipment 3-20 years None
1 In 1996, American changed the estimated useful lives of its Boeing
727-200 aircraft and engines from an average depreciable life of 21
years to an approximate common retirement date of December 31, 1999 for
those aircraft which will not be converted to Stage III noise standards
and December 31, 2003 for those which will be converted to Stage III.
The impact of this change was not material.
2 Approximate common retirement date.
Equipment and property under capital leases are amortized over the term
of the leases and such amortization is included in depreciation and
amortization. Lease terms vary but are generally 10 to 25 years for aircraft and
7 to 40 years for other leased equipment and property.
MAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased
flight equipment are charged to operating expense as incurred.
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1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS The Company continually evaluates intangible assets to
determine whether current events and circumstances warrant adjustment of the
carrying values or amortization periods.
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, 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 transportation 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 $178 million, $183 million, and $175 million for the
years ended December 31, 1997, 1996, and 1995, 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.
STATEMENT OF CASH FLOWS Short-term investments, without regard to remaining
maturity at acquisition, are not considered as cash equivalents for purposes of
the statement of cash flows.
2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
On July 2, 1996, AMR completed the reorganization of its information
technology businesses known as The SABRE Group into a separate, wholly-owned
subsidiary of AMR known as The SABRE Group Holdings, Inc. (the Reorganization).
Prior to the Reorganization, most of The SABRE Group's business units were
divisions of American. As part of the Reorganization, all of the businesses of
The SABRE Group, including American's SABRE Travel Information Network, SABRE
Computer Services, SABRE Development Services, and SABRE Interactive divisions
(collectively, the Information Services Group), and certain buildings,
equipment, and American's leasehold interest in certain other buildings used by
The SABRE Group were combined in subsidiaries of American, which were then
dividended to AMR. Also as part of the Reorganization, $850 million of
American's long-term debt owed to AMR was repaid through the transfer by
American to AMR of an $850 million debenture issued by The SABRE Group Holdings,
Inc. to American. Thus, the results of operations of American's Information
Services Group have been reflected in the consolidated statement of operations
as income from discontinued operations. Revenues from the operations of the
Information Services Group were $754 million and $1.4 billion for the period
January 1, 1996 through July 1, 1996 and 1995, respectively. Following the
Reorganization, American operates in only one business segment, formerly
American's Airline Group.
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2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
In connection with the Reorganization, the Company entered into various
agreements with The SABRE Group, the primary ones of which are discussed below.
The parties agreed to apply the financial terms of such agreements as of January
1, 1996.
INFORMATION TECHNOLOGY SERVICES AGREEMENT The Company is party to the
Information Technology Services Agreement with The SABRE Group dated July 1,
1996 (the Technology Services Agreement), whereby The SABRE Group provides
American with certain information technology services, including data center and
data network services, services relating to client server operations and
distributed system services. The base term of the Technology Services Agreement
expires June 30, 2006; however, the terms of the specific services to be
provided by The SABRE Group to American expire at various dates beginning in
June 2000. The Technology Services Agreement provides for annual price
adjustments. For certain prices, adjustments are made according to formulas
which, commencing in 1998, are reset every two years and which may take into
account the market for similar services provided by other companies. The
resulting rates may reflect an increase or decrease over the previous rates.
With limited exceptions, under the Technology Services Agreement, The
SABRE Group will continue to be the exclusive provider of all information
technology services that were provided by The SABRE Group to American
immediately prior to the execution of the Technology Services Agreement. Any new
information technology services, including most new application development
services, requested by the Company can be outsourced pursuant to competitive
bidding by the Company or performed by the Company on its own behalf.
American paid The SABRE Group approximately $499 million, $458 million
and $505 million in 1997, 1996 and 1995, respectively, for services contemplated
under the Technology Services Agreement, as well as airline booking fees, for
which American is billed by The SABRE Group at rates similar to those charged to
other carriers.
MARKETING COOPERATION AGREEMENT The SABRE Group 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 The SABRE Group's products targeted to travel agencies until June
30, 2006. For such support, The SABRE Group will pay American a fee based upon
booking volumes. That fee was approximately $22 million and $20 million in 1997
and 1996, respectively. Additionally, American will support The SABRE Group's
promotion of certain other products until 2001, for which The SABRE Group 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.
