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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For fiscal year ended December 31, 2001.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 February 20, 2002,
1,000 shares of the registrant's common stock were outstanding.
The registrant meets the conditions set forth in, and is filing this form with
the reduced disclosure format prescribed by, General Instructions I(1)(a) and
(b) of Form 10-K.
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PART I
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ITEM 1. BUSINESS
American Airlines, Inc., the principal subsidiary of AMR Corporation
(AMR), was founded in 1934. On April 9, 2001, American Airlines, Inc. purchased
substantially all of the assets and assumed certain liabilities of Trans World
Airlines, Inc. (TWA), the eighth largest U.S. carrier. American Airlines, Inc.,
including TWA (collectively, American or the Company), is the largest scheduled
passenger airline in the world. At the end of 2001, American provided scheduled
jet service to more than 161 destinations throughout North America, the
Caribbean, Latin America, Europe and the Pacific. American is also one of the
largest scheduled air freight carriers in the world, providing a full range of
freight and mail services to shippers throughout its system.
On September 11, 2001, two American Airlines aircraft were hijacked and
destroyed in terrorist attacks on The World Trade Center in New York City and
the Pentagon in northern Virginia. On the same day, two United Air Lines
(United) aircraft were also hijacked and used in terrorist attacks. In addition
to the loss of life on board the aircraft, these attacks resulted in untold
deaths and injuries to persons on the ground and massive property damage. In
response to those terrorist attacks, the Federal Aviation Administration (FAA)
issued a federal ground stop order on September 11, 2001, prohibiting all
flights to, from, and within the United States. Airports did not reopen until
September 13, 2001 (except for Washington Reagan Airport, which was partially
reopened on October 4, 2001). The Company was able to operate only a portion of
its scheduled flights for several days thereafter. When flights were permitted
to resume, passenger traffic and yields on the Company's flights were
significantly lower than prior to the attacks. As a result, the Company reduced
its operating schedule to approximately 80 percent of the schedule it flew prior
to September 11, 2001. In addition, as a result of its schedule reduction and
the sharp fall off in passenger traffic, the Company eliminated approximately
18,000 jobs. The Company's future schedule will vary as the Company reacts to
continuing changes in demand and yields, as well as normal factors such as
seasonality and fleet composition.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act), which for all U.S.
airlines and air cargo carriers (collectively, air carriers) provides for, among
other things: (i) $5 billion in compensation for direct losses (including lost
revenues) incurred as a result of the federal ground stop order and for
incremental losses incurred through December 31, 2001 as a direct result of the
attacks, of which the Company has received approximately $703 million as of
December 31, 2001 and expects to receive additional payments in 2002 aggregating
approximately $124 million; (ii) subject to certain conditions, the availability
of up to $10 billion in federal government guarantees of certain loans made to
air carriers for which credit is not reasonably available as determined by a
newly established Air Transportation Stabilization Board; (iii) the authority of
the Secretary of Transportation to reimburse air carriers (which authority
expires 180 days after the enactment of the Act) for the increase in the cost of
insurance, for coverage ending before October 1, 2002, over the premium in
effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of terrorism
committed on or to such air carrier during the 180-day period following the
enactment of the Act; (v) the extension of the due date for the payment by air
carriers of certain excise taxes; and (vi) compensation to individual claimants
who were physically injured or killed as a result of the terrorist attacks of
September 11, 2001. In addition, the Act provides that, notwithstanding any
other provision of law, liability for all claims, whether compensatory or
punitive, arising from the terrorist-related events of September 11, 2001
against any air carrier shall not exceed the liability coverage maintained by
the air carrier.
On November 12, 2001, American Airlines Flight 587 crashed shortly
after take-off from John F. Kennedy International Airport en route to Santo
Domingo in the Dominican Republic. In addition to the loss of life on board the
aircraft, there were several fatalities and injuries to persons on the ground as
well as property damage. The National Transportation Safety Board is currently
investigating the accident; a cause has yet to be determined. As a result of the
accident, claims have been made against American. It is anticipated these claims
will be covered under American's insurance policies.
1
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 five hubs: Dallas/Fort Worth (DFW), Chicago O'Hare,
Miami, St. Louis and San Juan, Puerto Rico. Delta Air Lines (Delta) and United
also have hub operations at DFW and Chicago O'Hare, respectively.
The American Eagle carriers, owned by AMR Eagle Holding Corporation, an
AMR subsidiary, increase the number of markets American serves by providing
connections at American's hubs and certain other major airports. The American
Eagle carriers serve smaller markets through Boston, DFW, Chicago, Miami, San
Juan, Los Angeles and New York's LaGuardia and John F. Kennedy International
Airports. In addition, American contracts with three independently owned
regional airlines which do business as the "American Connection" to provide
connecting service to American through St. Louis. 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, the Company provides
international service to the Caribbean, the Bahamas, Canada, Latin America,
Europe and the Pacific. The Company's operating revenues from foreign operations
were approximately 29 percent in 2001 and 31 percent in 2000 and 1999 of the
Company's total operating revenues. Additional information about the Company's
foreign operations is included in Note 14 to the consolidated financial
statements.
The domestic airline industry is fiercely competitive. Currently, any
air carrier deemed fit by the U.S. Department of Transportation (DOT) is free to
operate scheduled passenger service between any two points within the U.S. and
its possessions. On most of its domestic non-stop routes, the Company faces
competing service from at least one, and sometimes more than one, major domestic
airline including: Alaska Airlines, America West Airlines, Continental Airlines
(Continental), Delta, Northwest Airlines (Northwest), Southwest Airlines, United
and US Airways, and their affiliated regional carriers. Competition is even
greater between cities that require a connection, where all nine major airlines
may compete via their respective hubs. The Company also competes with national,
regional, all-cargo and charter carriers and, particularly on shorter segments,
ground transportation. In addition, on all of its routes, pricing decisions are
affected, in part, by competition from other airlines, some of which have cost
structures significantly lower than the Company's and can therefore operate
profitably at lower fare levels.
The majority of the tickets for travel on American are sold by travel
agents. Domestic travel agents generally receive a base commission of five
percent of the price of the tickets they sell. This amount is capped by the
Company at a maximum of $20 for a domestic roundtrip itinerary and $100 for an
international roundtrip itinerary. Airlines often pay additional commissions in
connection with special revenue programs. Accordingly, airlines compete not only
with respect to the price of the tickets sold but also with respect to the
amount of commissions paid.
The growing use of electronic distribution systems provides the Company
with an ever-increasing ability to lower its distribution costs. The Company
continues to expand the capabilities of its Internet website - AA.com - and the
use of electronic ticketing throughout the Company's network. In addition, the
Company has entered into various agreements with several Internet travel
providers, including Travelocity.com, Expedia, priceline.com, Orbitz and
Hotwire. The base commission for sales through Internet travel providers is
lower than traditional travel agencies.
2
International air transportation is subject to extensive government
regulation. In providing international air transportation, the Company competes
with foreign investor-owned carriers, state-owned carriers and U.S. airlines
that have been granted authority to provide scheduled passenger and cargo
service between the U.S. and various overseas locations. The Company's operating
authority in these markets is subject to aviation agreements between the U.S.
and the respective countries, and in some cases, fares and schedules require the
approval of the DOT and/or the relevant foreign governments. Because
international air transportation is governed by bilateral or other agreements
between the U.S. and the foreign country or countries involved, changes in U.S.
or foreign government aviation policies could result in the alteration or
termination of such agreements, diminish the value of such route authorities, or
otherwise adversely affect the Company's international operations. Bilateral
agreements between the U.S. and various foreign countries served by the Company
are subject to renegotiation. In addition, at some foreign airports, an air
carrier needs slots (landing and take-off authorizations) before the air carrier
can introduce new service or increase existing service. The availability of such
slots is not assured and can therefore inhibit an air carrier's efforts to
compete in certain markets.
The major U.S. air carriers have some advantage over foreign
competitors in their ability to generate traffic from their extensive domestic
route systems. In many cases, however, foreign governments, which own and
subsidize some of the Company's foreign competitors, limit U.S. air carriers'
rights to carry passengers beyond designated gateway cities in foreign
countries. To improve access to each other's markets, various U.S. and foreign
air carriers - including American - have established marketing relationships
with other airlines and rail companies. American currently has code-sharing
programs with Aer Lingus, Air Pacific, Alaska Airlines, Asiana Airlines, China
Eastern Airlines, EVA Air, Finnair, Gulf Air, Hawaiian Airlines, Iberia, Japan
Airlines, LanChile, LOT Polish Airlines, Qantas Airways, SNCF, TACA Group, the
TAM Group, TAP Air Portugal, Thalys and Turkish Airlines. Certain of these
relationships also include reciprocity between American and the other airlines'
frequent flyer programs. In addition, the Company expects to implement
codeshares with Cathay Pacific Airways and Vietnam Airlines pending regulatory
approval. In the coming years, the Company expects to develop these programs
further and to evaluate new alliances with other carriers.
In February 1999, American, British Airways, Canadian Airlines
International Limited (Canadian), Cathay Pacific Airways and Qantas Airways
formed the global alliance ONEworld(TM). In September 1999, Finnair and Iberia
joined these five founding members. Also, in June 2000, Aer Lingus and LanChile
joined the ONEworld alliance. Following the acquisition of Canadian by Air
Canada, Canadian terminated its membership in ONEworld in June 2000. The
ONEworld alliance links the networks of the member carriers to enhance customer
service and smooth connections to the destinations served by the alliance,
including linking the carriers' frequent flyer programs and access to the
carriers' airport lounge facilities.
In August 2001, American entered into a comprehensive transatlantic
alliance agreement with British Airways and subsequently filed for antitrust
immunity with the appropriate regulators in the U.S. and Europe. In January
2002, the DOT issued a preliminary "show cause" order outlining its remedy
requirements for approval of the alliance. Shortly afterwards, American and
British Airways indicated that this alliance would not go forward under the
conditions specified by the DOT. American and British Airways subsequently filed
a motion to withdraw their joint application at the DOT on February 13, 2002;
that motion has not yet been granted. American and British Airways are actively
seeking to further develop bilateral cooperation and enhance the mutual value of
the ONEworld alliance to the extent permitted by regulatory parameters. Several
of American's major competitors are members of marketing/operational alliances
that enjoy antitrust immunity. To the extent that American and British Airways
are restricted in their relationship because they lack antitrust immunity, the
carriers could be at a competitive disadvantage vis-a-vis other alliances.
The Company believes that it has several advantages relative to its
competition. It operates a fleet that is efficient and quiet. It has a
comprehensive domestic and international route structure, anchored by efficient
hubs, which permit it to take full advantage of whatever traffic growth occurs.
The Company believes American's AAdvantage frequent flyer program, which is the
largest program in the industry, its More Room Throughout Coach program and its
superior service also give it a competitive advantage.
3
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 FAA still exercise certain regulatory authority over air
carriers. The DOT maintains jurisdiction over the approval of international
codeshare agreements, international route authorities and certain consumer
protection matters, such as advertising, denied boarding compensation and
baggage liability.
The FAA regulates flying operations generally, including establishing
personnel, aircraft and security standards. As part of that oversight, the FAA
has implemented a number of requirements that the Company is incorporating into
its maintenance programs. These matters relate to, among other things, enhanced
ground proximity warning systems, McDonnell Douglas MD-80 metal-mylar insulation
replacement, McDonnell Douglas MD-80 main landing gear piston improvements,
Boeing 757 and Boeing 767 pylon improvements, Boeing 737 elevator improvements
and Airbus A300 structural improvements. Based on its current implementation
schedule, the Company expects to be in compliance with the applicable
requirements within the required time periods.
The DOJ has jurisdiction over airline antitrust matters. The U.S.
Postal Service has jurisdiction over certain aspects of the transportation of
mail and related services. Labor relations in the air transportation industry
are regulated under the Railway Labor Act, which vests in the National Mediation
Board (NMB) certain regulatory functions with respect to disputes between
airlines and labor unions relating to union representation and collective
bargaining agreements. To the extent the Company continues to increase its
alliances with international carriers, the Company may be subject to certain
regulations of foreign agencies.
In November 2001, the Aviation and Transportation Security Act (ATSA)
was enacted. The ATSA created a new government agency, the Transportation
Security Administration (TSA), which is part of the DOT and is responsible for
aviation security. The ATSA mandates that the TSA shall provide for the
screening of all passengers and property, including U.S. mail, cargo, carry-on
and checked baggage, and other articles that will be carried aboard a passenger
aircraft. The TSA assumed most passenger screening functions in February 2002,
largely by contracting with private-sector security providers; however, by
November 2002, the TSA is required to have its own federal employees in place to
perform these functions. To comply with the checked baggage screening
requirements, all checked baggage must either be screened by Explosive Detection
Systems or another manner, such as positive bag match, manual search, canine
explosive detection, or other approved means. In January 2002, the Company
implemented a bag screening program utilizing several of the approved methods.
The TSA also provides for increased security on flight decks of aircraft and
requires federal air marshals to be present on certain flights.
Effective February 1, 2002, the ATSA imposed a $2.50 per enplanement
security service fee ($5 one-way maximum fee) which will be collected by the air
carriers and submitted to the government to pay for these enhanced security
measures. Additionally, to the extent the TSA determines that such fee is
insufficient to pay for the cost of providing the security measures as mentioned
in the previous paragraph, in each of the years 2002, 2003 and 2004, air
carriers may be required to submit to the government an amount equal to the
amount the air carriers paid for screening passengers and property in 2000.
After that, this fee may be assessed based on the air carrier's market share.
Currently, it is unknown whether the Company will be required to make any
payments under this feature of the ATSA.
In addition, the ATSA requires air carriers to honor tickets for
suspended service on other air carriers that are insolvent or have declared
bankruptcy within 18 months of the passage of the ATSA. To be eligible, a
passenger must make arrangements with the air carrier within 60 days after the
date on which the passenger's air transportation was suspended. In as much as
this provision of the ATSA is recently enacted, the Company has no history to
determine its impact. If a major U.S. air carrier were to declare bankruptcy and
cease operations, this feature of the ATSA could have a significant impact on
the Company. To the extent the Company was not reimbursed for honoring such
tickets, the impact could be adverse.
4
In April 1998, the DOT issued proposed pricing and capacity rules that
would severely limit major air carriers' ability to compete with new entrant
carriers. In January 2001, following a multi-year investigation and public
docket concerning competition between major air carriers and new entrant
carriers, the DOT restated its concerns with competitive practices in the
industry, but declined to issue specific competitive guidelines. In its
statement of findings and conclusions, the DOT reiterated its view that it had
both the authority and the obligation to prevent what it considers to be unfair
competitive practices in the industry, and indicated its intent to pursue
enforcement actions on a case-by-case basis. To the extent that future DOT
enforcement actions either directly or indirectly impose restrictions upon the
Company's ability to respond to competitors, the Company's business may be
adversely impacted.
As described in Item 3 - Legal Proceedings, the Antitrust Division of
the DOJ and several purported classes of private parties are pursuing litigation
alleging that American violated federal antitrust laws when competing with new
air carriers. In April 2001, the U.S. District Court for the District of Kansas
granted American's motion for summary judgment and dismissed the government's
case. The DOJ has appealed, and the private lawsuits have been stayed pending
the outcome of the DOJ's appeal. Adverse court decisions could impose
restrictions on the Company's ability to respond to competitors, or could result
in awards of substantial money damages to private parties, in which case the
Company's business could 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 the Company
serves. While air carriers are required to file and adhere to international fare
and rate tariffs, substantial commissions, overrides and discounts to travel
agents, brokers and wholesalers characterize many international markets.
Legislation (sometimes referred to as the "Passengers' Bill of Rights")
has been discussed in various legislatures (including the Congress). This
legislation could, if enacted: (i) place various limitations on airline fares
and/or (ii) affect operating practices such as baggage handling and overbooking.
Effective December 15, 1999, the Company, as well as other domestic airlines,
implemented a Customer Service Plan to address a number of service goals,
including, but not limited to goals relating to: (i) lowest fare availability,
(ii) delays, cancellations and diversion events, (iii) baggage delivery and
liability, (iv) guaranteed fares, (v) ticket refunds, (vi) accommodation of
customers with special needs, (vii) essential customer needs during
extraordinary delays, (viii) flight oversales, (ix) Frequent Flyer Program -
AAdvantage, (x) other travel policies, (xi) service with domestic code share
partners, and (xii) handling of customer issues. In February 2001, the DOT
Inspector General issued a report on the various air carriers' performance of
their Customer Service Plans. The report included a number of recommendations
which could limit the Company's flexibility with respect to various operational
practices. In February 2001, a bill proposing an "Airline Customer Service
Improvement Act" was introduced in the U.S. Senate. In addition, other items of
legislation have been introduced that would limit hub concentration, reallocate
slots at certain airports and impose higher landing fees at certain hours. To
the extent legislation is enacted that would inhibit the Company's flexibility
with respect to fares, its revenue management system, its operations or other
aspects of its customer service operations, the Company's financial results
could be adversely affected.
