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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For fiscal year ended December 31, 2001.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 1-8400.
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AMR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-1825172
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 963-1234
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common stock, $1 par value per share New York Stock Exchange
9.00% Debentures due 2016 New York Stock Exchange
7.875% Public Income Notes due 2039 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 20, 2002, was approximately $3,926,385,128. As of
February 20, 2002, 154,825,912 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from
the Proxy Statement for the Annual Meeting of Stockholders to be held May 15,
2002.
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PART I
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ITEM 1. BUSINESS
AMR Corporation (AMR or the Company) was incorporated in October 1982.
AMR's operations fall almost entirely in the airline industry. AMR's principal
subsidiary, American Airlines, Inc., was founded in 1934. On April 9, 2001,
American Airlines, Inc. purchased substantially all of the assets and assumed
certain liabilities of Trans World Airlines, Inc. (TWA), the eighth largest U.S.
carrier. American Airlines, Inc., including TWA (collectively, American), is the
largest scheduled passenger airline in the world. At the end of 2001, American
provided scheduled jet service to more than 161 destinations throughout North
America, the Caribbean, Latin America, Europe and the Pacific. American is also
one of the largest scheduled air freight carriers in the world, providing a full
range of freight and mail services to shippers throughout its system.
In addition, AMR Eagle Holding Corporation (AMR Eagle), a wholly-owned
subsidiary of AMR, owns two regional airlines which do business as "American
Eagle" -- American Eagle Airlines, Inc. and Executive Airlines, Inc.
(Executive). These two American Eagle carriers provide connecting service from
eight of American's high-traffic cities to smaller markets throughout the United
States, Canada, the Bahamas and the Caribbean.
AMR Investment Services, Inc., a wholly-owned subsidiary of AMR, is
responsible for the investment and oversight of AMR's defined benefit and
defined contribution plans, as well as its short-term investments. It serves as
manager of the American AAdvantage Funds, a family of mutual funds with both
institutional and retail shareholders, and provides customized fixed income
portfolio management services. As of December 31, 2001, AMR Investment Services
was responsible for management of approximately $29.9 billion in assets,
including direct management of approximately $17.8 billion in short-term fixed
income investments.
Effective after the close of business on March 15, 2000, AMR distributed
0.722652 shares of Sabre Holdings Corporation (Sabre) Class A Common Stock for
each share of AMR stock owned by AMR's shareholders, thus distributing its
entire ownership interest in Sabre. As such, Sabre has been treated as a
discontinued operation in Item 6 - Selected Consolidated Financial Data, Item 7
- Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8 - Consolidated Financial Statements. In addition, the
discussion in the Other Items of this Form 10-K relates primarily to American
and AMR Eagle.
On September 11, 2001, two American Airlines aircraft were hijacked and
destroyed in terrorist attacks on The World Trade Center in New York City and
the Pentagon in northern Virginia. On the same day, two United Air Lines
(United) aircraft were also hijacked and used in terrorist attacks. In addition
to the loss of life on board the aircraft, these attacks resulted in untold
deaths and injuries to persons on the ground and massive property damage. In
response to those terrorist attacks, the Federal Aviation Administration (FAA)
issued a federal ground stop order on September 11, 2001, prohibiting all
flights to, from, and within the United States. Airports did not reopen until
September 13, 2001 (except for Washington Reagan Airport, which was partially
reopened on October 4, 2001). The Company was able to operate only a portion of
its scheduled flights for several days thereafter. When flights were permitted
to resume, passenger traffic and yields on the Company's flights were
significantly lower than prior to the attacks. As a result, the Company reduced
its operating schedule to approximately 80 percent of the schedule it flew prior
to September 11, 2001. In addition, as a result of its schedule reduction and
the sharp fall off in passenger traffic, the Company eliminated approximately
20,000 jobs. The Company's future schedule will vary as the Company reacts to
continuing changes in demand and yields, as well as normal factors such as
seasonality and fleet composition.
1
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act), which for all U.S.
airlines and air cargo carriers (collectively, air carriers) provides for, among
other things: (i) $5 billion in compensation for direct losses (including lost
revenues) incurred as a result of the federal ground stop order and for
incremental losses incurred through December 31, 2001 as a direct result of the
attacks, of which the Company has received approximately $728 million as of
December 31, 2001 and expects to receive additional payments in 2002 aggregating
approximately $128 million; (ii) subject to certain conditions, the availability
of up to $10 billion in federal government guarantees of certain loans made to
air carriers for which credit is not reasonably available as determined by a
newly established Air Transportation Stabilization Board; (iii) the authority of
the Secretary of Transportation to reimburse air carriers (which authority
expires 180 days after the enactment of the Act) for the increase in the cost of
insurance, for coverage ending before October 1, 2002, over the premium in
effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of terrorism
committed on or to such air carrier during the 180-day period following the
enactment of the Act; (v) the extension of the due date for the payment by air
carriers of certain excise taxes; and (vi) compensation to individual claimants
who were physically injured or killed as a result of the terrorist attacks of
September 11, 2001. In addition, the Act provides that, notwithstanding any
other provision of law, liability for all claims, whether compensatory or
punitive, arising from the terrorist-related events of September 11, 2001
against any air carrier shall not exceed the liability coverage maintained by
the air carrier.
On November 12, 2001, American Airlines Flight 587 crashed shortly after
take-off from John F. Kennedy International Airport en route to Santo Domingo in
the Dominican Republic. In addition to the loss of life on board the aircraft,
there were several fatalities and injuries to persons on the ground as well as
property damage. The National Transportation Safety Board is currently
investigating the accident; a cause has yet to be determined. As a result of the
accident, claims have been made against American. It is anticipated these claims
will be covered under American's insurance policies.
COMPETITION
Most major air carriers have developed hub-and-spoke systems and schedule
patterns in an effort to maximize the revenue potential of their service.
American operates five hubs: Dallas/Fort Worth (DFW), Chicago O'Hare, Miami, St.
Louis and San Juan, Puerto Rico. Delta Air Lines (Delta) and United also have
hub operations at DFW and Chicago O'Hare, respectively.
The American Eagle carriers increase the number of markets the Company
serves by providing connections to American at American's hubs and certain other
major airports. The American Eagle carriers serve smaller markets through
Boston, DFW, Chicago, Miami, San Juan, Los Angeles and New York's LaGuardia and
John F. Kennedy International Airports. In addition, American contracts with
three independently owned regional airlines which do business as the "American
Connection" to provide connecting service to American through St. Louis.
American's competitors also own or have marketing agreements with regional
carriers which provide similar services at their major hubs.
In addition to its extensive domestic service, the Company provides
international service to the Caribbean, the Bahamas, Canada, Latin America,
Europe and the Pacific. The Company's operating revenues from foreign operations
were approximately 28 percent, 30 percent and 29 percent of the Company's total
operating revenues in 2001, 2000 and 1999, respectively. Additional information
about the Company's foreign operations is included in Note 15 to the
consolidated financial statements.
2
The domestic airline industry is fiercely competitive. Currently, any air
carrier deemed fit by the U.S. Department of Transportation (DOT) is free to
operate scheduled passenger service between any two points within the U.S. and
its possessions. On most of its domestic non-stop routes, the Company faces
competing service from at least one, and sometimes more than one, major domestic
airline including: Alaska Airlines, America West Airlines, Continental Airlines
(Continental), Delta, Northwest Airlines (Northwest), Southwest Airlines, United
and US Airways, and their affiliated regional carriers. Competition is even
greater between cities that require a connection, where all nine major airlines
may compete via their respective hubs. The Company also competes with national,
regional, all-cargo and charter carriers and, particularly on shorter segments,
ground transportation. In addition, on all of its routes, pricing decisions are
affected, in part, by competition from other airlines, some of which have cost
structures significantly lower than the Company's and can therefore operate
profitably at lower fare levels.
The majority of the tickets for travel on American and American Eagle are
sold by travel agents. Domestic travel agents generally receive a base
commission of five percent of the price of the tickets they sell. This amount is
capped by the Company at a maximum of $20 for a domestic roundtrip itinerary and
$100 for an international roundtrip itinerary. Airlines often pay additional
commissions in connection with special revenue programs. Accordingly, airlines
compete not only with respect to the price of the tickets sold but also with
respect to the amount of commissions paid.
The growing use of electronic distribution systems provides the Company
with an ever-increasing ability to lower its distribution costs. The Company
continues to expand the capabilities of its Internet website - AA.com - and the
use of electronic ticketing throughout the Company's network. In addition, the
Company has entered into various agreements with several Internet travel
providers, including Travelocity.com, Expedia, priceline.com, Orbitz and
Hotwire. The base commission for sales through Internet travel providers is
lower than traditional travel agencies.
International air transportation is subject to extensive government
regulation. In providing international air transportation, the Company competes
with foreign investor-owned carriers, state-owned carriers and U.S. airlines
that have been granted authority to provide scheduled passenger and cargo
service between the U.S. and various overseas locations. The Company's operating
authority in these markets is subject to aviation agreements between the U.S.
and the respective countries, and in some cases, fares and schedules require the
approval of the DOT and/or the relevant foreign governments. Because
international air transportation is governed by bilateral or other agreements
between the U.S. and the foreign country or countries involved, changes in U.S.
or foreign government aviation policies could result in the alteration or
termination of such agreements, diminish the value of such route authorities, or
otherwise adversely affect the Company's international operations. Bilateral
agreements between the U.S. and various foreign countries served by the Company
are subject to renegotiation. In addition, at some foreign airports, an air
carrier needs slots (landing and take-off authorizations) before the air carrier
can introduce new service or increase existing service. The availability of such
slots is not assured and can therefore inhibit an air carrier's efforts to
compete in certain markets.
The major U.S. air carriers have some advantage over foreign competitors
in their ability to generate traffic from their extensive domestic route
systems. In many cases, however, foreign governments, which own and subsidize
some of the Company's foreign competitors, limit U.S. air carriers' rights to
carry passengers beyond designated gateway cities in foreign countries. To
improve access to each other's markets, various U.S. and foreign air carriers -
including American - have established marketing relationships with other
airlines and rail companies. American currently has code-sharing programs with
Aer Lingus, Air Pacific, Alaska Airlines, Asiana Airlines, China Eastern
Airlines, EVA Air, Finnair, Gulf Air, Hawaiian Airlines, Iberia, Japan Airlines,
LanChile, LOT Polish Airlines, Qantas Airways, SNCF, TACA Group, the TAM Group,
TAP Air Portugal, Thalys and Turkish Airlines. American Eagle also has
code-sharing programs with Continental, Delta, Midwest Express and Northwest, in
addition to code-sharing with some of American's codeshare partners. Certain of
these relationships also include reciprocity between American and the other
airlines' frequent flyer programs. In addition, the Company expects to implement
codeshares with Cathay Pacific Airways and Vietnam Airlines pending regulatory
approval. In the coming years, the Company expects to develop these programs
further and to evaluate new alliances with other carriers.
3
In February 1999, American, British Airways, Canadian Airlines
International Limited (Canadian), Cathay Pacific Airways and Qantas Airways
formed the global alliance ONEworld(TM). In September 1999, Finnair and Iberia
joined these five founding members. Also, in June 2000, Aer Lingus and LanChile
joined the ONEworld alliance. Following the acquisition of Canadian by Air
Canada, Canadian terminated its membership in ONEworld in June 2000. The
ONEworld alliance links the networks of the member carriers to enhance customer
service and smooth connections to the destinations served by the alliance,
including linking the carriers' frequent flyer programs and access to the
carriers' airport lounge facilities.