Additionally, The SABRE Group has guaranteed to American certain cost savings in
the fifth year of the Marketing Cooperation Agreement. If American does not
achieve those savings, The SABRE Group will pay American any shortfall, up to a
maximum of $50 million.
TRAVEL AGREEMENTS American and The SABRE Group are parties to travel agreements
dated July 1, 1996, pursuant to which The SABRE Group 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 and the Corporate Travel Agreement expire on June 30, 2008 and June
30, 1998, respectively. The SABRE Group paid American approximately $48 million
and $43 million in 1997 and 1996, respectively, pursuant to these agreements.
CREDIT AGREEMENT On July 1, 1996, The SABRE Group and American entered into a
Credit Agreement pursuant to which The SABRE Group is required to borrow from
American, and American is required to lend to The SABRE Group, amounts required
by The SABRE Group to fund its daily cash requirements. In addition, American
may, but is not required to, borrow from The SABRE Group to fund its daily cash
requirements. The maximum amount The SABRE Group may borrow at any time from
American under the Credit Agreement is $300 million. The maximum amount that
American may borrow at any time from The SABRE Group under the Credit Agreement
is $100 million. The interest rate to be charged to The SABRE Group is a
function of American's cost of capital and The SABRE Group's credit rating. The
interest rate to be charged to American is The SABRE Group's average portfolio
rate for the months in which borrowing occurred plus an additional
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2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
spread based upon American's credit risk. At the end of each quarter, American
must pay all amounts owed under the Credit Agreement to The SABRE Group. No
borrowings occurred by either The SABRE Group or American during 1997 or 1996.
INDEMNIFICATION AGREEMENTS Airline Management Services Holdings, Inc. (AMS), a
subsidiary of AMR, and Canadian Airlines International Limited (Canadian) have
entered into an agreement pursuant to which AMR and American supply to Canadian
various services, including technology services. American has subsequently
entered into the Canadian Technical Services Subcontract (the Canadian
Subcontract), which expires in 2006, with The SABRE Group to provide data
processing and network distributed systems services to Canadian. Under the terms
of the Canadian Subcontract, American has guaranteed full payment for services
actually performed by The SABRE Group and deferred costs associated with the
installation and implementation of certain systems. Additionally, AMS has
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 The SABRE Group
under the indemnification provisions of the Canadian Subcontract. In connection
with these guarantees, AMS reimbursed American $40 million for amounts paid by
American to The SABRE Group in December 1996 and $7 million in 1996 for certain
deferred costs previously incurred by American.
OTHER AGREEMENTS WITH THE SABRE GROUP American and The SABRE Group are also
parties to a Management Services Agreement dated July 1, 1996, pursuant to which
American performs various management services for The SABRE Group, including
treasury, risk management and other administrative services that American has
historically provided to The SABRE Group, for a fee approximating American's
cost of providing the services plus a margin. The SABRE Group paid American $11
million and $17 million in 1997 and 1996, respectively, pursuant to the
Management Services Agreement.
AMR, American and The SABRE Group 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 The SABRE Group'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.
OTHER RELATED PARTY TRANSACTIONS American invests funds, including funds of
certain affiliates, in a combined short-term investment portfolio and passes
through interest income on such funds at the average rate earned on the
portfolio. To the extent funds transferred to American exceed the invested
portfolio, such amounts are converted to Long-Term Debt Due to Parent under a
subordinated note agreement with AMR. To the extent American invests its excess
cash flows in the short-term investment portfolio, Long-Term Debt Due to Parent
is reduced with a corresponding increase in Payables to Affiliates. The
subordinated promissory note bears interest based on the weighted-average rate
on AMR's long-term debt. The interest rate is reset every six months. The note
is due September 30, 2004, unless extended. American may prepay the note without
penalty at any time.
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2. REORGANIZATION OF THE SABRE GROUP AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
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 AMR Eagle carriers based on the segments flown by the respective
carriers. In 1997, 1996 and 1995, American paid fees of $164 million, $196
million and $201 million, respectively, recorded as a reduction in passenger
revenues, to AMR 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 $63 million for 1997 and 1996 and $54 million for 1995.
