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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A NO. 1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From to .
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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
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1 par value - 1,000 shares as of July 15, 2002.
The registrant meets the conditions set forth in, and is filing this form with
the reduced disclosure format prescribed by, General Instructions H(1)(a) and
(b) of Form 10-Q.
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EXPLANATORY NOTE
AMERICAN AIRLINES, INC.
The purpose of this amendment No. 1 to the American Airlines, Inc. Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002 is to solely
reflect a cumulative effect of accounting change, as a result of the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002. This new accounting
pronouncement allows companies until December 31, 2002 to quantify the
impairment charge, if any, but requires companies to record this charge
effective January 1, 2002, resulting in this amended Form 10-Q.
INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and six months ended
June 30, 2002 and 2001
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31,
2001
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements - June 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)
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Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Passenger $ 3,747 $ 4,645 $ 7,231 $ 8,580
Cargo 141 188 274 362
Other revenues 222 315 413 584
------------ ------------ ------------ ------------
Total operating revenues 4,110 5,148 7,918 9,526
EXPENSES
Wages, salaries and benefits 2,017 2,008 3,989 3,640
Aircraft fuel 621 802 1,118 1,472
Depreciation and amortization 299 316 603 594
Other rentals and landing fees 284 298 552 534
Maintenance, materials and repairs 248 246 478 480
Aircraft rentals 208 218 427 358
Food service 178 217 347 398
Commissions to agents 149 244 300 456
Special charges -- 586 -- 586
Other operating expenses 737 914 1,457 1,721
------------ ------------ ------------ ------------
Total operating expenses 4,741 5,849 9,271 10,239
------------ ------------ ------------ ------------
OPERATING LOSS (631) (701) (1,353) (713)
OTHER INCOME (EXPENSE)
Interest income 18 22 36 44
Interest expense (123) (93) (250) (169)
Interest capitalized 21 35 41 74
Related party interest - net 5 (11) 10 (22)
Miscellaneous - net 4 36 (4) 30
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(75) (11) (167) (43)
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LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (706) (712) (1,520) (756)
Income tax benefit (220) (257) (492) (267)
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (486) (455) (1,028) (489)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX
BENEFIT -- -- (889) --
------------ ------------ ------------ ------------
NET LOSS $ (486) $ (455) $ (1,917) $ (489)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-1-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
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June 30, December 31,
2002 2001
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ASSETS
CURRENT ASSETS
Cash $ 191 $ 117
Short-term investments 2,352 2,856
Receivables, net 1,530 1,371
Inventories, net 676 752
Deferred income taxes 846 844
Other current assets 179 519
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Total current assets 5,774 6,459
EQUIPMENT AND PROPERTY
Flight equipment, net 13,519 13,151
Other equipment and property, net 2,234 2,000
Purchase deposits for flight equipment 607 834
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16,360 15,985
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment, net 1,372 1,492
Other equipment and property, net 92 95
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1,464 1,587
Route acquisition costs 829 829
Airport operating and gate lease rights, net 446 459
Other assets 4,228 5,158
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$ 29,101 $ 30,477
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LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,478 $ 1,717
Accrued liabilities 2,189 2,017
Air traffic liability 3,059 2,763
Payable to affiliates, net 69 66
Current maturities of long-term debt 255 421
Current obligations under capital leases 119 189
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Total current liabilities 7,169 7,173
Long-term debt, less current maturities 7,165 6,530
Obligations under capital leases, less current obligations 1,331 1,396
Deferred income taxes 1,426 1,465
Postretirement benefits 2,611 2,538
Other liabilities, deferred gains and deferred credits 5,808 5,896
STOCKHOLDER'S EQUITY
Common stock -- --
Additional paid-in capital 2,550 2,596
Accumulated other comprehensive loss (70) (145)
Retained earnings 1,111 3,028
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3,591 5,479
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$ 29,101 $ 30,477
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The accompanying notes are an integral part of these financial statements.
-2-
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
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Six Months Ended June 30,
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2002 2001
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ (53) $ 732
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including purchase deposits for flight equipment (846) (1,924)
Acquisition of Trans World Airlines, Inc. -- (742)
Net decrease in short-term investments 504 352
Proceeds from sale of equipment and property 160 204
Other 36 (6)
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Net cash used for investing activities (146) (2,116)
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (296) (159)
Proceeds from issuance of long-term debt 612 1,433
Funds transferred between affiliates, net (43) 285
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Net cash provided by financing activities 273 1,559
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Net increase in cash 74 175
Cash at beginning of period 117 86
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Cash at end of period $ 191 $ 261
============ ============
The accompanying notes are an integral part of these financial statements.