In August 2001, American entered into a comprehensive transatlantic
alliance agreement with British Airways and subsequently filed for antitrust
immunity with the appropriate regulators in the U.S. and Europe. In January
2002, the DOT issued a preliminary "show cause" order outlining its remedy
requirements for approval of the alliance. Shortly afterwards, American and
British Airways indicated that this alliance would not go forward under the
conditions specified by the DOT. American and British Airways subsequently filed
a motion to withdraw their joint application at the DOT on February 13, 2002;
that motion has not yet been granted. American and British Airways are actively
seeking to further develop bilateral cooperation and enhance the mutual value of
the ONEworld alliance to the extent permitted by regulatory parameters. Several
of American's major competitors are members of marketing/operational alliances
that enjoy antitrust immunity. To the extent that American and British Airways
are restricted in their relationship because they lack antitrust immunity, the
carriers could be at a competitive disadvantage vis-a-vis other alliances.
The Company believes that it has several advantages relative to its
competition. It operates a fleet that is efficient and quiet. It has a
comprehensive domestic and international route structure, anchored by efficient
hubs, which permit it to take full advantage of whatever traffic growth occurs.
The Company believes American's AAdvantage frequent flyer program, which is the
largest program in the industry, its More Room Throughout Coach program and its
superior service also give it a competitive advantage.
REGULATION
GENERAL The Airline Deregulation Act of 1978, as amended, eliminated most
domestic economic regulation of passenger and freight transportation. However,
the DOT and the FAA still exercise certain regulatory authority over air
carriers. The DOT maintains jurisdiction over the approval of international
codeshare agreements, international route authorities and certain consumer
protection matters, such as advertising, denied boarding compensation and
baggage liability.
The FAA regulates flying operations generally, including establishing
personnel, aircraft and security standards. As part of that oversight, the FAA
has implemented a number of requirements that the Company is incorporating into
its maintenance programs. These matters relate to, among other things, enhanced
ground proximity warning systems, McDonnell Douglas MD-80 metal-mylar insulation
replacement, McDonnell Douglas MD-80 main landing gear piston improvements,
Boeing 757 and Boeing 767 pylon improvements, Boeing 737 elevator improvements
and Airbus A300 structural improvements. Based on its current implementation
schedule, the Company expects to be in compliance with the applicable
requirements within the required time periods.
The DOJ has jurisdiction over airline antitrust matters. The U.S. Postal
Service has jurisdiction over certain aspects of the transportation of mail and
related services. Labor relations in the air transportation industry are
regulated under the Railway Labor Act, which vests in the National Mediation
Board (NMB) certain regulatory functions with respect to disputes between
airlines and labor unions relating to union representation and collective
bargaining agreements. To the extent the Company continues to increase its
alliances with international carriers, the Company may be subject to certain
regulations of foreign agencies.
4
In November 2001, the Aviation and Transportation Security Act (ATSA) was
enacted. The ATSA created a new government agency, the Transportation Security
Administration (TSA), which is part of the DOT and is responsible for aviation
security. The ATSA mandates that the TSA shall provide for the screening of all
passengers and property, including U.S. mail, cargo, carry-on and checked
baggage, and other articles that will be carried aboard a passenger aircraft.
The TSA assumed most passenger screening functions in February 2002, largely by
contracting with private-sector security providers; however, by November 2002,
the TSA is required to have its own federal employees in place to perform these
functions. To comply with the checked baggage screening requirements, all
checked baggage must either be screened by Explosive Detection Systems or
another manner, such as positive bag match, manual search, canine explosive
detection, or other approved means. In January 2002, the Company implemented a
bag screening program utilizing several of the approved methods. The TSA also
provides for increased security on flight decks of aircraft and requires federal
air marshals to be present on certain flights.
Effective February 1, 2002, the ATSA imposed a $2.50 per enplanement
security service fee ($5 one-way maximum fee) which will be collected by the air
carriers and submitted to the government to pay for these enhanced security
measures. Additionally, to the extent the TSA determines that such fee is
insufficient to pay for the cost of providing the security measures as mentioned
in the previous paragraph, in each of the years 2002, 2003 and 2004, air
carriers may be required to submit to the government an amount equal to the
amount the air carriers paid for screening passengers and property in 2000.
After that, this fee may be assessed based on the air carrier's market share.
Currently, it is unknown whether the Company will be required to make any
payments under this feature of the ATSA.
In addition, the ATSA requires air carriers to honor tickets for
suspended service on other air carriers that are insolvent or have declared
bankruptcy within 18 months of the passage of the ATSA. To be eligible, a
passenger must make arrangements with the air carrier within 60 days after the
date on which the passenger's air transportation was suspended. In as much as
this provision of the ATSA is recently enacted, the Company has no history to
determine its impact. If a major U.S. air carrier were to declare bankruptcy and
cease operations, this feature of the ATSA could have a significant impact on
the Company. To the extent the Company was not reimbursed for honoring such
tickets, the impact could be adverse.
In April 1998, the DOT issued proposed pricing and capacity rules that
would severely limit major air carriers' ability to compete with new entrant
carriers. In January 2001, following a multi-year investigation and public
docket concerning competition between major air carriers and new entrant
carriers, the DOT restated its concerns with competitive practices in the
industry, but declined to issue specific competitive guidelines. In its
statement of findings and conclusions, the DOT reiterated its view that it had
both the authority and the obligation to prevent what it considers to be unfair
competitive practices in the industry, and indicated its intent to pursue
enforcement actions on a case-by-case basis. To the extent that future DOT
enforcement actions either directly or indirectly impose restrictions upon the
Company's ability to respond to competitors, the Company's business may be
adversely impacted.
As described in Item 3 - Legal Proceedings, the Antitrust Division of the
DOJ and several purported classes of private parties are pursuing litigation
alleging that American and American Eagle violated federal antitrust laws when
competing with new air carriers. In April 2001, the U.S. District Court for the
District of Kansas granted American's motion for summary judgment and dismissed
the government's case. The DOJ has appealed, and the private lawsuits have been
stayed pending the outcome of the DOJ's appeal. Adverse court decisions could
impose restrictions on the Company's ability to respond to competitors, or could
result in awards of substantial money damages to private parties, in which case
the Company's business could be adversely impacted.
AIRLINE FARES Airlines are permitted to establish their own domestic fares
without governmental regulation, and the industry is characterized by
substantial price competition. The DOT maintains authority over international
fares, rates and charges. International fares and rates are also subject to the
jurisdiction of the governments of the foreign countries which the Company
serves. While air carriers are required to file and adhere to international fare
and rate tariffs, substantial commissions, overrides and discounts to travel
agents, brokers and wholesalers characterize many international markets.
5
Legislation (sometimes referred to as the "Passengers' Bill of Rights")
has been discussed in various legislatures (including the Congress). This
legislation could, if enacted: (i) place various limitations on airline fares
and/or (ii) affect operating practices such as baggage handling and overbooking.
Effective December 15, 1999, the Company, as well as other domestic airlines,
implemented a Customer Service Plan to address a number of service goals,
including, but not limited to goals relating to: (i) lowest fare availability,
(ii) delays, cancellations and diversion events, (iii) baggage delivery and
liability, (iv) guaranteed fares, (v) ticket refunds, (vi) accommodation of
customers with special needs, (vii) essential customer needs during
extraordinary delays, (viii) flight oversales, (ix) Frequent Flyer Program -
AAdvantage, (x) other travel policies, (xi) service with domestic code share
partners, and (xii) handling of customer issues. In February 2001, the DOT
Inspector General issued a report on the various air carriers' performance of
their Customer Service Plans. The report included a number of recommendations
which could limit the Company's flexibility with respect to various operational
practices. In February 2001, a bill proposing an "Airline Customer Service
Improvement Act" was introduced in the U.S. Senate. In addition, other items of
legislation have been introduced that would limit hub concentration, reallocate
slots at certain airports and impose higher landing fees at certain hours. To
the extent legislation is enacted that would inhibit the Company's flexibility
with respect to fares, its revenue management system, its operations or other
aspects of its customer service operations, the Company's financial results
could be adversely affected.
Fare discounting by competitors has historically had a negative effect on
the Company's financial results because the Company is generally required to
match competitors' fares to maintain passenger traffic. During recent years, a
number of new low-cost airlines have entered the domestic market and several
major airlines, including the Company, implemented efforts to lower their cost
structures. Further fare reductions, domestic and international, may occur in
the future. If fare reductions are not offset by increases in passenger traffic,
cost reductions or changes in the mix of traffic that improves yields, the
Company's operating results will be negatively impacted.
AIRPORT ACCESS In 1968, the FAA issued a rule designating New York John F.
Kennedy, New York LaGuardia, Washington National (now Washington Reagan),
Chicago O'Hare and Newark airports as high-density traffic airports. Newark was
subsequently removed from the high-density airport classification. The
high-density rule limits the number of Instrument Flight Rule operations -
take-offs and landings - permitted per hour and requires that a slot support
each operation. In April 2000, the Wendell H. Ford Aviation Investment and
Reform Act for the 21st Century (Air 21 Act) was enacted which: (i) eliminates
slot restrictions at New York's John F. Kennedy and LaGuardia airports in 2007,
(ii) shrank Chicago O'Hare's slot day from 0645 - 2114 hours to 1445 - 2014
hours starting July 2001, and (iii) eliminates Chicago O'Hare slots in July
2002. The Company does not expect the elimination of slot restrictions to have a
material adverse impact on the Company's operations or its financial condition,
results of operations or cash flows. In the aftermath of September 11, 2001,
Washington Reagan did not reopen until October 4, 2001, and only on a limited
basis. The Company does not know when operations at Washington Reagan will be
allowed to return to their pre-September 11 levels. However, in late February
2002, it was reported that the U.S. Transportation Secretary will propose in
March 2002 that Washington Reagan be allowed to return to its pre-September 11
number of commercial flights.
Under the Air 21 Act, slot restrictions were lifted for service to/from
LaGuardia and certain cities classified as small and non-hub airports (new
service cities). As a consequence, the Company and other air carriers increased
their service at LaGuardia to the new service cities. In December 2000, the DOT
held a lottery for LaGuardia slots for service to the new service cities in
order to ease congestion at the airport. The congestion was a direct result of
the growth of Air 21 Act slot operations. While the Company has scaled back its
service to the new service cities to/from LaGuardia, it is not anticipated that
this reduction will have a material impact on the Company's operations or its
financial condition, results of operations or cash flows.
Currently, the FAA permits the purchasing, selling, leasing or
transferring of slots except those slots designated as international, essential
air service or Air 21 Act. Trading of any slot is permitted subject to certain
parameters. Most foreign airports, including London Heathrow, a major European
destination for American, also have slot allocations. Most foreign authorities
do not permit the purchasing, selling or leasing of slots.
Although the Company is constrained by slots, it currently has sufficient
slot authorizations to operate its existing flights and has generally been able
to obtain slots to expand its operations and change its schedules. However,
there is no assurance that the Company will be able to obtain slots for these
purposes in the future because, among other factors, domestic slot allocations
are subject to changes in government policies.
