XMEX:AAMRQ Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2012.

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From                      to                     .

Commission file number 1-8400.

 

 

AMR Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-1825172
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer Identification No.)
4333 Amon Carter Blvd.
Fort Worth, Texas
 
76155
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (817) 963-1234

Not Applicable

(Former name, former address and former fiscal year , if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

x  Large Accelerated Filer    ¨  Accelerated Filer    ¨  Non-accelerated Filer

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  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 – 335,271,557 shares as of April 11, 2012.

 

 

 


Table of Contents

INDEX

AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

 

PART I:

 

FINANCIAL INFORMATION

     1   

Item 1.

  Financial Statements      1   
  Consolidated Statements of Operations — Three months ended March 31, 2012 and 2011      1   
  Consolidated Statements of Comprehensive Income — Three months ended March 31, 2012 and 2011      2   
  Condensed Consolidated Balance Sheets — March 31, 2012 and December 31, 2011      3   
  Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2012 and 2011      5   
  Notes to Condensed Consolidated Financial Statements — March 31, 2012      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      41   

Item 4.

  Controls and Procedures      42   

PART II:

  OTHER INFORMATION      43   

Item 1.

  Legal Proceedings      43   

Item 6.

  Exhibits      46   

SIGNATURE

     47   


Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In millions, except per share amounts)

 

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues

    

Passenger — American Airlines

   $ 4,557      $ 4,134   

— Regional Affiliates

     670        577   

Cargo

     168        169   

Other revenues

     642        653   
  

 

 

   

 

 

 

Total operating revenues

     6,037        5,533   

Expenses

    

Aircraft fuel

     2,165        1,842   

Wages, salaries and benefits

     1,782        1,722   

Other rentals and landing fees

     328        352   

Maintenance, materials and repairs

     343        305   

Depreciation and amortization

     260        276   

Commissions, booking fees and credit card expense

     266        256   

Aircraft rentals

     143        160   

Food service

     125        121   

Special charges

     11        —     

Other operating expenses

     703        731   
  

 

 

   

 

 

 

Total operating expenses

     6,126        5,765   
  

 

 

   

 

 

 

Operating Income (Loss)

     (89     (232

Other Income (Expense)

    

Interest income

     6        7   

Interest expense (contractual interest expense equals $(198) for the three months ended March 31, 2012)

     (178     (200

Interest capitalized

     12        7   

Miscellaneous — net

     (10     (18
  

 

 

   

 

 

 
     (170     (204
  

 

 

   

 

 

 

Income (Loss) Before Reorganization Items, Net

     (259     (436

Reorganization Items, Net

     (1,401     —     

Income (Loss) Before Income Taxes

     (1,660     (436

Income tax

     —          —     
  

 

 

   

 

 

 

Net Loss

   $ (1,660   $ (436
  

 

 

   

 

 

 

Earnings (Loss) Per Share

    

Basic

   $ (4.95   $ (1.31
  

 

 

   

 

 

 

Diluted

   $ (4.95   $ (1.31
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In millions)

 

 

     Three Months Ended
March 31,
 
     2012     2011  

Net Earnings (Loss)

   $ (1,660   $ (436

Other Comprehensive Income (Loss), Before Tax:

    

Defined benefit pension plans and retiree medical:

    

Amortization of actuarial loss and prior service cost

     56        32   

Current year change

     2        13   

Derivative financial instruments:

    

Change in fair value

     48        475   

Reclassification into earnings

     (26     (98

Unrealized gain (loss) on investments

    

Net change in value

     —          —     
  

 

 

   

 

 

 

Other Comprehensive Income (Loss) Before Tax

     80        422   

Income tax expense on other comprehensive income

     —          —     
  

 

 

   

 

 

 

Comprehensive Income (Loss)

   $ (1,580   $ (14
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In millions)

 

 

     March 31,      December 31,  
     2012      2011  

Assets

     

Current Assets

     

Cash

   $ 375       $ 283   

Short-term investments

     4,444         3,718   

Restricted cash and short-term investments

     771         738   

Receivables, net

     1,056         902   

Inventories, net

     619         617   

Fuel derivative contracts

     124         97   

Other current assets

     389         402   
  

 

 

    

 

 

 

Total current assets

     7,778         6,757   

Equipment and Property

     

Flight equipment, net

     10,800         11,041   

Other equipment and property, net

     2,114         2,126   

Purchase deposits for flight equipment

     682         746   
  

 

 

    

 

 

 
     13,596         13,913   

Equipment and Property Under Capital Leases

     

Flight equipment, net

     253         323   

Other equipment and property, net

     69         70   
  

 

 

    

 

 

 
     322         393   

International slots and route authorities

     708         708   

Domestic slots and airport operating and gate lease rights, less accumulated amortization, net

     179         186   

Other assets

     1,928         1,891   
  

 

 

    

 

 

 
   $ 24,511       $ 23,848   
  

 

 

    

 

 

 

 

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AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In millions)

 

 

     March 31,     December 31,  
     2012     2011  

Liabilities and Stockholders’ Equity (Deficit)

    

Current Liabilities

    

Accounts payable

   $ 1,336      $ 1,007   

Accrued liabilities

     1,700        1,882   

Air traffic liability

     4,848        4,223   

Current maturities of long-term debt

     1,593        1,518   

Current obligations under capital leases

     66        —     
  

 

 

   

 

 

 

Total current liabilities

     9,543        8,630   

Long-term debt, less current maturities

     6,575        6,702   

Obligations under capital leases, less current obligations

     316        —     

Pension and postretirement benefits

     77        9,204   

Other liabilities, deferred gains and deferred credits

     1,685        1,580   

Liabilities Subject to Compromise

     15,001        4,843   

Stockholders’ Equity (Deficit)

    

Preferred stock

     —          —     

Common stock

     341        341   

Additional paid-in capital

     4,470        4,465   

Treasury stock

     (367     (367

Accumulated other comprehensive income (loss)

     (3,884     (3,964

Accumulated deficit

     (9,246     (7,586
  

 

 

   

 

 

 
     (8,686     (7,111
  

 

 

   

 

 

 
   $ 24,511      $ 23,848   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In millions)

 

 

     Three Months Ended
March 31,
 
     2012     2011  

Net Cash Provided by (used for) Operating Activities

   $ 1,067      $ 708   

Cash Flow from Investing Activities:

    

Capital expenditures, including aircraft lease deposits

     (238     (359

Net (increase) decrease in short-term investments

     (726     (1,185

Net (increase) decrease in restricted cash and short-term investments

     (33     (5

Proceeds from sale of equipment and property

     12        (6
  

 

 

   

 

 

 

Net cash used for investing activities

     (985     (1,555

Cash Flow from Financing Activities:

    

Payments on long-term debt and capital lease obligations

     (314     (323

Proceeds from:

    

Issuance of debt

     —          1,164   

Sale leaseback transactions

     324        125   

Other

     —          (1
  

 

 

   

 

 

 

Net cash provided by financing activities

     10        965   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     92        118   

Cash at beginning of period

     283        168   
  

 

 

   

 

 

 

Cash at end of period

   $ 375      $ 286   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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AMR CORPORATION

DEBTORS AND DEBTORS IN POSSESSION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.        Chapter 11 Reorganization

Overview

On November 29, 2011 (the Petition Date), AMR Corporation (AMR or the Company) and certain of the Company’s direct and indirect domestic subsidiaries (collectively, the Debtors) filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code), in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). The Chapter 11 Cases are being jointly administered under the caption “in re AMR Corporation, et al, Case No. 11-15463-SHL.”

The Company and the other Debtors are operating as “debtors in possession” under the jurisdiction of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. In general, as debtors in possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. The Bankruptcy Code enables the Company to continue to operate its business without interruption, and the Bankruptcy Court has granted additional relief covering, among other things, obligations to (i) employees, (ii) taxing authorities, (iii) insurance providers, (iv) independent contractors for improvement projects, (v) foreign vendors, (vi) other airlines pursuant to certain interline agreements, and (vii) certain vendors deemed critical to the Debtors’ operations.

While operating as debtors in possession under Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. The Debtors have not yet prepared or filed with the Bankruptcy Court a plan of reorganization. On March 23, 2012, the Bankruptcy Court entered an order pursuant to Section 1121(d) of the Bankruptcy Code extending the exclusivity periods during which only the Debtors have the right to file a plan of reorganization and solicit and obtain acceptances of such plan. The date until which the Debtors have to file a plan of reorganization has been extended through and including September 28, 2012. If the Debtors file a plan of reorganization on or prior to such date, the Debtors have an exclusive period to solicit and obtain acceptances for such plan through and including November 29, 2012. These extensions are without prejudice to the Debtors’ right to seek further extensions of the exclusivity periods. The ultimate plan of reorganization, which would be subject to acceptance by the requisite majorities of empowered creditors under the Bankruptcy Code and approved by the Bankruptcy Court, could materially change the amounts and classifications in the Condensed Consolidated Financial Statements.

The Company’s Chapter 11 Cases followed an extended effort by the Company to restructure its business to strengthen its competitive and financial position. However, the Company’s substantial cost disadvantage compared to its larger competitors, all of which restructured their costs and debt through Chapter 11, became increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges.

No assurance can be given as to the value, if any, that may be ascribed to the Debtors’ various prepetition liabilities and other securities. The Company cannot predict what the ultimate value of any of its securities may be and it remains too early to determine whether holders of any such securities will receive any distribution in the Debtors’ reorganization. In particular, in most cases under Chapter 11 of the Bankruptcy Code, holders of equity securities receive little or no recovery of value from their investment. Accordingly, the Debtors urge that caution be exercised with respect to existing and future investments in any of these securities or other Debtor claims. In addition, trading in the Company’s common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and the Company’s common stock and such debt securities were delisted by the Securities and Exchange Commission from the NYSE on January 30, 2012. On January 5, 2012, the Company’s common stock began trading under the symbol “AAMRQ” on the OTCQB marketplace, operated by OTC Markets Group (www.otcmarkets.com).

 

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General Information

Notices to Creditors; Effect of Automatic Stay. The Debtors have notified all known current or potential creditors that the Chapter 11 Cases were filed. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a prepetition claim, are enjoined unless and until the Bankruptcy Court lifts the automatic stay as to any such claim. Vendors are being paid for goods furnished and services provided after the Petition Date in the ordinary course of business.

Appointment of Creditors’ Committee. On December 5, 2011, the U.S. Trustee appointed a statutory official committee of unsecured creditors (the Creditors’ Committee) for the Chapter 11 Cases.

Appointment of Retiree Committee. On March 23, 2012, the Bankruptcy Court entered a Stipulation and Order providing for the appointment of a committee of retired independent and unionized AMR employees (the Retiree Committee). The Retiree Committee will be constituted of persons selected by the U.S. Trustee.

Rejection of Executory Contracts. Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, agreements relating to aircraft and aircraft engines (collectively, Aircraft Property) and leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. The Debtors’ rights to assume, assume and assign, or reject unexpired leases of non-residential real estate has been extended by order of the Bankruptcy Court through June 26, 2012. In general, rejection of an executory contract or unexpired lease is treated as a prepetition breach of the executory contract or unexpired lease in question and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases have the right to file claims against the Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing defaults under such executory contract or unexpired lease.

In accordance with the Bankruptcy Code, as of March 31, 2012, the Company had rejected 2 ground leases of an immaterial amount and filed a motion to reject facility agreements supporting special facility revenue bonds at Dallas/Fort Worth International Airport and Fort Worth Alliance Airport. See “Reorganization Items, net” in Note 1 to the Condensed Consolidated Financial Statements for further information.

Any description of an executory contract or unexpired lease elsewhere in these Notes or in the report to which these Notes are attached, including where applicable the Debtors’ express termination rights or a quantification of their obligations, must be read in conjunction with, and is qualified by, any rights the Debtors or counterparties have under Section 365 of the Bankruptcy Code.

The Debtors expect that liabilities subject to compromise and resolution in the Chapter 11 Cases will arise in the future as a result of damage claims created by the Debtors’ rejection of various executory contracts and unexpired leases. Due to the uncertain nature of many of the potential rejection claims, the magnitude of such claims is not reasonably estimable at this time. Such claims may be material (see “Liabilities Subject to Compromise” in Note 1 to the Condensed Consolidated Financial Statements).

Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment. Notwithstanding the general discussion above of the impact of the automatic stay, under Section 1110 of the Bankruptcy Code, beginning 60 days after filing a petition under Chapter 11, certain secured parties, lessors and conditional sales vendors may have a right to take possession of certain qualifying Aircraft Property that is leased or subject to a security interest or conditional sale contract, unless the Debtors, subject to approval by the Bankruptcy Court, agree to perform under the applicable agreement, and cure any defaults as provided in Section 1110 (other than defaults of a kind specified in Section 365(b)(2) of the Bankruptcy Code). Taking such action does not preclude the Debtors from later rejecting the applicable lease or abandoning the Aircraft Property subject to the related security agreement, or from later seeking to renegotiate the terms of the related financing.

The Debtors may extend the 60-day period by agreement of the relevant financing party, with Bankruptcy Court approval. In the absence of an agreement or cure as described above or such an extension, the financing party may take possession of the Aircraft Property and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such equipment.

 

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The 60-day period under Section 1110 in the Chapter 11 Cases expired on January 27, 2012. In accordance with the Bankruptcy Court’s Order Authorizing the Debtors to (i) Enter into Agreements Under Section 1110(a) of the Bankruptcy Code, (ii) Enter into Stipulations to Extend the Time to Comply with Section 1110 of the Bankruptcy Code and (iii) File Redacted Section 1110(b) Stipulations, dated December 23, 2011, the Debtors have entered into agreements to extend the automatic stay or agreed to perform and cure defaults under financing agreements with respect to certain aircraft in their fleet and other Aircraft Property. With respect to certain Aircraft Property, the Debtors have reached agreements on, or agreements on key aspects of, renegotiated terms of the related financings, and the Debtors are continuing to negotiate terms with respect to many of their other Aircraft Property financings. The ultimate outcome of these negotiations cannot be predicted with certainty. To the extent the Debtors are unable to reach definitive agreements with Aircraft Property financing parties, those parties may seek to repossess the subject Aircraft Property. The loss of a significant number of aircraft could result in a material adverse effect on the Debtors’ financial and operating performance.