American paid affiliates in AMR's Management Services Group $121 million,
$120 million and $108 million in 1997, 1996 and 1995, 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.
American recognizes compensation expense associated with certain AMR
common stock-based awards for employees of American (See Note 9).
3. SHORT-TERM INVESTMENTS
Short-term investments consisted of (in millions):
December 31,
------------------------------------
1997 1996
-------------- --------------
Overnight investments and time deposits $ 523 $ 47
Corporate notes 678 1,014
Other debt securities 561 251
-------------- --------------
$ 1,762 $ 1,312
============== ==============
Short-term investments at December 31, 1997, by contractual maturity
included (in millions):
Due in one year or less $ 1,023
Due after one year through three years 475
Due after three years 264
--------------
$ 1,762
==============
All short-term investments are classified as available-for-sale and
stated at fair value. Net unrealized gains and losses, net of deferred taxes,
are reflected as an adjustment to stockholder's equity.
4. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had firm orders to acquire the
following aircraft: 75 Boeing 737-800s, 12 Boeing 757-200s, 11 Boeing
777-200IGWs and eight Boeing 767-300ERs. Deliveries of these aircraft commence
in 1998 and will continue through 2004. Future payments, including estimated
amounts for price escalation through anticipated delivery dates for these
aircraft and related equipment, will approximate $1.1 billion in 1998, $1.5
billion in 1999, $520 million in 2000 and an aggregate of $1.2 billion in 2001
through 2004. In addition to these commitments for aircraft, the Company's Board
of Directors has authorized expenditures of approximately $1.1 billion over the
next five years for modifications to aircraft, renovations of, and additions to,
airport and office facilities, and the acquisition of various other equipment
and assets. American expects to spend approximately $400 million of this
authorized amount in 1998.
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4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. 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. The
ultimate resolution is not, however, expected to have a significant impact on
the financial position or the liquidity of American.
In April 1995, American announced an agreement to sell 12 of its
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx), with
delivery of the aircraft between 1996 and 1999. No gain or loss is expected to
be recognized as a result of this transaction. Six aircraft had been delivered
as of December 31, 1997. The carrying value of the six remaining aircraft
American has committed to sell was approximately $357 million as of December 31,
1997. In addition, American has the option to sell its remaining seven MD-11
aircraft with deliveries between 2000 and 2002.
American has included an event risk covenant in approximately $2.8
billion of debt and lease agreements. The covenant permits the holders of such
instruments to receive a higher rate of return (between 50 and 700 basis points
above the stated rate) if a designated event, as defined, should occur and the
credit rating of the debt obligations underlying the lease agreements is
downgraded below certain levels.
Special facility revenue bonds have been issued by certain
municipalities, primarily to purchase equipment and improve airport facilities
which 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 $437 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, these letters
of credit are secured by funds held by bond trustees and by approximately $492
million of short-term investments.
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5. LEASES
American leases various types of equipment and property, including
aircraft, passenger terminals, equipment and various other facilities. The
future minimum lease payments required under capital leases, together with the
present value of net minimum 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, 1997, were (in millions):
Capital Operating
Year Ending December 31, Leases Leases
--------------- ---------------
1998 $ 211 $ 940
1999 206 926
2000 272 887
2001 254 893
2002 204 858
2003 and subsequent 1,041 13,116
---------------
---------------
2,188(1) $ 17,620 (2)
===============
Less amount representing interest 694
---------------
Present value of net minimum lease payments $ 1,494
===============
1 Future minimum payments required under capital leases include $192
million guaranteed by AMR relating to special facility revenue bonds
issued by municipalities.
2 Future minimum payments required under operating leases include $6.2
billion guaranteed by AMR relating to special facility revenue bonds
issued by municipalities.
At December 31, 1997, the Company had 186 aircraft under operating leases
and 82 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 totaling $565 million 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 are recorded as flight equipment under
capital leases.
Rent expense, excluding landing fees, was $1.1 billion for 1997 and 1996
and $1.2 billion for 1995.