6
ENVIRONMENTAL MATTERS The Company is subject to various laws and government
regulations concerning environmental matters and employee safety and health in
the U.S. and other countries. U.S. federal laws that have a particular impact on
the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean
Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the
Safe Drinking Water Act, and the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or the Superfund Act). The Company is
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency (EPA), OSHA, and other federal agencies have
been authorized to promulgate regulations that have an impact on the Company's
operations. In addition to these federal activities, various states have been
delegated certain authorities under the aforementioned federal statutes. Many
state and local governments have adopted environmental and employee safety and
health laws and regulations, some of which are similar to federal requirements.
As a part of its continuing safety, health and environmental program, the
Company anticipates that it will comply with such requirements without any
material adverse effect on its business.
The ANCA recognizes the rights of airport operators with noise problems
to implement local noise abatement programs so long as they do not interfere
unreasonably with interstate or foreign commerce or the national air
transportation system. Authorities in several cities have promulgated aircraft
noise reduction programs, including the imposition of nighttime curfews. The
ANCA generally requires FAA approval of local noise restrictions on aircraft.
While the Company has had sufficient scheduling flexibility to accommodate local
noise restrictions imposed to date, the Company's operations could be adversely
affected if locally-imposed regulations become more restrictive or widespread.
American has been identified by the EPA as a potentially responsible
party (PRP) at the Operating Industries, Inc. Superfund Site in California.
American has signed a partial consent decree with respect to this site and is
one of several PRPs named. American has also been identified as a PRP at the
Beede Waste Oil Superfund Site in New Hampshire. American has responded to a
104(e) Request for Information regarding interaction with several companies
related to this site. At the Operating Industries, Inc. and the Beede Waste Oil
sites, American's alleged waste disposal volumes are minor compared to the other
PRPs at these sites. In 1998, the EPA named American a de minimis PRP at the
Casmalia Waste Disposal Site in California.
American, along with most other tenants at the San Francisco
International Airport (SFIA), has been ordered by the California Regional Water
Quality Control Board to engage in various studies of potential environmental
contamination at the airport and to undertake remedial measures, if necessary.
SFIA is also seeking to recover its past costs related to the contamination from
the tenants.
Miami-Dade County is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and funding
the remediation costs through landing fees and various cost recovery methods.
American and AMR Eagle have been named as PRPs for the contamination at MIA.
During the second quarter of 2001, the County filed a lawsuit against 17
defendants, including American, in an attempt to recover its past and future
cleanup costs (Miami-Dade County, Florida v. Advance Cargo Services, Inc., et
al. in the Florida Circuit Court). In addition to the 17 defendants named in the
lawsuit, 243 other agencies and companies were also named as PRPs and
contributors to the contamination. American's and AMR Eagle's portion of the
cleanup costs cannot be reasonably estimated due to various factors, including
the unknown extent of the remedial actions that may be required, the proportion
of the cost that will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will ultimately
supervise the remedial activities and the nature of that supervision.
In 1999, American was ordered by the New York State Department of
Environmental Conservation to conduct remediation of environmental contamination
located at Terminals 8 and 9 at New York's John F. Kennedy International
Airport. American is seeking to recover a portion of the related costs from
previous users of the premises.
7
Also in 1999, the Company entered a plea agreement with the U.S.
Government with respect to a one count indictment relating to the storage of
hazardous materials. As part of the plea agreement, the Company was placed on
probation for three years and has adopted a comprehensive compliance program. To
the extent the Company fails to abide by the terms of the probation or its
compliance program, the Company's operations may be adversely impacted.
American and Executive, along with other tenants at the Luis Munoz Marin
International Airport in San Juan, Puerto Rico, have been named as PRPs for
environmental claims at the airport.
American Eagle Airlines, Inc. has been notified of its potential
liability under New York law at an inactive hazardous waste site in
Poughkeepsie, New York.
The Company does not expect these matters, individually or collectively,
to have a material impact on its financial condition, results of operations or
cash flows.
LABOR
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 37 percent of AMR's consolidated operating expenses
for the year ended December 31, 2001.
The majority of the Company's employees are represented by labor unions
and covered by collective bargaining agreements. The Company's relations with
such labor organizations are governed by the Railway Labor Act. Under this act,
the collective bargaining agreements among the Company and these organizations
do not expire but instead become amendable as of a stated date. If either party
wishes to modify the terms of any such agreement, it must notify the other party
in the manner described in the agreement. After receipt of such notice, the
parties must meet for direct negotiations, and if no agreement is reached,
either party may request the NMB to appoint a federal mediator. If no agreement
is reached in mediation, the NMB may declare at some time that an impasse
exists, and if an impasse is declared, the NMB proffers binding arbitration to
the parties. Either party may decline to submit to arbitration. If arbitration
is rejected by either party, a 30-day "cooling off" period commences. During
that period, a Presidential Emergency Board (PEB) may be established, which
examines the parties' positions and recommends a solution. The PEB process lasts
for 30 days and is followed by a "cooling off" period of 30 days. At the end of
a "cooling off" period, unless an agreement is reached or action is taken by
Congress, the labor organization may strike and the airline may resort to
"self-help", including the imposition of any or all of its proposed amendments
and the hiring of workers to replace strikers.
American reached a new contract with the Association of Professional
Flight Attendants (APFA) during 2001. The new contract becomes amendable on
November 30, 2004.
American reached new agreements with the Transport Workers Union (TWU)
during 2001 concerning the eight employee groups represented by the TWU. The new
agreements become amendable on March 1, 2004.
In 2001, American commenced negotiations with the Allied Pilots
Association (APA). The APA agreement became amendable August 31, 2001.
In addition, a provision under the current APA contract further limits
the number of available seat miles (ASMs) and block hours flown by American's
regional carriers when pilots from American are on furlough. American Eagle
continues to accept previously ordered regional jets. This will cause the ASM
cap to be reached in the first half of 2002, necessitating actions to comply
with that cap. American is working with its regional partners to ensure that it
is in compliance with this provision. Towards that end, American Eagle is
reducing the number of ASMs flown by its carriers, including, but not limited
to: (i) removal of seats from its Saab and ATR aircraft, (ii) reduction in the
number of turboprop aircraft, and (iii) reducing the frequency and/or
withdrawing from several routes across its network. American Eagle will continue
to evaluate a number of potential alternatives involving the carrier's Miami
operations and Executive, which range from changing its codeshare agreement with
American to the potential sale of some or all of these assets.
8
The Air Line Pilots Association (ALPA), which represents American Eagle
pilots, reached agreement with American Eagle effective September 1, 1997, to
have all of the pilots of the Eagle carriers covered by a single collective
bargaining agreement. This agreement lasts until October 31, 2013. The agreement
provides to the parties the right to seek limited changes in 2000, 2004, 2008
and 2012. If the parties are unable to agree on the limited changes, they also
agreed that the issues would be resolved by interest arbitration, without the
exercise of self-help (such as a strike). ALPA and American Eagle negotiated a
tentative agreement in 2000, but that agreement failed in ratification.
Thereafter, the parties participated in interest arbitration. The interest
arbitration panel determined the limited changes which should be made and these
changes were appropriately effected.
The Association of Flight Attendants (AFA), which represents the flight
attendants of the Eagle carriers, reached agreement with American Eagle
effective March 2, 1998, to have all flight attendants of the American Eagle
carriers covered by a single contract. The agreement became amendable on
September 2, 2001. However, the parties agreed to commence negotiations over
amendments to the agreement in March 2001. The parties are still engaged in
direct negotiations. The other union employees at the American Eagle carriers
are covered by separate agreements with the TWU which were effective April 28,
1998, and are amendable April 28, 2003.
The portions of the Company's work force which are non-union have already
largely incorporated their counterparts from TWA. With respect to the
integration of the unionized portions of the work forces at American and TWA,
the Company engaged facilitators to work with American's and TWA's unions in
attempting to achieve integration agreements acceptable to all unions.
Unfortunately, these discussions were unable to produce agreements acceptable to
both unions as to each class or craft. American later reached integration
agreements with the APA (with respect to pilot integration issues) and the APFA
(with respect to flight attendant integration issues). Discussions with the TWU
did not result in an agreement on integration of the eight work groups
represented at American by the TWU. However, American and the TWU will be
participating in arbitration with respect to certain integration issues in late
February and early March 2002. The International Association of Machinists,
which represents certain work groups at TWA, will be participating as well. The
details of the arbitration agreement are still being worked out. Currently, the
NMB is considering a petition asking that it declare American and TWA a single
carrier for labor relations purposes and the representation effects of such a
ruling (a single carrier ruling is believed likely to occur). It is expected
that the NMB will most likely designate American's incumbent unions as the
collective bargaining representatives of the combined work groups once a single
carrier is found to exist. The integration of the unionized work groups will
thereafter follow in a schedule worked out between American and the relevant
unions.
FUEL
The Company's operations are significantly affected by the availability
and price of jet fuel. The Company's fuel costs and consumption for the years
1999 through 2001 were:
Average
Cost Per
Average Gallon, Percent of
Gallons Cost Per Excluding AMR's
Consumed Total Cost Gallon Fuel Taxes Operating
Year (in millions) (in millions) (in cents) (in cents) Expenses
---- ------------- ------------- ---------- ---------- ----------
1999 3,084 $1,696 55.0 50.4 10.2
2000 3,197 2,495 78.1 72.8 13.6
2001 3,461 2,888* 81.4* 76.4* 13.5
* The amounts for 2001 reflect the January 1, 2001 adoption of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133); the 2000
and 1999 amounts do not. See a further discussion of the impact of
SFAS 133 to the Company in Note 8 to the consolidated financial
statements.
9
The impact of fuel price changes on the Company and its competitors is
dependent upon various factors, including hedging strategies. The Company has a
fuel hedging program in which it enters into jet fuel, heating oil and crude
swap and option contracts to protect against increases in jet fuel prices, which
has had the effect of reducing the Company's average cost per gallon. During
2001 and 2000, the Company's fuel hedging program reduced the Company's fuel
expense by approximately $29 million and $545 million, respectively. To reduce
the impact of potential fuel price increases in 2002, as of December 31, 2001,
the Company had hedged approximately 40 percent of its estimated 2002 fuel
requirements. Based on projected fuel usage, the Company estimates that a 10
percent increase in the price per gallon of fuel would result in an increase to
aircraft fuel expense of approximately $169 million in 2002, net of fuel hedge
instruments outstanding at December 31, 2001. Due to the competitive nature of
the airline industry, in the event of continuing increases in the price of jet
fuel, there can be no assurance that the Company will be able to pass on
increased fuel prices to its customers by increasing its fares. Likewise, any
potential benefit of lower fuel prices may be offset by increased fare
competition and lower revenues for all air carriers.
While the Company does not currently anticipate a significant reduction
in fuel availability, dependency on foreign imports of crude oil and the
possibility of changes in government policy on jet fuel production,
transportation and marketing make it impossible to predict the future
availability of jet fuel. In the event there was an outbreak of hostilities or
other conflicts in oil producing areas, there could be reductions in the
production and/or importation of crude oil. If there were major reductions in
the availability of jet fuel, the Company's business would be adversely
affected.
Additional information regarding the Company's fuel program is included
in Item 7(A) - Quantitative and Qualitative Disclosures about Market Risk and in
Note 8 to the consolidated financial statements.