-3-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, these financial statements contain all
adjustments, consisting of normal recurring accruals and the asset
impairment charge as discussed in footnote 8, necessary to present
fairly the financial position, results of operations and cash flows for
the periods indicated. The Company's 2002 results continue to be
adversely impacted by the September 11, 2001 terrorist attacks and the
resulting effect on the economy and the air transportation industry. In
addition, on April 9, 2001, Trans World Airlines LLC (TWA LLC, a wholly
owned subsidiary of AMR Corporation (AMR)) purchased substantially all
of the assets and assumed certain liabilities of Trans World Airlines,
Inc. (TWA). Accordingly, the operating results of TWA LLC are included
in the accompanying condensed consolidated financial statements for the
three and six month periods ended June 30, 2002 whereas for 2001 the
results of TWA LLC were included only for the period April 10, 2001
through June 30, 2001. When utilized in this report, all references to
American Airlines, Inc. include the operations of TWA LLC since April
10, 2001 (collectively, American). Results of operations for the
periods presented herein are not necessarily indicative of results of
operations for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
American Airlines, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001 ("2001 Form 10-K").
2. Accumulated depreciation of owned equipment and property at June 30,
2002 and December 31, 2001 was $8.3 billion and $8.2 billion,
respectively. Accumulated amortization of equipment and property under
capital leases at June 30, 2002 and December 31, 2001 was $920 million
and $1.0 billion, respectively.
3. The following table provides unaudited pro forma consolidated results
of operations, assuming the acquisition of TWA had occurred as of
January 1, 2001 (in millions):
Six Months Ended
June 30, 2001
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Operating revenues $ 10,392
Net loss (496)
The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only. These amounts are not
indicative of the combined results that 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. As discussed in the notes to the consolidated financial statements
included in the Company's 2001 Form 10-K, Miami-Dade County (the
County) is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and
funding the remediation costs through landing fees and various cost
recovery methods. American 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.
-4-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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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.
5. As of June 30, 2002, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 11 Boeing 777-200ERs and nine
Boeing 767-300ERs. Deliveries of these aircraft are scheduled to
continue through 2008. Payments for these aircraft are expected to be
approximately $210 million during the remainder of 2002, $890 million
in 2003, $390 million in 2004 and an aggregate of approximately $1.5
billion in 2005 through 2008.
6. During the six month period ended June 30, 2002, American borrowed
approximately $372 million under various debt agreements which are
secured by aircraft. Effective interest rates on these agreements are
based on London Interbank Offered Rate plus a spread and mature over
various periods of time through 2018.
In March 2002, the Regional Airports Improvement Corporation issued
facilities sublease revenue bonds at the Los Angeles International
Airport to provide reimbursement to American for certain facility
construction costs. The proceeds of approximately $225 million provided
to American have been recorded as long-term debt on the condensed
consolidated balance sheets. These obligations bear interest at fixed
rates, with an average rate of 7.88 percent, and mature over various
periods of time, with a final maturity in 2024.
7. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 142 requires the Company to test goodwill and
indefinite-lived intangible assets (for American, route acquisition
costs) for impairment rather than amortize them. During the first
quarter of 2002, the Company completed its impairment analysis for
route acquisition costs in accordance with SFAS 142. The analysis did
not result in an impairment charge. In addition, the Company completed
its impairment analysis related to its $1.3 billion of goodwill and
determined the Company's entire goodwill balance was impaired. In
arriving at this conclusion, the Company's net book value was
determined to be in excess of the Company's fair value at January 1,
2002, using American as the reporting unit for purposes of the fair
value determination. The Company determined its fair value as of
January 1, 2002 using various valuation methods, ultimately utilizing
an allocation of AMR's fair value, which was determined using market
capitalization as the primary indicator of fair value. As a result, the
Company recorded a one-time, non-cash charge, effective January 1,
2002, of $889 million (net of a tax benefit of $363 million) to
write-off all of American's goodwill. This charge is nonoperational in
nature and is reflected as a cumulative effect of accounting change in
the consolidated statements of operations. This charge does not affect
the Company's financial covenants in any of its credit agreements.
In addition, 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
required the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges are 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 are
either 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 is 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.