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6. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted of
(in millions):
December 31,
------------------------------------
1997 1996
-------------- --------------
7.67% - 9.59% notes due through 2014 $ 596 $ 611
Variable rate indebtedness due through 2024
(3.55% - 6.82% at December 31, 1997) 135 162
6.0% - 7.1% bonds due through 2031 176 176
Other 30 34
-------------- --------------
Long-term debt, less current maturities $ 937 $ 983
============== ==============
Maturities of long-term debt (including sinking fund requirements) for
the next five years are: 1998 - $21 million; 1999 - $24 million; 2000 - $27
million; 2001 - $32 million; 2002 - $26 million.
During 1996, American retired prior to scheduled maturity $449 million in
face value of long-term debt and capital lease obligations at amounts which
approximated their carrying value.
American has a $1.0 billion credit facility agreement which expires
December 19, 2001. At American's option, interest on the agreement 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, 1997, no borrowings were outstanding under
the agreement.
Certain debt is secured by aircraft, engines, equipment and other assets
having a net book value of approximately $739 million. In addition, certain of
American's debt and credit facility agreements contain restrictive covenants,
including a cash flow coverage test and a minimum net worth requirement, which
could affect AMR's ability to pay dividends. At December 31, 1997, under the
most restrictive provisions of those agreements, approximately $1.9 billion of
American's retained earnings were available for payment of dividends to AMR.
Cash payments for interest were $300 million, $367 million and $542
million for 1997, 1996 and 1995, respectively.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, American uses a variety
of financial instruments, including interest rate swaps, fuel swaps and collars
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, 1997, 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 enters into 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.
The following table indicates the notional amounts and fair values of the
Company's interest rate swap agreements (in millions):
December 31,
-------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Notional Notional
Amount Fair Value Amount Fair Value
-------------- --------------- -------------- --------------
Interest rate swap agreements $ 1,410 $ 12 $ 1,480 $ (9)
The fair values represent the amount the Company would pay or receive to
terminate the agreements at December 31, 1997 and 1996, respectively.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
At December 31, 1997, the weighted-average remaining duration of the
interest rate swap agreements in effect was 3.7 years. The weighted-average
floating rates and fixed rates on the contracts outstanding were:
December 31,
------------------------------------
1997 1996
-------------- --------------
Average floating rate 5.901% 5.728%
Average fixed rate 5.844% 5.627%
Floating rates are primarily based on LIBOR and may change significantly,
affecting future cash flows.
FUEL PRICE RISK MANAGEMENT
American enters into fuel swap contracts to protect against increases in
jet fuel prices. Under the agreements, American receives or makes payments based
on the difference between a fixed price and a variable price for certain fuel
commodities. The changes in market value of such agreements have a high
correlation to the price changes of the fuel being hedged. Gains and losses on
fuel swap agreements are recognized as a component of fuel expense when the
underlying fuel being hedged is used. Gains and losses on fuel swap agreements
would be recognized immediately were the changes in the market value of the
agreements to cease to have a high correlation to the price changes of the fuel
being hedged. At December 31, 1997, American had agreements with broker-dealers
to exchange payments on approximately 847 million gallons of fuel products,
which represents approximately 23 percent of its expected 1998 fuel needs and
approximately eight percent of its expected 1999 fuel needs. The fair value of
the Company's fuel swap agreements at December 31, 1997, representing the amount
the Company would pay to terminate the agreements, totaled $34 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 September 30, 1999, 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, 1997, the
notional amount related to these options totaled approximately $602 million and
the fair value, representing the amount American would receive to terminate the
agreements, totaled approximately $42 million.
The Company has entered into Japanese yen currency exchange agreements to
effectively convert certain 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 foreign currency 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 currency exchange agreements, representing the amount American would
pay or receive to terminate the agreements, were:
December 31,
-------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Notional Fair Value Notional Fair Value
Amount (in millions) Amount (in millions)
-------------- --------------- -------------- --------------
Japanese yen 24.5 billion $ (15) 24.7 billion $ 14
The exchange rates on the Japanese yen agreements range from 66.50 to 118.80 yen per U.S. dollar.