Fare discounting by competitors has historically had a negative effect
on the Company's financial results because the Company is generally required to
match competitors' fares to maintain passenger traffic. During recent years, a
number of new low-cost airlines have entered the domestic market and several
major airlines, including the Company, implemented efforts to lower their cost
structures. Further fare reductions, domestic and international, may occur in
the future. If fare reductions are not offset by increases in passenger traffic,
cost reductions or changes in the mix of traffic that improves yields, the
Company's operating results will be negatively impacted.
5
AIRPORT ACCESS In 1968, the FAA issued a rule designating New York
John F. Kennedy, New York LaGuardia, Washington National (now Washington
Reagan), Chicago O'Hare and Newark airports as high-density traffic airports.
Newark was subsequently removed from the high-density airport classification.
The high-density rule limits the number of Instrument Flight Rule operations -
take-offs and landings - permitted per hour and requires that a slot support
each operation. In April 2000, the Wendell H. Ford Aviation Investment and
Reform Act for the 21st Century (Air 21 Act) was enacted which: (i) eliminates
slot restrictions at New York's John F. Kennedy and LaGuardia airports in 2007,
(ii) shrank Chicago O'Hare's slot day from 0645 - 2114 hours to 1445 - 2014
hours starting July 2001, and (iii) eliminates Chicago O'Hare slots in July
2002. The Company does not expect the elimination of slot restrictions to have a
material adverse impact on the Company's operations or its financial condition,
results of operations or cash flows. In the aftermath of September 11, 2001,
Washington Reagan did not reopen until October 4, 2001, and only on a limited
basis. The Company does not know when operations at Washington Reagan will be
allowed to return to their pre-September 11 levels. However, in late February
2002, it was reported that the U.S. Transportation Secretary will propose in
March 2002 that Washington Reagan be allowed to return to its pre-September 11
number of commercial flights.
Under the Air 21 Act, slot restrictions were lifted for service to/from
LaGuardia and certain cities classified as small and non-hub airports (new
service cities). As a consequence, the Company and other air carriers increased
their service at LaGuardia to the new service cities. In December 2000, the DOT
held a lottery for LaGuardia slots for service to the new service cities in
order to ease congestion at the airport. The congestion was a direct result of
the growth of Air 21 Act slot operations. While the Company has scaled back its
service to the new service cities to/from LaGuardia, it is not anticipated that
this reduction will have a material impact on the Company's operations or its
financial condition, results of operations or cash flows.
Currently, the FAA permits the purchasing, selling, leasing or
transferring of slots except those slots designated as international, essential
air service or Air 21 Act. Trading of any slot is permitted subject to certain
parameters. Most foreign airports, including London Heathrow, a major European
destination for American, also have slot allocations. Most foreign authorities
do not permit the purchasing, selling or leasing of slots.
Although the Company is constrained by slots, it currently has
sufficient slot authorizations to operate its existing flights and has generally
been able to obtain slots to expand its operations and change its schedules.
However, there is no assurance that the Company will be able to obtain slots for
these purposes in the future because, among other factors, domestic slot
allocations are subject to changes in government policies.
ENVIRONMENTAL MATTERS The Company is subject to various laws and government
regulations concerning environmental matters and employee safety and health in
the U.S. and other countries. U.S. federal laws that have a particular impact on
the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean
Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the
Safe Drinking Water Act, and the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or the Superfund Act). The Company is
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency (EPA), OSHA, and other federal agencies have
been authorized to promulgate regulations that have an impact on the Company's
operations. In addition to these federal activities, various states have been
delegated certain authorities under the aforementioned federal statutes. Many
state and local governments have adopted environmental and employee safety and
health laws and regulations, some of which are similar to federal requirements.
As a part of its continuing safety, health and environmental program, the
Company anticipates that it will comply with such requirements without any
material adverse effect on its business.
The ANCA recognizes the rights of airport operators with noise problems
to implement local noise abatement programs so long as they do not interfere
unreasonably with interstate or foreign commerce or the national air
transportation system. Authorities in several cities have promulgated aircraft
noise reduction programs, including the imposition of nighttime curfews. The
ANCA generally requires FAA approval of local noise restrictions on aircraft.
While the Company has had sufficient scheduling flexibility to accommodate local
noise restrictions imposed to date, the Company's operations could be adversely
affected if locally-imposed regulations become more restrictive or widespread.
6
American has been identified by the EPA as a potentially responsible
party (PRP) at the Operating Industries, Inc. Superfund Site in California.
American has signed a partial consent decree with respect to this site and is
one of several PRPs named. American has also been identified as a PRP at the
Beede Waste Oil Superfund Site in New Hampshire. American has responded to a
104(e) Request for Information regarding interaction with several companies
related to this site. At the Operating Industries, Inc. and the Beede Waste Oil
sites, American's alleged waste disposal volumes are minor compared to the other
PRPs at these sites. In 1998, the EPA named American a de minimis PRP at the
Casmalia Waste Disposal Site in California.
American, along with most other tenants at the San Francisco
International Airport (SFIA), has been ordered by the California Regional Water
Quality Control Board to engage in various studies of potential environmental
contamination at the airport and to undertake remedial measures, if necessary.
SFIA is also seeking to recover its past costs related to the contamination from
the tenants.
Miami-Dade County is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and funding
the remediation costs through landing fees and various cost recovery methods.
American has been named as a PRP for the contamination at MIA. During the second
quarter of 2001, the County filed a lawsuit against 17 defendants, including
American, in an attempt to recover its past and future cleanup costs (Miami-Dade
County, Florida v. Advance Cargo Services, Inc., et al. in the Florida Circuit
Court). In addition to the 17 defendants named in the lawsuit, 243 other
agencies and companies were also named as PRPs and contributors to the
contamination. American's portion of the cleanup costs cannot be reasonably
estimated due to various factors, including the unknown extent of the remedial
actions that may be required, the proportion of the cost that will ultimately be
recovered from the responsible parties, and uncertainties regarding the
environmental agencies that will ultimately supervise the remedial activities
and the nature of that supervision.
In 1999, American was ordered by the New York State Department of
Environmental Conservation to conduct remediation of environmental contamination
located at Terminals 8 and 9 at New York's John F. Kennedy International
Airport. American is seeking to recover a portion of the related costs from
previous users of the premises.
In 1999, AMR entered a plea agreement with the U.S. Government with
respect to a one count indictment relating to the storage of hazardous
materials. As part of the plea agreement, AMR was placed on probation for three
years and has adopted a comprehensive compliance program. To the extent AMR
fails to abide by the terms of the probation or its compliance program, the
Company's operations may be adversely impacted.
American, along with other tenants at the Luis Munoz Marin
International Airport in San Juan, Puerto Rico, has been named as a PRP for
environmental claims at the airport.
The Company does not expect these matters, individually or
collectively, to have a material impact on its financial condition, results of
operations or cash flows.
7
LABOR
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 38 percent of the Company's consolidated operating
expenses for the year ended December 31, 2001.
The majority of the Company's employees are represented by labor unions
and covered by collective bargaining agreements. The Company's relations with
such labor organizations are governed by the Railway Labor Act. Under this act,
the collective bargaining agreements among American and these organizations do
not expire but instead become amendable as of a stated date. If either party
wishes to modify the terms of any such agreement, it must notify the other party
in the manner described in the agreement. After receipt of such notice, the
parties must meet for direct negotiations, and if no agreement is reached,
either party may request the NMB to appoint a federal mediator. If no agreement
is reached in mediation, the NMB may declare at some 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 by either party, a 30-day "cooling off" period commences. During
that period, a Presidential Emergency Board (PEB) may be established, which
examines the parties' positions and recommends a solution. The PEB process lasts
for 30 days and is followed by a "cooling off" period of 30 days. At the end of
a "cooling off" period, unless an agreement is reached or action is taken by
Congress, the labor organization may strike and the airline may resort to
"self-help", including the imposition of any or all of its proposed amendments
and the hiring of workers to replace strikers.
American reached a new contract with the Association of Professional
Flight Attendants (APFA) during 2001. The new contract becomes amendable on
November 30, 2004.
American reached new agreements with the Transport Workers Union (TWU)
during 2001 concerning the eight employee groups represented by the TWU. The new
agreements become amendable on March 1, 2004.
In 2001, American commenced negotiations with the Allied Pilots
Association (APA). The APA agreement became amendable August 31, 2001.
In addition, a provision under the current APA contract further limits
the number of available seat miles (ASMs) and block hours flown by American's
regional carriers when pilots from American are on furlough. American Eagle
continues to accept previously ordered regional jets. This will cause the ASM
cap to be reached in the first half of 2002, necessitating actions to comply
with that cap. American is working with its regional partners to ensure that it
is in compliance with this provision.
The portions of the Company's work force which are non-union have
already largely incorporated their counterparts from TWA. With respect to the
integration of the unionized portions of the work forces at American and TWA,
the Company engaged facilitators to work with American's and TWA's unions in
attempting to achieve integration agreements acceptable to all unions.
Unfortunately, these discussions were unable to produce agreements acceptable to
both unions as to each class or craft. American later reached integration
agreements with the APA (with respect to pilot integration issues) and the APFA
(with respect to flight attendant integration issues). Discussions with the TWU
did not result in an agreement on integration of the eight work groups
represented at American by the TWU. However, American and the TWU will be
participating in arbitration with respect to certain integration issues in late
February and early March 2002. The International Association of Machinists,
which represents certain work groups at TWA, will be participating as well. The
details of the arbitration agreement are still being worked out. Currently, the
NMB is considering a petition asking that it declare American and TWA a single
carrier for labor relations purposes and the representation effects of such a
ruling (a single carrier ruling is believed likely to occur). It is expected
that the NMB will most likely designate American's incumbent unions as the
collective bargaining representatives of the combined work groups once a single
carrier is found to exist. The integration of the unionized work groups will
thereafter follow in a schedule worked out between American and the relevant
unions.
8
FUEL
The Company's operations are significantly affected by the availability
and price of jet fuel. The Company's fuel costs and consumption for the years
1999 through 2001 were:
Average
Cost Per
Average Gallon, Percent of
Gallons Cost Per Excluding American's
Consumed Total Cost Gallon Fuel Taxes Operating
Year (in millions) (in millions) (in cents) (in cents) Expenses
---- ------------- ------------- ---------- ---------- ----------
1999 2,957 $ 1,622 54.8 50.1 10.6
2000 3,045 2,372 77.9 72.3 14.1
2001 3,294 2,744* 81.2* 76.0* 13.9
* The amounts for 2001 reflect the January 1, 2001 adoption of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133); the 2000 and 1999
amounts do not. See a further discussion of the impact of SFAS 133 to
the Company in Note 9 to the consolidated financial statements.
The impact of fuel price changes on the Company and its competitors is
dependent upon various factors, including hedging strategies. The Company has a
fuel hedging program in which it enters into jet fuel, heating oil and crude
swap and option contracts to protect against increases in jet fuel prices, which
has had the effect of reducing the Company's average cost per gallon. During
2001 and 2000, the Company's fuel hedging program reduced the Company's fuel
expense by approximately $27 million and $517 million, respectively. To reduce
the impact of potential fuel price increases in 2002, as of December 31, 2001,
the Company had hedged approximately 40 percent of its estimated 2002 fuel
requirements. Based on projected fuel usage, the Company estimates that a 10
percent increase in the price per gallon of fuel would result in an increase to
aircraft fuel expense of approximately $159 million in 2002, net of fuel hedge
instruments outstanding at December 31, 2001. Due to the competitive nature of
the airline industry, in the event of continuing increases in the price of jet
fuel, there can be no assurance that the Company will be able to pass on
increased fuel prices to its customers by increasing its fares. Likewise, any
potential benefit of lower fuel prices may be offset by increased fare
competition and lower revenues for all air carriers.
While the Company does not currently 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. In the event there was an outbreak of hostilities or
other conflicts in oil producing areas, there could be reductions in the
production and/or importation of crude oil. If there were major reductions in
the availability of jet fuel, the Company's business would be adversely
affected.
Additional information regarding the Company's fuel program is included
in Item 7(A) - Quantitative and Qualitative Disclosures about Market Risk and in
Note 9 to the consolidated financial statements.
FREQUENT FLYER PROGRAM
American established the AAdvantage frequent flyer program (AAdvantage)
to develop passenger loyalty by offering awards to travelers for their continued
patronage. AAdvantage members earn mileage credits for flights on American,
American Eagle and certain other participating airlines, or by utilizing
services of other program participants, including hotels, car rental companies
and bank credit card issuers. American sells mileage credits and related
services to the other companies participating in the program. American reserves
the right to change the AAdvantage program rules, regulations, travel awards and
special offers at any time without notice. American may initiate changes
impacting, for example, participant affiliations, rules for earning mileage
credit, mileage levels and awards, limited seating for travel awards, and the
features of special offers. American reserves the right to end the AAdvantage
program with six months' notice.
9
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
capacity controlled seating. In 1999, certain changes were made to the
AAdvantage program so that miles do not expire, provided a customer has any type
of qualifying activity at least once every 36 months.
American utilizes the incremental cost method to account for the
portion of its frequent flyer liability incurred when AAdvantage members earn
mileage credits by flying on American or American Eagle. 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. These estimates are based upon
the Company's 12-month historical average of such costs. The cost for fuel is
estimated based on total fuel consumption tracked by various categories of
markets, with an amount allocated to each passenger. Food costs are tracked by
market category, with an amount allocated to each passenger.
Reservation/ticketing costs are based on the total number of passengers,
including those traveling on free awards, divided into American's total expense
for these costs.
Revenue earned from selling AAdvantage miles to other companies
participating in American's frequent flyer program is recognized in two
components. The first component represents the revenue for air transportation
sold and is valued at current market rates. This revenue is deferred and
recognized over the period the mileage is expected to be used, which is
currently estimated to be 28 months. The second revenue component, representing
the marketing products sold and administrative costs associated with operating
the AAdvantage program, is recognized immediately.
In conjunction with the acquisition of TWA's assets (see Note 3 to the
consolidated financial statements), members of TWA's Aviators frequent flyer
program (Aviators) were eligible to transfer the unused mileage balances in
their Aviators account to the AAdvantage program. As part of the purchase price
allocation of TWA, the Company established a liability related to the
incremental cost of the unused mileage balances in the Aviator's program.
Effective November 30, 2001, Aviator's was discontinued and its members have
until November 30, 2002 to exchange their Aviators' miles for AAdvantage miles.
The Company does not expect the future transfer of Aviators' miles into the
AAdvantage program to be material.
At December 31, 2001 and 2000, American estimated that approximately
8.7 million and 6.5 million free travel awards, respectively, were expected to
be redeemed for free travel on American and American Eagle. In making the
estimate of free travel awards, American has included the Aviators' miles and
excluded mileage in inactive accounts, mileage related to accounts that have not
yet reached the lowest level of free travel award, and mileage in active
accounts that have reached the lowest level of free travel award but which are
not expected to ever be redeemed for free travel on American. The liability for
the program mileage that has reached the lowest level of free travel award and
is expected to be redeemed for free travel on American or other participating
airlines and deferred revenues for mileage credits sold to others participating
in the program was approximately $1.1 billion and $976 million, representing
15.6 percent and 14.4 percent of the Company's total current liabilities, at
December 31, 2001 and 2000, respectively.
The estimated number of free travel awards used for travel on American
and American Eagle (excluding TWA) was 2.7 million in 2001, 2.8 million in 2000
and 2.7 million in 1999, representing approximately 7.4 percent of total
passengers boarded in 2001, 7 percent in 2000 and 8 percent in 1999 (excluding
TWA). The Company believes displacement of revenue passengers is minimal given
the Company's load factors, its ability to manage frequent flyer seat inventory,
and the relatively low ratio of free award usage to total passengers boarded.
10
OTHER MATTERS
SEASONALITY AND OTHER FACTORS The Company'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, 2001 is included in Note 15 to
the consolidated financial statements.
No material part of the business of the Company 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 The Company 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.
As a result of the September 11, 2001 events, aviation insurers have
significantly reduced the maximum amount of insurance coverage available to
commercial air carriers for liability to persons other than employees or
passengers for claims resulting from acts of terrorism, war or similar events
(war-risk coverage). At the same time, they significantly increased the premiums
for such coverage as well as for aviation insurance in general.
Pursuant to authority granted in the Act, the Government has
supplemented the commercial war-risk insurance until March 20, 2002 with a third
party liability policy to cover losses to persons other than employees or
passengers for renewable 60-day periods. In the event the insurance carriers
reduce further the amount of insurance coverage available or the Government
fails to renew war-risk insurance, the Company's operations would be adversely
impacted.