-5-
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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The following table provides information relating to the Company's
amortized intangible assets as of June 30, 2002 (in millions):
Accumulated Net Book
Cost Amortization Value
------------ ------------ ------------
AMORTIZED INTANGIBLE ASSETS:
Airport operating rights $ 449 $ 136 $ 313
Gate lease rights 209 76 133
------------ ------------ ------------
Total $ 658 $ 212 $ 446
============ ============ ============
Airport operating and gate lease rights are being amortized on a
straight-line basis over 25 years to a zero residual value. For the
three and six month period ended June 30, 2002, the Company recorded
amortization expense of approximately $5 million and $13 million,
respectively, related to these intangible assets. The Company expects
to record annual amortization expense of approximately $26 million in
each of the next five years related to these intangible assets.
The pro forma effect of discontinuing amortization of goodwill and
route acquisition costs under SFAS 142 - assuming the Company had
adopted this standard as of January 1, 2001 - results in an adjusted
net loss of approximately $442 million and approximately $470 million,
respectively, for the three and six month periods ended June 30, 2001.
8. 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 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). 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
which is included in Special charges on the accompanying consolidated
statements of operations. 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. As a result of
the writedown of these aircraft to fair market value, as well as the
acceleration of the retirement dates and changes in salvage values,
depreciation and amortization will decrease by approximately $18
million on an annualized basis.
9. The Company includes unrealized gains and losses on available-for-sale
securities, changes in minimum pension liabilities and changes in the
fair value of certain derivative financial instruments that qualify for
hedge accounting in comprehensive loss. For the three months ended June
30, 2002 and 2001, comprehensive loss was $487 million and $457
million, respectively. In addition, for the six months ended June 30,
2002 and 2001, comprehensive loss was $1,842 million and $417 million,
respectively. The difference between net loss and comprehensive loss is
due primarily to the accounting for the Company's derivative financial
instruments under SFAS 133. In addition, the six month period ended
June 30, 2001 includes the cumulative effect of the adoption of SFAS
133.
During the second quarter of 2002, the Company discontinued entering
into new foreign exchange currency put option agreements. The fair
value of the Company's remaining foreign currency put option agreements
was not material as of June 30, 2002, and all of these agreements will
expire by September 30, 2002.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
SUMMARY American's LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE for the
six months ended June 30, 2002 was $1,028 million as compared to a net loss of
$489 million for the same period in 2001. American's OPERATING LOSS for the six
months ended June 30, 2002 was $1,353 million, compared to an operating loss of
$713 million for the same period in 2001. American's 2002 results continue to be
adversely impacted by the September 11, 2001 terrorist attacks and the resulting
effect on the economy and the air transportation industry. On April 9, 2001,
Trans World Airlines LLC (TWA LLC, a wholly owned subsidiary of AMR Corporation)
purchased substantially all of the assets and assumed certain liabilities of
Trans World Airlines, Inc. (TWA). Accordingly, the operating results of TWA LLC
are included in the accompanying condensed consolidated financial statements for
the six month period ended June 30, 2002 whereas for 2001 the results of TWA LLC
were included only for the period April 10, 2001 through June 30, 2001. All
references to American Airlines, Inc. include the operations of TWA LLC since
April 10, 2001 (collectively, American). In addition, the Company recorded a
one-time, non-cash charge of $889 million (net of tax), reflected as a
cumulative effect of accounting change, to write-off American's goodwill.
American's 2001 results include: (i) a $586 million charge ($368 million
after-tax) related to the writedown of the carrying value of its Fokker 100
aircraft and related rotables in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(see footnote 8 to the condensed consolidated financial statements), and (ii) a
$45 million gain ($29 million after-tax) from the settlement of a legal matter
related to the Company's 1999 labor disruption.
Although traffic has continued to increase on significantly reduced capacity
since the events of September 11, 2001, the Company's 2002 revenues were down
significantly year-over-year. In addition to the residual effects of September
11, the Company's revenues continue to be negatively impacted by the economic
slowdown, seen largely in business travel declines, the geographic distribution
of the Company's network and reduced fares. In total, the Company's REVENUES
decreased $1,608 million, or 16.9 percent, in 2002 versus the same period in
2001. American's PASSENGER REVENUES decreased by 15.7 percent, or $1,349 million
in 2002 as compared to the same period in 2001. American's domestic revenue per
available seat mile (RASM) decreased 13.4 percent, to 8.58 cents, on a capacity
decrease of 0.4 percent, to 61.3 billion available seat miles (ASMs).