In accordance with Section 1110 of the Bankruptcy Code, as of March 31, 2012, the Company had (i) rejected 40 leases relating to 21 MD-80 aircraft, four Fokker 100 aircraft, seven Boeing 757-200 aircraft and eight spare engines; (ii) relinquished one Airbus A300-600R aircraft that was subject to a mortgage; (iii) made elections under Section 1110(a) of the Bankruptcy Code to retain 347 aircraft and 87 spare engines, including Boeing 737-800, Boeing 757-200, Boeing 767-300ER, Boeing 777-200ER, Bombardier CRJ-700, and McDonnell Douglas MD-80 aircraft, on the terms provided in the related financing documents; and (iv) reached agreement on revised economic terms of the financings of 139 aircraft, comprising 70 MD-80 aircraft, nine Boeing 737-800 aircraft, 36 Boeing 757-200 aircraft, 11 Boeing 767-200ER aircraft and 13 Boeing 767-300ER aircraft (which agreements are subject to reaching agreement on definitive documentation). In addition, the Company reached an agreement with the lessor to modify the leases of 39 Super ATR aircraft. As of March 31, 2012, 21 of the Super ATR aircraft had been returned to the lessor as allowed under the modified agreement. The remaining 18 Super ATR aircraft are expected to be returned to the lessor during the remainder of 2012 and 2013. Lastly, the Company reached an agreement with the lender with respect to 18 Embraer RJ-135 aircraft pursuant to which the Company agreed to surrender such aircraft to the lender, and the lender agreed that, following such surrender, the Company would have no further obligations under the related mortgage documents.

Magnitude of Potential Claims. On February 27, 2012, the Debtors filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. All of the schedules are subject to further amendment or modification.

Bankruptcy Rule 3003(c)(3) requires the Bankruptcy Court to fix the time within which proofs of claim must be filed in a Chapter 11 case pursuant to Section 501 of the Bankruptcy Code. This Bankruptcy Rule also provides that any creditor who asserts a claim against the Debtors that arose prior to the Petition Date and whose claim (i) is not listed on the Debtors’ schedules or (ii) is listed on the schedules as disputed, contingent, or unliquidated, must file a proof of claim. On March 30, 2012, the Debtors filed the Motion of Debtors for Entry of Order Pursuant to 11 U.S.C. § 502(b)(9) and Fed. R. Bankr. P. 3003(c)(3) Establishing Deadline for Filing Proofs of Claim and Procedures Relating Thereto and Approving Form and Manner of Notice Thereof. Pursuant to such Motion, the Debtors have requested an Order establishing June 29, 2012 at 5:00 p.m. (Eastern Time) as the deadline to file proofs of claim against any Debtor. The Bankruptcy Court has not yet entered this proposed Order.

Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.

Collective Bargaining Agreements. The Bankruptcy Code provides a process for the modification and/or rejection of collective bargaining agreements (CBAs). In particular, Section 1113(c) of the Bankruptcy Code permits a debtor to reject its CBAs if the debtor satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court’s approval to reject the CBAs. The Section 1113(c) process requires that a debtor must make proposals to its unions to modify existing CBAs based on the most complete and reliable information available at the time the proposals are made. The proposed modifications must be necessary to permit the reorganization of the debtor and must assure that all the affected

 

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parties are treated fairly and equitably. The debtor must provide the unions with all information necessary to evaluate the proposals, and meet at reasonable times and confer in good faith with the unions in an effort to reach mutually agreeable modifications to the CBAs. American commenced the Section 1113(c) process with its unions on February 1, 2012, and since that time has been negotiating in good faith with the unions for consensual agreements that achieve the necessary level of labor cost savings. Because consensual agreements had not been reached, and given American’s need to restructure its labor costs expeditiously, the Debtors filed a motion with the Bankruptcy Court on March 27, 2012 requesting approval to reject the CBAs. Rejection of the CBAs is appropriate if the Bankruptcy Court finds the debtor’s proposals are necessary for its reorganization, are fair and equitable, and that the unions refused to agree to the proposals without good cause. Throughout this Court process, American will continue to negotiate in good faith with the unions toward consensual agreements. AMR Eagle commenced the Section 1113(c) process with its unions on March 21, 2012. The ultimate resolution of American’s and AMR Eagle’s union negotiations cannot be determined at this time.

Plan of Reorganization. On March 23, 2012, the Bankruptcy Court entered an order pursuant to Section 1121(d) of the Bankruptcy Code extending the exclusivity periods during which only the Debtors have the right to file a plan of reorganization and solicit and obtain acceptances of such plan. The date until which the Debtors have to file a plan of reorganization has been extended through and including September 28, 2012. If the Debtors file a plan of reorganization on or prior to such date, the Debtors have an exclusive period to solicit and obtain acceptances for such plan through and including November 29, 2012. These extensions are without prejudice to the Debtors’ right to seek further extensions of the exclusivity periods. If the Debtors’ exclusivity period lapses, any party in interest may file a plan of reorganization for any of the Debtors. In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective. A plan of reorganization has been accepted by holders of claims against and equity interests in the Debtors if (1) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept the plan and (2) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests has voted to accept the plan.

Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. A class of claims or equity interests that does not receive or retain any property under the plan on account of such claims or interests is deemed to have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be “crammed down” even if the shareowners receive no recovery if the proponent of the plan demonstrates that (1) no class junior to the common stock is receiving or retaining property under the plan and (2) no class of claims or interests senior to the common stock is being paid more than in full.

Availability and Utilization of Net Operating Losses. The availability and utilization of net operating losses (and utilization of alternative minimum tax credits) after the Debtors’ emergence from Chapter 11 is uncertain at this time and will be highly influenced by the composition of the plan of reorganization that is ultimately pursued. On January 27, 2012, the Bankruptcy Court issued a Final Order Establishing Notification Procedures for Substantial Claimholders and Equityholders and Approving Restrictions on Certain Transfers of Interests in the Debtors’ Estates, which restricts trading in the Company’s common stock and claims. The order is intended to prevent certain transfers of the Company’s common stock and certain transfers of claims against the Debtors that could impair the ability of one or more of the Debtors’ estates to use their net operating loss carryovers and certain other tax attributes currently or on a reorganized basis. Any acquisition, disposition, or other transfer of equity or claims on or after November 29, 2011 in violation of the restrictions set forth in the order will be null and void ab initio and/or subject to sanctions as an act in violation of the automatic stay under sections 105(a) and 362 of the Bankruptcy Code. The order applies to (i) “Substantial Equityholders,” i.e., persons who are, or as a result of a transaction would become, the beneficial owner of approximately 4.5 percent of the outstanding shares of the Company’s common stock and (ii) “Substantial Claimholders,” i.e., persons who are, or as a result of a transaction become, the beneficial owner of unsecured claims in excess of a threshold amount of unsecured claims (initially $190 million of unsecured claims, but which may be subsequently increased or decreased under certain circumstances in connection with the Debtors’ filing of a Chapter 11 plan). In the case of Substantial Equityholders, the order imposes current restrictions with respect to the acquisition or disposition of the Company’s stock, and certain notifications may be required. In the case of Substantial Claimholders, the order imposes a procedure pursuant to which, under certain circumstances, the claims acquired during the Chapter 11 cases may have to be resold, and certain notifications may be required.

 

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Liabilities Subject to Compromise

The following table summarizes the components of liabilities subject to compromise included on the Condensed Consolidated Balance Sheet as of March 31, 2012:

 

00000000
(in millions)       

Long-term debt

   $ 2,238   

Aircraft lease and facility bond related obligations

     2,830   

Pension and postretirement benefits

     9,430   

Accounts payable and other accrued liabilities

     511   

Other

     (8
  

 

 

 

Total liabilities subject to compromise

   $ 15,001   
  

 

 

 

Long-term debt, including undersecured debt, classified as subject to compromise as of March 31, 2012 consisted of (in millions):

 

00000000

Secured variable and fixed rate indebtedness due through 2023 (effective rates from 1.00% - 13.00% at March 31, 2012)

   $ 1,212   

6.00%—8.50% special facility revenue bonds due through 2036

     186   

6.25% senior convertible notes due 2014

     460   

9.0%—10.20% debentures due through 2021

     214   

7.88%—10.55% notes due through 2039

     166   
  

 

 

 
   $ 2,238   
  

 

 

 

Liabilities subject to compromise refers to prepetition obligations which may be impacted by the Chapter 11 reorganization process. These amounts represent the Debtors’ current estimate of known or potential prepetition obligations to be resolved in connection with the Chapter 11 Cases.

In accordance with ASC 852, substantially all of the Company’s unsecured debt has been classified as liabilities subject to compromise. Additionally, certain of the Company’s undersecured debt instruments have also been classified as liabilities subject to compromise.

As a result of the announcements discussed in Note 8 to the Condensed Consolidated Financial Statements, the Company’s Pension and postretirement benefits liability has been classified as liabilities subject to compromise.

Differences between liabilities the Debtors have estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 proceedings and adjust amounts as necessary. Such adjustments may be material. In light of the expected number of creditors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known.

 

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Reorganization Items, net

Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 proceedings. The following table summarizes the components included in reorganization items, net on the Consolidated Statements of Operations for the three months ended March 31, 2012:

 

(in millions)       

Aircraft financing renegotiations and rejections (1) (2)

   $       1,017           

Rejection of facility bond related obligations(2)

     339           

Professional fees

     45           
  

 

 

 

Total reorganization items, net

   $ 1,401           
  

 

 

 

 

(1) 

The Debtors record an estimated claim associated with the rejection of an executory contract or unexpired lease when a motion is filed with the Bankruptcy Court to reject such contract or lease and the Debtors believe that it is probable the motion will be approved and there is sufficient information to estimate the claim. The Debtors record an estimated claim associated with the renegotiation of an executory contract or unexpired lease when the renegotiated terms of such contract or lease are not opposed or are otherwise approved by the Bankruptcy Court and there is sufficient information to estimate the claim.

 

(2) 

Estimated allowed claims from (i) rejecting 16 leases of seven Boeing 757-200 aircraft, one McDonnell Douglas MD-80 aircraft, and eight spare engines, (ii) relinquishing one Airbus A300-600R aircraft that was subject to a mortgage, (iii) filing a motion to reject facility agreements supporting special facility revenue bonds at Dallas/Fort Worth International Airport and Fort Worth Alliance Airport, and (iv) filing motions to modify the leases of 158 aircraft, including 39 Super ATR aircraft, six Boeing 737-800 aircraft, 33 Boeing 757-200 aircraft, 11 Boeing 767-200ER aircraft, 10 Boeing 767-300ER aircraft, and 59 McDonnell Douglas MD-80 aircraft. The rejections of the leases of such aircraft and spare engines and the modification of the leases relating to such aircraft have been approved by the Bankruptcy Court. See above, “Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment,” for further information.

Claims related to reorganization items are reflected in liabilities subject to compromise on the Condensed Consolidated Balance Sheet as of March 31, 2012.

Additional information about the Company’s Chapter 11 filing is also available on the Internet at aa.com/restructuring. Court filings and claims information are available at amrcaseinfo.com.

 

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2.         Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. The condensed consolidated financial statements include the accounts of AMR Corporation (AMR or the Company) and its wholly owned subsidiaries, including (i) its principal subsidiary American Airlines, Inc. (American) and (ii) its regional airline subsidiary, AMR Eagle Holding Corporation and its primary subsidiaries, American Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR Eagle). The condensed consolidated financial statements also include the accounts of variable interest entities for which the Company is the primary beneficiary. For further information, refer to the consolidated financial statements and footnotes included in AMR’s Annual Report on Form 10-K filed on February 15, 2012 (2011 Form 10-K).

In accordance with GAAP, the Debtors have applied ASC 852 “Reorganizations” (ASC 852), in preparing the Condensed Consolidated Financial Statements. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred in the Chapter 11 Cases are recorded in reorganization items, net on the accompanying Consolidated Statement of Operations. In addition, prepetition obligations that may be impacted by the Chapter 11 reorganization process have been classified on the Condensed Consolidated Balance Sheet in liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

Certain of our non-U.S. subsidiaries were not part of the Chapter 11 filings. Since the non-US subsidiaries not part of the bankruptcy filing do not have significant transactions, we do not separately disclose the condensed combined financial statements of the Debtors in accordance with the requirements of reorganization accounting.

These Condensed Consolidated Financial Statements have also been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, the Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Debtors be unable to continue as a going concern.

As a result of the Chapter 11 proceedings, the satisfaction of our liabilities and funding of ongoing operations are subject to uncertainty and, accordingly, there is a substantial doubt of the Company’s ability to continue as a going concern.

The accompanying Condensed Consolidated Financial Statements do not purport to reflect or provide for the consequences of the Chapter 11 Cases, other than as set forth under “liabilities subject to compromise” on the accompanying Condensed Consolidated Balance Sheet and “income (loss) before reorganization items” and “reorganization items, net” on the accompanying Consolidated Statement of Operations (see Note 1 to the Condensed Consolidated Financial Statements). In particular, the financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (3) as to shareowners’ equity accounts, the effect of any changes that may be made to the Debtors’ capitalization; or (4) as to operations, the effect of any changes that may be made to the Debtors’ business.

 

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3.         Commitments, Contingencies and Guarantees

American had total aircraft acquisition commitments as of March 31, 2012 as follows:

 

          Boeing      Airbus         
          737  Family1      777-200ER      777-300ER      A320 Family      NEO      Total  

Remainder of 2012

   Purchase      22            2               24   
   Lease                     —     

2013

   Purchase      15            8               23   
   Lease      16              20           36   

2014

   Purchase      5         2                  7   
   Lease      15               35            50   

2015

   Purchase         2                 2   
   Lease      20               30            50   

2016

   Purchase         2                  2   
   Lease      20               25            45   

2017 and beyond

   Purchase                  130         130   
   Lease      20               20            40   

Total

   Purchase      42         6         10         0         130         188   
   Lease      91         0         0         130         0         221   

 

1 

As of March 31, 2012, American had elected to purchase nine Boeing 737 Next Generation aircraft using the sale-leaseback financing arranged directly by American with a third party leasing company. These aircraft are therefore reflected as purchases in the above table.