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. In the event the Company has to provide a
substantial amount of such services, its operations could be adversely impacted.
11
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
Owned and leased aircraft operated by the Company at December 31, 2001
included:
Average
Seating Capital Operating Age
Equipment Type Capacity Owned Leased Leased Total (Years)
-------------- -------- ----- ------- --------- ----- -------
AMERICAN AIRLINES AIRCRAFT
Airbus A300-600R 178/250/251 10 - 24 34 12
Boeing 727-200(1) 138 33 - - 33 23
Boeing 737-800 134 67 - 10 77 1
Boeing 757-200 176 75 11 31 117 8
Boeing 767-200 160 8 - - 8 19
Boeing 767-200 Extended Range 158 9 12 - 21 16
Boeing 767-300 Extended Range 190/228 32 7 10 49 9
Boeing 777-200 Extended Range 223/245/252 40 - - 40 2
Fokker 100 87 67 3 4 74 9
McDonnell Douglas MD-80 129 130 20 109 259 14
----- ------- --------- ----- ------
Total 471 53 188 712 10
===== ======= ========= ===== ======
TWA LLC AIRCRAFT
Boeing 717-200(2) 100 - - 30 30 1
Boeing 757-200 168 - - 27 27 4
Boeing 767-300 Extended Range 215/233 - - 9 9 7
McDonnell Douglas MD-80 131 19 23 61 103 9
----- ------- --------- ----- ------
Total 19 23 127 169 7
===== ======= ========= ===== ======
(1) The Boeing 727-200 fleet will be removed from service by May 2002.
(2) The Boeing 717-200 fleet will be removed from service by June 2002.
In addition, the following owned and leased aircraft were not operated
by the Company as of December 31, 2001: 15 owned and five operating leased
Boeing 727-200s, 16 operating leased McDonnell Douglas DC-9s, 10 owned McDonnell
Douglas DC-10-10s, six operating leased and one owned McDonnell Douglas MD-80s,
three owned McDonnell Douglas MD-11s and two owned McDonnell Douglas DC-10-30s.
Of the non-operating aircraft discussed above, the Company has agreed
to sell its McDonnell Douglas MD-11s to FedEx Corporation (FedEx). The Company
expects to deliver these aircraft to FedEx by the third quarter of 2002. The 10
McDonnell Douglas DC-10-10 aircraft are currently being leased to Hawaiian
Airlines, Inc. (Hawaiian). Upon termination of the lease agreement with
Hawaiian, the Company has agreed to sell these aircraft to FedEx, with
deliveries beginning in early 2002. The one owned McDonnell Douglas MD-80
aircraft was returned to a lessor in early 2002 in lieu of a leased American
Airlines aircraft. The Company is actively marketing its remaining non-operating
aircraft and does not anticipate bringing these aircraft back into its
operations.
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 7 to the consolidated
financial statements.
12
Lease expirations for the leased aircraft included in the preceding
table as of December 31, 2001, were:
2007
and
Equipment Type 2002 2003 2004 2005 2006 Thereafter
-------------- ------ ------ ------ ------ ------ ----------
AMERICAN AIRLINES AIRCRAFT
Airbus A300-600R -- -- -- -- -- 24
Boeing 737-800 -- -- -- -- -- 10
Boeing 757-200 2 -- 3 -- -- 37
Boeing 767-200 Extended Range -- -- -- -- -- 12
Boeing 767-300 Extended Range -- -- 1 4 2 10
Fokker 100 3 -- -- -- -- 4
McDonnell Douglas MD-80 1 2 -- 23 -- 103
------ ------ ------ ------ ------ ------
6 2 4 27 2 200
====== ====== ====== ====== ====== ======
TWA LLC AIRCRAFT
Boeing 717-200 30 -- -- -- -- --
Boeing 757-200 -- -- 11 -- -- 16
Boeing 767-300 Extended Range 2 7 -- -- -- --
McDonnell Douglas MD-80 -- -- 5 1 -- 78
------ ------ ------ ------ ------ ------
32 7 16 1 -- 94
====== ====== ====== ====== ====== ======
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.
GROUND PROPERTIES
The Company 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 bases at Tulsa International Airport (Tulsa, Oklahoma), Kansas
City International Airport (Kansas City, Missouri) and Alliance Airport (Fort
Worth, Texas); 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 the Company.
The Company 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. During 1999, the Company began construction of an approximate $1.3
billion terminal facility at New York's John F. Kennedy International Airport,
which the Company expects to fund primarily through future tax-exempt financing.
For information concerning the estimated lives and residual values for
owned ground properties, lease terms and amortization relating to ground
properties under capital leases, and acquisitions of ground properties, see
Notes 1 and 7 to the consolidated financial statements.
13
ITEM 3. LEGAL PROCEEDINGS
On July 26, 1999, a class action lawsuit was filed, and in November
1999 an amended complaint was filed, against AMR Corporation, American Airlines,
Inc., AMR Eagle Holding Corporation, Airlines Reporting Corporation, and the
Sabre Group Holdings, Inc. in the United States District Court for the Central
District of California, Western Division (Westways World Travel, Inc. v. AMR
Corp., et al.). The lawsuit alleges that requiring travel agencies to pay debit
memos to American for violations of American's fare rules (by customers of the
agencies) (1) breaches the Agent Reporting Agreement between American and
American Eagle and plaintiffs, (2) constitutes unjust enrichment, and (3)
violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
The as yet uncertified class includes all travel agencies who have been or will
be required to pay monies to American for debit memos for fare rules violations
from July 26, 1995 to the present. Plaintiffs seek to enjoin American from
enforcing the pricing rules in question and to recover the amounts paid for
debit memos, plus treble damages, attorneys' fees, and costs. The Company
intends to vigorously defend the lawsuit. Although the Company believes that the
litigation is without merit, adverse court decisions could impose restrictions
on the Company's ability to respond to competitors, and the Company's business
may be adversely impacted.
On May 13, 1999, the United States (through the Antitrust Division of
the Department of Justice) sued AMR Corporation, American Airlines, Inc., and
AMR Eagle Holding Corporation in federal court in Wichita, Kansas. The lawsuit
alleges that American unlawfully monopolized or attempted to monopolize airline
passenger service to and from Dallas/Fort Worth International Airport (DFW) by
increasing service when new competitors began flying to DFW, and by matching
these new competitors' fares. The Department of Justice seeks to enjoin American
from engaging in the alleged improper conduct and to impose restraints on
American to remedy the alleged effects of its past conduct. On April 27, 2001,
the U.S. District Court for the District of Kansas granted American's motion for
summary judgment. On June 26, 2001, the U.S. Department of Justice appealed the
granting of American's motion for summary judgment. The parties are currently
submitting briefs to the 10th Circuit Court of Appeals. No date has been set for
oral argument. The Company intends to defend the lawsuit vigorously. A final
adverse court decision imposing restrictions on the Company's ability to respond
to competitors would have an adverse impact on the Company.
Between May 14, 1999 and June 7, 1999, seven class action lawsuits were
filed against AMR Corporation, American Airlines, Inc., and AMR Eagle Holding
Corporation in the United States District Court in Wichita, Kansas seeking
treble damages under federal and state antitrust laws, as well as injunctive
relief and attorneys' fees (King v. AMR Corp., et al.; Smith v. AMR Corp., et
al.; Team Electric v. AMR Corp., et al.; Warren v. AMR Corp., et al.; Whittier
v. AMR Corp., et al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp.,
et al.). Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to and from DFW
by increasing service when new competitors began flying to DFW, and by matching
these new competitors' fares. Two of the suits (Smith and Wright) also allege
that American unlawfully monopolized or attempted to monopolize airline
passenger service to and from DFW by offering discounted fares to corporate
purchasers, by offering a frequent flyer program, by imposing certain conditions
on the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several classes of
consumers, the broadest of which is all persons who purchased tickets for air
travel on American into or out of DFW since 1995 to the present. On November 10,
1999, the District Court stayed all of these actions pending developments in the
case brought by the Department of Justice. As a result, to date no class has
been certified. The Company intends to defend these lawsuits vigorously. One or
more final adverse court decisions imposing restrictions on the Company's
ability to respond to competitors or awarding substantial money damages would
have an adverse impact on the Company.
14
On January 30, 2002, the named plaintiff in Hall v. United Airlines, et
al., No. 7:00 CV 123-BR(1), pending in the United States District Court for the
Eastern District of North Carolina, filed an amended complaint alleging that
between 1997 and the present, American and the other defendant airlines
conspired to reduce commissions paid to U.S.-based travel agents in violation of
Section 1 of the Sherman Act. The named plaintiff seeks to certify a nationwide
class of travel agents, but no class has yet been certified. American is
vigorously defending the lawsuit. A final adverse court decision awarding
substantial money damages would have an adverse impact on the Company.
Miami-Dade County is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and funding
the remediation costs through landing fees and various cost recovery methods.
American Airlines, Inc. and AMR Eagle have been named as potentially responsible
parties (PRPs) for the contamination at MIA. During the second quarter of 2001,
the County filed a lawsuit against 17 defendants, including American Airlines,
Inc., in an attempt to recover its past and future cleanup costs (Miami-Dade
County, Florida v. Advance Cargo Services, Inc., et al. in the Florida Circuit
Court). In addition to the 17 defendants named in the lawsuit, 243 other
agencies and companies were also named as PRPs and contributors to the
contamination. American's and AMR Eagle's portion of the cleanup costs 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 Company is vigorously
defending the lawsuit.
15
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 Airlines, Inc. 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 OPERATIONS
(Abbreviated pursuant to General Instruction I(2)(a) of Form 10-K).
American Airlines, Inc., the principal subsidiary of AMR Corporation
(AMR), was founded in 1934. On April 9, 2001, American Airlines, Inc. purchased
substantially all of the assets and assumed certain liabilities of Trans World
Airlines, Inc. (TWA). Accordingly, the operating results of TWA since the date
of acquisition have been included in the accompanying consolidated financial
statements for the year ended December 31, 2001 (see Note 3 to the consolidated
financial statements). American Airlines, Inc., including TWA (collectively,
American), is the largest scheduled passenger airline in the world.
RESULTS OF OPERATIONS
The Company's net loss in 2001 was $1.6 billion compared to net
earnings of $778 million in 2000. On September 11, 2001, two American Airlines
aircraft were hijacked and destroyed in terrorist attacks on The World Trade
Center in New York City and the Pentagon in northern Virginia. On the same day,
two United Air Lines aircraft were also hijacked and used in terrorist attacks.
In response to the terrorist attacks, the Federal Aviation Administration (FAA)
issued a federal ground stop order on September 11, 2001, prohibiting all
flights to, from, and within the United States. Airports did not reopen until
September 13, 2001 (except for Washington Reagan Airport, which was partially
reopened on October 4, 2001). The Company was able to operate only a portion of
its scheduled flights for several days thereafter. When flights were permitted
to resume, passenger traffic and yields on the Company's flights were
significantly lower than prior to the attacks. As a result, the Company reduced
its operating schedule to approximately 80 percent of the schedule it flew prior
to September 11, 2001. Somewhat offsetting the impact of the September 11
events, the Company recorded $827 million in reimbursement from the U.S.
Government under the Air Transportation Safety and System Stabilization Act (the
Act) (see Note 2 to the consolidated financial statements).
REVENUES
2001 COMPARED TO 2000 The Company's 2001 revenues, yield, revenue passenger
miles and available seat miles (ASMs) were severely impacted by the September
11, 2001 terrorist attacks, the Company's reduced operating schedule, a
worsening of the U.S. economy that had already been dampening the demand for
travel both domestically and internationally prior to the September 11, 2001
events, business travel declines as a result of the September 11, 2001 attacks,
and increased fare sale activity occurring subsequent to the September 11
attacks to encourage passengers to resume flying. The Company's revenues
decreased approximately $633 million, or 3.5 percent, versus 2000. However,
excluding TWA's revenues for the period April 10, 2001 through December 31,
2001, the Company's revenues would have decreased approximately $2.5 billion
versus 2000.
16
For comparability purposes, the following discussion does not combine
American's and TWA's results of operations or related statistics for 2001.
American's passenger revenues decreased by 14 percent, or $2.3 billion. In 2001,
American derived approximately 68 percent of its passenger revenues from
domestic operations and approximately 32 percent from international operations.
American's domestic revenue per available seat mile (RASM) decreased 11.3
percent, to 9.28 cents, on a capacity decrease of 5 percent, or 104 billion
ASMs. International RASM decreased to 9.07 cents, or 5.2 percent, on a capacity
decrease of 4.9 percent. The decrease in international RASM was led by an 11.8
percent and 10.8 percent decrease in Pacific and European RASM, respectively,
slightly offset by a 0.9 percent increase in Latin American RASM. The decrease
in international capacity was driven by a 6.5 percent and 4.7 percent reduction
in Latin American and European ASMs, respectively, partially offset by an
increase in Pacific capacity of 2.8 percent.
TWA's passenger revenues were approximately $1.7 billion for the period
April 10, 2001 through December 31, 2001. TWA's RASM was 7.74 cents on capacity
of 21.7 billion ASMs.
Cargo revenues decreased 8.1 percent, or $58 million, due primarily to
the September 11, 2001 terrorist attacks and a worsening of the U.S. economy
that had already been dampening the demand for air travel prior to that date.
OPERATING EXPENSES
2001 COMPARED TO 2000 The Company's operating expenses increased 17.1 percent,
or approximately $2.9 billion. However, excluding TWA's expenses for the period
April 10, 2001 through December 31, 2001, the Company's expenses would have
increased approximately $662 million versus 2000. In addition to the specific
explanations provided below, the significant decline in passenger traffic
resulting from the terrorist acts of September 11, 2001 and resulting reduced
operating schedule caused a favorable impact on certain passenger-related
operating expenses, including aircraft fuel, other rentals and landing fees,
commissions to agents and food service. American's cost per ASM increased 6.3
percent to 11.14 cents, excluding TWA and the impact of special charges - net of
U.S. Government grant. The increase in American's cost per ASM was driven
partially by a reduction in ASMs due to the Company's More Room Throughout Coach
program. Removing the impact of this program, American's cost per ASM grew
approximately 3.3 percent, excluding TWA and the impact of special charges - net
of U.S. Government grant. TWA's cost per ASM, excluding the impact of special
charges - net of U.S. Government grant, was 10.58 cents. Wages, salaries and
benefits increased 19.1 percent, or $1.2 billion, and included approximately
$920 million related to the addition of TWA. The remaining increase of
approximately $292 million related primarily to an increase in the average
number of equivalent employees and contractual wage rate and seniority increases
that are built into the Company's labor contracts. During 2001, the Company
recorded approximately $300 million in additional wages, salaries and benefits
related primarily to the Company's new contracts with its flight attendants and
Transport Workers Union work groups. This was mostly offset by a $341 million
decrease in the provision for profit-sharing as compared to 2000. Aircraft fuel
expense increased 15.7 percent, or $372 million, and included approximately $322
million related to the addition of TWA. The remaining increase in aircraft fuel
expense was due to a 4.2 percent increase in the Company's average price per
gallon, partially offset by a 4.4 percent decrease in the Company's fuel
consumption, excluding TWA. Depreciation and amortization expense increased 17.7
percent, or $189 million, due primarily to the addition of new aircraft and an
increase of approximately $88 million related to TWA. Other rentals and landing
fees increased $194 million, or 21.1 percent, and included approximately $130
million related to the addition of TWA. The remaining increase of $64 million
was due primarily to higher facilities rent and landing fees across American's
system. Aircraft rentals increased $238 million, or 42.4 percent, due primarily
to the addition of TWA aircraft. Commissions to agents decreased 19.2 percent,
or $187 million, and included approximately $59 million related to TWA. The
decrease in commissions to agents was due primarily to an approximate 14 percent
decrease in passenger revenues, excluding TWA, and the benefit from commission
structure changes implemented in 2000. Other operating expenses increased 12.3
percent, or $364 million, and included approximately $358 million related to
TWA. Special charges - net of U.S. Government grant included: (i) a $586 million
asset impairment charge recorded in the second quarter of 2001 related to the
write-down of the carrying value of the Company's Fokker 100 aircraft and
related rotables, (ii) charges resulting from the September 11, 2001 terrorist
events, including approximately $439 million related to aircraft charges, $114
million in facility exit costs, $69 million in employee charges and $40 million
in other charges, and (iii) an $827 million benefit recognized for the
reimbursement from the U.S. Government under the Act. See a further discussion
of special charges - net of U.S. Government grant in Note 2 to the consolidated
financial statements.