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7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
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 fair values of the Company's long-term
debt, including current maturities, were (in millions):
December 31,
-------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- --------------- -------------- --------------
Long-term debt due to Parent $ -- $ -- $ 118 $ 134
7.67% - 9.59% notes 611 716 625 685
Variable rate indebtedness 136 136 165 165
6.0% - 7.1 % bonds 176 194 176 180
Other 35 36 39 41
-------------- --------------- -------------- --------------
$ 958 $ 1,082 $ 1,123 $ 1,205
============== =============== ============== ==============
All other financial instruments are either carried at fair value or their
carrying value approximates fair value.
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,
----------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Current $ 221 $ 208 $ 21
Deferred 286 179 10
-------------- -------------- --------------
$ 507 $ 387 $ 31
============== ============== ==============
The income tax provision includes a federal income tax provision of $447
million, $342 million and $16 million for the years ended December 31, 1997,
1996 and 1995, respectively.
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8. INCOME TAXES (CONTINUED)
The income tax provision differed from amounts computed at the statutory
federal income tax rate as follows (in millions):
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Statutory income tax provision $ 451 $ 335 $ 7
State income tax provision, net 35 27 2
Meal expense 18 16 19
Other, net 3 9 3
-------------- -------------- --------------
Income tax provision $ 507 $ 387 $ 31
============== ============== ==============
The components of American's deferred tax assets and liabilities were (in
millions):
December 31,
------------------------------------
1997 1996
-------------- --------------
Deferred tax assets:
Alternative minimum tax credit carryforwards $ 732 $ 804
Postretirement benefits other than pensions 561 543
Rent expense 271 231
Gains from lease transactions 235 248
Frequent flyer obligation 231 172
Operating loss carryforwards -- 45
Other 320 341
Valuation allowance (3) (3)
-------------- --------------
Total deferred tax assets 2,347 2,381
-------------- --------------
Deferred tax liabilities:
Accelerated depreciation and amortization (2,665) (2,396)
Pensions (91) (144)
Other (230) (193)
-------------- --------------
Total deferred tax liabilities (2,986) (2,733)
-------------- --------------
Net deferred tax liability $ (639) $ (352)
============== ==============
At December 31, 1997, American had available under the terms of its tax
sharing agreement with AMR approximately $732 million of alternative minimum tax
credit carryforwards available for an indefinite period.
Cash payments for income taxes were $350 million, $191 million and $49
million for 1997, 1996 and 1995, respectively.
33
35
9. STOCK AWARDS AND OPTIONS
The Company participates in AMR's 1988 Long Term Incentive Plan (1988
Plan), as amended in 1994, 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 5.75
million shares of AMR stock at $83.375 per share, $10 less than the average fair
market value of the stock on the date of grant, May 5, 1997. These shares were
exercisable immediately.
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 1997, the total
charge for stock compensation expense included in wages, salaries and benefits
expense was $66 million. No compensation expense was recognized for stock option
grants under the 1988 Plan since the exercise price of the Company's stock
option grants was the fair market value of the underlying stock on the date of
grant.
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As 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 1997, 1996 and 1995:
risk-free interest rates of 5.80% to 6.31%; dividend yields of 0%; expected
stock volatility ranging from 25.4% to 25.6%; and a weighted-average expected
life of the options of 4.5 years, with the exception of The Pilot Plan which was
1.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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 will not be fully
reflected until 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 1997 net earnings of $755 million. The pro
forma effect of SFAS 123 is immaterial to the Company's 1996 and 1995 net
earnings.
10. RETIREMENT BENEFITS
Substantially all 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.
34
36
10. RETIREMENT BENEFITS (CONTINUED)
Total costs for all pension plans were (in millions):
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Defined benefit plans:
Service cost - benefits earned during
the period $ 159 $ 193 $ 162
Interest cost on projected benefit obligation 350 356 323
Return on assets (375) (87) (1,288)
Net amortization and deferral 17 (305) 1,008
-------------- -------------- --------------
Net periodic pension cost for defined
benefit plans 151 157 205
Defined contribution plans 142 132 124
-------------- -------------- --------------
Total $ 293 $ 289 $ 329
============== ============== ==============
In addition to the pension costs shown above, in late 1995, American
offered early retirement programs to select groups of employees as part of its
restructuring efforts. In accordance with Statement of Financial Accounting
Standards No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," American recognized
additional pension expense of $220 million associated with these programs in
1995 which was included in restructuring costs. Of this amount, $118 million was
for special termination benefits and $102 million was for the actuarial losses
resulting from the early retirements for 1995.