FREQUENT FLYER PROGRAM
American established the AAdvantage frequent flyer program (AAdvantage)
to develop passenger loyalty by offering awards to travelers for their continued
patronage. AAdvantage members earn mileage credits for flights on American,
American Eagle and certain other participating airlines, or by utilizing
services of other program participants, including hotels, car rental companies
and bank credit card issuers. American sells mileage credits and related
services to the other companies participating in the program. American reserves
the right to change the AAdvantage program rules, regulations, travel awards and
special offers at any time without notice. American may initiate changes
impacting, for example, participant affiliations, rules for earning mileage
credit, mileage levels and awards, limited seating for travel awards, and the
features of special offers. American reserves the right to end the AAdvantage
program with six months' notice.
Mileage credits can be redeemed for free, discounted or upgraded travel
on American, American Eagle or participating airlines, or for other travel
industry awards. Once a member accrues sufficient mileage for an award, the
member may request an award certificate from American. Award certificates may be
redeemed up to one year after issuance. Most travel awards are subject to
capacity controlled seating. In 1999, certain changes were made to the
AAdvantage program so that miles do not expire, provided a customer has any type
of qualifying activity at least once every 36 months.
American utilizes the incremental cost method to account for the portion
of its frequent flyer liability incurred when AAdvantage members earn mileage
credits by flying on American or American Eagle. American's frequent flyer
liability is accrued each time a member accumulates sufficient mileage in his or
her account to claim the lowest level of free travel award (25,000 miles) and
such award is expected to be used for free travel. American includes fuel, food,
and reservations/ticketing costs, but not a contribution to overhead or profit,
in the calculation of incremental cost. These estimates are based upon the
Company's 12-month historical average of such costs. The cost for fuel is
estimated based on total fuel consumption tracked by various categories of
markets, with an amount allocated to each passenger. Food costs are tracked by
market category, with an amount allocated to each passenger.
Reservation/ticketing costs are based on the total number of passengers,
including those traveling on free awards, divided into American's total expense
for these costs.
10
Revenue earned from selling AAdvantage miles to other companies
participating in American's frequent flyer program is recognized in two
components. The first component represents the revenue for air transportation
sold and is valued at current market rates. This revenue is deferred and
recognized over the period the mileage is expected to be used, which is
currently estimated to be 28 months. The second revenue component, representing
the marketing products sold and administrative costs associated with operating
the AAdvantage program, is recognized immediately.
In conjunction with the acquisition of TWA's assets (see Note 3 to the
consolidated financial statements), members of TWA's Aviators frequent flyer
program (Aviators) were eligible to transfer the unused mileage balances in
their Aviators account to the AAdvantage program. As part of the purchase price
allocation of TWA, the Company established a liability related to the
incremental cost of the unused mileage balances in the Aviator's program.
Effective November 30, 2001, Aviator's was discontinued and its members have
until November 30, 2002 to exchange their Aviators' miles for AAdvantage miles.
The Company does not expect the future transfer of Aviators' miles into the
AAdvantage program to be material.
At December 31, 2001 and 2000, American estimated that approximately 8.7
million and 6.5 million free travel awards, respectively, were expected to be
redeemed for free travel on American and American Eagle. In making the estimate
of free travel awards, American has included the Aviators' miles and excluded
mileage in inactive accounts, mileage related to accounts that have not yet
reached the lowest level of free travel award, and mileage in active accounts
that have reached the lowest level of free travel award but which are not
expected to ever be redeemed for free travel on American. The liability for the
program mileage that has reached the lowest level of free travel award and is
expected to be redeemed for free travel on American or other participating
airlines and deferred revenues for mileage credits sold to others participating
in the program was approximately $1.1 billion and $976 million, representing
14.9 percent and 14.0 percent of AMR's total current liabilities, at December
31, 2001 and 2000, respectively.
The estimated number of free travel awards used for travel on American
and American Eagle (excluding TWA) was 2.7 million in 2001, 2.8 million in 2000
and 2.7 million in 1999, representing approximately 7.4 percent of total
passengers boarded in 2001, 7 percent in 2000 and 8 percent in 1999 (excluding
TWA). The Company believes displacement of revenue passengers is minimal given
the Company's load factors, its ability to manage frequent flyer seat inventory,
and the relatively low ratio of free award usage to total passengers boarded.
OTHER MATTERS
SEASONALITY AND OTHER FACTORS The Company's results of operations for any
interim period are not necessarily indicative of those for the entire year,
since the air transportation business is subject to seasonal fluctuations.
Higher demand for air travel has traditionally resulted in more favorable
operating results for the second and third quarters of the year than for the
first and fourth quarters.
The results of operations in the air transportation business have also
significantly fluctuated in the past in response to general economic conditions.
In addition, fare initiatives, fluctuations in fuel prices, labor actions and
other factors could impact this seasonal pattern. Unaudited quarterly financial
data for the two-year period ended December 31, 2001 is included in Note 16 to
the consolidated financial statements.
No material part of the business of AMR and its subsidiaries is dependent
upon a single customer or very few customers. Consequently, the loss of the
Company's largest few customers would not have a materially adverse effect upon
the Company.
11
INSURANCE The Company carries insurance for public liability, passenger
liability, property damage and all-risk coverage for damage to its aircraft, in
amounts which, in the opinion of management, are adequate.
As a result of the September 11, 2001 events, aviation insurers have
significantly reduced the maximum amount of insurance coverage available to
commercial air carriers for liability to persons other than employees or
passengers for claims resulting from acts of terrorism, war or similar events
(war-risk coverage). At the same time, they significantly increased the premiums
for such coverage as well as for aviation insurance in general.
Pursuant to authority granted in the Act, the Government has supplemented
the commercial war-risk insurance until March 20, 2002 with a third party
liability policy to cover losses to persons other than employees or passengers
for renewable 60-day periods. In the event the insurance carriers reduce further
the amount of insurance coverage available or the Government fails to renew
war-risk insurance, the Company's operations would be adversely impacted.
OTHER GOVERNMENT MATTERS In time of war or during an unlimited national
emergency or civil defense emergency, American and other major air carriers may
be required to provide airlift services to the Military Airlift Command under
the Civil Reserve Air Fleet program. In the event the Company has to provide a
substantial amount of such services, its operations could be adversely impacted.
12
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
Owned and leased aircraft operated by the Company at December 31, 2001
included:
Average
Seating Capital Operating Age
Equipment Type Capacity Owned Leased Leased Total (Years)
---------------------------------- ---------------- ---------- ---------- ---------- ---------- ----------
AMERICAN AIRLINES AIRCRAFT
Airbus A300-600R 178/250/251 10 -- 24 34 12
Boeing 727-200(1) 138 33 -- -- 33 23
Boeing 737-800 134 67 -- 10 77 1
Boeing 757-200 176 75 11 31 117 8
Boeing 767-200 160 8 -- -- 8 19
Boeing 767-200 Extended Range 158 9 12 -- 21 16
Boeing 767-300 Extended Range 190/228 32 7 10 49 9
Boeing 777-200 Extended Range 223/245/252 40 -- -- 40 2
Fokker 100 87 67 3 4 74 9
McDonnell Douglas MD-80 129 130 20 109 259 14
---------- ---------- ---------- ---------- ----------
Total 471 53 188 712 10
========== ========== ========== ========== ==========
TWA LLC AIRCRAFT
Boeing 717-200(2) 100 -- -- 30 30 1
Boeing 757-200 168 -- -- 27 27 4
Boeing 767-300 Extended Range 215/233 -- -- 9 9 7
McDonnell Douglas MD-80 131 19 23 61 103 9
---------- ---------- ---------- ---------- ----------
Total 19 23 127 169 7
========== ========== ========== ========== ==========
AMR EAGLE AIRCRAFT
ATR 42 46 20 -- 10 30 11
Bombardier CRJ-700 70 1 -- -- 1 --
Embraer 135 37 40 -- -- 40 2
Embraer 140 44 15 -- -- 15 --
Embraer 145 50 56 -- -- 56 3
Super ATR 64/66 40 -- 3 43 7
Saab 340B 34 17 49 -- 66 10
Saab 340B Plus 34 -- -- 25 25 6
---------- ---------- ---------- ---------- ----------
Total 189 49 38 276 7
========== ========== ========== ========== ==========
(1) The Boeing 727-200 fleet will be removed from service by May 2002.
(2) The Boeing 717-200 fleet will be removed from service by June 2002.
In addition, the following owned and leased aircraft were not operated by
the Company as of December 31, 2001: 15 owned and five operating leased Boeing
727-200s, 16 operating leased McDonnell Douglas DC-9s, 10 owned McDonnell
Douglas DC-10-10s, six operating leased and one owned McDonnell Douglas MD-80s,
three owned McDonnell Douglas MD-11s, two owned McDonnell Douglas DC-10-30s, and
five owned, six capital leased and three operating leased Saab 340Bs.
13
Of the non-operating aircraft discussed above, the Company has agreed to
sell its McDonnell Douglas MD-11s to FedEx Corporation (FedEx). The Company
expects to deliver these aircraft to FedEx by the third quarter of 2002. The 10
McDonnell Douglas DC-10-10 aircraft are currently being leased to Hawaiian
Airlines, Inc. (Hawaiian). Upon termination of the lease agreement with
Hawaiian, the Company has agreed to sell these aircraft to FedEx, with
deliveries beginning in early 2002. The one owned McDonnell Douglas MD-80
aircraft was returned to a lessor in early 2002 in lieu of a leased American
Airlines aircraft. The Company is actively marketing its remaining non-operating
aircraft and does not anticipate bringing these aircraft back into its
operations.
For information concerning the estimated useful lives and residual values
for owned aircraft, lease terms for leased aircraft and amortization relating to
aircraft under capital leases, see Notes 1 and 6 to the consolidated financial
statements.
Lease expirations for the leased aircraft included in the preceding table
as of December 31, 2001, were:
2007
and
Equipment Type 2002 2003 2004 2005 2006 Thereafter
----------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
AMERICAN AIRLINES AIRCRAFT
Airbus A300-600R -- -- -- -- -- 24
Boeing 737-800 -- -- -- -- -- 10
Boeing 757-200 2 -- 3 -- -- 37
Boeing 767-200 Extended Range -- -- -- -- -- 12
Boeing 767-300 Extended Range -- -- 1 4 2 10
Fokker 100 3 -- -- -- -- 4
McDonnell Douglas MD-80 1 2 -- 23 -- 103
---------- ---------- ---------- ---------- ---------- -----------
6 2 4 27 2 200
========== ========== ========== ========== ========== ===========
TWA LLC AIRCRAFT
Boeing 717-200 30 -- -- -- -- --
Boeing 757-200 -- -- 11 -- -- 16
Boeing 767-300 Extended Range 2 7 -- -- -- --
McDonnell Douglas MD-80 -- -- 5 1 -- 78
---------- ---------- ---------- ---------- ---------- -----------
32 7 16 1 -- 94
========== ========== ========== ========== ========== ===========
AMR EAGLE AIRCRAFT
ATR 42 3 7 -- -- -- --
Super ATR 1 -- 2 -- -- --
Saab 340B -- -- -- 24 22 3
Saab 340B Plus -- -- -- -- 8 17
---------- ---------- ---------- ---------- ---------- -----------
4 7 2 24 30 20
========== ========== ========== ========== ========== ===========
Substantially all of the Company's aircraft leases include an option to
purchase the aircraft or to extend the lease term, or both, with the purchase
price or renewal rental to be based essentially on the market value of the
aircraft at the end of the term of the lease or at a predetermined fixed amount.