The assumption of agreements related to the Company’s aircraft commitments is subject to collaboration with the Company’s key stakeholders and, in some instances, approval of the Bankruptcy Court. The Company cannot predict what the outcome of these discussions and the Bankruptcy Court process will be.

As of March 31, 2012, and subject to assumption of the related agreements, payments for the above purchase commitments and certain engines will approximate $998 million in the remainder of 2012, $1.5 billion in 2013, $555 million in 2014, $311 million in 2015, $341 million in 2016, and $7.3 billion for 2017 and beyond. These amounts are net of purchase deposits currently held by the manufacturers. American has granted Boeing a security interest in American’s purchase deposits with Boeing. The Company’s purchase deposits totaled $682 million as of March 31, 2012.

As of March 31, 2012, and subject to assumption of the related agreements, total future lease payments for all leased aircraft, including aircraft not yet delivered, will approximate $742 million in the remainder of 2012, $1.0 billion in 2013, $1.2 billion in 2014, $1.4 billion in 2015, $1.6 billion in 2016, and $15.3 billion in 2017 and beyond.

In 2008, American entered into a purchase agreement with Boeing (subject to certain reconfirmation rights) to acquire 42 Boeing 787-9 aircraft, with the right to acquire an additional 58 Boeing 787-9 aircraft. American’s first Boeing 787-9 aircraft was previously scheduled to deliver (subject to reconfirmation rights) in 2014; however, due to production issues such delivery has been delayed. American has selected GE Aviation as the exclusive provider of engines for its expected order of Boeing 787-9 aircraft. The assumption of the agreements related to our Boeing 787-9 aircraft order is subject to collaboration with the Company’s key stakeholders and, in some instances, approval of the Bankruptcy Court. The Company cannot predict what the outcome of these discussions and the Bankruptcy Court process will be.

In 2010, American and Japan Airlines (JAL) entered into a Joint Business Agreement (JBA) to enhance their scope of cooperation on routes between North America and Asia through adjustments to their respective networks, flight schedules, and other business activities. American and JAL began implementing the JBA on April 1, 2011. The JBA provides for expanded

 

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codesharing, enhanced frequent flyer program reciprocity, and cooperation in other areas. American and JAL entered into a Revenue Sharing Agreement, effective April 1, 2011, as envisaged by the JBA. Under this agreement, American and JAL share certain revenues of their operations. In addition, American provided JAL a guarantee of certain minimum incremental revenue resulting from the successful operation of the joint business for the first three years following its implementation, subject to certain terms and conditions. The amount required to be paid by the Company under the guarantee in any one of such years may not exceed $100 million, and is reduced if capacity for one of such years is less than a defined base year period capacity. Based on current Trans-Pacific capacity, the guarantee in any one of such years may not exceed approximately $75 million. As of March 31, 2012, based on an expected probability model, American had recorded a guarantee liability that is not material. 

As discussed further in Note 8 to the Condensed Consolidated Financial Statements, the Company announced the principal terms of a new business plan on February 1, 2012 which contemplates, among other things, reducing headcount by approximately 13,000. The Company may incur significant accounting charges as a result of this business plan, including employee severance charges. The business plan will require continued collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. The Company cannot predict whether, or to what extent, the business plan will be implemented. As such, at this time, the Company is not able to reasonably estimate the amount and timing of such charges or the portion of these charges that will result in future cash expenditures.

As a result of the current Chapter 11 filings, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the Debtors are subject to the automatic stay provisions of Section 362(a) of the Bankruptcy Code, except in such cases where the Bankruptcy Court has entered an order modifying or lifting the automatic stay. Notwithstanding the general application of the automatic stay described above, governmental authorities, both domestic and foreign, may determine to continue actions brought under their regulatory powers. Therefore, the automatic stay may have no effect on certain matters, and the Debtors cannot predict the impact, if any, that its Chapter 11 Cases might have on its commitments and obligations.

4.         Depreciation and Amortization

Accumulated depreciation of owned equipment and property at March 31, 2012 and December 31, 2011 was $10.3 billion and $10.1 billion, respectively. Accumulated amortization of equipment and property under capital leases at March 31, 2012 and December 31, 2011 was $199 million and $448 million, respectively.

5.         Income Taxes

The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. The Company’s deferred tax asset valuation allowance increased from $4.1 billion as of December 31, 2011 to $4.7 billion as of March 31, 2012, including the impact of comprehensive income for the three months ended March 31, 2012 and changes from other adjustments.

Under current accounting rules, the Company is required to consider all items (including items recorded in other comprehensive income) in determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. The Company generally does not record any such tax benefit allocation in interim reporting periods as the Company concluded the potential benefit is not considered realizable because the change in the pension liability, a material component of other comprehensive income, is determined annually. Thus, any such interim tax benefit allocation may subsequently be subject to reversal.

 

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6.         Indebtedness

Long-term debt classified as not subject to compromise consisted of (in millions):

 

     March 31,
2012
     December 31,
2011
 

Secured variable and fixed rate indebtedness due through 2023 (effective rates from 1.00%—13.00% at March 31, 2012)

   $ 2,958       $ 2,952   

Enhanced equipment trust certificates due through 2021 (rates from 5.10%—10.375% at March 31, 2012)

     1,891         1,942   

6.00%—8.50% special facility revenue bonds due through 2036

7.50% senior secured notes due 2016

    

 

1,437

1,000

  

  

    

 

1,436

1,000

  

  

AAdvantage Miles advance purchase (net of discount of $110 million) (effective rate 8.3%)

     882         890   

6.25% senior convertible notes due 2014

     —           —     

9.0%—10.20% debentures due through 2021

     —           —     

7.88%—10.55% notes due through 2039

     —           —     
  

 

 

    

 

 

 
     8,168         8,220   

Less current maturities

     1,593         1,518   
  

 

 

    

 

 

 

Long-term debt, less current maturities

   $ 6,575       $ 6,702   
  

 

 

    

 

 

 

The financings listed in the table above are considered not subject to compromise. For information regarding the liabilities subject to compromise, see Note 1 to the Condensed Consolidated Financial Statements.

The Company’s future long-term debt and operating lease payments have changed as its ordered aircraft are delivered and such deliveries have been financed. As of March 31, 2012, maturities of long-term debt (including sinking fund requirements) for the next five years are:

 

Years Ending December 31

(in millions)

 

Principal Not Subject
to Compromise

 

Principal Subject
to Compromise

 

Total Principal
Amount

Remainder of 2012

  $1,273   $184   $1,457

2013

  898   193   1,091

2014

  761   639   1,400

2015

  664   162   826

2016

  1,645   227   1,872

Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of a year as of March 31, 2012, were: remainder of 2012 – $701 million, 2013 – $897 million, 2014 – $823 million, 2015 – $731 million, 2016 – $661 million, and 2017 and beyond – $4.6 billion.

As of March 31, 2012, AMR had issued guarantees covering approximately $1.6 billion of American’s tax-exempt bond debt (and interest thereon) and $4.2 billion of American’s secured debt (and interest thereon). American had issued guarantees covering approximately $842 million of AMR’s unsecured debt (and interest thereon). AMR also guarantees $10.5 million of American’s leases of certain Super ATR aircraft, which are subleased to AMR Eagle.

In July 2011, American entered into a sale-leaseback arrangement with a leasing company to finance 35 Boeing 737-800 aircraft scheduled to be delivered in 2011 through 2014. The financing of each aircraft under this arrangement will be subject to certain terms and conditions. As of the end of the first quarter of 2012, American had financed 21 Boeing 737-800 aircraft under this and other arrangements, which are accounted for as operating leases.

Certain of the Company’s debt financing agreements contain loan to value ratio covenants and require the Company to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, the Company is required to subject additional qualifying collateral (which in some cases may include cash collateral) or, in the alternative, to pay down such financing, in whole or in part, with premium (if any).

 

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Specifically, the Company is required to meet certain collateral coverage tests on a periodic basis on three financing transactions: (1) 10.5% $450 million Senior Secured Notes due 2012 (the 10.5% Notes), (2) Senior Secured Notes, and (3) 2005 Spare Engine EETC due in 2012, as described below:

 

     

(1)

10.5% Notes

 

(2)

Senior Secured Notes

 

(3)

2005 Spare Engine

EETC

Frequency of

Appraisals

  

Semi-Annual

(April and October)

 

Semi-Annual

(June and December,

commencing December 2011)

 

 

Semi-Annual

(April and October)

LTV

Requirement

  

43%; failure to meet collateral

test requires posting of additional

collateral

 

 

 

1.5x Collateral valuation to

amount of debt outstanding

(67% LTV); failure to meet

collateral test results in

American paying 2% additional

interest until the ratio is at least

1.5x; additional collateral can be

posted to meet this requirement

 

 

 

 

32.8% applicable to the one

Tranche only;

failure to meet collateral test

requires posting of additional

cash collateral

LTV as of

Last

Measurement    

Date

   44.1%   65.5%   31.8%
     

Collateral

Description

   143 aircraft consisting of:   Generally, certain route authorities, take-off and landing slots, and rights to airport facilities used by American to operate certain services between the U.S. and London Heathrow, Tokyo Narita/Haneda, and China   87 spare aircraft engines consisting of:
   Type      # of Aircraft        

 

Engine/Associated Aircraft

  # of Engines
  

 

   

 

   MD-80      74     JT8D-219/MD-80   47
   B757-200      41     RB211-535E4B/B757-200   22
   B767-200ER      3     CF6-80A/B767-200ER   3
   B767-300ER      25     CF6-80C2 B6/B767-300ER   12
  

 

       
   TOTAL      143     CF6-80C2 A5/A300   3
             

 

                  TOTAL   87

At March 31, 2012, the Company was in compliance with the most recently completed collateral coverage tests for the Senior Secured Notes and the 2005 Spare Engine EETC, and was not in compliance with the most recently completed collateral coverage test for the 10.5% Notes. The Company has not remedied its non-compliance with that test due to the ongoing Chapter 11 proceedings.

Almost all of the Company’s aircraft assets (including aircraft and aircraft-related assets eligible for the benefits of Section 1110 of the U.S. Bankruptcy Code) are encumbered, and the Company has a very limited quantity of assets which could be used as collateral in financing.

The Chapter 11 petitions triggered defaults on substantially all debt obligations of the Debtors. However, under Section 362 of the Bankruptcy Code, the commencement of a Chapter 11 case automatically stays most creditor actions against the Debtors’ estates.

 

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The Debtors cannot predict the impact, if any, that the Chapter 11 Cases might have on these obligations. For further information regarding the Chapter 11 Cases, see Note 1 to the Condensed Consolidated Financial Statements.

7.        Fair Value Measurements

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. The Company’s fuel derivative contracts, primarily call options, collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option), are valued using energy and commodity market data which is derived by combining raw inputs with quantitative models and processes to generate forward curves and volatilities. Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. No changes in valuation techniques or inputs occurred during the three months ended March 31, 2012.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

00000000 00000000 00000000 00000000
(in millions)    Fair Value Measurements as of March 31, 2012         
Description    Total      Level 1      Level 2      Level 3  

Short-term investments 1, 2

           

Money market funds

   $ 895       $ 895       $ —         $ —     

Government agency investments

     584         —           584         —     

Repurchase investments

     128         —           128         —     

Corporate obligations

     2,277         —           2,277         —     

Bank notes / Certificates of deposit / Time deposits

     560         —           560         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,444         895         3,549         —     

Restricted cash and short-term investments 1

     771         771         —           —     

Fuel derivative contracts, net 1

     124         —           124         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,339       $ 1,666       $ 3,673       $ —     

 

1

Unrealized gains or losses on short-term investments, restricted cash and short-term investments and derivatives qualifying for hedge accounting are recorded in Accumulated other comprehensive income (loss) (OCI) at each measurement date.

 

2 

The Company’s short-term investments mature in one year or less except for $50 million of Bank notes/Certificates of deposit/Time deposits, $584 million of U.S. Government agency investments and $412 million of Corporate obligations which have maturity dates exceeding one year.

No significant transfers between Level 1 and Level 2 occurred during the three months ended March 31, 2012. The Company’s policy regarding the recording of transfers between levels is to reflect any such transfers at the end of the reporting period.

As of March 31, 2012, the Company had no exposure to European sovereign debt.

 

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The fair values of the Company’s long-term debt classified as Level 1 were estimated using quoted market prices. The fair values of the Company’s long-term debt classified as Level 2 were estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. All of the Company’s long term debt not classified as subject to compromise is classified as Level 1, with the exception of the AAdvantage Miles advance purchase and $2.1 billion of the fair value of the Secured variable and fixed rate indebtedness.

The carrying value and estimated fair values of the Company’s long-term debt, including current maturities, not classified as subject to compromise, were (in millions):

 

00000000 00000000 00000000 00000000
     March 31, 2012      December 31, 2011  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Secured variable and fixed rate indebtedness

   $ 2,958       $ 2,791       $ 2,952       $ 2,647   

Enhanced equipment trust certificates

     1,891         1,969         1,942         1,927   

6.0%—8.5% special facility revenue bonds

     1,437         1,390         1,436         1,230   

7.50% senior secured notes

     1,000         879         1,000         711   

AAdvantage Miles advance purchase

     882         884         890         902   

6.25% senior convertible notes

     —           —           —           —     

9.0%—10.20% debentures

     —           —           —           —     

7.88%—10.55% notes

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,168       $ 7,913       $ 8,220       $ 7,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying value and estimated fair value of the Company’s long-term debt, including current maturities, classified as subject to compromise, were (in millions):

 

00000000 00000000 00000000 00000000
     March 31, 2012      December 31, 2011  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Secured variable and fixed rate indebtedness

   $ 1,212       $ 1,013       $ 1,456       $ 1,123   

Enhanced equipment trust certificates

     —           —           —           —     

6.0%—8.5% special facility revenue bonds

     186         83         186         37   

7.50% senior secured notes

     —           —           —           —     

AAdvantage Miles advance purchase

     —           —           —           —     

6.25% senior convertible notes

     460         215         460         101   

9.0%—10.20% debentures

     214         83         214         46   

7.88%—10.55% notes

     166         22         166         34   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,238       $ 1,416       $ 2,482       $ 1,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

All of the Company’s long term debt classified as subject to compromise is classified as Level 1, with the exception of the AAdvantage Miles advance purchase and the Secured variable and fixed rate indebtedness.