International RASM decreased to 8.67 cents, or 7.7 percent, on a capacity
decrease of 14 percent. The decrease in international RASM was due to a 10.2
percent and 7.9 percent decrease in Latin American and European RASM,
respectively, slightly offset by a 5.6 percent increase in Pacific RASM. The
decrease in international capacity was driven by a 36.4 percent, 15.2 percent
and 8.2 percent reduction in Pacific, European and Latin American ASMs,
respectively.
Cargo REVENUES decreased $88 million, or 24.3 percent, primarily due to the same
reasons as noted above.
OTHER REVENUES decreased 29.3 percent, or $171 million, due primarily to
decreases in contract maintenance work that American performs for other
airlines, and decreases in codeshare revenue and employee travel service
charges.
-7-
RESULTS OF OPERATIONS (CONTINUED)
The Company's OPERATING EXPENSES decreased 9.5 percent, or approximately $968
million. American's COST PER ASM increased by 0.5 percent to 11.03 cents,
excluding the impact of the second quarter 2001 asset impairment charge. WAGES,
SALARIES AND BENEFITS increased 9.6 percent, or $349 million, reflecting (i) a
decrease in the average number of equivalent employees, somewhat offset by
higher salaries, and (ii) increases in the Company's pension and health
insurance costs, the latter reflecting rapidly rising medical care and
prescription drug costs. AIRCRAFT FUEL expense decreased 24 percent, or $354
million, due primarily to a 16.1 percent decrease in the Company's average price
per gallon of fuel and a 6.7 percent decrease in the Company's fuel consumption.
AIRCRAFT RENTALS increased $69 million, or 19.3 percent, due primarily the
addition of TWA aircraft. FOOD service decreased 12.8 percent, or $51 million,
due primarily to the Company's reduced operating schedule and change in level of
food service. COMMISSIONS TO AGENTS decreased 34.2 percent, or $156 million, due
primarily to a 15.7 percent decrease in passenger revenues and commission
structure changes implemented in March 2002. SPECIAL CHARGES of $586 million
related to the writedown of the carrying value of the Company's Fokker 100
aircraft and related rotables during the second quarter of 2001 (see footnote 8
to the condensed consolidated financial statements). OTHER OPERATING EXPENSES
decreased 15.3 percent, or $264 million, due primarily to decreases in contract
maintenance work that American performs for other airlines, and decreases in
travel and incidental costs, credit card and booking fees, advertising and
promotion costs, and data processing expenses, which were partially offset by
higher insurance and security costs.
OTHER INCOME (EXPENSE) increased $124 million due to the following: INTEREST
INCOME decreased 18.2 percent, or $8 million, due primarily to decreases in
interest rates. INTEREST EXPENSE increased $81 million, or 47.9 percent,
resulting primarily from the increase in the Company's long-term debt. INTEREST
CAPITALIZED decreased $33 million, or 44.6 percent, due primarily to a decrease
in purchase deposits for flight equipment. RELATED PARTY INTEREST - NET
increased $32 million due primarily to higher receivable balances from
affiliated entities versus 2001. MISCELLANEOUS-NET decreased $34 million due
primarily to a $45 million gain recorded during the second quarter of 2001 from
the settlement of a legal matter related to the Company's 1999 labor disruption.
The effective tax rate for the six months ended June 30, 2002 was impacted by a
$57 million charge resulting from a provision in Congress' economic stimulus
package that changes the period for carrybacks of net operating losses (NOLs).
This change allows the Company to carry back 2001 and 2002 NOLs for five years,
rather than two years under the existing law, allowing the Company to more
quickly recover its NOLs. The extended NOL carryback did however, result in the
displacement of foreign tax credits taken in prior years. These credits are now
expected to expire before being utilized by the Company, resulting in this
charge.
OTHER INFORMATION
NET CASH USED FOR OPERATING ACTIVITIES in the six month period ended June 30,
2002 was $53 million, a decrease of $785 million over the same period in 2001,
due primarily to an increase in the Company's net loss. Included in net cash
used for operating activities during the first six months of 2002 was
approximately $658 million received by the Company as a result of the
utilization of its 2001 NOL's. Capital expenditures for the first six months of
2002 were $846 million and included the acquisition of seven Boeing 757-200s and
three Boeing 777-200ER aircraft. These capital expenditures were financed
primarily through secured mortgage agreements. Proceeds from the sale of
equipment and property of $160 million include the proceeds received upon
delivery of three McDonnell Douglas MD-11 aircraft to FedEx.
As of June 30, 2002, the Company had commitments to acquire the following
aircraft: 47 Boeing 737-800s, 11 Boeing 777-200ERs and nine Boeing 767-300ERs.