17
OTHER INCOME (EXPENSE)
2001 COMPARED TO 2000 Interest income decreased $49 million, or 35.5 percent,
resulting from lower investment balances throughout most of 2001. Interest
expense increased $98 million, or 34.9 percent, resulting primarily from the
increase in long-term debt of approximately $4.2 billion. Related party interest
- net decreased $34 million due primarily to higher affiliate intercompany
balances with American throughout most of the year. Miscellaneous - net
decreased $24 million due primarily to 2001 including a $45 million gain from
the settlement of a legal matter related to the Company's 1999 labor disruption,
offset by the write-down of certain investments held by the Company. This
compares to 2000 including a $57 million gain on the sale of the Company's
warrants to purchase 5.5 million shares of priceline.com Incorporated common
stock.
OTHER INFORMATION
The impact of the terrorist attacks of September 11, 2001 and their
aftermath on the Company and the sufficiency of its financial resources to
absorb that impact will depend on a number of factors, including: (i) the
magnitude and duration of the adverse impact of the terrorist attacks on the
economy in general, and the airline industry in particular; (ii) the Company's
ability to reduce its operating costs and conserve its financial resources,
taking into account the increased costs it will incur as a consequence of the
attacks, including those referred to below; (iii) the higher costs associated
with new airline security directives, including the impact of the Aviation and
Transportation Security Act, and any other increased regulation of air carriers;
(iv) the significantly higher costs of aircraft insurance coverage for future
claims caused by acts of war, terrorism, sabotage, hijacking and other similar
perils, and the extent to which such insurance will continue to be available;
(v) the Company's ability to raise additional financing and the cost of such
financing; (vi) the price and availability of jet fuel, and the availability to
the Company of fuel hedges in light of current industry conditions; and (vii)
the extent of the benefits received by the Company under the Act, taking into
account any challenges to and interpretations or amendments of the Act or
regulations issued pursuant thereto.
In response to the September 11, 2001 terrorist attacks, the Company
initiated the following measures: reduced capacity by approximately 20 percent,
grounded aircraft and deferred certain aircraft deliveries to future years,
significantly reduced capital spending, closed facilities, reduced its workforce
(see Note 2 to the consolidated financial statements for additional information)
and implemented numerous other cost reduction initiatives.
During the fourth quarter of 2001, the Company reached an agreement
with Boeing that included a combination of aircraft delivery deferrals,
substitutions and limited additional aircraft orders. As a direct result of the
agreement with Boeing, the Company's 2002 and 2003 aircraft commitment amounts
have been reduced, in the aggregate, by approximately $700 million. Following
this agreement, at December 31, 2001, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 14 Boeing 777-200ERs, nine Boeing
767-300ERs and seven Boeing 757-200s. Deliveries of all aircraft extend through
2008. Future payments for all aircraft, including the estimated amounts for
price escalation, will approximate $650 million in 2002, $1.0 billion in 2003,
$500 million in 2004 and an aggregate of approximately $1.3 billion in 2005
through 2008. These future payments are net of approximately $470 million
related to deposits made for 2002 aircraft deliveries - which have been deferred
as part of the agreement with Boeing - that will be applied to future aircraft
deliveries. In addition to these commitments for aircraft, the Company expects
to spend approximately $500 million in 2002 for modifications to aircraft,
renovations of - and additions to - airport and off-airport facilities, and the
acquisition of various other equipment and assets.
During 2001, American issued approximately $2.6 billion of enhanced
equipment trust certificates which has been recorded as long-term debt. These
enhanced equipment trust certificates are secured by aircraft, bear interest at
6.8 percent to 9.1 percent, and mature in 2006 to 2019. Also during 2001, the
Company entered into approximately $773 million of various debt agreements
secured by aircraft. Effective rates on these agreements are fixed or variable
(based upon the London Interbank Offered Rate (LIBOR) plus a spread), ranging up
to approximately 4.5 percent, and mature over various periods of time, ranging
from 2007 to 2021.
18
American has an $834 million credit facility that expires December 15,
2005. At American's option, interest on this facility can be calculated on one
of several different bases. For most borrowings, American would anticipate
choosing a floating rate based upon LIBOR. During the fourth quarter of 2001,
American amended this credit facility to include, among other items, a revision
of its financial covenants, including modifications to its fixed charge covenant
and the addition of certain liquidity requirements. The next test of the fixed
charge covenant will occur on June 30, 2003 and will consider only the preceding
six-month period. American secured the facility with previously unencumbered
aircraft. In addition, the facility requires that American maintain at least
$1.5 billion of liquidity, as defined in the facility, which consists primarily
of cash and short-term investments, and 50 percent of the net book value of its
unencumbered aircraft. As of December 31, 2001, $814 million was outstanding
under this credit facility, at an interest rate of 5.09 percent. The interest
rate on the entire credit facility will be reset on March 18, 2002.
In addition, American has available a $1 billion credit facility that
expires September 30, 2002. Interest on this facility is based upon LIBOR plus a
spread. This facility is immediately available subject to the Company providing
specified aircraft collateral as security at the time of borrowing. At December
31, 2001, no borrowings were outstanding under this facility.
Following the September 11, 2001 events, Standard & Poor's and Moody's
downgraded the credit ratings of American, and the credit ratings of a number of
other major airlines. The long-term corporate credit ratings of American were
initially retained on review for possible downgrade by Moody's, and following
subsequent downgrades, were given a negative outlook. In addition, the long-term
corporate credit ratings of American remain on Standard & Poor's CreditWatch
with negative implications. Any additional reductions in American's credit
ratings could result in increased borrowing costs to the Company and might limit
the availability of future financing sources.
The following table summarizes the Company's obligations and
commitments to be paid in 2002 and 2003 (in millions):
Nature of commitment 2002 2003
-------------------- ---------- ----------
Operating lease payments for aircraft and
facility obligations(*) $ 1,314 $ 1,256
Firm aircraft commitments 650 1,000
Long-term debt(**) 421 212
Capital lease obligations(**) 288 205
---------- ----------
Total obligations and commitments $ 2,673 $ 2,673
========== ==========
(*) Certain special facility revenue bonds issued by municipalities -
which are supported by operating leases executed by American -
are guaranteed by AMR and American. See Note 7 to the
consolidated financial statements for additional information.
(**) Excludes related interest amounts
In addition to the Company's approximately $3.0 billion in cash and
short-term investments as of December 31, 2001, the Company has available a
variety of future financing sources, including, but not limited to: (i) the
receipt of the remainder of the U.S. Government grant, which approximates $124
million, (ii) additional secured aircraft debt (as of December 31, 2001, the
Company had approximately $4.4 billion net book value of unencumbered aircraft),
(iii) the availability of the Company's $1 billion credit facility, (iv)
sale-leaseback transactions of owned property, including aircraft and real
estate, (v) tax-exempt borrowings for airport facilities, (vi) securitization of
future operating receipts, (vii) unsecured borrowings, and (viii) borrowings
backed by federal loan guarantees as provided under the Act. No assurance can be
given that any of these financing sources will be available on terms acceptable
to the Company. However, the Company believes it will meet its financing needs
as discussed above.
19
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.
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 6 to the consolidated
financial statements.
CAPITAL CONTRIBUTION FROM AMR During 2001, the Board of Directors of AMR
approved the capital contribution of $1.5 billion from AMR to American.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the Company's
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. The
Company believes its estimates and assumptions are reasonable; however, actual
results and the timing of the recognition of such amounts could differ from
those estimates. The Company has identified the following critical accounting
policies and estimates utilized by management in the preparation of the
Company's financial statements: accounting for long-lived assets, passenger
revenue, frequent flyer accounting, and pensions and other postretirement
benefits.
Accounting for Long-Lived Assets - The Company has approximately $19
billion of long-lived assets as of December 31, 2001, including
approximately $17 billion related to flight equipment and related fixed
assets. In addition to the original cost of these assets, their recorded
value is impacted by a number of policy elections made by the Company,
including estimated useful lives, salvage values and in 2001, impairment
charges. In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121), the Company records impairment
charges on long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the
carrying amount of those assets. In this circumstance, the impairment
charge is determined based upon the amount the net book value of the assets
exceeds their fair market value. In making these determinations, the
Company utilizes certain assumptions, including, but not limited to: (i)
estimated fair market value of the assets, and (ii) estimated future cash
flows expected to be generated by these assets, which are based on
additional assumptions such as asset utilization, length of service the
asset will be used in the Company's operations and estimated salvage
values. During 2001, the Company determined its Fokker 100 aircraft and
related rotables were impaired under SFAS 121 and recorded impairment
charges of approximately $911 million. In addition, during the fourth
quarter of 2001, the Company completed an impairment analysis of its
long-lived assets, including aircraft fleets, route acquisition costs,
airport operating and gate lease rights, and goodwill. The impairment
analysis did not result in any additional impairment charges. See Notes 1
and 2 to the consolidated financial statements for additional information
with respect to each of the policies and assumptions utilized by the
Company which affect the recorded values of long-lived assets.
Passenger revenue - Passenger ticket sales are initially recorded as a
component of air traffic liability. Revenue derived from ticket sales is
recognized at the time service is provided. However, due to various
factors, including the complex pricing structure and interline agreements
throughout the industry, certain amounts are recognized in revenue using
estimates regarding both the timing of the revenue recognition and the
amount of revenue to be recognized. These estimates are generally based
upon the evaluation of historical trends, including the use of regression
analysis and other methods to model the outcome of future events based on
the Company's historical experience. Due to the uncertainties surrounding
the impact of the September 11, 2001 events on the Company's business (see
Note 2 to the consolidated financial statements) and the acquisition of TWA
in April 2001 (see Note 3 to the consolidated financial statements),
historical trends may not be representative of future results.
20
Frequent flyer accounting - The Company utilizes a number of estimates in
accounting for its AAdvantage frequent flyer program. Additional
information regarding the Company's AAdvantage frequent flyer program is
included in Item 1 - Business (pages 9 and 10) and Note 1 to the
consolidated financial statements. Changes to the percentage of the amount
of revenue deferred, deferred recognition period, cost per mile estimates
or the minimum award level accrued could have a significant impact on the
Company's revenues or incremental cost accrual in the year of the change as
well as in future years. In addition, the Emerging Issues Task Force of the
Financial Accounting Standards Board is currently reviewing the accounting
for both multiple-deliverable revenue arrangements and volume-based sales
incentive offers, but has not yet reached a consensus that would apply to
programs such as the AAdvantage program. The issuance of new accounting
standards could have a significant impact on the Company's frequent flyer
liability in the year of the change as well as in future years.
Pensions and other postretirement benefits - The Company's pension and
other postretirement benefit costs and liabilities are calculated utilizing
various actuarial assumptions and methodologies prescribed under Statements
of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions" and No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". The Company utilizes certain assumptions including,
but not limited to, the selection of the: (i) discount rate, (ii) expected
return on plan assets, and (iii) expected health care cost trend rate. The
discount rate assumption is based upon the review of high quality corporate
bond rates and the change in these rates during the year. The expected
return on plan assets and health care cost trend rate are based upon an
evaluation of the Company's historical trends and experience taking into
account current and expected market conditions. In addition, the Company's
future pension and other postretirement benefit costs and liabilities will
be impacted by the acquisition of TWA and the new labor agreements entered
into during 2001. See Note 12 to the consolidated financial statements for
additional information regarding the Company's pension and other
postretirement benefits.
NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 prohibits the use of the pooling-of-interests method for
business combinations initiated after June 30, 2001 and includes criteria for
the recognition of intangible assets separately from goodwill. SFAS 142 includes
the requirement to test goodwill and indefinite lived intangible assets for
impairment rather than amortize them. The Company will adopt SFAS 142 in the
first quarter of 2002, and currently estimates the impact to the Company's
results of operations of discontinuing the amortization of goodwill and route
authorities to be approximately $63 million on an annualized basis. The Company
is currently evaluating what additional impact these new accounting standards
may have on the Company's financial position or results of operations. However,
with the decline in the Company's market capitalization, in part due to the
terrorist attacks on September 11, 2001, the adoption of SFAS 142 may result in
the impairment of the Company's goodwill.
21
OUTLOOK Due in part to the lack of predictability of future traffic, business
mix and yields, the Company continues to have difficulty in estimating the
impact of the events of September 11, 2001. However, given the magnitude of
these unprecedented events, the Company expects that the adverse impact to the
Company - and to the airline industry as a whole - will continue to be
significant in 2002. Because of the high degree of uncertainty, the Company is
not currently able to provide an estimate for the full year 2002. However, the
Company does expect to incur a sizable loss in the first quarter, and will
likely incur a loss for 2002.
Capacity for American - which reflects TWA in the first quarter of 2002
but not in the first quarter of 2001 - is expected to increase two to three
percent in the first quarter of 2002 compared to last year's first quarter
levels. Capacity for the remainder of 2002 is less clear and depends on a number
of factors, including, but not limited to, how quickly demand returns and what
levels of capacity the Company's competitors deploy. Traffic continues to remain
challenging to predict. However, for the first quarter of 2002, the Company
expects traffic to be up about three percent from last year's first quarter
levels. In response to the September 11 terrorist attacks, the Company put in
place numerous cost reduction initiatives, including, but not limited to:
cutting capacity, grounding aircraft and deferring certain aircraft deliveries
to future years, sharply reducing capital spending, closing facilities, trimming
food service and reducing its workforce. In addition, the Company expects to see
lower fuel prices in the first quarter of 2002 compared to 2001. Somewhat
offsetting these cost savings, however, will be higher wages, salaries and
benefit costs, higher security costs and insurance premiums, and greater
interest expense. American's unit costs for the first quarter of 2002 are
expected to be three to five percent higher than last year's first quarter.
FORWARD-LOOKING INFORMATION
The preceding discussions under Business, Properties, Legal Proceedings
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events. When used in this document and
in documents incorporated herein by reference, the words "expects," "plans,"
"anticipates," "believes," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations concerning operations and financial
conditions, including changes in capacity, revenues and costs, expectations as
to future financing needs, overall economic conditions and plans and objectives
for future operations, the ability to continue to successfully integrate with
its operations the assets acquired from TWA and the former TWA workforce, and
the impact of the events of September 11, 2001 on the Company and the
sufficiency of the Company's financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate solely to
historical facts, such as, without limitation, statements which discuss the
possible future effects of current known trends or uncertainties, or which
indicate that the future effects of known trends or uncertainties cannot be
predicted, guaranteed or assured. All forward-looking statements in this report
are based upon information available to the Company on the date of this report.
The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. Forward-looking statements are subject to a number of factors that
could cause 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 AND EVENTS The Company's
operations could be adversely affected by failure of the Company to reach
agreement with any labor union representing the Company's employees (including,
for example, the successful integration of TWA's workforce) or by an agreement
with any such labor union representing the Company's employees that contains
terms which prevent the Company from competing effectively with other airlines.
In addition, a dispute between the Company and an employee work group (outside
the confines of a collective bargaining agreement) could adversely impact the
Company's operations.
ECONOMIC AND OTHER CONDITIONS The airline industry is affected by changes in
international, national, regional and local economic conditions, inflation, war
or political instability (or the threat thereof), consumer preferences and
spending patterns, demographic trends, disruptions to the air traffic control
system, consumer perceptions of airline safety, costs of safety, security and
environmental measures, and the weather.
22
FUEL PRICES/SUPPLY Due to the competitive nature of the airline industry, there
can be no assurance that the Company would be able to pass on any increased fuel
prices to its customers by increasing fares. Moreover, to the extent there was a
reduction in the supply of jet fuel, the Company's operations could be adversely
impacted.
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of the Company's
routes is highly competitive. The Company faces vigorous competition from major
domestic airlines, national, regional, all-cargo and charter carriers, foreign
air carriers, low-cost air carriers, and, particularly on shorter segments,
ground transportation. Increasingly the Company faces significant competition
from marketing/operational alliances formed by its competitors. To the extent
those alliances can undertake activities that are not available to the Company,
the Company's ability to effectively compete could be hindered. Pricing
decisions are affected by competition from other airlines. Fare discounting by
competitors has historically had a negative effect on the Company's financial
results because the Company is generally required to match competitors' fares to
maintain passenger traffic. No assurance can be given that any future fare
reduction would be offset by increases in passenger traffic, a reduction in
costs or changes in the mix of traffic that would improve yields.
CHANGING BUSINESS STRATEGY Although it has no current plan to do so, the Company
may change its business strategy in the future and may not pursue some of the
goals stated herein.
GOVERNMENT REGULATION Future results of the Company's operations may vary based
upon any actions which the governmental agencies with jurisdiction over the
Company's operations may take, including the granting and timing of certain
governmental approvals (including foreign government approvals) needed for
code-sharing alliances and other arrangements with other airlines, restrictions
on competitive practices (e.g., Court Orders, or Agency regulations or orders,
that would curtail an airline's ability to respond to a competitor), the
adoption of regulations that impact customer service standards (e.g., new
passenger security standards), and the adoption of more restrictive
locally-imposed noise restrictions.