 

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8.        Retirement Benefits

The following tables provide the components of net periodic benefit cost for the three months ended March 31, 2012 and 2011 (in millions):

 

000000000 000000000 000000000 000000000
     Pension Benefits     Retiree Medical and Other
Benefits
 
     2012     2011     2012     2011  

Components of net periodic benefit cost

        

Service cost

   $ 104      $ 95      $ 15      $ 15   

Interest cost

     191        190        38        44   

Expected return on assets

     (166     (163     (4     (5

Amortization of:

        

Prior service cost

     4        4        (7     (7

Unrecognized net (gain) loss

     61        37        (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 194      $ 163      $ 40      $ 45   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of ERISA, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, and the Pension Relief Act of 2010.

As a result of the Chapter 11 Cases, AMR contributed $6.5 million to its defined benefit pension plans on January 13, 2012 to cover the post-petition period of November 29, 2011 to December 31, 2011. As a result of only contributing the post-petition portion of the required contribution, the Pension Benefit Guaranty Corporation filed a lien against certain assets of the Company’s non-debtor subsidiaries. On April 13, 2012, the Company contributed $86 million to its defined benefit pension plans to cover the post-petition period of January 1, 2012 to March 31, 2012. The Company’s 2012 contributions to its defined benefit pension plans is subject to the Chapter 11 proceedings, as discussed below.

On February 1, 2012, the Company announced the principal terms of a new business plan. The chief components of the business plan included targets of an annual $2 billion in cost savings and $1 billion in revenue enhancement. The business plan contemplates, among other things, reducing headcount by approximately 13,000, terminating American’s defined benefit pension plans, and discontinuing subsidized retiree medical coverage. On March 7, 2012, the Company announced that, in working with the Creditors’ Committee and the PBGC, it had developed a solution that would allow the Company to pursue a freeze of its defined benefit pension plans for non-pilot employees instead of seeking termination. These arrangements have not yet been presented to or approved by the Bankruptcy Court. In addition, the Company is continuing to work with the PBGC, the Creditors’ Committee and the Allied Pilots Association on a solution that could allow the Company to freeze the defined benefit pension plan for pilots instead of seeking termination.

As a result of these announcements, the Company’s Pension and postretirement benefits liability has been classified as liabilities subject to compromise.

The Company may incur significant accounting charges as a result of this business plan, including pension related curtailment or settlement charges upon modification of the retirement plans. The business plan will require continued collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. The Company cannot predict whether, or to what extent, the business plan will be implemented. As such, at this time, the Company is not able to reasonably estimate the amount and timing of such charges or the portion of these charges that will result in future cash expenditures.

 

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9.        Special Charges and Restructuring Activities

As a result of the revenue environment, high fuel prices and the Company’s restructuring activities, including its capacity reductions, the Company has recorded a number of charges during the last few years. In 2008 and 2009, the Company announced capacity reductions due to unprecedented high fuel costs at that time and the other challenges facing the industry. In connection with these capacity reductions, the Company incurred special charges related to aircraft and certain other charges.

The following table summarizes the components of the Company’s special charges, the remaining accruals for these charges and the capacity reduction related charges (in millions) as of March 31, 2012:

 

00000000000 00000000000 00000000000
     Aircraft
Charges
    Facility Exit
Costs
    Total  

Remaining accrual at December 31, 2011

   $ 49      $ 16      $ 65   

Non-cash charges

     (11     —          (11

Adjustments

     (29     —          (29

Payments

     (1     (1     (2
  

 

 

   

 

 

   

 

 

 

Remaining accrual at March 31, 2012

   $ 8      $ 15      $ 23   
  

 

 

   

 

 

   

 

 

 

Cash outlays related to the accruals for aircraft charges and facility exit costs will occur through 2017 and 2018, respectively. However, these cash outlays could be modified in the Chapter 11 proceedings.

As previously discussed, the Company announced the principal terms of a new business plan on February 1, 2012 which contemplates, among other things, reducing headcount by approximately 13,000. The Company may incur significant accounting charges as a result of this business plan, including employee severance charges. The business plan will require continued collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. The Company cannot predict whether, or to what extent, the business plan will be implemented. As such, at this time, the Company is not able to reasonably estimate the amount and timing of such charges or the portion of these charges that will result in future cash expenditures.

 

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10.        Financial Instruments and Risk Management

As part of the Company’s risk management program, it uses a variety of financial instruments, primarily heating oil, jet fuel, and WTI crude option and collar contracts, as cash flow hedges to mitigate commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes. As of March 31, 2012, the Company had fuel derivative contracts outstanding covering 18 million barrels of jet fuel that will be settled over the next 12 months. A deterioration of the Company’s liquidity position and its Chapter 11 filing may negatively affect the Company’s ability to hedge fuel in the future.

For the three months ended March 31, 2012 and 2011, the Company recognized a decrease of approximately $29 million and $101 million, respectively, in fuel expense on the accompanying consolidated statements of operations related to its fuel hedging agreements, including the ineffective portion of the hedges. The net fair value of the Company’s fuel hedging agreements at March 31, 2012 and December 31, 2011, representing the amount the Company would receive upon termination of the agreements (net of settled contract assets), totaled $104 million and $80 million, respectively.

The impact of cash flow hedges on the Company’s Condensed Consolidated Financial Statements is depicted below (in millions):

Fair Value of Aircraft Fuel Derivative Instruments (all cash flow hedges)

 

Asset Derivatives as of

    

Liability Derivatives as of

 

March 31, 2012

    

December 31, 2011

    

March 31, 2012

    

December 31, 2011

 

Balance
Sheet
Location

   Fair
Value
    

Balance
Sheet
Location

   Fair
Value
    

Balance
Sheet
Location

   Fair
Value
    

Balance
Sheet
Location

   Fair Value  
Fuel derivative contracts    $     124       Fuel derivative contracts    $     97       Accrued liabilities    $     —         Accrued liabilities    $                 2   

Effect of Aircraft Fuel Derivative Instruments on Statements of Operations (all cash flow hedges)

 

Amount of Gain

(Loss) Recognized in

OCI on Derivative1

for the quarter ended March 31,

     Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income 1
   Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income 1 for the
quarter
ended March 31,
     Location of Gain
(Loss) Recognized in
Income on
Derivative 2
   Amount of Gain
(Loss) Recognized in
Income on Derivative
2 for the quarter
ended March 31,
 

2012

   2011     

 

   2012      2011     

 

   2012      2011  

$         48

   $ 475       Aircraft Fuel    $ 26       $ 98       Aircraft Fuel    $ 3       $ 3   

 

1 

Effective portion of gain (loss)

2 

Ineffective portion of gain (loss)

The Company is also exposed to credit losses in the event of non-performance by counterparties to these financial instruments, and although no assurances can be given, the Company 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 a number of its counterparties which may require the Company or the counterparty to post collateral if the value of selected instruments exceed specified mark-to-market thresholds or upon certain changes in credit ratings.

 

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As of March 31, 2012, the Company had received collateral of $9 million which is included in short-term investments.

11.        Earnings (Loss) Per Share

The following table sets forth the computations of basic and diluted earnings (loss) per share (in millions, except per share data):

 

0000000000 0000000000
     Three Months Ended  
     March 31,  
     2012     2011  

Numerator:

    

Net earnings (loss)—numerator for basic earnings (loss) per share

   $ (1,660   $ (436

Interest on senior convertible notes

     —          —     
  

 

 

   

 

 

 

Net earnings (loss) adjusted for interest on senior convertible notes

   $ (1,660   $ (436
  

 

 

   

 

 

 

Denominator:

    

Denominator for basic earnings (loss) per share – weighted-average shares

     335        333   

Effect of dilutive securities:

    

Senior convertible notes

     —          —     

Employee options and shares

     —          —     

Assumed treasury shares purchased

     —          —     
  

 

 

   

 

 

 

Dilutive potential common shares

     335        333   

Denominator for diluted earnings (loss) per share—adjusted weighted-average shares

     335        333   
  

 

 

   

 

 

 

Basic earnings (loss) per share

   $ (4.95   $ (1.31
  

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ (4.95   $ (1.31
  

 

 

   

 

 

 

The following were excluded from the calculation:

    

Convertible notes, employee stock options and deferred stock because inclusion would be anti-dilutive

     46        57   

Employee stock options because the options’ exercise prices were greater than the average market price of shares

     24        10   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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,” “estimates,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook,” “may,” “will,” “should,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Similarly, statements that describe the Company’s objectives, plans or goals, or actions the Company may take in the future, are forward-looking statements. Forward-looking statements include, without limitation, the Company’s expectations concerning the Chapter 11 Cases; the Company’s operations and financial conditions, including changes in capacity, revenues, and costs; future financing plans and needs; the amounts of its unencumbered assets and other sources of liquidity; fleet plans; overall economic and industry conditions; plans and objectives for future operations; regulatory approvals and actions; and the impact on the Company of its results of operations in recent years and the sufficiency of its 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.

Guidance given in this report regarding capacity, fuel consumption, fuel prices, fuel hedging and unit costs are forward-looking statements. Forward-looking statements are subject to a number of factors that could cause the Company’s actual results to differ materially from the Company’s 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: risks arising from the Chapter 11 Cases, including reorganization risks, liquidity risks, and common stock risks; the materially weakened financial condition of the Company, resulting from its significant losses in recent years; weak demand for air travel resulting from the severe global economic downturn; the potential requirement for the Company to maintain reserves under its credit card processing agreements, which could materially adversely impact the Company’s liquidity; the ability of the Company to generate additional revenues and reduce its costs; continued high and volatile fuel prices and further increases in the price of fuel, and the availability of fuel; the resolution of pending litigation with certain global distribution systems and business discussions with certain on-line travel agents; the Company’s substantial indebtedness and other obligations; the ability of the Company to satisfy certain covenants and conditions in certain of its financing and other agreements; changes in economic and other conditions beyond the Company’s control, and the volatile results of the Company’s operations; the fiercely and increasingly competitive business environment faced by the Company; industry consolidation and alliance changes; competition with reorganized carriers; low fare levels by historical standards and the Company’s reduced pricing power; changes in the Company’s corporate or business strategy; extensive government regulation of the Company’s business; conflicts overseas or terrorist attacks; uncertainties with respect to the Company’s international operations; outbreaks of a disease (such as SARS, avian flu or the H1N1 virus) that affects travel behavior; labor costs that are higher than those of the Company’s competitors; uncertainties with respect to the Company’s relationships with unionized and other employee work groups; higher than normal number of pilot retirements; increased insurance costs and potential reductions of available insurance coverage; the Company’s ability to retain key management personnel; potential failures or disruptions of the Company’s computer, communications or other technology systems; losses and adverse publicity resulting from any accident involving the Company’s aircraft; interruptions or disruptions in service at one or more of the Company’s primary market airports; and the heavy taxation of the airline industry. The Risk Factors contained in the Company’s Securities and Exchange Commission filings, including the 2011 Form 10-K, could cause the Company’s actual results to differ materially from historical results and from those expressed in forward-looking statements.

 

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Chapter 11 Proceedings

Overview

As previously discussed, on November 29, 2011, AMR and certain of its direct and indirect domestic subsidiaries filed voluntary petitions for relief under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The Chapter 11 Cases are being jointly administered under the caption “in re AMR Corporation, et al, Case No. 11-15463-SHL.”

The Company and the other Debtors are operating as “debtors in possession” under the jurisdiction of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. In general, as debtors in possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. The Bankruptcy Code enables the Company to continue to operate its business without interruption, and the Bankruptcy Court has granted additional relief covering, among other things, obligations to (i) employees, (ii) taxing authorities, (iii) insurance providers, (iv) independent contractors for improvement projects, (v) foreign vendors, (vi) other airlines pursuant to certain interline agreements, and (vii) certain vendors deemed critical to the Debtors’ operations.

While operating as debtors in possession under Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. The Debtors have not yet prepared or filed with the Bankruptcy Court a plan of reorganization. On March 23, 2012, the Bankruptcy Court entered an order pursuant to Section 1121(d) of the Bankruptcy Code extending the exclusivity periods during which only the Debtors have the right to file a plan of reorganization and solicit and obtain acceptances of such plan. The date until which the Debtors have to file a plan of reorganization has been extended through and including September 28, 2012. If the Debtors file a plan of reorganization on or prior to such date, the Debtors have an exclusive period to solicit and obtain acceptances for such plan through and including November 29, 2012. These extensions are without prejudice to the Debtors’ right to seek further extensions of the exclusivity periods. The ultimate plan of reorganization, which would be subject to acceptance by the requisite majorities of empowered creditors under the Bankruptcy Code and approved by the Bankruptcy Court, could materially change the amounts and classifications in the Condensed Consolidated Financial Statements.

The Company’s Chapter 11 Cases followed an extended effort by the Company to restructure its business to strengthen its competitive and financial position. However, the Company’s substantial cost disadvantage compared to its larger competitors, all of which restructured their costs and debt through Chapter 11, became increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges.