14
GROUND PROPERTIES
The Company leases, or has built as leasehold improvements on leased
property, most of its airport and terminal facilities; certain corporate office,
maintenance and training facilities in Fort Worth, Texas; its principal overhaul
and maintenance bases at Tulsa International Airport (Tulsa, Oklahoma), Kansas
City International Airport (Kansas City, Missouri) and Alliance Airport (Fort
Worth, Texas); its regional reservation offices; and local ticket and
administration offices throughout the system. American has entered into
agreements with the Tulsa Municipal Airport Trust; the Alliance Airport
Authority, Fort Worth, Texas; and the Dallas/Fort Worth, Chicago O'Hare,
Raleigh/Durham, Nashville, San Juan, New York, and Los Angeles airport
authorities to provide funds for constructing, improving and modifying
facilities and acquiring equipment which are or will be leased to the Company.
The Company also utilizes public airports for its flight operations under lease
or use arrangements with the municipalities or governmental agencies owning or
controlling them and leases certain other ground equipment for use at its
facilities. During 1999, the Company began construction of an approximate $1.3
billion terminal facility at New York's John F. Kennedy International Airport,
which the Company expects to fund primarily through future tax-exempt financing.
For information concerning the estimated lives and residual values for
owned ground properties, lease terms and amortization relating to ground
properties under capital leases, and acquisitions of ground properties, see
Notes 1 and 6 to the consolidated financial statements.
15
ITEM 3. LEGAL PROCEEDINGS
On July 26, 1999, a class action lawsuit was filed, and in November 1999
an amended complaint was filed, against AMR Corporation, American Airlines,
Inc., AMR Eagle Holding Corporation, Airlines Reporting Corporation, and the
Sabre Group Holdings, Inc. in the United States District Court for the Central
District of California, Western Division (Westways World Travel, Inc. v. AMR
Corp., et al.). The lawsuit alleges that requiring travel agencies to pay debit
memos to American for violations of American's fare rules (by customers of the
agencies) (1) breaches the Agent Reporting Agreement between American and
American Eagle and plaintiffs, (2) constitutes unjust enrichment, and (3)
violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
The as yet uncertified class includes all travel agencies who have been or will
be required to pay monies to American for debit memos for fare rules violations
from July 26, 1995 to the present. Plaintiffs seek to enjoin American from
enforcing the pricing rules in question and to recover the amounts paid for
debit memos, plus treble damages, attorneys' fees, and costs. The Company
intends to vigorously defend the lawsuit. Although the Company believes that the
litigation is without merit, adverse court decisions could impose restrictions
on the Company's ability to respond to competitors, and the Company's business
may be adversely impacted.
On May 13, 1999, the United States (through the Antitrust Division of the
Department of Justice) sued AMR Corporation, American Airlines, Inc., and AMR
Eagle Holding Corporation in federal court in Wichita, Kansas. The lawsuit
alleges that American unlawfully monopolized or attempted to monopolize airline
passenger service to and from Dallas/Fort Worth International Airport (DFW) by
increasing service when new competitors began flying to DFW, and by matching
these new competitors' fares. The Department of Justice seeks to enjoin American
from engaging in the alleged improper conduct and to impose restraints on
American to remedy the alleged effects of its past conduct. On April 27, 2001,
the U.S. District Court for the District of Kansas granted American's motion for
summary judgment. On June 26, 2001, the U.S. Department of Justice appealed the
granting of American's motion for summary judgment. The parties are currently
submitting briefs to the 10th Circuit Court of Appeals. No date has been set for
oral argument. The Company intends to defend the lawsuit vigorously. A final
adverse court decision imposing restrictions on the Company's ability to respond
to competitors would have an adverse impact on the Company.
Between May 14, 1999 and June 7, 1999, seven class action lawsuits were
filed against AMR Corporation, American Airlines, Inc., and AMR Eagle Holding
Corporation in the United States District Court in Wichita, Kansas seeking
treble damages under federal and state antitrust laws, as well as injunctive
relief and attorneys' fees (King v. AMR Corp., et al.; Smith v. AMR Corp., et
al.; Team Electric v. AMR Corp., et al.; Warren v. AMR Corp., et al.; Whittier
v. AMR Corp., et al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp.,
et al.). Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to and from DFW
by increasing service when new competitors began flying to DFW, and by matching
these new competitors' fares. Two of the suits (Smith and Wright) also allege
that American unlawfully monopolized or attempted to monopolize airline
passenger service to and from DFW by offering discounted fares to corporate
purchasers, by offering a frequent flyer program, by imposing certain conditions
on the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several classes of
consumers, the broadest of which is all persons who purchased tickets for air
travel on American into or out of DFW since 1995 to the present. On November 10,
1999, the District Court stayed all of these actions pending developments in the
case brought by the Department of Justice. As a result, to date no class has
been certified. The Company intends to defend these lawsuits vigorously. One or
more final adverse court decisions imposing restrictions on the Company's
ability to respond to competitors or awarding substantial money damages would
have an adverse impact on the Company.
16
On January 30, 2002, the named plaintiff in Hall v. United Airlines, et
al., No. 7:00 CV 123-BR(1), pending in the United States District Court for the
Eastern District of North Carolina, filed an amended complaint alleging that
between 1997 and the present, American and the other defendant airlines
conspired to reduce commissions paid to U.S.-based travel agents in violation of
Section 1 of the Sherman Act. The named plaintiff seeks to certify a nationwide
class of travel agents, but no class has yet been certified. American is
vigorously defending the lawsuit. A final adverse court decision awarding
substantial money damages would have an adverse impact on the Company.
Miami-Dade County is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and funding
the remediation costs through landing fees and various cost recovery methods.
American Airlines, Inc. and AMR Eagle have been named as potentially responsible
parties (PRPs) for the contamination at MIA. During the second quarter of 2001,
the County filed a lawsuit against 17 defendants, including American Airlines,
Inc., in an attempt to recover its past and future cleanup costs (Miami-Dade
County, Florida v. Advance Cargo Services, Inc., et al. in the Florida Circuit
Court). In addition to the 17 defendants named in the lawsuit, 243 other
agencies and companies were also named as PRPs and contributors to the
contamination. American's and AMR Eagle's portion of the cleanup costs cannot be
reasonably estimated due to various factors, including the unknown extent of the
remedial actions that may be required, the proportion of the cost that will
ultimately be recovered from the responsible parties, and uncertainties
regarding the environmental agencies that will ultimately supervise the remedial
activities and the nature of that supervision. The Company is vigorously
defending the lawsuit.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information relates to the executive officers of AMR as of
December 31, 2001.
Donald J. Carty Mr. Carty was elected Chairman, President and Chief Executive
Officer of AMR and American in May 1998. He has been
President of American since March 1995. Prior to that, he
served as Executive Vice President of AMR from October 1989
to March 1995. Except for two years service as President and
CEO of Canadian Pacific Air between March 1985 and March
1987, he has been with the Company in various finance and
planning positions since 1978. Age 55.
Robert W. Baker Mr. Baker was elected Vice Chairman of AMR and American in
January 2000. He served as Executive Vice President -
Operations of American from 1989 to January 2000 and a Senior
Vice President of American from 1985 to September 1989. Prior
to that, he served in various management positions at
American since 1968. Age 57.
Gerard J. Arpey Mr. Arpey was elected Executive Vice President - Operations
of American in January 2000. He is also an Executive Vice
President of AMR. Mr. Arpey served as Chief Financial Officer
of AMR from 1995 through 2000 and Senior Vice President of
American from 1992 to January 2000. Prior to that, he served
in various management positions at American since 1982. Age
43.
Daniel P. Garton Mr. Garton was elected Executive Vice President - Customer
Service of American in January 2000. He is also an Executive
Vice President of AMR. He served as Senior Vice President -
Customer Service of American from 1998 to January 2000. Prior
to that, he served as President of AMR Eagle from 1995 to
1998. Except for two years service as Senior Vice President
and CFO of Continental Airlines between 1993 and 1995, he has
been with the Company in various management positions since
1984. Age 44.
Michael W. Gunn Mr. Gunn was elected Executive Vice President - Marketing and
Planning of American in January 2000. He is also an Executive
Vice President of AMR. He served as Senior Vice President -
Marketing from 1985 to January 2000. Prior to that, he has
served in various management positions at American since
1970. Age 56.
Thomas W. Horton Mr. Horton was elected Senior Vice President and Chief
Financial Officer of AMR and American in January 2000. Prior
to that, he served as a Vice President of American from 1994
to January 2000 and has served in various management
positions of American since 1985. Age 40.
Anne H. McNamara Ms. McNamara was elected Senior Vice President and General
Counsel in 1988. She served as Vice President - Personnel
Resources of American during 1988. She was elected Corporate
Secretary of AMR in 1982 and of American in 1979 and held
those positions through 1987. Prior to that, she served as an
attorney since 1976. Age 54.
Charles D. MarLett Mr. MarLett was elected Corporate Secretary in January 1988.
He joined American as an attorney in June 1984. Age 47.
18
EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
There are no family relationships among the executive officers of the
Company named on the preceding page.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation of the
ability and integrity of any director or executive officer during the past five
years.
19
PART II
--------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
(symbol AMR). The approximate number of record holders of the Company's common
stock at February 20, 2002 was 13,700.
The range of closing market prices for AMR's common stock on the New York
Stock Exchange was:
2001 2000
--------------------------------------- -------------------------------------
High Low High Low
----------------- ----------------- ---------------- ----------------
QUARTER ENDED
March 31 $ 43 3/4 $ 31 1/16 $ 67 3/8 $ 30
June 30 39 3/8 33 1/4 37 7/8 26 7/16
September 30 37 15/16 17 7/8 34 11/16 26 1/8
December 31 23 5/16 16 1/2 39 3/16 27 15/16
Effective after the close of business on March 15, 2000, AMR distributed
0.722652 shares of Sabre Class A common stock for each share of AMR stock owned
by AMR's shareholders. As a result of the dividend, AMR's stock price was
adjusted from $60 9/16 to $25 9/16 by the New York Stock Exchange after the
market close on March 15, 2000 to exclude the value of Sabre. The pre-March 15,
2000 stock prices in the above table have not been adjusted to give effect to
this distribution.
No cash dividends on common stock were declared for any period during
2001 or 2000. Payment of dividends is subject to various restrictions described
in Note 7 to the consolidated financial statements.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(in millions, except per share amounts)
--------------------------------------------------------------------------------
2001(1,2) 2000 1999 1998(3) 1997(3)
------------ ------------ ------------ ------------ ------------
Total operating revenues $ 18,963 $ 19,703 $ 17,730 $ 17,516 $ 16,957
Operating income (loss) (2,470) 1,381 1,156 1,988 1,595
Income (loss) from continuing
operations before extraordinary
loss (1,762) 779 656 1,114 809
Net earnings (loss) (1,762) 813 985 1,314 985
Earnings (loss) per share from
continuing operations before
extraordinary loss:(4)
Basic (11.43) 5.20 4.30 6.60 4.54
Diluted (11.43) 4.81 4.17 6.38 4.43
Net earnings (loss) per share:(4)
Basic (11.43) 5.43 6.46 7.78 5.52
Diluted (11.43) 5.03 6.26 7.52 5.39
Total assets 32,841 26,213 24,374 21,455 20,287
Long-term debt, less current
maturities 8,310 4,151 4,078 2,436 2,248
Obligations under capital leases,
less current obligations
1,524 1,323 1,611 1,764 1,629
Obligation for postretirement
benefits 2,538 1,706 1,669 1,598 1,527
(1) On April 9, 2001, American purchased substantially all of the assets and
assumed certain liabilities of Trans World Airlines, Inc. (TWA).