Deliveries of these aircraft are scheduled to continue through 2008. Payments
for these aircraft are expected to be approximately $210 million during the
remainder of 2002, $890 million in 2003, $390 million in 2004 and an aggregate
of approximately $1.5 billion in 2005 through 2008.
In June 2002, Standard & Poor's downgraded the credit ratings of American, and
the credit ratings of a number of other major airlines. The long-term credit
ratings of American were removed from Standard & Poor's Credit Watch with
negative implications and were given a negative outlook. 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 needs.
-8-
In addition to the Company's approximately $2.5 billion in cash and short-term
investments as of June 30, 2002, 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 authorized by the Air Transportation
Safety and System Stabilization Act (the Act), which is estimated to be in
excess of $40 million, (ii) additional secured aircraft debt, (iii) the
availability of the Company's $1 billion credit facility, (iv) sale-leaseback
transactions of owned property, including aircraft and real estate, (v) the
recovery of past federal income taxes paid as a result of a provision in the
recently passed economic stimulus package regarding NOL carrybacks, (vi)
tax-exempt borrowings for airport facilities, (vii) securitization of future
operating receipts, and (viii) unsecured borrowings. 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 current financing needs.
Pursuant to the Act, the Government made available to air carriers, subject to
certain conditions, up to $10 billion in federal government guarantees of
certain loans. American did not seek such loan guarantees.
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 August 17, 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 and/or financial position, results of
operations or cash flows would be adversely impacted.
As discussed in the Company's 2001 Form 10-K, a provision in the current Allied
Pilots Association (APA) contract freezes the number of ASMs and block hours
flown on American's two letter marketing code by American's regional carrier
partners when American pilots are on furlough (the ASM cap). As AMR Eagle
continues to accept previously ordered regional jets, this ASM cap would be
reached sometime in 2002, necessitating actions to insure compliance with the
ASM cap. American is working with its regional partners to accomplish this.
Actions currently being taken and considered by AMR Eagle to reduce its capacity
are discussed in the Company's 2001 Form 10-K. In addition, American is removing
its code from flights of the AmericanConnection carriers, which are independent
carriers that provide feed to American's St. Louis hub. American believes that
the combination of these actions will enable it to comply with this ASM cap
through 2002 and for sometime beyond.
In addition, another provision in the current APA contract limits the total
number of regional jets with more than 44 seats flown under the American code by
American's regional carrier partners to 67 aircraft. Similar to the above, as
AMR Eagle continues to accept previously ordered Bombardier CRJ aircraft, this
cap would be reached in early 2003. In order to ensure American remains in
compliance with this provision, AMR Eagle has reached an agreement in principle
to dispose of 14 Embraer 145 aircraft. Ultimately, these airplanes will be
acquired by Trans States Airlines, an AmericanConnection carrier. Trans States
Airlines will operate these aircraft under its two letter airline code and
expects to deploy these aircraft at its St. Louis hub where it feeds American.
The potential transaction still requires the consent of certain third parties,
including the companies financing these aircraft, and is subject to the
negotiation of final documentation.
-9-
OUTLOOK
Capacity for American is expected to be down approximately two percent in the
third quarter of 2002 compared to last year's third quarter levels. For the
third quarter of 2002, the Company expects traffic to be about flat as compared
to last year's third quarter levels. Pressure to reduce costs will continue,
although the Company will continue to see higher benefit and security costs,
increased insurance premiums, and greater interest expense. However, the Company
expects to see a slight decrease in fuel prices as compared to the third quarter
of 2001 and the continued decline in commission expense due to the commission
changes implemented earlier in 2002. In total, American's unit costs, excluding
special items, for the third quarter of 2002 are expected to be down
approximately 3.5 percent from last year's third quarter level. Notwithstanding
the expected decrease in unit costs however, given the revenue pressures seen in
the first half of the year and expected to continue into the third quarter, the
Company expects to incur a sizable loss in the third quarter and a significant
loss for 2002.
In response to these financial challenges, the Company has undertaken a
comprehensive review of its business to better align its cost structure with the
current revenue environment, aimed at improving productivity, simplifying
operations and reducing costs. The Company has begun to implement certain of
these changes, including a fleet simplification program, adjustments to its
operating schedule and increased airport automation, and will continue to refine
its business throughout the coming months.