35
37
10. RETIREMENT BENEFITS (CONTINUED)
The funded status and actuarial present value of benefit obligations of
the defined benefit plans were (in millions):
December 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
Plans with Plans with Plans with Plans with
Assets in Accumulated Assets in Accumulated
Excess of Benefit Excess of Benefit
Accumulated Obligation in Accumulated Obligation in
Benefit Excess of Benefit Excess of
Obligation Assets Obligation Assets
----------------- ----------------- ---------------- ----------------
Vested benefit obligation $ 4,524 $ 53 $ 2,729 $ 1,435
================= ================= ================ ================
Accumulated benefit obligation
$ 4,733 $ 57 $ 2,882 $ 1,510
Effect of projected future salary
increases 850 26 650 202
----------------- ----------------- ---------------- ----------------
Projected benefit obligation 5,583 83 3,532 1,712
----------------- ----------------- ---------------- ----------------
Plan assets at fair value 5,121 6 3,154 1,463
Plan assets less than projected
benefit obligation (462) (77) (378) (249)
Unrecognized net loss 728 27 729 237
Unrecognized prior service cost
58 5 37 29
Unrecognized transition asset (21) 1 (32) -
Adjustment to record minimum
pension liability -- (11) -- (69)
----------------- ----------------- ---------------- ----------------
Prepaid (accrued) pension cost(1)
$ 303 $ (55) $ 356 $ (52)
================= ================= ================ ================
1 American's funding policy is to make contributions equal to, or in
excess of, the minimum funding requirements of the Employee Retirement
Income Security Act of 1974.
Plan assets consist primarily of domestic and foreign government and
corporate debt securities, marketable equity securities, and money market fund
and mutual fund shares, of which approximately $71 million of plan assets at
December 31, 1996 were invested in shares of mutual funds managed by a
subsidiary of AMR.
The projected benefit obligation was calculated using weighted-average
discount rates of 7.25% and 7.75% at December 31, 1997 and 1996, respectively;
rates of increase for compensation of 4.20% at December 31, 1997 and 1996; and
the 1983 Group Annuity Mortality Table. The weighted-average expected long-term
rate of return on assets was 9.50% in 1997, 1996 and 1995. The vested benefit
obligation and plan assets at fair value at December 31, 1997, for plans whose
benefits are guaranteed by the Pension Benefit Guaranty Corporation were $4.5
billion and $5.1 billion, respectively.
In October 1997, the portion of American's defined benefit pension plan
applicable to employees of The SABRE Group was spun-off to The SABRE Group. At
the date of the spin-off, the net obligation attributable to The SABRE Group
employees participating in American's plan of approximately $20 million, net of
deferred taxes of approximately $8 million, was credited to retained earnings.
36
38
10. RETIREMENT BENEFITS (CONTINUED)
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. Substantially all employees of American and employees of
certain other subsidiaries 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.
Net other postretirement benefit cost was (in millions):
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
Service cost - benefits earned during the period $ 42 $ 55 $ 48
Interest cost on accumulated other postretirement
benefit obligation 88 98 99
Return on assets (4) (3) (2)
Net amortization and deferral (13) (5) (6)
--------------- --------------- --------------
Net other postretirement benefit cost $ 113 $ 145 $ 139
=============== =============== ==============
In addition to net other postretirement benefit cost, in late 1995,
American offered early retirement programs to select groups of employees as part
of its restructuring efforts. In accordance with Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," American recognized additional other postretirement
benefit expense of $93 million associated with these programs in 1995 which was
included in restructuring costs. Of this amount, $26 million was for special
termination benefits and $67 million was for the net actuarial losses resulting
from the early retirements for 1995.