Accordingly, the 2001 financial information above includes the operating
results of TWA since the date of acquisition. See a further discussion of
the TWA acquisition in Note 3 to the consolidated financial statements.
(2) Includes the second quarter asset impairment charge, the impact of the
September 11, 2001 terrorist attacks and $856 million of U.S. Government
grant. For a further discussion of these items, see Note 2 to the
consolidated financial statements.
(3) Restated to reflect discontinued operations.
(4) The earnings per share amounts reflect the stock split on June 9, 1998.
No cash dividends were declared on common shares during any of the
periods above.
Information on the comparability of results is included in Management's
Discussion and Analysis and the notes to the consolidated financial statements.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AMR Corporation (AMR or the Company) was incorporated in October 1982.
AMR's principal subsidiary, American Airlines, Inc., was founded in 1934. On
April 9, 2001, American Airlines, Inc. purchased substantially all of the
assets and assumed certain liabilities of Trans World Airlines, Inc. (TWA).
Accordingly, the operating results of TWA since the date of acquisition have
been included in the accompanying consolidated financial statements for the year
ended December 31, 2001 (see Note 3 to the consolidated financial statements).
American Airlines, Inc., including TWA (collectively, American), is the largest
scheduled passenger airline in the world. AMR's operations fall almost entirely
in the airline industry.
RESULTS OF OPERATIONS
AMR's net loss in 2001 was $1.8 billion, or $11.43 loss per share. AMR's
net earnings in 2000 were $813 million, or $5.43 per share ($5.03 diluted). On
September 11, 2001, two American Airlines aircraft were hijacked and destroyed
in terrorist attacks on The World Trade Center in New York City and the Pentagon
in northern Virginia. On the same day, two United Air Lines aircraft were also
hijacked and used in terrorist attacks. In response to the terrorist attacks,
the Federal Aviation Administration (FAA) issued a federal ground stop order on
September 11, 2001, prohibiting all flights to, from, and within the United
States. Airports did not reopen until September 13, 2001 (except for Washington
Reagan Airport, which was partially reopened on October 4, 2001). The Company
was able to operate only a portion of its scheduled flights for several days
thereafter. When flights were permitted to resume, passenger traffic and yields
on the Company's flights were significantly lower than prior to the attacks. As
a result, the Company reduced its operating schedule to approximately 80 percent
of the schedule it flew prior to September 11, 2001. Somewhat offsetting the
impact of the September 11 events, the Company recorded $856 million in
reimbursement from the U.S. Government under the Air Transportation Safety and
System Stabilization Act (the Act) (see Note 2 to the consolidated financial
statements).
REVENUES
2001 COMPARED TO 2000 The Company's 2001 revenues, yield, revenue passenger
miles (RPMs) and available seat miles (ASMs) were severely impacted by the
September 11, 2001 terrorist attacks, the Company's reduced operating schedule,
a worsening of the U.S. economy that had already been dampening the demand for
travel both domestically and internationally prior to the September 11, 2001
events, business travel declines as a result of the September 11, 2001 attacks,
and increased fare sale activity occurring subsequent to the September 11
attacks to encourage passengers to resume flying. The Company's revenues
decreased approximately $740 million, or 3.8 percent, versus 2000. However,
excluding TWA's revenues for the period April 10, 2001 through December 31,
2001, the Company's revenues would have decreased approximately $2.6 billion
versus 2000.
For comparability purposes, the following discussion does not combine
American's and TWA's results of operations or related statistics for 2001.
American's passenger revenues decreased by 14 percent, or $2.3 billion. In 2001,
American derived approximately 68 percent of its passenger revenues from
domestic operations and approximately 32 percent from international operations.
American's domestic revenue per available seat mile (RASM) decreased 11.3
percent, to 9.28 cents, on a capacity decrease of 5 percent, or 104 billion
ASMs. International RASM decreased to 9.07 cents, or 5.2 percent, on a capacity
decrease of 4.9 percent. The decrease in international RASM was led by an 11.8
percent and 10.8 percent decrease in Pacific and European RASM, respectively,
slightly offset by a 0.9 percent increase in Latin American RASM. The decrease
in international capacity was driven by a 6.5 percent and 4.7 percent reduction
in Latin American and European ASMs, respectively, partially offset by an
increase in Pacific capacity of 2.8 percent.
TWA's passenger revenues were approximately $1.7 billion for the period
April 10, 2001 through December 31, 2001. TWA's RASM was 7.74 cents on capacity
of 21.7 billion ASMs.
22
AMR Eagle's passenger revenues decreased $74 million, or 5.1 percent. AMR
Eagle's traffic remained flat compared to 2000, at 3.7 billion RPMs, while
capacity increased to 6.5 billion ASMs, or 3.4 percent. Similar to American, the
decrease in AMR Eagle's revenues was due primarily to the September 11, 2001
terrorist attacks and a worsening of the U.S. economy that had already been
dampening the demand for air travel prior to that date.
Cargo revenues decreased 8.2 percent, or $59 million, for the same
reasons as noted above.
2000 COMPARED TO 1999 The Company's revenues increased approximately $2.0
billion, or 11.1 percent, versus 1999. American's passenger revenues increased
by 11.3 percent, or $1.7 billion. The increase in revenues was due primarily to
a strong U.S. economy, which led to strong demand for air travel both
domestically and internationally, a favorable pricing climate, the impact of a
domestic fuel surcharge implemented in January 2000 and increased in September
2000, a labor disruption at one of the Company's competitors which positively
impacted the Company's revenues by approximately $80 to $100 million, and a
schedule disruption which negatively impacted the Company's operations in 1999.
In 2000, American derived approximately 70 percent of its passenger revenues
from domestic operations and approximately 30 percent from international
operations.
American's domestic RASM increased 12.4 percent, to 10.42 cents, on a
capacity decrease of 1.6 percent, or 109.5 billion ASMs. The decrease in
domestic capacity was due primarily to the Company's More Room Throughout Coach
program. International RASM increased to 9.64 cents, or 10.7 percent, on a
capacity increase of 3.2 percent. The increase in international RASM was led by
a 16.5 percent, 13.4 percent and 7.8 percent increase in Pacific, European and
Latin American RASM, respectively. The increase in international capacity was
driven by a 6.6 percent, 2.7 percent and 0.5 percent increase in European,
Pacific and Latin American ASMs, respectively.
AMR Eagle's passenger revenues increased $158 million, or 12.2 percent.
AMR Eagle's traffic increased to 3.7 billion RPMs, up 10.7 percent, while
capacity increased to 6.3 billion ASMs, or 10.9 percent. The increase in
revenues was due primarily to growth in AMR Eagle capacity aided by a strong
U.S. economy, which led to strong demand for air travel, and a favorable pricing
environment.
Cargo revenues increased 12.1 percent, or $78 million, due primarily to a
fuel surcharge implemented in February 2000 and increased in October 2000, and
the increase in cargo capacity from the addition of 16 Boeing 777-200ER aircraft
in 2000.
OPERATING EXPENSES
2001 COMPARED TO 2000 The Company's operating expenses increased 17 percent, or
approximately $3.1 billion. However, excluding TWA's expenses for the period
April 10, 2001 through December 31, 2001, the Company's expenses would have
increased approximately $888 million versus 2000. In addition to the specific
explanations provided below, the significant decline in passenger traffic
resulting from the terrorist acts of September 11, 2001 and resulting reduced
operating schedule caused a favorable impact on certain passenger-related
operating expenses, including aircraft fuel, other rentals and landing fees,
commissions to agents and food service. American's cost per ASM increased 6.3
percent to 11.14 cents, excluding TWA and the impact of special charges - net of
U.S. Government grant. The increase in American's cost per ASM was driven
partially by a reduction in ASMs due to the Company's More Room Throughout Coach
program. Removing the impact of this program, American's cost per ASM grew
approximately 3.3 percent, excluding TWA and the impact of special charges - net
of U.S. Government grant. TWA's cost per ASM, excluding the impact of special
charges - net of U.S. Government grant, was 10.58 cents. Wages, salaries and
benefits increased 18.4 percent, or $1.3 billion, and included approximately
$920 million related to the addition of TWA. The remaining increase of
approximately $329 million related primarily to an increase in the average
number of equivalent employees and contractual wage rate and seniority increases
that are built into the Company's labor contracts. During 2001, the Company
recorded approximately $300 million in additional wages, salaries and benefits
related primarily to the Company's new contracts with its flight attendants and
Transport Workers Union work groups. This was mostly offset by a $328 million
decrease in the provision for profit-sharing as compared to 2000. Aircraft fuel
expense increased 15.8 percent, or $393 million, and included approximately $322
million related to the addition of TWA. The remaining increase in aircraft fuel
expense was due to a 4.2 percent increase in the Company's average price per
gallon, partially offset by a 3.7 percent decrease in the Company's fuel
consumption, excluding TWA. Depreciation and amortization expense increased 16.8
percent, or $202 million, due primarily to the addition of
23
new aircraft and an increase of approximately $88 million related to TWA. Other
rentals and landing fees increased $198 million, or 19.8 percent, and included
approximately $130 million related to the addition of TWA. The remaining
increase of $68 million was due primarily to higher facilities rent and landing
fees across the Company's system. Commissions to agents decreased 19.5 percent,
or $202 million, and included approximately $59 million related to TWA. The
decrease in commissions to agents was due primarily to a 13.2 percent decrease
in passenger revenues, excluding TWA, and the benefit from commission structure
changes implemented in 2000. Aircraft rentals increased $222 million, or 36.6
percent, due primarily to the addition of TWA aircraft. Other operating expenses
increased 11.1 percent, or $368 million, and included approximately $358 million
related to TWA. Special charges - net of U.S. Government grant included: (i) a
$685 million asset impairment charge recorded in the second quarter of 2001
related to the write-down of the carrying value of the Company's Fokker 100,
Saab 340 and ATR-42 aircraft and related rotables, (ii) charges resulting from
the September 11, 2001 terrorist events, including approximately $552 million
related to aircraft charges, $115 million in facility exit costs, $71 million in
employee charges and $43 million in other charges, and (iii) an $856 million
benefit recognized for the reimbursement from the U.S. Government under the Act.
See a further discussion of special charges - net of U.S. Government grant in
Note 2 to the consolidated financial statements.