UNCERTAINTY IN INTERNATIONAL OPERATIONS The Company's current international
activities and prospects could be adversely affected by factors such as
reversals or delays in the opening of foreign markets, exchange controls,
currency and political risks, taxation and changes in international government
regulation of the Company's operations.
ADVERSE IMPACT OF THE TERRORIST ATTACKS As described elsewhere in this Report,
the events of September 11, 2001 had and continue to have a material adverse
impact on the Company. Among the effects experienced by the Company from the
September 11, 2001 terrorist attacks have been significant flight disruption
costs caused by the FAA's imposed grounding of the U.S. airline industry's
fleet, significantly increased security and other costs, a reduction in the
availability of insurance coverage by insurance carriers, significantly higher
ticket refunds, significantly reduced load factors, and significantly reduced
yields. The occurrence of another terrorist attack (whether domestic or
international and whether against the Company or another entity) could again
have a material adverse impact on the Company, its finances and/or its
operations by further aggravating the aforementioned effects.
AVAILABILITY OF FUTURE FINANCING In the aftermath of the events of September 11,
2001, the Company raised substantial amounts of money to finance capital
commitments and day-to-day operations. Although the Company has a substantial
amount of unencumbered assets, there is no guarantee that it will be able to use
those assets for financing activities or that these assets will maintain their
current market value. To the extent that the Company may be unable to access the
capital markets for long-term capital spending requirements or short-term
liquidity needs, the Company's finances and/or operations could be adversely
impacted. As noted elsewhere in this Report, in the aftermath of the events of
September 11, 2001, credit ratings for the Company's debt instruments were
downgraded. To the extent the Company's credit ratings are further downgraded,
it could have an adverse impact on the ability of the Company to access capital
markets and/or the costs of such financing.
AVAILABILITY OF THE ACT As reported elsewhere in this Report, the Act has
mitigated some of the material adverse consequences of the events of September
11, 2001. To the extent there are amendments to, or interpretations of, the Act
or successful challenges to the Act, any of which are contrary to such
mitigation, the Company's finances and/or operations could be adversely
impacted.
23
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in the price of
fuel, foreign currency exchange rates and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management may take to mitigate the Company's exposure to such changes.
Actual results may differ. See Note 9 to the consolidated financial statements
for accounting policies and additional information.
AIRCRAFT FUEL The Company's earnings are affected by changes in the price and
availability of aircraft fuel. In order to provide a measure of control over
price and supply, the Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. The Company also manages the price
risk of fuel costs primarily by utilizing jet fuel, heating oil, and crude swap
and option contracts. Market risk is estimated as a hypothetical 10 percent
increase in the December 31, 2001 and 2000 cost per gallon of fuel. Based on
projected 2002 fuel usage, such an increase would result in an increase to
aircraft fuel expense of approximately $159 million in 2002, net of fuel hedge
instruments outstanding at December 31, 2001, and assumes the Company's fuel
hedging program remains effective under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Comparatively, based on projected 2001 fuel usage, such an increase
would have resulted in an increase to aircraft fuel expense of approximately
$183 million in 2001, net of fuel hedge instruments outstanding at December 31,
2000. The change in market risk is due primarily to the decrease in fuel prices.
As of December 31, 2001, the Company had hedged approximately 40 percent of its
estimated 2002 fuel requirements, approximately 21 percent of its estimated 2003
fuel requirements, and approximately five percent of its estimated 2004 fuel
requirements, compared to approximately 40 percent of its estimated 2001 fuel
requirements, 15 percent of its estimated 2002 fuel requirements, and
approximately seven percent of its estimated 2003 fuel requirements hedged at
December 31, 2000.
FOREIGN CURRENCY The Company is exposed to the effect of foreign exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated operating
revenues and expenses. The Company's largest exposure comes from the British
pound, Euro, Canadian dollar, Japanese yen and various Latin American
currencies. The Company uses options to hedge a portion of its anticipated
foreign currency-denominated ticket sales. The result of a uniform 10 percent
strengthening in the value of the U.S. dollar from December 31, 2001 and 2000
levels relative to each of the currencies in which the Company has foreign
currency exposure would result in a decrease in operating income of
approximately $40 million and $33 million for the years ending December 31, 2002
and 2001, respectively, net of hedge instruments outstanding at December 31,
2001 and 2000, due to the Company's foreign-denominated revenues exceeding its
foreign-denominated expenses. This sensitivity analysis was prepared based upon
projected 2002 and 2001 foreign currency-denominated revenues and expenses as of
December 31, 2001 and 2000.
INTEREST The Company's earnings are also affected by changes in interest rates
due to the impact those changes have on its interest income from cash and
short-term investments, and its interest expense from variable-rate debt
instruments. The Company has variable-rate debt instruments representing
approximately 45 percent and 51 percent of its total long-term debt at December
31, 2001 and 2000, respectively, and interest rate swaps on notional amounts of
approximately $148 million and $158 million, respectively, at December 31, 2001
and 2000. If interest rates average 10 percent more in 2002 than they did at
December 31, 2001, the Company's interest expense would increase by
approximately $10 million and interest income from cash and short-term
investments would increase by approximately $16 million. In comparison, at
December 31, 2000, the Company estimated that if interest rates averaged 10
percent more in 2001 than they did at December 31, 2000, the Company's interest
expense would have increased by approximately $11 million and interest income
from cash and short-term investments would have increased by approximately $11
million. These amounts are determined by considering the impact of the
hypothetical interest rates on the Company's variable-rate long-term debt,
interest rate swap agreements, and cash and short-term investment balances at
December 31, 2001 and 2000.
24
Market risk for fixed-rate long-term debt is estimated as the potential
increase in fair value resulting from a hypothetical 10 percent decrease in
interest rates, and amounts to approximately $195 million and $59 million as of
December 31, 2001 and 2000, respectively. The change in market risk is due
primarily to the increase in the Company's fixed-rate long-term debt during
2001. The fair values of the Company's long-term debt were estimated using
quoted market prices or discounted future cash flows based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
In addition, the Company holds investments in certain other entities
which are subject to market risk. However, the impact of such market risk on
earnings is not significant due to the immateriality of the carrying value and
the geographically diverse nature of these holdings.
25
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 27
Consolidated Statements of Operations 28
Consolidated Balance Sheets 29
Consolidated Statements of Cash Flows 31
Consolidated Statements of Stockholder's Equity 32
Notes to Consolidated Financial Statements 33
26
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, 2001 and 2000, 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, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Airlines, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 9 to the consolidated financial statements,
effective January 1, 2001 the Company changed its method of accounting for its
derivative and hedging activities as required by Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 15, 2002
27
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
--------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
REVENUES
Passenger $ 15,780 $ 16,394 $ 14,724
Cargo 656 714 635
Other 1,048 1,009 979
---------- ---------- ----------
Total operating revenues 17,484 18,117 16,338
---------- ---------- ----------
EXPENSES
Wages, salaries and benefits 7,566 6,354 5,747
Aircraft fuel 2,744 2,372 1,622
Depreciation and amortization 1,257 1,068 977
Other rentals and landing fees 1,113 919 867
Maintenance, materials and repairs 979 899 833
Aircraft rentals 799 561 582
Commissions to agents 786 973 1,090
Food service 771 769 734
Other operating expenses 3,322 2,958 2,866
Special charges, net of U.S. Government grant 421 -- --
---------- ---------- ----------
Total operating expenses 19,758 16,873 15,318
---------- ---------- ----------
OPERATING INCOME (LOSS) (2,274) 1,244 1,020
OTHER INCOME (EXPENSE)
Interest income 89 138 80
Interest expense (379) (281) (215)
Interest capitalized 135 143 111
Related party interest - net (27) 7 48
Miscellaneous - net 7 31 10
---------- ---------- ----------
(175) 38 34
---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES (2,449) 1,282 1,054
Income tax provision (benefit) (887) 504 427
---------- ---------- ----------
NET EARNINGS (LOSS) $ (1,562) $ 778 $ 627
========== ========== ==========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
--------------------------------------------------------------------------------
December 31,
-----------------------
2001 2000
---------- ----------
ASSETS
CURRENT ASSETS
Cash $ 117 $ 86
Short-term investments 2,856 1,549
Receivables, less allowance for uncollectible
accounts (2001 - $51; 2000 - $26) 1,371 1,242
Inventories, less allowance for obsolescence
(2001 - $346; 2000 - $302) 752 656
Deferred income taxes 844 675
Other current assets 519 186
---------- ----------
Total current assets 6,459 4,394
EQUIPMENT AND PROPERTY
Flight equipment, at cost 19,332 17,984
Less accumulated depreciation 6,181 5,903
---------- ----------
13,151 12,081
Purchase deposits for flight equipment 834 1,590
Other equipment and property, at cost 4,045 3,503
Less accumulated depreciation 2,045 1,896
---------- ----------
2,000 1,607
---------- ----------
15,985 15,278
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 2,386 2,233
Other equipment and property 163 159
---------- ----------
2,549 2,392
Less accumulated amortization 962 1,044
---------- ----------
1,587 1,348
OTHER ASSETS
Route acquisition costs and airport operating and gate lease rights, less
accumulated amortization (2001 - $526; 2000 - $470) 1,288 1,103
Goodwill, less accumulated amortization (2001 - $77; 2000 - $54) 1,293 291
Other 3,865 747
---------- ----------
6,446 2,141
---------- ----------
TOTAL ASSETS $ 30,477 $ 23,161
========== ==========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
--------------------------------------------------------------------------------
December 31,
---------- ----------
2001 2000
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,717 $ 1,178
Accrued salaries and wages 681 924
Accrued liabilities 1,336 1,143
Air traffic liability 2,763 2,696
Payable to affiliates, net 66 511
Current maturities of long-term debt 421 108
Current obligations under capital leases 189 201
---------- ----------
Total current liabilities 7,173 6,761
LONG-TERM DEBT, LESS CURRENT MATURITIES 6,530 2,601
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,396 1,163
OTHER LIABILITIES AND CREDITS
Deferred income taxes 1,465 2,080
Deferred gains 520 508
Postretirement benefits 2,538 1,706
Other liabilities and deferred credits 5,376 1,907
---------- ----------
9,899 6,201
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock - $1 par value;
1,000 shares authorized, issued and outstanding -- --
Additional paid-in capital 2,596 1,847
Accumulated other comprehensive loss (145) (2)
Retained earnings 3,028 4,590
---------- ----------
5,479 6,435
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 30,477 $ 23,161
========== ==========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
--------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,562) $ 778 $ 627
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation 1,006 829 776
Amortization 251 239 201
Provisions for asset impairment 1,001 -- --
Deferred income taxes (664) 426 216
Gain on disposition of equipment and property and
other investments (23) (57) (90)
Change in assets and liabilities:
Decrease (increase) in receivables 101 (118) 41
Increase in inventories (48) (95) (123)
Increase (decrease) in accounts payable
and accrued liabilities 362 583 (212)
Increase (decrease) in air traffic liability (276) 438 84
Other, net 201 29 214
------- ------- -------
Net cash provided by operating activities 349 3,052 1,734
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including purchase deposits for
flight equipment (3,240) (3,280) (3,066)
Net decrease (increase) in short-term investments (1,307) 96 (247)
Acquisition of Trans World Airlines, Inc. (742) -- --
Proceeds from sale of equipment and property and other
investments 386 306 162
Other 18 (23) (44)
------- ------- -------
Net cash used for investing activities (4,885) (2,901) (3,195)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of long-term debt 4,388 513 1,388
Sale-leaseback transactions 352 -- 54
Short-term loan from affiliate -- -- 300
Funds transferred from affiliates, net 246 1,162 (69)
Payments on long-term debt and capital lease obligations (419) (312) (226)
Dividend to Parent -- (1,500) --
------- ------- -------
Net cash provided by (used for) financing activities 4,567 (137) 1,447
------- ------- -------
Net increase (decrease) in cash 31 14 (14)
Cash at beginning of year 86 72 86
------- ------- -------
Cash at end of year $ 117 $ 86 $ 72
======= ======= =======
ACTIVITIES NOT AFFECTING CASH
Capital contribution from Parent $ 1,500 $ -- $ --
======= ======= =======
Capital lease obligations incurred $ -- $ -- $ 54
======= ======= =======
The accompanying notes are an integral part of these financial statements.
31
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in millions)
--------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Loss Earnings Total
------- ---------- ------------- --------- -------
Balance at January 1, 1999 $ -- $ 1,743 $ (3) $ 4,685 $ 6,425
Net earnings -- -- -- 627 627
Adjustment for minimum pension
liability, net of tax of $1 -- -- 3 -- 3
Unrealized loss on investments,
net of tax of $1 -- -- (2) -- (2)
-------
Total comprehensive income 628
-------
Contribution of assets from
Parent -- 94 -- -- 94
Other -- 3 -- -- 3
------- ------- ------- ------- -------
Balance at December 31, 1999 -- 1,840 (2) 5,312 7,150
Net earnings -- -- -- 778 778
Adjustment for minimum pension
liability, net of tax of $3 -- -- (5) -- (5)
Unrealized gain on investments,
net of tax of $2 -- -- 5 -- 5
-------
Total comprehensive income 778
-------
Cash dividend to Parent -- -- -- (1,500) (1,500)
Other -- 7 -- -- 7
------- ------- ------- ------- -------
Balance at December 31, 2000 -- 1,847 (2) 4,590 6,435
Net loss -- -- -- (1,562) (1,562)
Adjustment for minimum pension
liability, net of tax of $60 -- -- (101) -- (101)
Changes in fair value of derivative
financial instruments,
net of tax of $29 -- -- (46) -- (46)
Unrealized gain on investments,
net of tax of $2 -- -- 4 -- 4
-------
Total comprehensive loss (1,705)
-------
Transactions with Parent (Note 4) -- 691 -- -- 691
Other -- 58 -- -- 58
------- ------- ------- ------- -------
Balance at December 31, 2001 $ -- $ 2,596 $ (145) $ 3,028 $ 5,479
======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION American Airlines, Inc. (American or the Company) is a
wholly-owned subsidiary of AMR Corporation (AMR). On April 9, 2001, American
purchased substantially all of the assets and assumed certain liabilities of
Trans World Airlines, Inc. (TWA). Accordingly, the operating results of TWA
since the date of acquisition have been included in the accompanying
consolidated financial statements for the year ended December 31, 2001. 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 2001 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES Spare parts, materials and supplies relating to flight equipment are
carried at average acquisition cost and are expensed when incurred in
operations. Allowances for obsolescence are provided - over the estimated useful
life of the related aircraft and engines - for spare parts expected to be on
hand at the date aircraft are retired from service, plus allowances for spare
parts currently identified as excess. These allowances are based on management
estimates, which are subject to change.
EQUIPMENT AND PROPERTY The provision for depreciation of operating equipment and
property is computed on the straight-line method applied to each unit of
property, except major rotable parts, avionics and assemblies are depreciated on
a group basis. The depreciable lives and residual values used for the principal
depreciable asset classifications are:
Depreciable Life
----------------------------
Boeing 727-200 aircraft 2002(1)
Fokker 100 aircraft 2010(1)
Other aircraft 20 - 30 years
Major rotable parts, avionics and assemblies Life of equipment to which
applicable
Improvements to leased flight equipment Term of lease
Buildings and improvements (principally on 10-30 years or term of lease
leased land)
Furniture, fixtures and other equipment 3-20 years
Capitalized software 3-10 years
(1) Approximate final aircraft retirement date.
Residual values for aircraft, engines, major rotable parts, avionics
and assemblies are generally five to 10 percent, except when a guaranteed
residual value or other agreements exist to better estimate the residual value.
Equipment and property under capital leases are amortized over the term
of the leases or, in the case of certain aircraft, over their expected useful
lives, and such amortization is included in depreciation and amortization. Lease
terms vary but are generally 10 to 25 years for aircraft and seven to 40 years
for other leased equipment and property.
33
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
MAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased
flight equipment are charged to operating expense as incurred, except costs
incurred for maintenance and repair under power by the hour maintenance contract
agreements, which are accrued on the basis of hours flown.
INTANGIBLE ASSETS Route acquisition costs and airport operating and gate lease
rights represent the purchase price attributable to route authorities (including
international airport take-off and landing slots), airport take-off and landing
slots and airport gate leasehold rights acquired. These assets are being
amortized on a straight-line basis over 40 years for route authorities,
primarily 25 years for airport take-off and landing slots, and the term of the
lease for airport gate leasehold rights.
PASSENGER REVENUE Passenger ticket sales are initially recorded as a component
of air traffic liability. Revenue derived from ticket sales is recognized at the
time service is provided. However, due to various factors, including the complex
pricing structure and interline agreements throughout the industry, certain
amounts are recognized in revenue using estimates regarding both the timing of
the revenue recognition and the amount of revenue to be recognized. These
estimates are generally based upon the evaluation of historical trends,
including the use of regression analysis and other methods to model the outcome
of future events based on the Company's historical experience.