No assurance can be given as to the value, if any, that may be ascribed to the Debtors’ various prepetition liabilities and other securities. The Company cannot predict what the ultimate value of any of its securities may be and it remains too early to determine whether holders of any such securities will receive any distribution in the Debtors’ reorganization. In particular, in most cases under Chapter 11 of the Bankruptcy Code, holders of equity securities receive little or no recovery of value from their investment. Accordingly, the Debtors urge that caution be exercised with respect to existing and future investments in any of these securities or other Debtor claims. In addition, trading in the Company’s common stock and certain debt securities on the NYSE was suspended on January 5, 2012, and the Company’s common stock and such debt securities were delisted by the Securities and Exchange Commission from the NYSE on January 30, 2012. On January 5, 2012, the Company’s common stock began trading under the symbol “AAMRQ” on the OTCQB marketplace, operated by OTC Markets Group (www.otcmarkets.com).

General Information

Notices to Creditors; Effect of Automatic Stay. The Debtors have notified all known current or potential creditors that the Chapter 11 Cases were filed. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a prepetition claim, are enjoined unless and until the Bankruptcy Court lifts the automatic stay as to any such claim. Vendors are being paid for goods furnished and services provided after the Petition Date in the ordinary course of business.

 

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Appointment of Creditors’ Committee. On December 5, 2011, the U.S. Trustee appointed a statutory official committee of unsecured creditors (the Creditors’ Committee) for the Chapter 11 Cases.

Appointment of Retiree Committee. On March 23, 2012, the Bankruptcy Court entered a Stipulation and Order providing for the appointment of a committee of retired independent and unionized AMR employees (the Retiree Committee). The Retiree Committee will be constituted of persons selected by the U.S. Trustee.

Rejection of Executory Contracts. Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, agreements relating to aircraft and aircraft engines (collectively, Aircraft Property) and leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. The Debtors’ rights to assume, assume and assign, or reject unexpired leases of non-residential real estate has been extended by order of the Bankruptcy Court through June 26, 2012. In general, rejection of an executory contract or unexpired lease is treated as a prepetition breach of the executory contract or unexpired lease in question and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases have the right to file claims against the Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing defaults under such executory contract or unexpired lease.

In accordance with the Bankruptcy Code, as of March 31, 2012, the Company had rejected 2 ground leases of an immaterial amount and filed a motion to reject facility agreements supporting special facility revenue bonds at Dallas/Fort Worth International Airport and Fort Worth Alliance Airport. See “Reorganization Items, net” in Note 1 to the Condensed Consolidated Financial Statements for further information.

Any description of an executory contract or unexpired lease elsewhere in these Notes or in the report to which these Notes are attached, including where applicable the Debtors’ express termination rights or a quantification of their obligations, must be read in conjunction with, and is qualified by, any rights the Debtors or counterparties have under Section 365 of the Bankruptcy Code.

The Debtors expect that liabilities subject to compromise and resolution in the Chapter 11 Cases will arise in the future as a result of damage claims created by the Debtors’ rejection of various executory contracts and unexpired leases. Due to the uncertain nature of many of the potential rejection claims, the magnitude of such claims is not reasonably estimable at this time. Such claims may be material (see “Liabilities Subject to Compromise” in Note 1 to the Condensed Consolidated Financial Statements).

Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment. Notwithstanding the general discussion above of the impact of the automatic stay, under Section 1110 of the Bankruptcy Code, beginning 60 days after filing a petition under Chapter 11, certain secured parties, lessors and conditional sales vendors may have a right to take possession of certain qualifying Aircraft Property that is leased or subject to a security interest or conditional sale contract, unless the Debtors, subject to approval by the Bankruptcy Court, agree to perform under the applicable agreement, and cure any defaults as provided in Section 1110 (other than defaults of a kind specified in Section 365(b)(2) of the Bankruptcy Code). Taking such action does not preclude the Debtors from later rejecting the applicable lease or abandoning the Aircraft Property subject to the related security agreement, or from later seeking to renegotiate the terms of the related financing.

The Debtors may extend the 60-day period by agreement of the relevant financing party, with Bankruptcy Court approval. In the absence of an agreement or cure as described above or such an extension, the financing party may take possession of the Aircraft Property and enforce any of its contractual rights or remedies to sell, lease or otherwise retain or dispose of such equipment.

The 60-day period under Section 1110 in the Chapter 11 Cases expired on January 27, 2012. In accordance with the Bankruptcy Court’s Order Authorizing the Debtors to (i) Enter into Agreements Under Section 1110(a) of the Bankruptcy Code, (ii) Enter into Stipulations to Extend the Time to Comply with Section 1110 of the Bankruptcy Code and (iii) File Redacted Section 1110(b) Stipulations, dated December 23, 2011, the Debtors have entered into agreements to extend the automatic stay or agreed to perform and cure defaults under financing agreements with respect to certain aircraft in their fleet and other

 

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Aircraft Property. With respect to certain Aircraft Property, the Debtors have reached agreements on, or agreements on key aspects of, renegotiated terms of the related financings, and the Debtors are continuing to negotiate terms with respect to many of their other Aircraft Property financings. The ultimate outcome of these negotiations cannot be predicted with certainty. To the extent the Debtors are unable to reach definitive agreements with Aircraft Property financing parties, those parties may seek to repossess the subject Aircraft Property. The loss of a significant number of aircraft could result in a material adverse effect on the Debtors’ financial and operating performance.

In accordance with Section 1110 of the Bankruptcy Code, as of March 31, 2012, the Company had (i) rejected 40 leases relating to 21 MD-80 aircraft, four Fokker 100 aircraft, seven Boeing 757-200 aircraft and eight spare engines; (ii) relinquished one Airbus A300-600R aircraft that was subject to a mortgage; (iii) made elections under Section 1110(a) of the Bankruptcy Code to retain 347 aircraft and 87 spare engines, including Boeing 737-800, Boeing 757-200, Boeing 767-300ER, Boeing 777-200ER, Bombardier CRJ-700, and McDonnell Douglas MD-80 aircraft, on the terms provided in the related financing documents; and (iv) reached agreement on revised economic terms of the financings of 139 aircraft, comprising 70 MD-80 aircraft, nine Boeing 737-800 aircraft, 36 Boeing 757-200 aircraft, 11 Boeing 767-200ER aircraft and 13 Boeing 767-300ER aircraft (which agreements are subject to reaching agreement on definitive documentation). In addition, the Company reached an agreement with the lessor to modify the leases of 39 Super ATR aircraft. As of March 31, 2012, 21 of the Super ATR aircraft had been returned to the lessor as allowed under the modified agreement. The remaining 18 Super ATR aircraft are expected to be returned to the lessor during the remainder of 2012 and 2013. Lastly, the Company reached an agreement with the lender with respect to 18 Embraer RJ-135 aircraft pursuant to which the Company agreed to surrender such aircraft to the lender, and the lender agreed that, following such surrender, the Company would have no further obligations under the related mortgage documents.

Magnitude of Potential Claims. On February 27, 2012, the Debtors filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. All of the schedules are subject to further amendment or modification.

Bankruptcy Rule 3003(c)(3) requires the Bankruptcy Court to fix the time within which proofs of claim must be filed in a Chapter 11 case pursuant to Section 501 of the Bankruptcy Code. This Bankruptcy Rule also provides that any creditor who asserts a claim against the Debtors that arose prior to the Petition Date and whose claim (i) is not listed on the Debtors’ schedules or (ii) is listed on the schedules as disputed, contingent, or unliquidated, must file a proof of claim. On March 30, 2012, the Debtors filed the Motion of Debtors for Entry of Order Pursuant to 11 U.S.C. § 502(b)(9) and Fed. R. Bankr. P. 3003(c)(3) Establishing Deadline for Filing Proofs of Claim and Procedures Relating Thereto and Approving Form and Manner of Notice Thereof. Pursuant to such Motion, the Debtors have requested an Order establishing June 29, 2012 at 5:00 p.m. (Eastern Time) as the deadline to file proofs of claim against any Debtor. The Bankruptcy Court has not yet entered this proposed Order.

Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.

Collective Bargaining Agreements. The Bankruptcy Code provides a process for the modification and/or rejection of collective bargaining agreements (CBAs). In particular, Section 1113(c) of the Bankruptcy Code permits a debtor to reject its CBAs if the debtor satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court’s approval to reject the CBAs. The Section 1113(c) process requires that a debtor must make proposals to its unions to modify existing CBAs based on the most complete and reliable information available at the time the proposals are made. The proposed modifications must be necessary to permit the reorganization of the debtor and must assure that all the affected parties are treated fairly and equitably. The debtor must provide the unions with all information necessary to evaluate the proposals, and meet at reasonable times and confer in good faith with the unions in an effort to reach mutually agreeable modifications to the CBAs. American commenced the Section 1113(c) process with its unions on February 1, 2012, and since that time has been negotiating in good faith with the unions for consensual agreements that achieve the necessary level of labor cost savings. Because consensual agreements had not been reached, and given American’s need to restructure its labor costs expeditiously, the Debtors filed a motion with the Bankruptcy Court on March 27, 2012 requesting approval to reject the CBAs. Rejection of the CBAs is appropriate if the Bankruptcy Court finds the debtor’s proposals are necessary for its reorganization, are fair and equitable, and that the unions refused to agree to the proposals without good cause. Throughout

 

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this Court process, American will continue to negotiate in good faith with the unions toward consensual agreements. AMR Eagle commenced the Section 1113(c) process with its unions on March 21, 2012. The ultimate resolution of American’s and AMR Eagle’s union negotiations cannot be determined at this time.

Plan of Reorganization. On March 23, 2012, the Bankruptcy Court entered an order pursuant to Section 1121(d) of the Bankruptcy Code extending the exclusivity periods during which only the Debtors have the right to file a plan of reorganization and solicit and obtain acceptances of such plan. The date until which the Debtors have to file a plan of reorganization has been extended through and including September 28, 2012. If the Debtors file a plan of reorganization on or prior to such date, the Debtors have an exclusive period to solicit and obtain acceptances for such plan through and including November 29, 2012. These extensions are without prejudice to the Debtors’ right to seek further extensions of the exclusivity periods. If the Debtors’ exclusivity period lapses, any party in interest may file a plan of reorganization for any of the Debtors. In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective. A plan of reorganization has been accepted by holders of claims against and equity interests in the Debtors if (1) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept the plan and (2) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests has voted to accept the plan.

Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. A class of claims or equity interests that does not receive or retain any property under the plan on account of such claims or interests is deemed to have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be “crammed down” even if the shareowners receive no recovery if the proponent of the plan demonstrates that (1) no class junior to the common stock is receiving or retaining property under the plan and (2) no class of claims or interests senior to the common stock is being paid more than in full.

Availability and Utilization of Net Operating Losses. The availability and utilization of net operating losses (and utilization of alternative minimum tax credits) after the Debtors’ emergence from Chapter 11 is uncertain at this time and will be highly influenced by the composition of the plan of reorganization that is ultimately pursued. On January 27, 2012, the Bankruptcy Court issued a Final Order Establishing Notification Procedures for Substantial Claimholders and Equityholders and Approving Restrictions on Certain Transfers of Interests in the Debtors’ Estates, which restricts trading in the Company’s common stock and claims. The order is intended to prevent certain transfers of the Company’s common stock and certain transfers of claims against the Debtors that could impair the ability of one or more of the Debtors’ estates to use their net operating loss carryovers and certain other tax attributes currently or on a reorganized basis. Any acquisition, disposition, or other transfer of equity or claims on or after November 29, 2011 in violation of the restrictions set forth in the order will be null and void ab initio and/or subject to sanctions as an act in violation of the automatic stay under sections 105(a) and 362 of the Bankruptcy Code. The order applies to (i) “Substantial Equityholders,” i.e., persons who are, or as a result of a transaction would become, the beneficial owner of approximately 4.5 percent of the outstanding shares of the Company’s common stock and (ii) “Substantial Claimholders,” i.e., persons who are, or as a result of a transaction become, the beneficial owner of unsecured claims in excess of a threshold amount of unsecured claims (initially $190 million of unsecured claims, but which may be subsequently increased or decreased under certain circumstances in connection with the Debtors’ filing of a Chapter 11 plan). In the case of Substantial Equityholders, the order imposes current restrictions with respect to the acquisition or disposition of the Company’s stock, and certain notifications may be required. In the case of Substantial Claimholders, the order imposes a procedure pursuant to which, under certain circumstances, the claims acquired during the Chapter 11 cases may have to be resold, and certain notifications may be required.

Liabilities Subject to Compromise. The Debtors have incurred and will continue to incur significant costs associated with their reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Debtors’ results of operations. Claims related to reorganization items are reflected in liabilities subject to compromise on the Condensed Consolidated Balance Sheet as of March 31, 2012. For additional information, see Note 1 to the Condensed Consolidated Financial Statements.

 

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Further Information For further information regarding the Chapter 11 Cases, see Note 1 to the Condensed Consolidated Financial Statements. Additional information about the Company’s Chapter 11 filing is also available on the Internet at aa.com/restructuring. Court filings and claims information are available at amrcaseinfo.com.

 

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Business Plan

On February 1, 2012, we announced the principal terms of a new business plan that is designed to transform the Company and restore it to industry leadership, profitability and growth. The chief components of this business plan include targets of an annual $2 billion in cost savings and $1 billion in revenue enhancement. Management expects that the additional cash flow generated from these improvements will enable us to renew American’s fleet and to invest several hundred million dollars per year in ongoing improvements in products and services to deliver a world-class travel experience for our customers. The improved cash flow is also expected to enable us to become financially stronger in the years after we emerge from the restructuring process.

We expect that implementing the business plan will require collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. As noted above under “Chapter 11 Proceedings—Overview”, we will be required to seek Bankruptcy Court approval in order to implement any action that we take in connection with the business plan that is out of the ordinary course of business. We intend to utilize the Chapter 11 restructuring process to realize additional savings over the next six years by restructuring debt, leases and certain other agreements, grounding older planes, improving supplier contract terms and undertaking other initiatives.