2000 COMPARED TO 1999 The Company's operating expenses increased 10.5 percent,
or approximately $1.7 billion. American's cost per ASM increased by 10.3 percent
to 10.48 cents, partially driven by a reduction in ASMs due to the Company's
More Room Throughout Coach program. Removing the impact of this program,
American's cost per ASM grew approximately 6.9 percent. Wages, salaries and
benefits increased $663 million, or 10.8 percent, primarily due to an increase
in the average number of equivalent employees and contractual wage rate and
seniority increases that are built into the Company's labor contracts, an
increase of approximately $93 million in the provision for profit-sharing, and a
charge of approximately $56 million for the Company's employee home computer
program. Aircraft fuel expense increased $799 million, or 47.1 percent, due to
an increase of 42.0 percent in the Company's average price per gallon and a 3.7
percent increase in the Company's fuel consumption. The increase in fuel expense
is net of gains of approximately $545 million recognized during 2000 related to
the Company's fuel hedging program. Depreciation and amortization expense
increased $110 million, or 10.1 percent, due primarily to the addition of new
aircraft, many of which replaced older aircraft. Maintenance, materials and
repairs expense increased $92 million, or 9.2 percent, due primarily to an
increase in airframe and engine maintenance volumes at the Company's maintenance
bases and an approximate $17 million one-time credit the Company received in
1999. Commissions to agents decreased 10.8 percent, or $125 million, despite an
11.4 percent increase in passenger revenues, due primarily to commission
structure changes implemented in October 1999 and January 2000, and a decrease
in the percentage of commissionable transactions.
OTHER INCOME (EXPENSE)
Other income (expense) consists of interest income and expense, interest
capitalized and miscellaneous - net.
2001 COMPARED TO 2000 Interest income decreased $44 million, or 28.6 percent,
resulting from lower investment balances throughout most of 2001. Interest
expense increased $71 million, or 15.2 percent, resulting primarily from the
increase in long-term debt of approximately $4.2 billion. Miscellaneous - net
decreased $70 million due primarily to 2001 including a $45 million gain from
the settlement of a legal matter related to the Company's 1999 labor disruption,
offset by the write-down of certain investments held by the Company. This
compares to 2000 including a $57 million gain on the sale of the Company's
warrants to purchase 5.5 million shares of priceline.com Incorporated
(priceline) common stock and a gain of approximately $41 million from the
recovery of start-up expenses from the Canadian Airlines International Limited
(Canadian) services agreement.
24
2000 COMPARED TO 1999 Interest income increased $59 million, or 62.1 percent,
due primarily to higher investment balances. Interest expense increased $74
million, or 18.8 percent, resulting primarily from financing new aircraft
deliveries. Interest capitalized increased 28 percent, or $33 million, due to an
increase in purchase deposits for flight equipment. Miscellaneous - net
increased $38 million due primarily to a $57 million gain on the sale of the
Company's warrants to purchase 5.5 million shares of priceline common stock and
a gain of approximately $41 million from the recovery of start-up expenses from
the Canadian services agreement. During 1999, the Company recorded a gain of
approximately $75 million from the sale of a portion of American's interest in
Equant N.V. and a gain of approximately $40 million related to the sale of the
Company's investment in the preferred stock of Canadian. These gains were
partially offset by the provision for the settlement of litigation items and the
write-down of certain investments held by the Company during 1999.
OPERATING STATISTICS
The following table provides statistical information for American (excluding
TWA) and AMR Eagle for the years ended December 31, 2001, 2000 and 1999.
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
AMERICAN AIRLINES
Revenue passenger miles (millions) 106,224 116,594 112,067
Available seat miles (millions) 153,035 161,030 161,211
Cargo ton miles (millions) 2,058 2,280 2,068
Passenger load factor 69.4% 72.4% 69.5%
Breakeven load factor (*) 78.1% 65.9% 63.8%
Passenger revenue yield per passenger mile (cents) 13.28 14.06 13.14
Passenger revenue per available seat mile (cents) 9.22 10.18 9.13
Cargo revenue yield per ton mile (cents) 30.24 31.31 30.70
Operating expenses per available seat mile (cents) (*) 11.14 10.48 9.50
Operating aircraft at year-end 712 717 697
AMR EAGLE
Revenue passenger miles (millions) 3,725 3,731 3,371
Available seat miles (millions) 6,471 6,256 5,640
Passenger load factor 57.6% 59.6% 59.8%
Operating aircraft at year-end 276 261 268
(*) Excludes the impact of special charges - net of U.S. Government grant
LIQUIDITY AND CAPITAL RESOURCES
The impact of the terrorist attacks of September 11, 2001 and their
aftermath on the Company and the sufficiency of its financial resources to
absorb that impact will depend on a number of factors, including: (i) the
magnitude and duration of the adverse impact of the terrorist attacks on the
economy in general, and the airline industry in particular; (ii) the Company's
ability to reduce its operating costs and conserve its financial resources,
taking into account the increased costs it will incur as a consequence of the
attacks, including those referred to below; (iii) the higher costs associated
with new airline security directives, including the impact of the Aviation and
Transportation Security Act, and any other increased regulation of air carriers;
(iv) the significantly higher costs of aircraft insurance coverage for future
claims caused by acts of war, terrorism, sabotage, hijacking and other similar
perils, and the extent to which such insurance will continue to be available;
(v) the Company's ability to raise additional financing and the cost of such
financing; (vi) the price and availability of jet fuel, and the availability to
the Company of fuel hedges in light of current industry conditions; and (vii)
the extent of the benefits received by the Company under the Act, taking into
account any challenges to and interpretations or amendments of the Act or
regulations issued pursuant thereto.
25
In response to the September 11, 2001 terrorist attacks, the Company
initiated the following measures: reduced capacity by approximately 20 percent,
grounded aircraft and deferred certain aircraft deliveries to future years,
significantly reduced capital spending, closed facilities, reduced its workforce
(see Note 2 to the consolidated financial statements for additional information)
and implemented numerous other cost reduction initiatives.
Operating activities provided net cash of $511 million in 2001, $3.1
billion in 2000 and $2.3 billion in 1999. The $2.6 billion decrease from 2000 to
2001 resulted primarily from a decrease in income.
On April 9, 2001, American purchased substantially all of the assets and
assumed certain liabilities of TWA for approximately $742 million, which was
funded from the Company's existing cash and short-term investments.
Capital expenditures in 2001 totaled $3.6 billion, compared to $3.7
billion in 2000 and $3.5 billion in 1999. In 2001, American took delivery of 26
Boeing 737-800s, 13 Boeing 777-200ERs and 16 Boeing 757-200s. AMR Eagle took
delivery of 15 Embraer 140s, seven Embraer 135s, six Embraer 145s and one
Bombardier CRJ-700 aircraft. These expenditures were financed primarily through
secured mortgage and debt agreements. Ten Boeing 737-800 aircraft were financed
through sale-leaseback transactions, resulting in cash of approximately $352
million being received by the Company. Proceeds from the sale of equipment and
property and other investments of $401 million included the proceeds received
upon the delivery of five McDonnell Douglas MD-11 aircraft to FedEx.
During the fourth quarter of 2001, the Company reached an agreement with
Boeing that included a combination of aircraft delivery deferrals, substitutions
and limited additional aircraft orders. As a direct result of the agreement with
Boeing, the Company's 2002 and 2003 aircraft commitment amounts have been
reduced, in the aggregate, by approximately $700 million. Following this
agreement, at December 31, 2001, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 14 Boeing 777-200ERs, nine Boeing
767-300ERs, seven Boeing 757-200s, 124 Embraer regional jets and 24 Bombardier
CRJ-700s. Deliveries of all aircraft extend through 2008. Future payments for
all aircraft, including the estimated amounts for price escalation, will
approximate $1.3 billion in 2002, $1.7 billion in 2003, $1.2 billion in 2004 and
an aggregate of approximately $1.9 billion in 2005 through 2008. These future
payments are net of approximately $470 million related to deposits made for 2002
aircraft deliveries - which have been deferred as part of the agreement with
Boeing - that will be applied to future aircraft deliveries. In addition to
these commitments for aircraft, the Company expects to spend approximately $500
million in 2002 for modifications to aircraft, renovations of - and additions to
- airport and off-airport facilities, and the acquisition of various other
equipment and assets.
During 2001, American issued approximately $2.6 billion of enhanced
equipment trust certificates which has been recorded as long-term debt. These
enhanced equipment trust certificates are secured by aircraft, bear interest at
6.8 percent to 9.1 percent, and mature in 2006 to 2019. Also during 2001, as
mentioned above, the Company entered into approximately $1.1 billion of various
debt agreements secured by aircraft. Effective rates on these agreements are
fixed or variable (based upon the London Interbank Offered Rate (LIBOR) plus a
spread), ranging up to approximately 4.5 percent, and mature over various
periods of time, ranging from 2007 to 2021.
American has an $834 million credit facility that expires December 15,
2005. At American's option, interest on this facility can be calculated on one
of several different bases. For most borrowings, American would anticipate
choosing a floating rate based upon LIBOR. During the fourth quarter of 2001,
American amended this credit facility to include, among other items, a revision
of its financial covenants, including modifications to its fixed charge covenant
and the addition of certain liquidity requirements. The next test of the fixed
charge covenant will occur on June 30, 2003 and will consider only the preceding
six-month period. American secured the facility with previously unencumbered
aircraft. In addition, the facility requires that American maintain at least
$1.5 billion of liquidity, as defined in the facility, which consists primarily
of cash and short-term investments, and 50 percent of the net book value of its
unencumbered aircraft. As of December 31, 2001, $814 million was outstanding
under this credit facility, at an interest rate of 5.09 percent. The interest
rate on the entire credit facility will be reset on March 18, 2002.
26
In addition, American has available a $1 billion credit facility that
expires September 30, 2002. Interest on this facility is based upon LIBOR plus a
spread. This facility is immediately available subject to the Company providing
specified aircraft collateral as security at the time of borrowing. At December
31, 2001, no borrowings were outstanding under this facility.
Following the September 11, 2001 events, Standard & Poor's and Moody's
downgraded the credit ratings of AMR and American, and the credit ratings of a
number of other major airlines. The long-term corporate credit ratings of AMR
and American were initially retained on review for possible downgrade by
Moody's, and following subsequent downgrades, were given a negative outlook. In
addition, the long-term corporate credit ratings of AMR and American remain on
Standard & Poor's CreditWatch with negative implications. Any additional
reductions in AMR's or American's credit ratings could result in increased
borrowing costs to the Company and might limit the availability of future
financing sources.
The following table summarizes the Company's obligations and commitments
to be paid in 2002 and 2003 (in millions):
Nature of commitment 2002 2003
------------------------------------------------------- ------------ ------------
Operating lease payments for aircraft and facility
obligations (*) $ 1,336 $ 1,276
Firm aircraft commitments 1,300 1,700
Long-term debt (**) 556 296
Capital lease obligations (**) 326 243
------------ ------------
Total obligations and commitments $ 3,518 $ 3,515
============ ============
(*) Certain special facility revenue bonds issued by municipalities - which
are supported by operating leases executed by American - are guaranteed
by AMR and American. See Note 6 to the consolidated financial statements
for additional information.