ADVERTISING COSTS The Company expenses the costs of advertising as incurred.
Advertising expense was $199 million, $218 million and $201 million for the
years ended December 31, 2001, 2000 and 1999, 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 over 28 months, which approximates the expected period over which the
mileage credits are used. The remaining portion of the revenue is recognized
upon sale as the related services have been provided.
STATEMENTS OF CASH FLOWS Short-term investments, without regard to remaining
maturity at acquisition, are not considered as cash equivalents for purposes of
the statements of cash flows.
EMPLOYEE ACCRUALS The Company estimates the amount of potential retroactive pay
expected to be provided upon finalization of a labor agreement for work groups
working under contracts that have become amendable. These estimates are based
upon management's expectation of the most likely outcome of the contract
negotiations.
MEASUREMENT OF ASSET IMPAIRMENTS In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), the Company
records impairment charges on long-lived assets (including goodwill) used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. The impairment charge
is determined based upon the amount the net book value of the assets exceeds
their fair market value. In making these determinations, the Company utilizes
certain assumptions, including, but not limited to: (i) estimated fair market
value of the assets, and (ii) estimated future cash flows expected to be
generated by these assets, which are based on additional assumptions such as
asset utilization, length of service the asset will be used in the Company's
operations and estimated salvage values.
34
2. SPECIAL CHARGES - NET OF U.S. GOVERNMENT GRANT
On September 11, 2001, two American Airlines aircraft were hijacked and
destroyed in terrorist attacks on The World Trade Center in New York City and
the Pentagon in northern Virginia. On the same day, two United Air Lines
aircraft were also hijacked and used in terrorist attacks. In addition to the
loss of life on board the aircraft, these attacks resulted in untold deaths and
injuries to persons on the ground and massive property damage. In response to
those terrorist attacks, the Federal Aviation Administration issued a federal
ground stop order on September 11, 2001, prohibiting all flights to, from, and
within the United States. Airports did not reopen until September 13, 2001
(except for Washington Reagan Airport, which was partially reopened on October
4, 2001). The Company was able to operate only a portion of its scheduled
flights for several days thereafter. When flights were permitted to resume,
passenger traffic and yields on the Company's flights were significantly lower
than prior to the attacks. As a result, the Company announced that it would
reduce its operating schedule to approximately 80 percent of the schedule it
flew prior to September 11, 2001. In addition, the Company also announced that,
as a result of its schedule reduction and the sharp fall off in passenger
traffic, it would eliminate approximately 18,000 jobs. The Company's future
schedule will vary as the Company reacts to continuing changes in demand and
yields, as well as normal factors such as seasonality and fleet composition.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act), which for all U.S.
airlines and air cargo carriers (collectively, air carriers) provides for, among
other things: (i) $5 billion in compensation for direct losses (including lost
revenues) incurred as a result of the federal ground stop order and for
incremental losses incurred through December 31, 2001 as a direct result of the
attacks; (ii) subject to certain conditions, the availability of up to $10
billion in federal government guarantees of certain loans made to air carriers
for which credit is not reasonably available as determined by a newly
established Air Transportation Stabilization Board; (iii) the authority of the
Secretary of Transportation to reimburse air carriers (which authority expires
180 days after the enactment of the Act) for the increase in the cost of
insurance, for coverage ending before October 1, 2002, over the premium in
effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of terrorism
committed on or to such air carrier during the 180-day period following the
enactment of the Act; (v) the extension of the due date for the payment by air
carriers of certain excise taxes; and (vi) compensation to individual claimants
who were physically injured or killed as a result of the terrorist attacks of
September 11, 2001. In addition, the Act provides that, notwithstanding any
other provision of law, liability for all claims, whether compensatory or
punitive, arising from the terrorist-related events of September 11, 2001
against any air carrier shall not exceed the liability coverage maintained by
the air carrier.
Based upon estimates provided by the Company's insurance providers, the
Company has recorded a liability of approximately $2.3 billion for claims
arising from the events of September 11, 2001, after considering the liability
protections provided for by the Act. In addition, the Company has recorded a
receivable for the same amount which the Company expects to recover from its
insurance carriers as claims are resolved. This insurance receivable and
liability are classified as Other assets and Other liabilities and deferred
credits on the accompanying consolidated balance sheets, respectively, and are
based on reserves established by the Company's insurance carriers. These
estimates may be revised as additional information becomes available concerning
the expected claims.
Under the airline compensation provisions of the Act, each air carrier
is entitled to receive the lesser of: (i) its direct and incremental losses for
the period September 11, 2001 to December 31, 2001 or (ii) its proportional
available seat mile allocation of the $5 billion compensation available under
the Act. The Company has received a total of $703 million from the U.S.
Government under the Act. The Company expects to receive additional payments in
2002 aggregating approximately $124 million. As of December 31, 2001, the
Company recognized approximately $827 million as compensation under the Act,
which is included in special charges - net of U.S. Government grant on the
accompanying consolidated statements of operations. Adjustments to the amount of
compensation received by the Company may be recognized in 2002 as the rules
governing the distribution of the government grant are finalized. The finalized
rules could result in more or less compensation to the Company under the Act.
35
2. SPECIAL CHARGES - NET OF U.S. GOVERNMENT GRANT (CONTINUED)
Special charges - net of U.S. Government grant for the year ended
December 31, 2001 included the following (in millions):
Year Ended
December 31, 2001
-----------------
Aircraft charges $ 1,025
Facility exit costs 114
Employee charges 69
Other 40
-------
Total special charges 1,248
Less: U.S. Government grant (827)
-------
$ 421
=======
Aircraft charges
In conjunction with the acquisition of TWA, coupled with revisions to
the Company's fleet plan to accelerate the retirement dates of its Fokker 100
aircraft, during the second quarter of 2001 the Company determined these
aircraft were impaired under SFAS 121. As a result, during the second quarter of
2001, the Company recorded an asset impairment charge of approximately $586
million relating to the write-down of the carrying value of 71 Fokker 100
aircraft and related rotables to their estimated fair market values. Management
estimated the undiscounted future cash flows utilizing models used by the
Company in making fleet and scheduling decisions. In determining the fair market
value of these aircraft, the Company considered outside third party appraisals
and recent transactions involving sales of similar aircraft.
Following the events of September 11, 2001, and decisions by other
carriers to ground their Fokker 100 fleets, the Company determined that the
estimated fair market value of these aircraft had further declined in value.
Therefore, during the third quarter of 2001, the Company recorded an additional
charge of approximately $325 million reflecting the diminution in the estimated
fair market value of these aircraft and related rotables.
In addition, due primarily to fleet plan changes implemented by the
Company as a result of the events of September 11, 2001, the Company recorded a
charge of approximately $49 million related primarily to the write-down of
certain other aircraft and aircraft modifications to their estimated fair market
value. Included in this charge is the write-down of five owned Boeing 727-200
non-operating aircraft and one owned McDonnell Douglas MD-80 non-operating
aircraft.
As a result of the write-down of these aircraft to fair market value,
as well as the acceleration of the retirement dates, including the acceleration
of the Company's remaining 50 owned Boeing 727-200 aircraft to May 2002, and
changes in salvage values, depreciation and amortization expense will decrease
by approximately $57 million on an annualized basis.
Due to the events of September 11, 2001, and subsequent impact on the
Company and the rest of the airline industry, during the fourth quarter of 2001,
the Company completed an impairment analysis of its long-lived assets, including
aircraft fleets, route acquisition costs, airport operating and gate lease
rights, and goodwill in accordance with applicable accounting standards. The
impairment analysis did not result in any additional impairment charges beyond
those recorded in the second and third quarters of 2001.
The Company also retired all McDonnell Douglas DC-9 aircraft and eight
McDonnell Douglas MD-80 aircraft during the third and fourth quarters of 2001,
and accelerated the retirement of its entire Boeing 717-200 fleet to June 2002
(these aircraft were acquired from TWA). In conjunction therewith, the Company
recorded a charge of approximately $65 million related primarily to future lease
commitments and return condition costs on the operating leased aircraft past the
dates they will be removed from service. As of December 31, 2001, cash outlays
are estimated to be approximately $58 million and will occur over the remaining
lease terms, which extend through 2010.
36
2. SPECIAL CHARGES - NET OF U.S. GOVERNMENT GRANT (CONTINUED)
Facility exit costs
Also in response to the September 11, 2001 terrorist attacks, the
Company announced that it would discontinue service at Dallas Love Field and
discontinue or reduce service on several of its international routes. In
addition, the Company announced it would close six Admiral's Clubs, five airport
Platinum Service Centers and approximately 105 off-airport Travel Centers in 37
cities, all effective September 28, 2001. As a result of these announcements,
the Company recorded an $86 million charge related primarily to future lease
commitments and the write-off of leasehold improvements and fixed assets. As of
December 31, 2001, cash outlays related to the accrual of future lease
commitments are estimated to be approximately $20 million and will occur over
the remaining lease terms, which extend through 2018.
In addition, in December 2001, American agreed to sell its terminal
facilities lease rights at the Raleigh-Durham International Airport to the
Raleigh-Durham Airport Authority. As a result of this transaction, the Company
recorded a $28 million charge in the fourth quarter of 2001 to accrue the
residual cost less sales proceeds.
Employee charges
On September 19, 2001, the Company announced that it would be forced to
reduce its workforce by approximately 18,000 jobs across all work groups
(pilots, flight attendants, mechanics, fleet service clerks, agents, management
and support staff personnel). The reduction in workforce, which the Company
accomplished through various measures, including leaves of absence, job sharing,
elimination of open positions, furloughs in accordance with collective
bargaining agreements, and permanent layoffs, resulted from the September 11,
2001 terrorist attacks and the Company's subsequent reduction of its operating
schedule by approximately 20 percent. In connection therewith, the Company
recorded a charge of approximately $69 million for employee termination
benefits. Cash outlays for the employee charges were incurred substantially
during 2001 and approximated the amount of the charge recorded.
3. ACQUISITION OF TWA ASSETS
On April 9, 2001, American purchased substantially all of the assets of
TWA and assumed certain liabilities. TWA was the eighth largest U.S. carrier,
with a primary domestic hub in St. Louis. American funded the acquisition of
TWA's assets with its existing cash and short-term investments. The acquisition
of TWA was accounted for under the purchase method of accounting and,
accordingly, the operating results of TWA since the date of acquisition have
been included in the accompanying consolidated financial statements for the year
ended December 31, 2001.
The accompanying consolidated financial statements reflect the
allocation of the purchase price, which was based on estimated fair values of
the assets acquired and liabilities assumed. American paid approximately $742
million in cash (subject to certain working capital adjustments) for the
purchase of TWA, which included the $625 million purchase price paid to TWA and
various other acquisition costs, primarily the purchase of aircraft security
deposits and prepaid rent, and assumed the following obligations: $638 million
in current liabilities, $734 million in postretirement benefits other than
pensions, $519 million in capital lease obligations and approximately $175
million of other long-term liabilities. The purchase price was allocated as
follows: approximately $812 million to current assets, $574 million to fixed
assets, primarily capital lease aircraft, and approximately $320 million to
other assets, resulting in goodwill of approximately $1 billion, which is being
amortized on a straight-line basis over 40 years.
37
3. ACQUISITION OF TWA ASSETS (CONTINUED)
The following table provides unaudited pro forma consolidated results
of operations, assuming the acquisition had occurred as of January 1, 2000 (in
millions, except per share amounts):
(Unaudited)
Year Ended December 31,
-----------------------
2001 2000
------- -------
Operating revenues $18,350 $21,679
Net earnings (loss) (1,569) 686
The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only. These amounts are not indicative of the
combined results which would have occurred had the transaction actually been
consummated on the date indicated above and are not indicative of the
consolidated results of operations which may occur in the future.
4. TRANSACTIONS WITH RELATED PARTIES
American invests funds, including funds of certain affiliates, if any,
in a combined short-term investment portfolio and passes through interest income
on such funds at the average rate earned on the portfolio. These amounts are
classified as Payable to affiliate, net on the accompanying consolidated balance
sheets. In December 2000, AMR paid American approximately $980 million in
settlement of its balance due American.
American issues tickets for flights on its American Eagle affiliate
regional carriers, owned by AMR Eagle Holding Corporation, a subsidiary of AMR.
As a result, the revenue collected for such tickets is prorated between American
and the American Eagle carriers based on the segments flown by the respective
carriers. The aggregate amount prorated for the segments flown by the American
Eagle carriers was approximately $1.2 billion for 2001 and 2000, and $1.0
billion for 1999. In 2001, 2000 and 1999, American paid fees of $161 million,
$178 million and $160 million, respectively, recorded as a reduction in
passenger revenues, to American Eagle primarily for passengers connecting with
American flights. In addition, American provides each of the regional carriers,
among other things, communication and reservation services and other services,
including yield management and participation in American's frequent flyer
program. In consideration for certain services provided, each regional carrier
pays American a service charge, based primarily on passengers boarded, which
approximated $86 million for 2001 and 2000, and $72 million for 1999.
American paid subsidiaries of AMR approximately $13 million in 2001 and
2000, and $32 million in 1999 for ground handling services provided at selected
airports, consulting services and investment management and advisory services
with respect to short-term investments and the assets of its retirement benefit
plans. The decrease in amounts American paid to subsidiaries of AMR is due to
AMR's sale of AMR Services Corporation, which prior to March of 1999, was a
wholly-owned subsidiary of AMR that provided ground handling services to
American.
American recognizes compensation expense associated with certain AMR
common stock-based awards for employees of American (see Note 11). In addition,
American incurs pension and postretirement benefit expense for American
employees working at affiliates of the Company. American transfers pension and
postretirement benefit expense for these employees to its affiliates based on a
percentage of salaries and cost per employee, respectively (see Note 12).
On July 1, 2000, American and AMR Investment Services, Inc. (AMRIS), a
subsidiary of AMR, entered into a five-year Credit Agreement. The maximum amount
American can advance AMRIS is $100 million and the maximum amount AMRIS can
advance American is $40 million. The interest rate is equal to the lending
party's cost of funds for the current month. Payments are due when the borrowing
company has excess cash. As of December 31, 2001, no borrowings were outstanding
under this Credit Agreement.
38
4. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
On October 18, 2000, the Board of Directors of American declared a $1.5
billion dividend which was paid on November 1, 2000 to AMR. The dividend was
recorded as a reduction to American's retained earnings on the accompanying
consolidated balance sheets.
During 2001, the Board of Directors of AMR approved the capital
contribution of $1.5 billion from AMR to American. This capital contribution was
recorded as an addition to American's paid-in-capital on the accompanying
consolidated balance sheets.
As of December 31, 2001, the Company classified an $809 million
receivable from its parent and affiliates against paid-in-capital on the
accompanying consolidated balance sheets.
American was a party to various agreements with Sabre Holdings
Corporation (Sabre), a former 83 percent owned subsidiary of AMR. Effective
after the close of business on March 15, 2000, AMR distributed its entire
ownership interest in Sabre as a dividend on all outstanding shares of its
common stock. In connection with the spin-off, AMR, American and Sabre
terminated or amended certain of these agreements. The significant agreements
with Sabre and the effect of those amendments are described below.
Information Technology Services Agreement - American was party to the
Information Technology Services Agreement with Sabre dated July 1, 1996
(the Technology Services Agreement), whereby Sabre provided American
with certain information technology services, including data center and
data network services, services relating to client server operations
and distributed systems and voice network services. American paid Sabre
approximately $130 million in 2000 (prior to the Sabre spin-off in
March 2000) and $521 million in 1999, respectively, for services
provided under the Technology Services Agreement, as well as airline
booking fees, for which American is billed by Sabre at rates similar to
those charged to other carriers.
Marketing Cooperation Agreement - Sabre and American were parties to
the Marketing Cooperation Agreement dated as of July 1, 1996, pursuant
to which American provided marketing support for Sabre's products
targeted to travel agencies and Sabre's promotion of certain other
products. For such support, Sabre paid American a fee based upon
booking volumes. That fee was approximately $18 million in 1999.
Travel Agreements - American and Sabre were parties to travel
agreements dated July 1, 1996, pursuant to which Sabre is entitled to
purchase personal travel for its employees and retirees at reduced
fares, and business travel at a discount for certain flights on
American. The Travel Privileges Agreement expires on June 30, 2008 and
the Corporate Travel Agreement expired on June 30, 2001. Sabre paid
American approximately $45 million in 1999 pursuant to these
agreements. In connection with the spin-off of Sabre from AMR, the
Company and Sabre agreed to allow American to provide certain Sabre
employees with additional limited travel privileges and required Sabre
to indemnify American for costs related to Sabre's continued use of the
Travel Privileges Agreement.