The funded status of the plan, reconciled to the accrued other
postretirement benefit cost recognized in American's balance sheet, was (in
millions):
December 31,
------------------------------------
1997 1996
-------------- --------------
Retirees $ 630 $ 593
Fully eligible active plan participants 168 123
Other active plan participants 557 461
-------------- --------------
Accumulated other postretirement benefit obligation 1,355 1,177
Plan assets at fair value 49 35
-------------- --------------
Accumulated other postretirement benefit obligation
in excess of plan assets 1,306 1,142
Unrecognized net gain 170 287
Unrecognized prior service benefit 48 52
-------------- --------------
Accrued other postretirement benefit cost $ 1,524 $ 1,481
============== ==============
Plan assets consist primarily of shares of mutual funds managed by a
subsidiary of AMR.
37
39
10. RETIREMENT BENEFITS (CONTINUED)
For 1997 and 1996, future benefit costs were estimated assuming per
capita cost of covered medical benefits would increase at a five and six percent
annual rate, respectively, decreasing gradually to a four percent annual growth
rate in 2001. A one percent increase in this annual trend rate would have
increased the accumulated other postretirement benefit obligation at December
31, 1997, by approximately $144 million and 1997 other postretirement benefit
cost by approximately $19 million. The weighted-average discount rate used in
estimating the accumulated other postretirement benefit obligation was 7.25% and
7.75% at December 31, 1997 and 1996, respectively.
11. RESTRUCTURING COSTS
In 1995, the Company recorded $485 million for restructuring costs which
included (in millions):
December 31,
----------------------
1995
----------------------
Special termination benefits:
Pension $ 118
Other postretirement benefits 26
Other termination benefits 19
Actuarial losses:
Pension 102
Other postretirement benefits 67
----------------------
Total cost of early retirement programs 332
Provisions for aircraft impairment and retirement 145
Other 8
----------------------
$ 485
======================
In 1995, approximately 2,100 mechanics and fleet service clerks and 300
flight attendants elected early retirement under programs offered in conjunction
with renegotiated union labor contracts, and the majority of these employees
left the Company's workforce during 1996. The Company recorded restructuring
costs of $332 million in 1995 related to these early retirement programs. A
large portion of the funding for the programs was done in 1995. The remaining
cash payments associated with these programs will be expended as required for
funding the appropriate pension and other postretirement benefit plans in future
years.
The aircraft portion of the 1995 restructuring costs consists of a $145
million provision related to the write-down of certain McDonnell Douglas DC-10
aircraft. Effective January 1, 1995, American adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. In 1995, the Company
evaluated its fleet operating plan with respect to the DC-10-10 fleet and, as a
result, believes that the estimated future cash flows expected to be generated
by these aircraft will not be sufficient to recover their net book value.
Management estimated the undiscounted future cash flows utilizing models used by
the Company in making fleet and scheduling decisions. As a result of this
analysis, the Company determined that a write-down of the DC-10-10 aircraft to
the net present value of their estimated discounted future cash flows was
warranted, which resulted in a $112 million charge. In addition, the Company
recorded a $33 million charge to reflect a diminution in the estimated market
value of certain DC-10 aircraft previously grounded by the Company. No cash
costs have been incurred or are expected as a result of these DC-10 write-downs.
38
40
12. FOREIGN OPERATIONS
American conducts operations in various foreign countries. American's
operating revenues from foreign operations were (in millions):
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Latin America $ 2,716 $ 2,438 $ 2,316
Europe 2,035 1,967 2,059
Pacific 356 336 373
-------------- -------------- --------------
Foreign operating revenues $ 5,107 $ 4,741 $ 4,748
============== ============== ==============
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1997 and 1996 (in
millions):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- -------------- --------------
1997
Operating revenues $ 3,750 $ 4,029 $ 4,107 $ 3,970
Operating income 199 444 469 335
Net earnings 74 240 266 200
1996
Operating revenues $ 3,639 $ 3,885 $ 3,900 $ 3,712
Operating income 240 447 444 200
Net earnings 150 274 208 73
Results for the third quarter of 1996 include a $21 million provision for
American's share of a multi-carrier travel agency class action litigation
settlement. Results for the fourth quarter of 1996 include a $26 million charge
to write down the value of aircraft interiors the Company planned to refurbish.