The business plan has been designed to build on initiatives already in place that reduced costs over the past several years, including major changes in American’s route structure, network, capacity and fleet. The business plan contemplates significant reductions in both non-labor and labor costs, including reducing headcount by approximately 13,000, outsourcing a portion of American’s aircraft maintenance work (including seeking the closure of our Fort Worth Alliance Airport maintenance base) and certain airport fleet service clerk work, and discontinuing our subsidized retiree medical coverage. Further, on March 7, 2012, the Company announced that, in working with the Creditors’ Committee and the PBGC, it had developed a solution that would allow the Company to pursue a freeze of its defined benefit pension plans for non-pilot employees instead of seeking termination. These arrangements have not yet been presented to or approved by the Bankruptcy Court. In addition, the Company is continuing to work with the PBGC, the Creditors’ Committee and the Allied Pilots Association on a solution that could allow the Company to freeze the defined benefit pension plan for pilots instead of seeking termination.

Many of our competitors took similar actions when they went through the bankruptcy process. We hope to implement these cost reductions and other changes consensually; however, there can be no assurance that we will be able to do so. In certain circumstances described under “Chapter 11 Proceedings – General Information” above, we may be able, by complying with various provisions of the Bankruptcy Code and with Bankruptcy Court approval, to reject executory contracts and unexpired leases, collective bargaining agreements and financing agreements with respect to American’s Aircraft Property.

Our business plan also targets approximately $1 billion in annual revenue enhancements by 2017 by renewing and optimizing American’s fleet, building network scale and alliances, and modernizing American’s brand, products and services. With the aircraft commitments discussed in Note 3 to the Condensed Consolidated Financial Statements, we anticipate that American’s mainline jet fleet will be the youngest in North America by 2017. This new fleet would provide more profitable flying due to markedly improved fuel and maintenance costs and enhanced versatility to better match aircraft size to the markets American serves. We intend to build network scale and alliances by increasing departures across American’s five key markets – Dallas/Fort Worth, Chicago, Miami, Los Angeles and New York – by approximately 20% over the next five years and by increasing international flying. Finally, we plan to invest several hundred million dollars annually to enhance the customer experience and attract high-value customers.

Additionally, to ensure that employee performance is rewarded and aligned with successful operations after we emerge from the Chapter 11 process, we envision putting into place a profit sharing plan which, beginning with the first dollar of pre-tax income, would pay awards totaling 15% of all pre-tax income.

Our business plan, as noted above, will require collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. We cannot at this point predict whether discussions with these groups will be successful or whether the Creditors’ Committee or others will support our positions regarding the elements of the business plan. Further, there can be no assurance that we will be able to implement the business plan successfully and return the Company to profitability.

 

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GDS Discussion

Over the past several years, American has been developing a direct connection technology, designed to distribute its fare content and bookings capability directly to travel agents in order to achieve greater efficiencies, cost savings, and technological advances in the distribution of our services. Historically, approximately 60% of American’s bookings are booked through travel agencies, which typically use one or more global distribution systems, or “GDSs”, to view fare content from American and other industry participants. American is currently in litigation with two of the GDSs, Sabre and Travelport, and with Orbitz, a large online travel agency that is affiliated with Travelport. In that litigation, American alleges, among other things, that the one or more of the defendants (1) engaged in anticompetitive business practices to preserve GDS monopoly power in the distribution of airlines services through travel agencies; (2) conspired with each other to preserve the existing GDS business model; (3) engaged in numerous actions intended to punish American for supporting a competitive alternative to the GDSs, including biasing displays against American’s services and imposed large price increases, (4) organized, supported, and monitored a boycott of American services among travel agencies; and (5) interfered with American’s contractual relationships, including an obligation owed by Orbitz to cooperatively work with American to receive American’s content through a direct connect.

On November 1, 2010, after Orbitz refused to receive American’s content through American’s newest version of direct connect, American notified Orbitz that it intended to terminate its contracts and agency relationship. On November 5, 2010, Travelport, the GDS used by Orbitz, filed a lawsuit against American seeking a ruling that a notice of termination delivered by American to Orbitz breached American’s content distribution agreement with Travelport, and Travelport subsequently obtained a preliminary injunction which precluded American from terminating its relationship with Orbitz prior to September 1, 2011. On December 3, 2010, Travelport doubled the booking fees it charges American for some international point-of-sale bookings through Travelport, and made it more difficult for travel agents to find American’s fares on the Travelport system display. We believe these actions violate our agreement with Travelport. In response, American filed counterclaims against Travelport for breach of contract, and announced that it would charge travel agencies for bookings through Travelport in an effort to offset the booking fee increase. That surcharge was never implemented. American and Travelport subsequently entered into a short term extension of its agreement, which also provides that neither American nor Orbitz will terminate their agency relationship during the term of this short term extension. There can be no assurance that we will ultimately prevail in the lawsuit filed by Travelport or on our counterclaims, or that American, Travelport, and Orbitz will enter into acceptable long term agreements The litigation initiated by Travelport in response to American’s decision to terminate Orbitz is currently stayed as a result of the Chapter 11 filing. We will vigorously pursue our counterclaims and rights in the litigation.

On January 1, 2011, Expedia discontinued selling American tickets on its website. Prior to that date, approximately 5.4% of American’s passenger revenue, on an annualized basis, was booked through Expedia. On April 4, 2011, American and Expedia entered into a new agreement which returned American’s fares to Expedia’s web site, and Expedia agreed to transition its American bookings to American’s direct connect via integration services provided by a GDS.

In late 2010, and in direct response to the perceived threat of American’s direct connect, Sabre began biasing its display against American. On January 5, 2011, Sabre instituted pervasive and massive bias against American throughout it system, making it substantially more difficult for travel agents to find American’s fares on the Sabre system display. Sabre also doubled the fees it charges American for bookings through its GDS, and purported to terminate its agreement with American, effective July 2011. Sabre alleges that our contract allowed it to take these actions in response to statements that American made in the press concerning our direct connection technology. Sabre is the largest non-direct source of American’s bookings. In 2010, over $7 billion of American’s passenger revenues were generated from bookings made through the Sabre GDS. In response to Sabre’s actions, on January 10, 2011, American filed a lawsuit against Sabre in Texas state court on several grounds. The court temporarily enjoined Sabre from “biasing” or making it more difficult to find American’s fares on the Sabre GDS, and set a preliminary injunction hearing for February 14, 2011. On January 23, 2011, American and Sabre entered into a Stand Down Agreement that suspended the litigation until June 1, 2011 and vacated the February 14 hearing date. During this period, Sabre agreed (1) not to take any actions to bias the display of American’s services; (2) to return to the pricing in effect on January 4, 2011; and (3) withdraw its notice of termination of certain parts of the agreement. Following the expiration of this Stand Down agreement, American filed new antitrust claims in both federal and Texas state courts, and Sabre has filed breach of contract and antitrust claims against American. On August 29, 2011, Sabre and American entered into an agreement that extended their agreement, subject to certain pricing and other adjustments, during the period in which American’s Texas state court claims are pending. That case is currently set to go to trial on August 6, 2012.

 

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While we believe that some of the bookings through Orbitz, Travelport, and Sabre have transitioned or will transition to other distribution channels, such as other travel agencies, metasearch sites and American’s AA.com web site, it is not possible at this time to estimate what the ultimate impact would be to our business if we are unsuccessful in resolving one or more of these matters. If as a result of these matters it becomes more difficult for our customers to find and book flights on American, we could be put at a competitive disadvantage against our competitors and this may result in lower bookings. If we are unable to sell American inventory through any or all of these channels, our level of bookings, business and results of operations could be materially adversely affected. We also believe the actions taken by Travelport and Sabre described above are not permitted by the applicable contracts. We intend to vigorously pursue our claims and defenses in the lawsuits described above, but there can be no assurance of the outcome of any such lawsuit.

Contingencies

The Company has certain contingencies resulting from litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the information currently available, the views of legal counsel, the nature of contingencies to which the Company is subject and prior experience, that the ultimate disposition of the litigation (except as noted in “Legal Proceedings” in Part II, item 1) and claims will not materially affect the Company’s consolidated financial position or results of operations. When appropriate, the Company accrues for these contingencies based on its assessments of the likely outcomes of the related matters. The amounts of these contingencies could increase or decrease in the near term, based on revisions to those assessments.

As a result of the Chapter 11 Cases, virtually all prepetition pending litigation against the Company is stayed. However, the Company has entered into a stipulation with Sabre to permit the Sabre related litigation to proceed.

 

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Financial Highlights

The Company recorded a consolidated net loss of $1.7 billion in the first quarter of 2012 compared to a net loss of $436 million in the same period last year. The Company’s consolidated net loss reflects $1.4 billion of charges to reorganization items and an increase in fuel costs, partially offset by higher operating revenues. Consolidated passenger revenue increased by $515 million to $5.2 billion for the first quarter of 2012 compared to the same period last year. Cargo and other revenues decreased by $12 million to $810 million for the first quarter of 2012 compared to the same period last year. Mainline passenger unit revenues increased 10.0 percent in the first quarter of 2012 due to a 7.3 percent increase in passenger yield year-over-year. This also reflects an increase in load factor of approximately 2.0 points compared to the first quarter of 2011.

Charges to reorganization items, net, of $1.4 billion for the first quarter of 2012 are primarily from estimated claims associated with restructuring the financing arrangements for certain aircraft and rejecting certain special facility revenue bonds.

Fuel prices continued the trend set in 2011, with prices remaining high and extremely volatile. The Company paid an average of $3.24 per gallon in the first quarter of 2012 compared to an average of $2.76 per gallon in the first quarter of 2011, including the effects of hedging. As a result, fuel expense, taking into account the impact of fuel hedging, increased $323 million year-over-year to $2.2 billion. Hedging gains reduced fuel expense by approximately $29 million.

 

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LIQUIDITY AND CAPITAL RESOURCES

The matters described herein, to the extent that they relate to future events or expectations, may be significantly affected by the Chapter 11 Cases. Those proceedings will involve, or may result in, various restrictions on our activities, limitations on financing, the need to consult with the Creditors’ Committee and other key stakeholders and to obtain Bankruptcy Court approval for various matters, and uncertainty as to relationships with vendors, suppliers, customers, labor and others with whom we may conduct or seek to conduct business. The Debtors cannot predict the impact, if any, that its Chapter 11 Cases might have on these obligations. For further information regarding the Chapter 11 Cases, see Note 1 to the Condensed Consolidated Financial Statements.

Cash, Short-Term Investments and Restricted Assets

At March 31, 2012, the Company had $4.8 billion in unrestricted cash and short-term investments and $771 million in restricted cash and short-term investments, both at fair value, versus $4.0 billion in unrestricted cash and short-term investments and $738 million in restricted cash and short-term investments at December 31, 2011.

The Company’s unrestricted short-term investment portfolio consists of a variety of what the Company believes are highly liquid, lower risk instruments including money market funds, government agency investments, repurchase investments, short-term obligations, corporate obligations, bank notes, certificates of deposit and time deposits. AMR’s objectives for its investment portfolio are (1) the safety of principal, (2) liquidity maintenance, (3) yield maximization, and (4) the full investment of all available funds. The Company’s risk management policy further emphasizes superior credit quality (primarily based on short-term ratings by nationally recognized statistical rating organizations) in selecting and maintaining investments in its portfolio and enforces limits on the proportion of funds invested with one issuer, one industry, or one type of instrument. The Company regularly assesses the market risks of its portfolio, and believes that its established policies and business practices adequately limit those risks. As a result, the Company does not anticipate any material adverse impact from these risks.

Significant Indebtedness and Future Financing

Indebtedness is a significant risk to the Company as discussed more fully in the Risk Factors included under Item 1A of the 2011 Form 10-K.

The Chapter 11 petitions triggered defaults on substantially all debt obligations of the Debtors. However, under Section 362 of the Bankruptcy Code, the commencement of a Chapter 11 case automatically stays most creditor actions against the Debtors’ estates.

The Company has financing commitments covering all of the aircraft scheduled to be delivered between 2011 and 2016, except 16 widebody aircraft that it intends to finance at a later time.

In the remainder of 2012, including liabilities subject to compromise, the Company will be contractually required to make approximately $1.5 billion of principal payments on long-term debt and approximately $41 million in principal payments on capital leases, and the Company expects to spend approximately $1.5 billion on capital expenditures, including aircraft commitments.

As discussed above under “Chapter 11 Proceedings”, we intend to use the benefits afforded by the Bankruptcy Code to restructure the terms of much of our indebtedness. It is still early in our Chapter 11 Cases, and we cannot predict at this time the outcome of our efforts to restructure our indebtedness. It is possible that holders of our unsecured indebtedness may lose all or a substantial portion of their investment in our unsecured indebtedness upon the implementation of any plan of reorganization that is ultimately accepted by the requisite majority of creditors and approved by the Bankruptcy Court.

See Note 3 to the Condensed Consolidated Financial Statements for a schedule of the Company’s aircraft commitments and payments.

 

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Credit Ratings

AMR’s and American’s credit ratings are significantly below investment grade. The outcome of the Chapter 11 proceedings, which cannot be determined at this time, could further increase the Company’s borrowing or other costs and further restrict the availability of future financing.

Credit Card Processing and Other Reserves

American has agreements with a number of credit card companies and processors to accept credit cards for the sale of air travel and other services. Under certain of these agreements, the credit card processor may hold back a reserve from American’s credit card receivables following the occurrence of certain events, including the failure of American to maintain certain levels of liquidity (as specified in each agreement).

Under such agreements, the amount of the reserve that may be required generally is based on the processor’s exposure to the Company under the applicable agreement and, in the case a reserve is required because of AMR’s failure to maintain a certain level of liquidity, the amount of such liquidity. As of March 31, 2012, the Company was not required to maintain any reserve under such agreements. If circumstances were to occur that would allow the credit card processor to require the Company to maintain a reserve, the Company’s liquidity would be negatively impacted.

Pension Funding Obligation

The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of ERISA, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, and the Pension Relief Act of 2010.