39
5. INVESTMENTS
Short-term investments consisted of (in millions):
December 31,
-----------------
2001 2000
------ ------
Overnight investments and time deposits $ 458 $ 269
U. S. Government agency notes 722 --
Corporate and bank notes 649 851
U. S. Treasury notes 500 --
Asset backed securities 333 209
U. S. Government agency mortgages 130 220
Other 64 --
------ ------
$2,856 $1,549
====== ======
Short-term investments at December 31, 2001, by contractual maturity
included (in millions):
Due in one year or less $1,934
Due between one year and three years 692
Due after three years 230
------
$2,856
======
All short-term investments are classified as available-for-sale and
stated at fair value. Unrealized gains and losses, net of deferred taxes, are
reflected as an adjustment to stockholders' equity.
American has standby letter of credit agreements (see Note 7) which are
secured by approximately $490 million of short-term investments.
During 1999, the Company entered into an agreement with priceline.com
Incorporated (priceline) whereby ticket inventory provided by the Company may be
sold through priceline's e-commerce system. In conjunction with this agreement,
the Company received warrants to purchase approximately 5.5 million shares of
priceline common stock. In the second quarter of 2000, the Company sold these
warrants for proceeds of approximately $94 million, and recorded a gain of $57
million which is included in Miscellaneous - net on the accompanying
consolidated statements of operations.
Also during 1999, the Company sold approximately 1.0 million depository
certificates which were convertible, subject to certain restrictions, into the
common stock of Equant N.V. (Equant), a public company, for a net gain of
approximately $75 million which is included in Miscellaneous - net on the
accompanying consolidated statements of operations. During 2001, as a result of
the merger between France Telecom and Equant, the Company converted its
remaining depository certificates into France Telecom common stock and
subsequently sold those shares for a net gain of approximately $5 million which
is included in Miscellaneous - net on the accompanying consolidated statements
of operations.
40
6. COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 2001, the Company reached an agreement
with Boeing that included a combination of aircraft delivery deferrals,
substitutions and limited additional aircraft orders. As a direct result of the
agreement with Boeing, the Company's 2002 and 2003 aircraft commitment amounts
have been reduced, in the aggregate, by approximately $700 million. Following
this agreement, at December 31, 2001, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 14 Boeing 777-200ERs, nine Boeing
767-300ERs and seven Boeing 757-200s. Deliveries of all aircraft extend through
2008. Future payments for all aircraft, including the estimated amounts for
price escalation, will approximate $650 million in 2002, $1.0 billion in 2003,
$500 million in 2004 and an aggregate of approximately $1.3 billion in 2005
through 2008. These future payments are net of approximately $470 million
related to deposits made for 2002 aircraft deliveries - which have been deferred
as part of the agreement with Boeing - that will be applied to future aircraft
deliveries. In addition to these commitments for aircraft, the Company expects
to spend approximately $500 million in 2002 for modifications to aircraft,
renovations of - and additions to - airport and off-airport facilities, and the
acquisition of various other equipment and assets.
Miami-Dade County is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and funding
the remediation costs through landing fees and various cost recovery methods.
American has been named as a potentially responsible party (PRP) for the
contamination at MIA. During the second quarter of 2001, the County filed a
lawsuit against 17 defendants, including American, in an attempt to recover its
past and future cleanup costs (Miami-Dade County, Florida v. Advance Cargo
Services, Inc., et al. in the Florida Circuit Court). In addition to the 17
defendants named in the lawsuit, 243 other agencies and companies were also
named as PRPs and contributors to the contamination. American's portion of the
cleanup costs cannot be reasonably estimated due to various factors, including
the unknown extent of the remedial actions that may be required, the proportion
of the cost that will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will ultimately
supervise the remedial activities and the nature of that supervision. In
addition, the Company is subject to environmental issues at various other
airport and non-airport locations. Management believes, after considering a
number of factors, that the ultimate disposition of these environmental issues
is not expected to materially affect the Company's consolidated financial
position, results of operations or cash flows. Amounts recorded for
environmental issues are based on the Company's current assessments of the
ultimate outcome and, accordingly, could increase or decrease as these
assessments change.
The Company is involved in certain claims and litigation related to its
operations. In the opinion of management, liabilities, if any, arising from
these claims and litigation (including those matters identified in Item 3 -
Legal Proceedings) would not have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
The Company has agreed to sell its McDonnell Douglas MD-11 aircraft to
FedEx Corporation (FedEx). No significant gain or loss is expected to be
recognized as a result of this transaction. As of December 31, 2001, the
carrying value of the remaining aircraft American has committed to sell was
approximately $143 million. The Company expects to deliver the remaining
aircraft to FedEx by the third quarter of 2002.
American have event risk covenants in approximately $2.2 billion of
indebtedness as of December 31, 2001. These covenants permit the holders of such
indebtedness to receive a higher rate of return (between 75 and 650 basis points
above the stated rate) if a designated event, as defined, should occur and the
credit rating of such indebtedness is downgraded below certain levels within a
certain period of time following the event. No designated event, as defined, has
occurred as of December 31, 2001.
41
7. LEASES
The Company leases various types of equipment and property, primarily
aircraft and airport facilities. The future minimum lease payments required
under capital leases, together with the present value of such 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,
2001, were (in millions):
Capital Operating
Year Ending December 31, Leases Leases
------- ---------
2002 $ 288 $ 1,314
2003 205 1,256
2004 256 1,180
2005 187 1,119
2006 208 1,054
2007 and subsequent 1,223 11,622
------- -------
2,367 $17,545(1)
=======
Less amount representing interest 782
-------
Present value of net minimum lease payments $ 1,585
=======
(1) As of December 31, 2001, included in Other liabilities and
deferred credits on the accompanying consolidated balance sheets
is approximately $1.6 billion relating to rent expense being
recorded in advance of future operating lease payments.
At December 31, 2001, the Company had 342 aircraft under operating
leases and 76 aircraft under capital leases - which includes both operating and
non-operating aircraft. 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.
Special facility revenue bonds have been issued by certain
municipalities primarily to purchase equipment and improve airport facilities
that are leased by American and accounted for as operating leases. Approximately
$2.3 billion of these bonds (with total future payments of approximately $6
billion as of December 31, 2001) are guaranteed by AMR and American. These
guarantees can only be invoked in the event American defaults on the lease
obligation and certain other remedies are not available. In addition, of the
$2.3 billion, American may be required to purchase up to $558 million under
various remarketing agreements which are supported by standby letters of credit
with terms ranging from one to three years.
Rent expense, excluding landing fees, was $1.6 billion in 2001 and $1.2
billion in 2000 and 1999.
42
8. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted
of (in millions):
December 31,
-----------------
2001 2000
------ ------
Enhanced equipment trust certificates due through 2019
(rates from 6.8% - 9.1% at December 31, 2001) $3,006 $ 553
Secured variable and fixed rate indebtedness due through 2021
(effective rates from 2.4% - 9.6% at December 31, 2001) 2,421 1,763
Credit facility agreement due in 2005
(5.09% at December 31, 2001) 814 --
6.0% - 7.10% bonds due through 2031 176 176
Unsecured variable rate indebtedness due through 2024
(3.55% at December 31, 2001) 86 86
Other 27 23
------ ------
Long-term debt, less current maturities $6,530 $2,601
====== ======
Maturities of long-term debt (including sinking fund requirements) for
the next five years are: 2002 - $421 million; 2003 - $212 million; 2004 - $273
million; 2005 - $1.0 billion; 2006 - $777 million.
During 2001, American issued approximately $2.6 billion of enhanced
equipment trust certificates and entered into approximately $773 million of
various debt agreements. These financings are secured by aircraft. Effective
rates on these financings are fixed or variable (based upon the London Interbank
Offered Rate (LIBOR) plus a spread).
In April 2001, the Board of Directors of American approved the
guarantee by American of AMR's existing debt obligations. As of December 31,
2001, this guarantee covered approximately $676 million of unsecured debt and
approximately $573 million of secured debt.
American has an $834 million credit facility that expires December 15,
2005. At American's option, interest on this facility can be calculated on one
of several different bases. For most borrowings, American would anticipate
choosing a floating rate based upon LIBOR. During the fourth quarter of 2001,
American amended this credit facility to include, among other items, a revision
of its financial covenants, including modifications to its fixed charge covenant
and the addition of certain liquidity requirements. The next test of the fixed
charge covenant will occur on June 30, 2003 and will consider only the preceding
six-month period. American secured the facility with previously unencumbered
aircraft. In addition, the facility requires that American maintain at least
$1.5 billion of liquidity, as defined in the facility, which consists primarily
of cash and short-term investments, and 50 percent of the net book value of its
unencumbered aircraft. The interest rate on the entire credit facility will be
reset on March 18, 2002.
In addition, American has available a $1 billion credit facility that
expires September 30, 2002. Interest on this facility is based upon LIBOR plus a
spread. This facility is immediately available subject to the Company providing
specified aircraft collateral as security at the time of borrowing. At December
31, 2001, no borrowings were outstanding under this facility.
43
8. INDEBTEDNESS (CONTINUED)
Certain debt is secured by aircraft, engines, equipment and other
assets having a net book value of approximately $7.3 billion. In addition,
certain of American's debt and letter of credit agreements contain restrictive
covenants, including a minimum net worth requirement, which could limit
American's ability to pay dividends. At December 31, 2001, under the most
restrictive provisions of those debt and credit facility agreements,
approximately $400 million of the retained earnings of American was available
for payment of dividends to AMR.
Cash payments for interest, net of capitalized interest, were $286
million, $196 million and $123 million for 2001, 2000 and 1999, respectively.
9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, the Company uses a
variety of financial instruments, including fuel swap and option contracts,
interest rate swaps, and currency option contracts and exchange agreements. The
Company does not hold or issue derivative financial instruments for trading
purposes.
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. The Company's outstanding collateral as of December 31, 2001 was not
material.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended (SFAS 133). SFAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS 133 did not result in a cumulative
effect adjustment being recorded to net income for the change in accounting.
However, the Company recorded a transition adjustment of approximately $64
million in Accumulated other comprehensive loss in the first quarter of 2001.
The amounts included in the following discussion are not comparable in that the
2001 amounts reflect the January 1, 2001 adoption of SFAS 133 whereas the 2000
amounts do not.
FUEL PRICE RISK MANAGEMENT
American enters into jet fuel, heating oil and crude swap and option
contracts to protect against increases in jet fuel prices. These instruments
generally have maturities of up to 36 months. In accordance with SFAS 133, the
Company accounts for its fuel swap and option contracts as cash flow hedges.
Upon the adoption of SFAS 133, the Company recorded the fair value of its fuel
hedging contracts in Other assets and Accumulated other comprehensive loss on
the consolidated balance sheets. Effective gains or losses on fuel hedging
agreements are deferred in Accumulated other comprehensive loss and are
recognized in earnings as a component of fuel expense when the underlying fuel
being hedged is used. The ineffective portion of the fuel hedge agreements is
based on the change in the total value of the derivative relative to the change
in the value of the fuel being hedged and is recognized as a component of fuel
expense on the accompanying consolidated statements of operations.
44
9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
For the year ended December 31, 2001 and 2000, the Company recognized
net gains of approximately $27 million and $517 million, respectively, as a
component of fuel expense on the accompanying consolidated statements of
operations related to its fuel hedging agreements. The net gains recognized in
2001 included approximately $68 million of ineffectiveness expense relating to
the Company's fuel hedging agreements. At December 31, 2001, American had fuel
hedging agreements with broker-dealers on approximately 2.3 billion gallons of
fuel products, which represented approximately 40 percent of its expected 2002
fuel needs, approximately 21 percent of its expected 2003 fuel needs, and
approximately five percent of its expected 2004 fuel needs. The fair value of
the Company's fuel hedging agreements at December 31, 2001 and 2000,
representing the amount the Company would receive to terminate the agreements,
totaled $39 million and $223 million, respectively.
INTEREST RATE RISK MANAGEMENT
American utilizes interest rate swap contracts to effectively convert a
portion of its fixed-rate obligations to floating-rate obligations. Under SFAS
133, the Company accounts for its interest rate swap contracts as fair value
hedges whereby the fair value of the related interest rate swap agreement is
reflected in Other assets with the corresponding liability being recorded as a
component of Long-term debt on the consolidated balance sheets. The Company has
no ineffectiveness with regard to its interest rate swap contracts. The fair
value of the Company's interest rate swap agreements, representing the amount
the Company would receive if the agreements were terminated at December 31, 2001
and 2000, was approximately $11 million and $4 million, respectively.
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. These
instruments generally have maturities of up to 12 months. In accordance with
SFAS 133, the Company accounts for its currency put option agreements as cash
flow hedges. Upon the adoption of SFAS 133, the Company recorded the fair value
of its foreign currency put option agreements in Other assets and Accumulated
other comprehensive loss on the consolidated balance sheets. Effective gains and
losses on currency put option agreements are deferred in Accumulated other
comprehensive loss and are recognized in earnings as a component of passenger
revenue when the underlying hedged revenues are recognized. The ineffectiveness
associated with the Company's currency put option agreements was not material.
For the year ended December 31, 2001, the Company recognized net gains of
approximately $14 million as a component of passenger revenue related to its
foreign currency put option agreements. The fair value of the Company's foreign
currency put option agreements totaled approximately $12 million and $20 million
as of December 31, 2001 and 2000, respectively, representing the amount the
Company would receive to terminate these agreements.
The Company has entered into Japanese yen currency exchange agreements
to effectively convert certain yen-based lease obligations into dollar-based
obligations. Under SFAS 133, the Company accounts for its Japanese yen currency
exchange agreements as cash flow hedges whereby the fair value of the related
Japanese yen currency exchange agreements is reflected in Other liabilites and
deferred credits and Accumulated other comprehensive loss on the consolidated
balance sheets. The Company has no ineffectiveness with regard to its Japanese
yen currency exchange agreements. The fair value of the Company's yen currency
exchange agreements, representing the amount the Company would pay to terminate
the agreements, were $45 million and $5 million as of December 31, 2001 and
2000, respectively. The exchange rates on the Japanese yen agreements range from
66.5 to 113.5 yen per U.S. dollar.
45
9. 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 estimated fair values of the Company's
long-term debt, including current maturities, were (in millions):
December 31,
-------------------------------------------
2001 2000
------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ -------- ------
Enhanced equipment trust certificates $3,094 $3,025 $ 567 $ 576
Secured variable and fixed rate indebtedness 2,724 2,775 1,849 1,924
Credit facility agreement 814 814 -- --
6.0% - 7.10 % bonds 176 143 176 179
Unsecured variable rate indebtedness 86 86 86 86
Other 57 57 31 31
------ ------ ------ ------
$6,951 $6,900 $2,709 $2,796
====== ====== ====== ======
All other financial instruments are either carried at fair value or
their carrying value approximates fair value.
10. 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 (benefit) were
(in millions):
Year Ended December 31,
--------------------------
2001 2000 1999
----- ----- -----
Current $(223) $ 78 $ 211
Deferred (664) 426 216
----- ----- -----
$(887) $ 504 $ 427
===== ===== =====
The income tax provision (benefit) includes a federal income tax
provision (benefit) of $(810) million, $453 million and $376 million and a state
income tax provision (benefit) of $(81) million, $46 million and $44 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
46
10. INCOME TAXES (CONTINUED)
The income tax provision (benefit) differed from amounts computed at
the statutory federal income tax rate as follows (in millions):
Year Ended December 31,
--------------------------
2001 2000 1999
----- ----- -----
Statutory income tax provision (benefit) $(857) $ 449 $ 369
State income tax provision (benefit), net of
federal tax effect (53) 30 29
Meal expense 18 17 17
Other, net 5 8 12
----- ----- -----
Income tax provision (benefit) $(887) $ 504 $ 427
===== ===== =====
The components of American's deferred tax assets and liabilities were
(in millions):
December 31,
-------------------
2001 2000
------- -------
Deferred tax assets:
Postretirement benefits other than pensions $ 943 $ 644
Rent expense 708 452
Alternative minimum tax credit carryforwards 473 124
Frequent flyer obligation 415 366
Operating loss carryforwards 306 --
Gains from lease transactions 226 229
Other 713 533
Valuation allowance (4) --
------- -------
Total deferred tax assets 3,780 2,348
------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization (3,482) (3,348)
Purchased intangible assets (374) --
Pensions (160) (90)
Other (385) (315)
------- -------
Total deferred tax liabilities (4,401) (3,753)
------- -------
Net deferred tax liability $ (621) $(1,405)
======= =======
At December 31, 2001, American had available, under the terms of its
tax sharing agreement with AMR, an alternative minimum tax credit carryforward
of approximately $473 million which is available for an indefinite period, and
federal and state operating losses of approximately $829 million for regular tax
purposes which will fully expire, if unused, in 2021.