FORWARD-LOOKING INFORMATION
Statements in this report contain various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. When used in this
document and in documents incorporated herein by reference, the words "expects,"
"plans," "anticipates," "believes," and similar expressions are intended to
identify forward-looking statements. 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. Additional information concerning these and
other factors is contained in the Company's Securities and Exchange Commission
filings, including but not limited to 2001 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
2001 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures within 90 days before the filing
date of this quarterly report (October 18, 2002). Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to their evaluation.
-10-
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 26, 1999, a class action lawsuit was filed, and in November 1999 an
amended complaint was filed, against AMR 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 AMR
Eagle and the 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. The 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, an adverse court decision could impose restrictions
on the Company's relationships with travel agencies which restrictions could
have an adverse impact on the Company.
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 have submitted
briefs to the 10th Circuit Court of Appeals, which has scheduled the case for
oral argument on September 23, 2002. 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 from 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.
On May 17, 2002, the named plaintiffs in Hall, et al. 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 1995 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 plaintiffs seek to certify a nationwide
class of travel agents, but no class has yet been certified. American is
vigorously defending the lawsuit. Trial is set for April 29, 2003. A final
adverse court decision awarding substantial money damages or placing
restrictions on the Company's commission policies or practices would have an
adverse impact on the Company.
-11-
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
On April 26, 2002, six travel agencies filed an action in the United States
District Court for the Central District of California against American, United
Air Lines, Delta Air Lines, and Orbitz, LLC, alleging that American and the
other defendants: (i) conspired to prevent travel agents from acting as
effective competitors in the distribution of airline tickets to passengers in
violation of Section 1 of the Sherman Act; and (ii) conspired to monopolize the
distribution of common carrier air travel between airports in the United States
in violation of Section 2 of the Sherman Act. The named plaintiffs seek to
certify a nationwide class of travel agents, but no class has yet been
certified. American is vigorously defending the lawsuit, which is styled Albany
Travel Co., et al. v. Orbitz, LLC, et al., No. 02-3459 (ER) (AJW)x. A final
adverse court decision awarding substantial money damages or placing
restrictions on the Company's distribution practices would have an adverse
impact on the Company.
On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air Canada,
et. al., No. T757-027, pending in the Federal Court of Canada, Trial Division,
Montreal, filed a statement of claim alleging that between 1995 and the present,
American, the other defendant airlines, and the International Air Transport
Association conspired to reduce commissions paid to Canada-based travel agents
in violation of Section 45 of the Competition Act of Canada. The named
plaintiffs seek 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 or placing
restrictions on the Company's commission policies would have an adverse impact
on the Company.
Miami-Dade County (the County) is currently investigating and remediating
various environmental conditions at the Miami International Airport (MIA) and
funding the remediation costs through landing fees and various cost recovery
methods. American 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
3.1 Bylaws of American Airlines, Inc., amended as of April 2, 2002. For
document description, see American Airlines, Inc. Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002, as filed on
July 19, 2002.
12 Computation of ratio of earnings to fixed charges for the three and six
months ended June 30, 2002 and 2001.
99 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code).
Form 8-Ks filed under Item 5 - Other Events
On June 13, 2002, American Airlines, Inc. filed a report on Form 8-K
relating to a press release issued by American to announce the appointment of
Jeffrey C. Campbell as Senior Vice President - Finance and Planning and Chief
Financial Officer of the Company.
On June 19, 2002, American Airlines, Inc. filed a report on Form 8-K to
provide updated monthly guidance on unit cost, fuel, traffic and capacity for
the months of May through August 2002.
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure
On May 31, 2002, American Airlines, Inc. furnished a report on Form 8-K
to provide updated monthly guidance on unit cost, fuel, traffic and capacity for
the months of March through July 2002.
-12-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: October 18, 2002 BY: /s/ Jeffrey C. Campbell
-------------------------------------
Jeffrey C. Campbell
Senior Vice President -
Finance and Planning and Chief
Financial Officer
-13-
CERTIFICATIONS
I, Donald J. Carty, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A No. 1 of American
Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 18, 2002 /s/ Donald J. Carty
-----------------------------------------
Donald J. Carty
Chairman and Chief Executive Officer
-14-
CERTIFICATIONS (CONTINUED)
I, Jeffrey C. Campbell, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A No. 1 of American
Airlines, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 18, 2002 /s/ Jeffrey C. Campbell
-----------------------------------------
Jeffrey C. Campbell
Senior Vice President and Chief Financial
Officer
-15-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
12 Computation of ratio of earnings to fixed charges for the
three and six months ended June 30, 2002 and 2001.
99 Certification pursuant to section 906 of the Sarbanes-Oxley
Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code).