As a result of the Chapter 11 Cases, AMR contributed $6.5 million to its defined benefit pension plans on January 13, 2012 to cover the post-petition period of November 29, 2011 to December 31, 2011. As a result of only contributing the post-petition portion of the required contribution, the Pension Benefit Guaranty Corporation filed a lien against certain assets of the Company’s non-debtor subsidiaries. On April 13, 2012, the Company contributed $86 million to its defined benefit pension plans to cover the post-petition period of January 1, 2012 to March 31, 2012. The Company’s 2012 contributions to its defined benefit pension plans is subject to the Chapter 11 proceedings, as discussed above in Note 8 to the Condensed Consolidated Financial Statements.

Cash Flow Activity

At March 31, 2012, the Company had $4.8 billion in unrestricted cash and short-term investments, which is an increase of $818 million from the balance as of December 31, 2011. Net cash provided by operating activities in the three month period ended March 31, 2012 was $1.1 billion, as compared to $708 million over the same period in 2011. The increase is primarily the result of a stronger year over year revenue environment and the Company’s Chapter 11 proceedings as described in Note 1 to the Condensed Consolidated Financial Statements.

The Company made debt and capital lease payments of $314 million and invested $238 million in capital expenditures in the first three months of 2012. Capital expenditures primarily consisted of new aircraft and certain aircraft modifications.

Due to the current value of the Company’s derivative contracts, some agreements with counterparties require collateral to be deposited by the counterparty. As of March 31, 2012, the cash collateral held by AMR from such counterparties was $9 million as compared to $0.5 million at December 31, 2011. Cash held at December 31, 2011 from counterparties is included in short-term investments. As a result of movements in fuel prices, the cash collateral amounts held by AMR or the counterparties to such contracts, as the case may be, can vary significantly.

Certain of the Company’s debt financing agreements contain loan to value ratio covenants and require the Company to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, the Company may be required to subject additional qualifying collateral (which in some cases may include cash collateral) or, in the alternative, to pay down such financing, in whole or in part, with premium (if any). See Note 6 to the Condensed Consolidated Financial Statements for further information.

 

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War-Risk Insurance

The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines through September 30, 2012, covering losses to employees, passengers, third parties and aircraft. If the U.S. government were to cease providing such insurance in whole or in part, it is likely that the Company could obtain comparable coverage in the commercial market, but the Company would incur substantially higher premiums and more restrictive terms. There can be no assurance that comparable war-risk coverage will be available in the commercial market. If the Company is unable to obtain adequate war-risk coverage at commercially reasonable rates, the Company would be adversely affected.

 

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RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2012 and 2011

REVENUES

The Company’s revenues increased approximately $504 million, or 9.1 percent, to $6.0 billion in the first quarter of 2012 from the same period last year. American’s passenger revenues increased by 10.2 percent, or $423 million, on flat capacity of 37.9 billion available seat miles (ASM). American’s passenger load factor increased 2.0 points while passenger yield increased by 7.3 percent to 15.2 cents. This resulted in an increase in passenger revenue per available seat mile (RASM) of 10.0 percent to 12.0 cents. American derived approximately 60 percent of its passenger revenues from domestic operations and approximately 40 percent from international operations (flights serving international destinations). Following is additional information regarding American’s domestic and international RASM and capacity:

 

     Three Months Ended March 31, 2012  
    

 

RASM

(cents)

  

  

   

 

Y-O-Y

Change

  

  

   
 
ASMs
(billions)
  
  
   

 

Y-O-Y

Change

  

  

  

 

 

   

 

 

   

 

 

   

 

 

 

DOT Domestic

     11.96        9.7     22.5        (1.5 )% 

International

     12.11        10.4        15.5        2.7   

DOT Latin America

     14.02        10.8        8.5        5.0   

DOT Atlantic

     9.95        9.7        4.7        (4.9

DOT Pacific

     9.51        6.5        2.3        11.9   

The Company’s Regional Affiliates include two wholly owned subsidiaries, American Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR Eagle), and an independent carrier with which American has a capacity purchase agreement, Chautauqua Airlines, Inc. (Chautauqua).

Regional Affiliates’ passenger revenues, which are based on industry standard proration agreements for flights connecting to American flights, increased $92 million, or 16.0 percent, to $670 million as a result of higher yield and increased traffic. Regional Affiliates’ traffic increased 11.0 percent to 2.4 billion revenue passenger miles (RPMs), on a capacity increase of 5.6 percent to 3.3 billion ASMs, resulting in a 3.4 point increase in passenger load factor to 71.1 percent.

Cargo revenues decreased 0.6 percent, or $0.9 million, to $168 million primarily as a result of decreased freight and mail yields.

Other revenues decreased 1.5 percent, or $10 million, to $642 million primarily as a result of insurance proceeds related to casualty events in the first quarter of 2011.

 

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OPERATING EXPENSES

The Company’s total operating expenses increased 6.3 percent, or $361 million, to $6.1 billion in the first quarter of 2012 compared to the same period in 2011. American’s mainline operating expenses per ASM increased 6.1 percent to 14.2 cents. The increase in operating expense was largely due to a year-over-year increase in fuel prices from $2.76 per gallon in the first quarter of 2011 to $3.24 per gallon in the first quarter of 2012, including the impact of fuel hedging. Fuel expense was the Company’s largest single expense category in the first quarter of 2012 and the price increase resulted in $325 million in incremental year-over-year fuel expense in the first quarter of 2012 (based on the year-over-year increase in the average price per gallon multiplied by gallons consumed, inclusive of the impact of fuel hedging). Further increases in fuel prices and/or disruptions in the supply of fuel would further materially adversely affect the Company’s financial condition and results of operations. The remaining increase in operating expense was primarily due to revenue related expenses, such as credit card fees and booking fees and commissions, and increased aircraft rent related to the Company’s fleet renewal plan.

 

(in millions)

Operating Expenses

   Three Months
Ended March 31,
2012
     Change from
2011
    Percentage
Change
 

Aircraft fuel

   $ 2,165       $ 323        17.5 %(a) 

Wages, salaries and benefits

     1,782         60        3.5   

Other rentals and landing fees

     328         (24     (6.9 )(b) 

Maintenance, materials and repairs

     343         38        12.6 (c) 

Depreciation and amortization

     260         (15     (5.6

Commissions, booking fees and credit card expense

     266         11        4.1   

Aircraft rentals

     143         (18     (10.9 )(d) 

Food service

     125         4        3.1   

Special charges

     11         11        —     

Other operating expenses

     703         (29     (3.8
  

 

 

    

 

 

   

 

 

 

Total operating expenses

   $ 6,126       $ 361        6.3
  

 

 

    

 

 

   

 

 

 

 

(a) Aircraft fuel expense increased primarily due to a 17.6 percent increase in the Company’s price per gallon of fuel (net of the impact of hedging gains of $29 million).

 

(b) Other rentals and landing fees decreased primarily as a result of the Company’s Chapter 11 proceedings as described in Note 1 to the Condensed Consolidated Financial Statements.

 

(c) Maintenance, materials and repairs increased primarily due to timing of materials and repairs expenses.

 

(d) Aircraft rental expense decreased primarily as a result of the Company’s Chapter 11 proceedings as described in Note 1 to the Condensed Consolidated Financial Statements.

OTHER INCOME (EXPENSE)

Other income (expense) consists of interest income and expense, interest capitalized and miscellaneous—net.

A decrease in short-term investment balances caused a decrease in interest income of $0.7 million, or 10.1 percent, to $6 million for the first quarter 2012 compared to the same period last year. Interest expense decreased $22 million, or 10.9 percent, to $178 million primarily as a result of the Company’s Chapter 11 proceedings as described in Note 1 to the Condensed Consolidated Financial Statements.

 

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REORGANIZATION ITEMS, NET

Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 proceedings. The following table summarizes the components included in reorganization items, net on the Consolidated Statements of Operations for the three months ended March 31, 2012:

 

(in millions)       

Aircraft financing renegotiations and rejections (1) (2)

   $ 1,017   

Rejection of facility bond related obligations(2)

     339   

Professional fees

     45   
  

 

 

 

Total reorganization items, net

   $ 1,401   
  

 

 

 

 

(1) 

The Debtors record an estimated claim associated with the rejection of an executory contract or unexpired lease when a motion is filed with the Bankruptcy Court to reject such contract or lease and the Debtors believe that it is probable the motion will be approved and there is sufficient information to estimate the claim. The Debtors record an estimated claim associated with the renegotiation of an executory contract or unexpired lease when the renegotiated terms of such contract or lease are not opposed or are otherwise approved by the Bankruptcy Court and there is sufficient information to estimate the claim.

 

(2) 

Estimated allowed claims from (i) rejecting 16 leases of seven Boeing 757-200 aircraft, one McDonnell Douglas MD-80 aircraft, and eight spare engines, (ii) relinquishing one Airbus A300-600R aircraft that was subject to a mortgage, (iii) filing a motion to reject facility agreements supporting special facility revenue bonds at Dallas/Fort Worth International Airport and Fort Worth Alliance Airport, and (iv) filing motions to modify the leases of 158 aircraft, including 39 Super ATR aircraft, six Boeing 737-800 aircraft, 33 Boeing 757-200 aircraft, 11 Boeing 767-200ER aircraft, 10 Boeing 767-300ER aircraft, and 59 McDonnell Douglas MD-80 aircraft. The rejections of the leases of such aircraft and spare engines and the modification of the leases relating to such aircraft have been approved by the Bankruptcy Court. See above, “Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment,” for further information.

Claims related to reorganization items are reflected in liabilities subject to compromise on the Condensed Consolidated Balance Sheet as of March 31, 2012.

INCOME TAX

The Company did not record a net tax provision (benefit) associated with its net loss for the three months ended March 31, 2012 or March 31, 2011 due to the Company providing a valuation allowance, as discussed in Note 5 to the Condensed Consolidated Financial Statements.

 

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OPERATING STATISTICS

The following table provides statistical information for American and Regional Affiliates for the three months ended March 31, 2012 and 2011.

 

     Three Months Ended March 31,  
     2012     2011  
American Airlines, Inc. Mainline Jet Operations             

Revenue passenger miles (millions)

     29,960        29,165   

Available seat miles (millions)

     37,918        37,850   

Cargo ton miles (millions)

     445        439   

Passenger load factor

     79.0     77.1

Passenger revenue yield per passenger mile (cents)

     15.21        14.18   

Passenger revenue per available seat mile (cents)

     12.02        10.92   

Cargo revenue yield per ton mile (cents)

     37.80        38.50   

Operating expenses per available seat mile, excluding Regional Affiliates (cents) (*)

     14.22        13.40   

Fuel consumption (gallons, in millions)

     592        597   

Fuel price per gallon (dollars)

     3.23        2.75   

Operating aircraft at period-end

     610        615   

Regional Affiliates

    

Revenue passenger miles (millions)

     2,370        2,136   

Available seat miles (millions)

     3,333        3,155   

Passenger load factor

     71.1     67.7

 

(*) Excludes $742 million and $721 million of expense incurred related to Regional Affiliates in 2012 and 2011, respectively.

Operating aircraft at March 31, 2012, included:

 

American Airlines Aircraft           AMR Eagle Aircraft       

Boeing 737-800

     173      

Bombardier CRJ-700

     47   

Boeing 757-200

     114      

Embraer RJ-135

     39   

Boeing 767-200 Extended Range

     15      

Embraer RJ-140

     59   

Boeing 767-300 Extended Range

     58      

Embraer RJ-145

     118   

Boeing 777-200 Extended Range

     47      

Super ATR

     17   
        

 

 

 

McDonnell Douglas MD-80

     203      

Total

     280   
  

 

 

       

 

 

 

Total

     610         
  

 

 

       

The average aircraft age for American’s and AMR Eagle’s aircraft is 14.9 years and 9.92 years, respectively.

Almost all of the Company’s owned aircraft are encumbered by liens granted in connection with financing transactions entered into by the Company.

Of the operating aircraft listed above, 5 McDonnell Douglas MD-80 aircraft, 1 Boeing 757-200 aircraft and 18 Embraer RJ-135 aircraft were in temporary storage as of March 31, 2012.

Owned and leased aircraft not operated by the Company at March 31, 2012, included:

 

American Airlines Aircraft           AMR Eagle Aircraft       

Boeing 737-800

     1      

Saab 340B

     41   

Boeing 757-200

     2      

Super ATR

     1   
        

 

 

 

Airbus A300-600R

     1      

Total

     42   
        

 

 

 

McDonnell Douglas MD-80

     34         
  

 

 

       

Total

     38         
  

 

 

       

 

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All aircraft, including those operated by AMR Eagle, are owned or leased by American as of March 31, 2012.

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed 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 used by management in the preparation of the Company’s financial statements: long-lived assets, international slot and route authorities, passenger revenue, frequent flyer program, stock compensation, pensions and retiree medical and other benefits, income taxes and derivatives. These policies and estimates are described in the 2011 Form 10-K.

 

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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 Company’s 2011 Form 10-K. The change in market risk for aircraft fuel is discussed below for informational purposes.

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. Therefore, actual results may differ. The Company does not hold or issue derivative financial instruments for trading purposes.

Aircraft Fuel The Company’s earnings are substantially 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 through the use of hedging contracts, primarily call options, collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option). Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. Market risk is estimated as a hypothetical 10 percent increase in the March 31, 2012 and 2011 cost per gallon of fuel. Based on projected fuel usage for the next twelve months, such an increase would result in an increase to Aircraft fuel expense of approximately $756 million, inclusive of the impact of effective fuel hedge instruments outstanding at March 31, 2012, and assumes the Company’s fuel hedging program remains effective. Such an increase would have resulted in an increase to projected Aircraft fuel expense of approximately $502 million in the twelve months ended December 31, 2011, inclusive of the impact of fuel hedge instruments outstanding at December 31, 2010. As of March 2012, the Company had cash flow hedges covering approximately 32 percent of its estimated remaining 2012 fuel requirements. Comparatively, as of March 31, 2011, the Company had hedged approximately 38 percent of its estimated remaining 2011 fuel requirements. The consumption hedged for the remainder of 2012 is capped at an average price of approximately $3.26 per gallon of jet fuel, with protection capped on 4 percent of estimated consumption, through the use of sold call options, at an average of $3.56 per gallon of jet fuel. The Company’s collars represent approximately 26 percent of its estimated remaining 2012 fuel requirements and have an average floor price of approximately $2.43 per gallon of jet fuel (both the capped and floor price exclude taxes and transportation costs). A deterioration of the Company’s financial position could negatively affect the Company’s ability to hedge fuel in the future.