39
41
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 16
Consolidated Statement of Operations for the Years Ended
December 31, 1997, 1996 and 1995 17
Consolidated Balance Sheet at December 31, 1997 and 1996 18-19
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 20
Consolidated Statement of Stockholder's Equity for the Years Ended
December 31, 1997, 1996 and 1995 21
Notes to Consolidated Financial Statements 22-39
(2) The following financial statement schedule and Independent
Auditors' Report are filed as part of this report:
Page
--------------
Report of Independent Auditors 43
Schedule II Valuation and Qualifying Accounts and Reserves 44
40
42
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.
3.2 Amended Bylaws of American, incorporated by reference to
Exhibit 3(b) to American's report on Form 10-K for the
year ended December 31, 1990.
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's
report on Form 10-K for the year ended December 31, 1997.
Confidential treatment has been requested as to a portion
of this document.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
41
43
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/ Robert L. Crandall
- ------------------------------------------------------
Robert L. Crandall
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard J. Arpey
- ------------------------------------------------------
Gerard J. Arpey
Senior Vice President - Finance and Planning and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: March 25, 1998
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/ Dee J. Kelly
- ------------------------------------------------------ ------------------------------------------------------
David L. Boren Dee J. Kelly
/s/ Edward A. Brennan /s/ Ann D. McLaughlin
- ------------------------------------------------------ ----------------------------------------------------
Edward A. Brennan Ann D. McLaughlin
/s/ Armando M. Codina /s/ Charles H. Pistor, Jr.
- ------------------------------------------------------ ----------------------------------------------------
Armando M. Codina Charles H. Pistor, Jr.
/s/ Christopher F. Edley /s/ Joe M. Rodgers
- ------------------------------------------------------ ----------------------------------------------------
Christopher F. Edley Joe M. Rodgers
/s/ Charles T. Fisher, III /s/ Judith Rodin
- ------------------------------------------------------ ----------------------------------------------------
Charles T. Fisher, III Judith Rodin
/s/ Earl G. Graves /s/ Maurice Segall
- ------------------------------------------------------ ----------------------------------------------------
Earl G. Graves Maurice Segall
Date: March 25, 1998
42
44
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, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, and have issued our report thereon dated
January 19, 1998. 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 19, 1998
43
45
AMERICAN AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DEDUCTED FROM ASSET TO WHICH APPLICABLE)
(IN MILLIONS)
CHARGED TO
----------
SALES,
BALANCE RETIRE- BALANCE
AT OTHER DEPREC. NET MENTS AT
BEGINNING OPERATING AND RESTRUCT WRITE- AND END OF
OF YEAR EXPENSES AMORT. COSTS OFF TRANSFERS YEAR
--------- -------- ------ ----- --- --------- ----
YEAR ENDED DECEMBER 31, 1997
Allowance for
uncollectible accounts $ 6 $11 $ -- $ -- $(9) $ -- $ 8
Allowance for
obsolescence of inventories 197 -- 33 -- -- (41) 189
YEAR ENDED DECEMBER 31, 1996
Allowance for
uncollectible accounts 13 10 -- -- (14) (3) 6
Allowance for
obsolescence of inventories 228 -- 20 -- -- (51) 197
YEAR ENDED DECEMBER 31, 1995
Allowance for
uncollectible accounts 14 14 -- -- (15) -- 13
Allowance for
obsolescence of inventories 171 -- 36 9 -- 12 228
44
46
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
23 Consent of Independent Auditors.
27 Financial Data Schedule.
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) of American Airlines,
Inc., and in the related Prospectus, of our reports dated January 19, 1998 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, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 25, 1998
45
5
1,000,000
YEAR
DEC-31-1997
JAN-01-1997
DEC-31-1997
47
1,762
1,065
8
555
3,982
18,114
6,653
17,753
5,347
2,319
0
0
1,732
3,622
17,753
0
15,856
0
14,409
0
0
278
1,287
507
780
0
0
0
780
0
0