Cash payments for income taxes were $5 million, $79 million and $232
million for 2001, 2000 and 1999, respectively.
47
11. STOCK AWARDS AND OPTIONS
The Company participates in AMR's 1998 and 1988 Long Term Incentive
Plans, as amended, (collectively, the Plans) whereby officers and key employees
of AMR and its subsidiaries may be granted stock options, stock appreciation
rights, restricted stock, deferred stock, stock purchase rights, other
stock-based awards and/or performance-related awards, including cash bonuses.
The Company also participates in AMR's Pilot Stock Option Plan (The Pilot Plan).
The Pilot Plan granted members of the Allied Pilots Association the option to
purchase 11.5 million shares of AMR stock at $41.69 per share, $5 less than the
average fair market value of the stock on the date of grant, May 5, 1997. These
shares were exercisable immediately. In conjunction with the Sabre spin-off, the
exercise price of The Pilot Plan options was adjusted to $17.59 per share.
The Company accounts for participation in AMR's stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations. In
2001, 2000 and 1999, the total charge for stock compensation expense included in
wages, salaries and benefits expense, primarily related to the Company's
participation in AMR's performance share plan, was $21 million, $50 million and
$52 million, respectively. No compensation expense was recognized for stock
option grants under the Plans since the exercise price was the fair market value
of the underlying stock on the date of grant.
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 (loss) 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 2001, 2000 and 1999: risk-free interest rates of 4.58% to 6.15%;
dividend yields of 0%; expected stock volatility ranging from 31.3% to 45.2%;
and expected life of the options of 4.5 years for the Plans and 1.5 years for
The Pilot Plan.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company's pro forma net earnings (loss) 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 2001, 2000 and 1999 net
earnings (loss) of approximately $(1.6) billion, $771 million and $622 million,
respectively.
12. RETIREMENT BENEFITS
All regular employees of American are eligible to participate in
pension plans. The defined benefit plans provide benefits for participating
employees based on years of service and average compensation for a specified
period of time before retirement. Airline pilots also participate in a defined
contribution plan for which Company contributions are determined as a percentage
of participant compensation.
Effective January 1, 2001, American established a defined contribution
plan for non-contract employees in which the Company will contribute a match up
to 5.5 percent on employee contributions of pensionable earnings to the
Company's existing 401(k) plan. During 2000, American provided a one-time
election for current non-contract employees to remain in the defined benefit
plan or discontinue accruing future credited service in the defined benefit plan
as of January 1, 2001 and begin participation in the defined contribution plan.
Effective January 1, 2002, all new non-contract employees of the Company will
become members of the defined contribution plan.
48
12. 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. All regular employees of American may become
eligible for these benefits if they satisfy eligibility requirements during
their working lives.
Certain employee groups make contributions toward funding a portion of
their retiree health care benefits during their working lives. American funds
benefits as incurred and makes contributions to match employee prefunding.
American incurs pension and postretirement benefit expense for American
employees working at affiliates of the Company. American transfers pension and
postretirement benefit expense for these employees to its affiliates based on a
percentage of salaries and cost per employee, respectively.
In connection with the acquisition of TWA in April 2001 (see Note 3),
the Company assumed certain retiree benefit plan liabilities of TWA, primarily
its postretirement benefit obligation. As such, the following information
reflects the inclusion of these obligations from the date of acquisition. In
addition, effective January 1, 2002, TWA employees were eligible to begin
participation in American's pension plans. However, these employees were not
granted prior credited service.
49
12. RETIREMENT BENEFITS (CONTINUED)
The following table provides a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended December
31, 2001 and 2000, and a statement of funded status as of December 31, 2001 and
2000 (in millions):
Pension Benefits Other Benefits
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Reconciliation of benefit obligation
Obligation at January 1 $ 6,434 $ 5,628 $ 1,708 $ 1,306
Service cost 260 213 66 43
Interest cost 515 467 175 108
Actuarial loss 416 499 205 328
Plan amendments 168 -- (12) --
Acquisition of TWA -- -- 734 --
Benefit payments (371) (373) (117) (77)
------- ------- ------- -------
Obligation at December 31 $ 7,422 $ 6,434 $ 2,759 $ 1,708
======= ======= ======= =======
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 5,731 $ 5,282 $ 88 $ 72
Actual return on plan assets 1 735 (5) 5
Employer contributions 121 85 129 88
Benefit payments (371) (373) (117) (77)
Transfers -- 2 -- --
------- ------- ------- -------
Fair value of plan assets at December 31 $ 5,482 $ 5,731 $ 95 $ 88
======= ======= ======= =======
Funded status
Accumulated benefit obligation (ABO) $ 6,041 $ 5,306 $ -- $ --
Projected benefit obligation (PBO) 7,422 6,434 -- --
Accumulated postretirement benefit obligation
(APBO) -- -- 2,759 1,708
Fair value of assets 5,482 5,731 95 88
Funded status at December 31 (1,940) (703) (2,664) (1,620)
Unrecognized loss (gain) 1,454 523 168 (51)
Unrecognized prior service cost 286 129 (42) (35)
Unrecognized transition asset (5) (6) -- --
------- ------- ------- -------
Accrued benefit cost $ (205) $ (57) $(2,538) $(1,706)
======= ======= ======= =======
As of December 31, 2001, the accumulated benefit obligation and the
fair value of plan assets for pension plans with accumulated benefit obligations
in excess of plan assets were approximately $4.2 billion and $3.6 billion,
respectively.
At December 31, 2001 and 2000, other benefits plan assets of
approximately $93 million and $88 million, respectively, were invested in shares
of mutual funds managed by an affiliate of American.
50
12. RETIREMENT BENEFITS (CONTINUED)
The following tables provide the components of net periodic benefit
cost for the years ended December 31, 2001, 2000 and 1999 (in millions):
Pension Benefits
---------------------------
2001 2000 1999
----- ----- -----
Components of net periodic benefit cost
Defined benefit plans:
Service cost $ 260 $ 213 $ 236
Interest cost 515 467 433
Expected return on assets (539) (490) (514)
Amortization of:
Transition asset (1) (1) (4)
Prior service cost 11 10 5
Unrecognized net loss 22 17 21
----- ----- -----
Net periodic benefit cost for
defined benefit plans 268 216 177
Defined contribution plans 238 170 151
----- ----- -----
Total $ 506 $ 386 $ 328
===== ===== =====
Other Benefits
---------------------------
2001 2000 1999
----- ----- -----
Components of net periodic benefit cost
Service cost $ 66 $ 43 $ 56
Interest cost 175 108 108
Expected return on assets (9) (7) (6)
Amortization of:
Prior service cost (5) (5) (5)
Unrecognized net gain -- (14) --
----- ----- -----
Net periodic benefit cost $ 227 $ 125 $ 153
===== ===== =====
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 2001 and 2000 (in millions):
Pension Benefits Other Benefits
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Prepaid benefit cost $ 123 $ 107 $ -- $ --
Accrued benefit liability (328) (225) (2,538) (1,706)
Additional minimum liability (335) (21) -- --
Intangible asset 163 72 -- --
Accumulated other comprehensive income
172 10 -- --
------- ------- ------- -------
Net amount recognized $ (205) $ (57) $(2,538) $(1,706)
======= ======= ======= =======
51
12. RETIREMENT BENEFITS (CONTINUED)
Pension Benefits Other Benefits
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Weighted-average assumptions as of
December 31
Discount rate 7.50% 7.75% 7.50% 7.75%
Salary scale 4.26 4.26 -- --
Expected return on plan assets 9.50 9.50 9.50 9.50
The assumed health care cost trend rate was six percent in 2001,
decreasing gradually to an ultimate rate of 4.5 percent by 2004. The previously
assumed health care cost trend rate was seven percent in 2000, decreasing
gradually to an ultimate rate of four percent by 2004.
A one percentage point change in the assumed health care cost trend
rates would have the following effects (in millions):
One percent One percent
increase decrease
----------- -----------
Impact on 2001 service and interest cost $ 26 $ (24)
Impact on postretirement benefit obligation
as of December 31, 2001 $ 206 $ (196)
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in millions):
Unrealized
Gain/(Loss)
Minimum Unrealized on Derivative
Pension Gain/(Loss) on Financial
Liability Investments Instruments Total
--------- -------------- ------------- ------
Balance at December 31, 1998 $ (4) $ 1 $ -- $ (3)
Current year net change 3 (2) -- 1
----- ----- ----- -----
Balance at December 31, 1999 (1) (1) -- (2)
Current year net change (5) 5 -- --
----- ----- ----- -----
Balance at December 31, 2000 (6) 4 -- (2)
Current year net change (101) 4 -- (97)
Cumulative effect of adoption of
SFAS 133 as of January 1, 2001,
net of tax of $38 -- -- 64 64
Reclassification of derivative
financial instruments into
earnings, net of tax of $37 -- -- (62) (62)
Change in fair value of derivative
financial instruments, net of tax
of $30 -- -- (48) (48)
----- ----- ----- -----
Balance at December 31, 2001 $(107) $ 8 $ (46) $(145)
===== ===== ===== =====
As of December 31, 2001, the Company estimates during the next twelve
months it will reclassify from accumulated other comprehensive loss into net
earnings approximately $33 million relating to its derivative financial
instruments.
52
14. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", as amended (SFAS 131),
requires that a public company report annual and interim financial and
descriptive information about its reportable operating segments. Operating
segments, as defined, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. American has one reportable segment.
Following the acquisition of TWA in April 2001 (see Note 3), American
is the largest scheduled passenger airlines in the world. At the end of 2001,
American provided scheduled jet service to more than 161 destinations throughout
North America, the Caribbean, Latin America, Europe and the Pacific. American is
also one of the largest scheduled air freight carriers in the world, providing a
full range of freight and mail services to shippers throughout its system.
American's operating revenues by geographic region are summarized below
(in millions):
Year Ended December 31,
-------------------------------
2001 2000 1999
------- ------- -------
Domestic $12,344 $12,444 $11,311
Latin America 2,566 2,758 2,557
Europe 2,076 2,338 1,984
Pacific 498 577 486
------- ------- -------
Total operating revenues $17,484 $18,117 $16,338
======= ======= =======
The Company attributes operating revenues by geographic region based
upon the origin and destination of each flight segment. The Company's tangible
assets consist primarily of flight equipment which is mobile across geographic
markets and, therefore, has not been allocated.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 2001 and 2000 (in
millions):
First Second Third Fourth
Quarter(*) Quarter Quarter Quarter
---------- -------- ------- -------
2001
Operating revenues $ 4,378 $ 5,148 $ 4,454 $ 3,504
Operating loss (12) (701) (472) (1,089)
Net loss (34) (455) (338) (735)
2000
Operating revenues $ 4,202 $ 4,610 $ 4,833 $ 4,472
Operating income 186 471 517 70
Net earnings 105 324 316 33
(*) Certain amounts for the first quarter of 2001 related to the Company's
fuel hedging program have been reclassified to conform with the 2001
presentation.
53
15. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The following table summarizes the special charges - net of U.S.
Government grant recorded by the Company during the second, third and fourth
quarters of 2001 (in millions):
Second Third Fourth
Quarter Quarter Quarter
------- ------- -------
Aircraft charges $ 586 $ 398 $ 41
Facility exit costs -- 60 54
Employee charges -- 53 16
Other -- 20 20
----- ----- -----
Total special charges 586 531 131
Less: U.S. Government grant -- (780) (47)
----- ----- -----
$ 586 $(249) $ 84
===== ===== =====
See Note 2 for a further discussion of special charges - net of U.S.
Government grant.
In addition to the above items, during the second quarter of 2001, the
Company recorded a gain of $45 million from the settlement of a legal matter
related to the Company's 1999 labor disruption.
During the second quarter of 2000, the Company recorded a gain of
approximately $57 million from the sale of the Company's warrants to purchase
5.5 million shares of priceline common stock (see Note 5). Results for the
fourth quarter of 2000 include a charge of approximately $50 million for the
Company's employee home computer program.
54
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 27
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 28
Consolidated Balance Sheets at December 31, 2001 and 2000 29-30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 31
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2001, 2000 and 1999 32
Notes to Consolidated Financial Statements 33-54
(2) The following financial statement schedule and Independent
Auditors' Report are filed as part of this report:
Page
-----
Report of Independent Auditors 58
Schedule II Valuation and Qualifying Accounts and Reserves 59
55
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
10.1 Bylaws of American Airlines, Inc., amended November
18, 1998, incorporated by reference to Exhibit 10.3
to American Airlines, Inc. report on Form 10-K for
the year ended December 31, 1998.
10.2 Information Technology Services Agreement, dated July
1, 1996, between American and The Sabre Group, Inc.,
incorporated by reference to Exhibit 10.6 to The
Sabre Group Holdings, Inc.'s Registration Statement
on Form S-1, file number 333-09747. Confidential
treatment was granted as to a portion of this
document.
10.3 Aircraft Purchase Agreement by and between American
Airlines, Inc. and The Boeing Company, dated October
31, 1997, incorporated by reference to Exhibit 10.48
to AMR Corporation's report on Form 10-K for the year
ended December 31, 1997. Confidential treatment was
granted as to a portion of this document.
12 Computation of ratio of earnings to fixed charges for
the years ended December 31, 1997, 1998, 1999, 2000
and 2001.
23 Consent of Independent Auditors.
(b) Reports on Form 8-K:
Form 8-Ks filed under Item 5 - Other Events
On November 13, 2001, American Airlines, Inc. filed a report on Form
8-K relative to a press release issued by American to confirm that Flight 587,
an American Airlines Airbus A300 aircraft en route from New York's John F.
Kennedy (JFK) airport to Santo Domingo, crashed near JFK airport on November 12,
2001.
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure
On December 19, 2001, American Airlines, Inc. filed a report on Form
8-K to provide certain data regarding its unit costs, capacity, traffic and
fuel, a monthly update, and an updated fleet plan.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN AIRLINES, INC.
/s/ Donald J. Carty
-----------------------------------------------------------
Donald J. Carty
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas W. Horton
-----------------------------------------------------------
Thomas W. Horton
Senior Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 27, 2002
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/ John W. Bachmann /s/ Michael A. Miles
----------------------------- -----------------------------
John W. Bachmann Michael A. Miles
/s/ David L. Boren /s/ Philip J. Purcell
----------------------------- -----------------------------
David L. Boren Philip J. Purcell
/s/ Edward A. Brennan /s/ Joe M. Rodgers
----------------------------- -----------------------------
Edward A. Brennan Joe M. Rodgers
/s/ Armando M. Codina /s/ Judith Rodin
----------------------------- -----------------------------
Armando M. Codina Judith Rodin
/s/ Earl G. Graves /s/ Roger T. Staubach
----------------------------- -----------------------------
Earl G. Graves Roger T. Staubach
/s/ Ann McLaughlin Korologos
----------------------------
Ann McLaughlin Korologos
Date: February 27, 2002
57
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, 2001 and 2000, and for each of the three years
in the period ended December 31, 2001, and have issued our report thereon dated
January 15, 2002. 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 15, 2002
58
AMERICAN AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
INCREASES
BALANCE CHARGED TO INCREASES SALES, BALANCE
AT INCOME CHARGED TO WRITE-OFFS RETIREMENTS AT
BEGINNING STATEMENT OTHER (NET OF AND END OF
OF YEAR ACCOUNTS ACCOUNTS PAYMENTS RECOVERIES) TRANSFERS YEAR
--------- ---------- ---------- -------- ----------- ----------- -------
(Note)
YEAR ENDED DECEMBER 31, 2001
Allowance for
obsolescence of inventories $302 $ 59 $ -- $ -- $ -- $(15) $346
Allowance for
uncollectible accounts 26 19 -- -- 6 -- 51
Reserves for environmental
remediation costs 70 24 19 (29) -- -- 84
Reserves for litigation 29 6 -- (29) -- -- 6
YEAR ENDED DECEMBER 31, 2000
Allowance for
obsolescence of inventories 255 54 -- -- -- (7) 302
Allowance for
uncollectible accounts 53 18 -- -- (45) -- 26
Reserves for environmental
remediation costs 65 24 -- (19) -- -- 70
Reserves for litigation 31 -- -- (2) -- -- 29
YEAR ENDED DECEMBER 31, 1999
Allowance for
obsolescence of inventories 196 54 -- -- -- 5 255
Allowance for
uncollectible accounts 17 34 -- -- 2 -- 53
Reserves for environmental
remediation costs 23 48 -- (6) -- -- 65
Reserves for litigation -- 39 -- (8) -- -- 31
Note: Amount was established as part of the April 2001 acquisition of TWA
(see Note 3 to the consolidated financial statements) and was charged
to goodwill on the consolidated balance sheets.
59
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
12 Computation of ratio of earnings to fixed charges for the years
ended December 31, 1997, 1998, 1999, 2000 and 2001.
23 Consent of Independent Auditors.