Ineffectiveness is inherent in hedging jet fuel with derivative positions based in crude oil or other crude oil related commodities. The Company assesses, both at the inception of each hedge and on an ongoing basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. In doing so, the Company uses a regression model to determine the correlation of the change in prices of the commodities used to hedge jet fuel (e.g., NYMEX Heating oil) to the change in the price of jet fuel. The Company also monitors the actual dollar offset of the hedges’ market values as compared to hypothetical jet fuel hedges. The fuel hedge contracts are generally deemed to be “highly effective” if the R-squared is greater than 80 percent and the dollar offset correlation is within 80 percent to 125 percent. The Company discontinues hedge accounting prospectively if it determines that a derivative is no longer expected to be highly effective as a hedge or if it decides to discontinue the hedging relationship.

 

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Item 4. Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. 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 Company’s disclosure controls and procedures as of December 31, 2011. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.

Since filing the Chapter 11 Cases, except as set forth below, the Company made no change in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

   

The Company’s Chapter 11 Cases have a significant impact on its business processes and internal control over financial reporting related to (1) the proper separation and payment of prepetition and post-petition obligations and (2) the preparation of consolidated financial statements reflecting the accounting required for the restructuring activities and reorganization expenses resulting from the Chapter 11 proceedings. Management continues to take actions necessary to address the resources, processes and controls related to these restructuring activities, while maintaining controls over routine daily operations.

 

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

As previously discussed, on November 29, 2011 the Debtors filed voluntary petitions for relief under the Bankruptcy Code. Each of the Debtors continues to operate its business and manage its property as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. As a result of the current Chapter 11 filings, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the Debtors are subject to the automatic stay provisions of Section 362(a) of the Bankruptcy Code, including, except in such cases where the Bankruptcy Court has entered an order modifying or lifting the automatic stay, the litigation described below. Notwithstanding the general application of the automatic stay described above, governmental authorities, both domestic and foreign, may determine to continue actions brought under their regulatory powers. Therefore, the automatic stay may have no effect on certain matters described below.

On February 14, 2006, the DOJ served the Company with a grand jury subpoena as part of an ongoing investigation into possible criminal violations of the antitrust laws by certain domestic and foreign air cargo carriers. At this time, the Company does not believe it is a target of the DOJ investigation. The New Zealand Commerce Commission notified the Company on February 17, 2006 that it is investigating whether the Company and certain other cargo carriers entered into agreements relating to fuel surcharges, security surcharges, war-risk surcharges, and customs clearance surcharges. On February 22, 2006, the Company received a letter from the Swiss Competition Commission informing the Company that it is investigating whether the Company and certain other cargo carriers entered into agreements relating to fuel surcharges, security surcharges, war-risk surcharges, and customs clearance surcharges. On March 11, 2008, the Company received a request for information from the Swiss Competition Commission concerning, among other things, the scope and organization of the Company’s activities in Switzerland. On June 27, 2007 and October 31, 2007, the Company received requests for information from the Australian Competition and Consumer Commission seeking information regarding fuel surcharges imposed by the Company on cargo shipments to and from Australia and regarding the structure of the Company’s cargo operations. On September 1, 2008, the Company received a request from the Korea Fair Trade Commission seeking information regarding cargo rates and surcharges and the structure of the Company’s activities in Korea. On January 23, 2007, the Brazilian competition authorities, as part of an ongoing investigation, conducted an unannounced search of the Company’s cargo facilities in Sao Paulo, Brazil. On April 24, 2008, the Brazilian competition authorities charged the Company with violating Brazilian competition laws. On December 31, 2009, the Brazilian competition authorities made a non-binding recommendation to the Brazilian competition tribunal that it find the Company in violation of competition laws. The authorities are investigating whether the Company and certain other foreign and domestic air carriers violated Brazilian competition laws by illegally conspiring to set fuel surcharges on cargo shipments. The Company is vigorously contesting the allegations and the preliminary findings of the Brazilian competition authorities. The Company intends to cooperate fully with all pending investigations. In the event that any investigations uncover violations of the U.S. antitrust laws or the competition laws of some other jurisdiction, or if the Company were named and found liable in any litigation based on these allegations, such findings and related legal proceedings could have a material adverse impact on the Company.

Forty-five purported class action lawsuits have been filed in the U.S. against the Company and certain foreign and domestic air carriers alleging that the defendants violated U.S. antitrust laws by illegally conspiring to set prices and surcharges on cargo shipments. These cases, along with other purported class action lawsuits in which the Company was not named, were consolidated in the United States District Court for the Eastern District of New York as In re Air Cargo Shipping Services Antitrust Litigation, 06-MD-1775 on June 20, 2006. Plaintiffs are seeking trebled money damages and injunctive relief. To facilitate a settlement on a class basis, the Company agreed to be named in a separate class action complaint, which was filed on July 26, 2010. The settlement of that complaint, in which the Company does not admit and denies liability, was approved by the court and final judgment was entered on April 6, 2011. Approximately 40 members of the class have elected to opt out, thereby preserving their rights to sue the Company separately. Any adverse judgment could have a material adverse impact on the Company. Also, on January 23, 2007, the Company was served with a purported class action complaint filed against the Company, American, and certain foreign and domestic air carriers in the Supreme Court of British Columbia in Canada (McKay v. Ace Aviation Holdings, et al.). The plaintiff alleges that the defendants violated Canadian competition laws by illegally conspiring to set prices and surcharges on cargo shipments. The complaint seeks compensatory and punitive damages under Canadian law. On June 22, 2007, the plaintiffs agreed to dismiss their claims against the Company. The dismissal is without prejudice and the Company could be brought back into the litigation at a future date. If litigation is recommenced against the Company in the Canadian courts, the Company will vigorously defend itself; however, any adverse judgment could have a material adverse impact on the Company.

 

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On June 20, 2006, the DOJ served the Company with a grand jury subpoena as part of an ongoing investigation into possible criminal violations of the antitrust laws by certain domestic and foreign passenger carriers. At this time, the Company does not believe it is a target of the DOJ investigation. The Company intends to cooperate fully with this investigation. On September 4, 2007, the Attorney General of the State of Florida served the Company with a Civil Investigative Demand as part of its investigation of possible violations of federal and Florida antitrust laws regarding the pricing of air passenger transportation. In the event that this or other investigations uncover violations of the U.S. antitrust laws or the competition laws of some other jurisdiction, such findings and related legal proceedings could have a material adverse impact on the Company. Approximately 52 purported class action lawsuits have been filed in the U.S. against the Company and certain foreign and domestic air carriers alleging that the defendants violated U.S. antitrust laws by illegally conspiring to set prices and surcharges for passenger transportation. On October 25, 2006, these cases, along with other purported class action lawsuits in which the Company was not named, were consolidated in the United States District Court for the Northern District of California as In re International Air Transportation Surcharge Antitrust Litigation, Civ. No. 06-1793 (the Passenger MDL). On July 9, 2007, the Company was named as a defendant in the Passenger MDL. On August 25, 2008, the plaintiffs dismissed their claims against the Company in this action. On March 13, 2008, and March 14, 2008, an additional purported class action complaint, Turner v. American Airlines, et al., Civ. No. 08-1444 (N.D. Cal.), was filed against the Company, alleging that the Company violated U.S. antitrust laws by illegally conspiring to set prices and surcharges for passenger transportation in Japan and certain European countries, respectively. The Turner plaintiffs have failed to perfect service against the Company, and it is unclear whether they intend to pursue their claims. In the event that the Turner plaintiffs pursue their claims, the Company will vigorously defend these lawsuits, but any adverse judgment in these actions could have a material adverse impact on the Company.

On August 21, 2006, a patent infringement lawsuit was filed against American and American Beacon Advisors, Inc. (then a wholly-owned subsidiary of the Company) in the United States District Court for the Eastern District of Texas (Ronald A. Katz Technology Licensing, L.P. v. American Airlines, Inc., et al.). This case has been consolidated in the Central District of California for pre-trial purposes with numerous other cases brought by the plaintiff against other defendants. The plaintiff alleges that American infringes a number of the plaintiff’s patents, each of which relates to automated telephone call processing systems. The plaintiff is seeking past and future royalties, injunctive relief, costs and attorneys’ fees. On December 1, 2008, the court dismissed with prejudice all claims against American Beacon. On May 22, 2009, following its granting of summary judgment to American based on invalidity and non-infringement, the court dismissed all claims against American. Plaintiff appealed, and on February 18, 2011, the Federal Circuit Court of Appeals issued a decision affirming in part and reversing in part and remanding the case back to the District Court for further proceedings. Plaintiff’s petition for a rehearing of the appeal en banc before the Federal Circuit was denied. Although the Company believes that the plaintiff’s claims are without merit and is vigorously defending the lawsuit, a final adverse court decision awarding substantial money damages or placing material restrictions on existing automated telephone call system operations would have a material adverse impact on the Company. This case has been stayed as a result of the Chapter 11 Cases.

On January 10, 2011, the Company filed a lawsuit in Tarrant County, Texas State Court against Sabre alleging, among other claims, that Sabre’s actions of introducing bias against the display of American’s services in its global distribution system (GDS) and substantially increasing the rates that it would charge the Company for bookings made through the Sabre GDS breached its agreement with the Company. That same day, the Company successfully obtained a temporary restraining order that prohibited Sabre from continuing to bias the display of American’s services. On January 23, 2011, the Company and Sabre entered into a Stand-Down Agreement, pursuant to which American agreed to suspend the litigation against Sabre, and Sabre agreed not to reintroduce biasing against American’s services in its GDS and to return to the pricing in effect on January 4, 2011. The parties further agreed to enter into good faith negotiations. The Stand-Down Agreement expired on June 1, 2011. On July 8, 2011, the Company filed new breach of contract and Texas antitrust claims in this action. On June 8, 2011 and October 7, 2011, Sabre filed counterclaims against the Company alleging that American has breached its agreement and that American violated antitrust laws. On August 29, 2011, the Company entered into an agreement with Sabre that will allow American to continue to participate in the Sabre GDS until American’s antitrust claims in the Texas state court are resolved. On January 23, 2012, Sabre filed a petition for mandamus with the Texas Supreme Court asking that the court overturn a decision by the district court that American’s Texas state antitrust claims are not preempted by federal law. Trial in that case is now set to begin August 6, 2012. The Company intends to vigorously pursue its claims, but there can be no assurance of the outcome, and if the Court does not further enjoin Sabre from introducing bias against American’s services or allowing Sabre to remove American services from its system, actions taken by Sabre could have a material adverse effect on the Company.

On April 12, 2011, the Company filed an antitrust lawsuit against Travelport and Orbitz in Federal District Court for the Northern District of Texas. On June 1, 2011, Sabre filed a request to intervene in this action and stated that it intended to file

 

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its own claims against American alleging that American violated the antitrust laws by withholding certain content from the Sabre GDS. On June 1, 2011, the Company amended its lawsuit to add Sabre as a defendant. On October 20, 2011, American sought leave to file new antitrust claims against the defendants based on facts learned through discovery. The lawsuit, as amended, alleges, among other things, that the defendants (1) engaged in anticompetitive practices to preserve their monopoly power over American’s ability to distribute its products through their subscribers; (2) conspired with each other, as well as other third parties, to preserve existing the GDS business model; (3) undertook actions against American, such as biasing and increasing prices, to punish American for supporting a competitive alternative, and (4) organized, supported, and monitored a boycott of American services among travel agencies. The lawsuit further alleges that these actions have prevented American from employing new competing technologies and have allowed the defendants to continue to charge American supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. On December 22, 2011, Travelport brought counterclaims against American alleging that American’s direct connect efforts violate the antitrust laws by preserving American’s monopoly power on certain city pairs. In addition, all defendants filed motions requesting that the court dismiss American’s claims. On November 21, 2011, the court granted those motions as to certain claims, but denied them as to others. The court further granted American’s request to amend its lawsuit by filing additional claims based on the evidence it had uncovered in discovery. American filed a motion for reconsideration of those portions of the court’s November 21 order dismissing certain of American’s claims, and on February 28, 2012, the court granted that motion in part and denied it in part. The defendants have each filed new motions to dismiss certain claims asserted in American’s amended complaint.

American intends to vigorously pursue these claims, which are not stayed by our Chapter 11 filing, but there can be no assurance of the outcome, and if the Court does not enjoin Sabre or other defendants from taking actions against American, including removing American’s services from their systems, actions taken by the defendants could have a material adverse impact on the Company. Furthermore, the Bankruptcy Court granted motions filed by Sabre and Travelport to lift the automatic stay with respect to their counterclaims; American did not oppose these motions.

 

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Item 6. Exhibits

Exhibits required to be filed by Item 601 of Regulation S-K. Where the amount of securities authorized to be issued under any of AMR’s long-term debt agreements does not exceed 10 percent of AMR’s assets, pursuant to paragraph (b) (4) of Item 601 of Regulation S-K, in lieu of filing such as an exhibit, AMR hereby agrees to furnish to the Commission upon request a copy of any agreement with respect to such long-term debt.

The following exhibits are included herein:

 

10.1 Supplemental Agreement No. 29 to Purchase Agreement No. 1980 by and between American Airlines, Inc. and The Boeing Company dated March 12, 2012. Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.

 

12 Computation of ratio of earnings to fixed charges for the three months ended March 31, 2012 and 2011.

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

 

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

 

32 Certification pursuant to Rule 13a-14(b) and section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code).

 

101 The following materials from AMR Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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.

 

    AMR CORPORATION
Date: April 19, 2012     BY:   /s/ Isabella D. Goren
      Isabella D. Goren
      Senior Vice President and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

47

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