(**) Excludes related interest amounts
In addition to the Company's approximately $3.0 billion in cash and
short-term investments as of December 31, 2001, the Company has available a
variety of future financing sources, including, but not limited to: (i) the
receipt of the remainder of the U.S. Government grant, which approximates $128
million, (ii) additional secured aircraft debt (as of December 31, 2001, the
Company had approximately $4.4 billion net book value of unencumbered aircraft),
(iii) the availability of the Company's $1 billion credit facility, (iv)
sale-leaseback transactions of owned property, including aircraft and real
estate, (v) tax-exempt borrowings for airport facilities, (vi) securitization of
future operating receipts, (vii) unsecured borrowings, and (viii) borrowings
backed by federal loan guarantees as provided under the Act. No assurance can be
given that any of these financing sources will be available on terms acceptable
to the Company. However, the Company believes it will meet its financing needs
as discussed above.
AMR (principally American) historically operates with a working capital
deficit as do most other airline companies. The existence of such a deficit has
not in the past impaired the Company's ability to meet its obligations as they
become due and is not expected to do so in the future.
OTHER INFORMATION
ENVIRONMENTAL MATTERS Subsidiaries of AMR have been notified of potential
liability with regard to several environmental cleanup sites and certain airport
locations. At sites where remedial litigation has commenced, potential liability
is joint and several. AMR's alleged volumetric contributions at these sites are
minimal compared to others. AMR does not expect these matters, individually or
collectively, to have a material impact on its results of operations, financial
position or liquidity. Additional information is included in Note 5 to the
consolidated financial statements.
27
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the Company's
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The
Company believes its estimates and assumptions are reasonable; however, actual
results and the timing of the recognition of such amounts could differ from
those estimates. The Company has identified the following critical accounting
policies and estimates utilized by management in the preparation of the
Company's financial statements: accounting for long-lived assets, passenger
revenue, frequent flyer accounting, and pensions and other postretirement
benefits.
Accounting for Long-Lived Assets - The Company has approximately $21
billion of long-lived assets as of December 31, 2001, including
approximately $19 billion related to flight equipment and related fixed
assets. In addition to the original cost of these assets, their recorded
value is impacted by a number of policy elections made by the Company,
including estimated useful lives, salvage values and in 2001, impairment
charges. In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121), the Company records
impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of those assets. In this circumstance, the
impairment charge is determined based upon the amount the net book value
of the assets exceeds their fair market value. In making these
determinations, the Company utilizes certain assumptions, including, but
not limited to: (i) estimated fair market value of the assets, and (ii)
estimated future cash flows expected to be generated by these assets,
which are based on additional assumptions such as asset utilization,
length of service the asset will be used in the Company's operations and
estimated salvage values. During 2001, the Company determined its Fokker
100, Saab 340 and ATR 42 aircraft and related rotables were impaired
under SFAS 121 and recorded impairment charges of approximately $1.1
billion. In addition, during the fourth quarter of 2001, the Company
completed an impairment analysis of its long-lived assets, including
aircraft fleets, route acquisition costs, airport operating and gate
lease rights, and goodwill. The impairment analysis did not result in any
additional impairment charges. See Notes 1 and 2 to the consolidated
financial statements for additional information with respect to each of
the policies and assumptions utilized by the Company which affect the
recorded values of long-lived assets.
Passenger revenue - Passenger ticket sales are initially recorded as a
component of air traffic liability. Revenue derived from ticket sales is
recognized at the time service is provided. However, due to various
factors, including the complex pricing structure and interline agreements
throughout the industry, certain amounts are recognized in revenue using
estimates regarding both the timing of the revenue recognition and the
amount of revenue to be recognized. These estimates are generally based
upon the evaluation of historical trends, including the use of regression
analysis and other methods to model the outcome of future events based on
the Company's historical experience. Due to the uncertainties surrounding
the impact of the September 11, 2001 events on the Company's business
(see Note 2 to the consolidated financial statements) and the acquisition
of TWA in April 2001 (see Note 3 to the consolidated financial
statements), historical trends may not be representative of future
results.
Frequent flyer accounting - The Company utilizes a number of estimates in
accounting for its AAdvantage frequent flyer program. Additional
information regarding the Company's AAdvantage frequent flyer program is
included in Item 1 - Business (pages 10 and 11) and Note 1 to the
consolidated financial statements. Changes to the percentage of the
amount of revenue deferred, deferred recognition period, cost per mile
estimates or the minimum award level accrued could have a significant
impact on the Company's revenues or incremental cost accrual in the year
of the change as well as in future years. In addition, the Emerging
Issues Task Force of the Financial Accounting Standards Board is
currently reviewing the accounting for both multiple-deliverable revenue
arrangements and volume-based sales incentive offers, but has not yet
reached a consensus that would apply to programs such as the AAdvantage
program. The issuance of new accounting standards could have a
significant impact on the Company's frequent flyer liability in the year
of the change as well as in future years.
28
Pensions and other postretirement benefits - The Company's pension and
other postretirement benefit costs and liabilities are calculated
utilizing various actuarial assumptions and methodologies prescribed
under Statements of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions" and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Company utilizes
certain assumptions including, but not limited to, the selection of the:
(i) discount rate, (ii) expected return on plan assets, and (iii)
expected health care cost trend rate. The discount rate assumption is
based upon the review of high quality corporate bond rates and the change
in these rates during the year. The expected return on plan assets and
health care cost trend rate are based upon an evaluation of the Company's
historical trends and experience taking into account current and expected
market conditions. In addition, the Company's future pension and other
postretirement benefit costs and liabilities will be impacted by the
acquisition of TWA and the new labor agreements entered into during 2001.
See Note 11 to the consolidated financial statements for additional
information regarding the Company's pension and other postretirement
benefits.
NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 prohibits the use of the pooling-of-interests method for
business combinations initiated after June 30, 2001 and includes criteria for
the recognition of intangible assets separately from goodwill. SFAS 142 includes
the requirement to test goodwill and indefinite lived intangible assets for
impairment rather than amortize them. The Company will adopt SFAS 142 in the
first quarter of 2002, and currently estimates the impact to the Company's
results of operations of discontinuing the amortization of goodwill and route
authorities to be approximately $66 million on an annualized basis. The Company
is currently evaluating what additional impact these new accounting standards
may have on the Company's financial position or results of operations. However,
with the decline in the Company's market capitalization, in part due to the
terrorist attacks on September 11, 2001, the adoption of SFAS 142 may result in
the impairment of the Company's goodwill.
OUTLOOK
Due in part to the lack of predictability of future traffic, business mix
and yields, the Company continues to have difficulty in estimating the impact of
the events of September 11, 2001. However, given the magnitude of these
unprecedented events, the Company expects that the adverse impact to the Company
- and to the airline industry as a whole - will continue to be significant in
2002. Because of the high degree of uncertainty, the Company is not currently
able to provide an estimate for the full year 2002. However, the Company does
expect to incur a sizable loss in the first quarter, and will likely incur a
loss for 2002.
Capacity for American - which reflects TWA in the first quarter of 2002
but not in the first quarter of 2001 - is expected to increase two to three
percent in the first quarter of 2002 compared to last year's first quarter
levels. American Eagle's capacity will be down slightly (see page 8 regarding
additional information on American Eagle's capacity). Capacity for the remainder
of 2002 is less clear and depends on a number of factors, including, but not
limited to, how quickly demand returns and what levels of capacity the Company's
competitors deploy. Traffic continues to remain challenging to predict. However,
for the first quarter of 2002, the Company expects traffic to be up about three
percent from last year's first quarter levels. In response to the September 11
terrorist attacks, the Company put in place numerous cost reduction initiatives,
including, but not limited to: cutting capacity, grounding aircraft and
deferring certain aircraft deliveries to future years, sharply reducing capital
spending, closing facilities, trimming food service and reducing its workforce.
In addition, the Company expects to see lower fuel prices in the first quarter
of 2002 compared to 2001. Somewhat offsetting these cost savings, however, will
be higher wages, salaries and benefit costs, higher security costs and insurance
premiums, and greater interest expense. American's unit costs for the first
quarter of 2002 are expected to be three to five percent higher than last year's
first quarter.
29
FORWARD-LOOKING INFORMATION
The preceding discussions under Business, Properties, Legal Proceedings
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events. When used in this document and
in documents incorporated herein by reference, the words "expects," "plans,"
"anticipates," "believes," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations concerning operations and financial
conditions, including changes in capacity, revenues and costs, expectations as
to future financing needs, overall economic conditions and plans and objectives
for future operations, the ability to continue to successfully integrate with
its operations the assets acquired from TWA and the former TWA workforce, and
the impact of the events of September 11, 2001 on the Company and the
sufficiency of the Company's financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate solely to
historical facts, such as, without limitation, statements which discuss the
possible future effects of current known trends or uncertainties, or which
indicate that the future effects of known trends or uncertainties cannot be
predicted, guaranteed or assured. All forward-looking statements in this report
are based upon information available to the Company on the date of this report.
The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expectations. The
following factors, in addition to other possible factors not listed, could cause
the Company's actual results to differ materially from those expressed in
forward-looking statements:
UNCERTAINTY OF FUTURE COLLECTIVE BARGAINING AGREEMENTS AND EVENTS The Company's
operations could be adversely affected by failure of the Company to reach
agreement with any labor union representing the Company's employees (including,
for example, the successful integration of TWA's workforce) or by an agreement
with any such labor union representing the Company's employees that contains
terms which prevent the Company from competing effectively with other airlines.
In addition, a dispute between the Company and an employee work group (outside
the confines of a collective bargaining agreement) could adversely impact the
Company's operations.
ECONOMIC AND OTHER CONDITIONS The airline industry is affected by changes in
international, national, regional and local economic conditions, inflation, war
or political instability (or the threat thereof), consumer preferences and
spending patterns, demographic trends, disruptions to the air traffic control
system, consumer perceptions of airline safety, costs of safety, security and
environmental measures, and the weather.
FUEL PRICES / SUPPLY Due to the competitive nature of the airline industry,
there can be no assurance that the Company would be able to pass on any
increased fuel prices to its customers by increasing fares. Moreover, to the
extent there was a reduction in the supply of jet fuel, the Company's operations
could be adversely impacted.
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of the Company's
routes is highly competitive. The Company faces vigorous competition from major
domestic airlines, national, regional, all-cargo and charter carriers, foreign
air carriers, low-cost air carriers, and, particularly on shorter segments,
ground transportation. Increasingly the Company faces significant competition
from marketing/operational alliances formed by its competitors. To the extent
those alliances can undertake activities that are not available to the Company,
the Company's ability to effectively compete could be hindered. Pricing
decisions are affected by competition from other airlines. Fare discounting by
competitors has historically had a negative effect on the Company's financial
results because the Company is generally required to match competitors' fares to
maintain passenger traffic. No assurance can be given that any future fare
reduction would be offset by increases in passenger traffic, a reduction in
costs or changes in the mix of traffic that would improve yields.
CHANGING BUSINESS STRATEGY Although it has no current plan to do so, the Company
may change its business strategy in the future and may not pursue some of the
goals stated herein.
30
GOVERNMENT REGULATION Future results of the Company's operations may vary based
upon any actions which the governmental agencies with jurisdiction over the
Company's operations may take, including the granting and timing of certain
governmental approvals (including foreign government approvals) needed for
code-sharing alliances and other arrangements with other airlines, restrictions
on competitive practices (e.g., Court Orders, or Agency regulations or orders,
that would curtail an airline's ability to respond to a competitor), the
adoption of regulations that impact customer service standards (e.g., new
passenger security standards), and the adoption of more restrictive
locally-imposed noise restrictions.
UNCERTAINTY IN INTERNATIONAL OPERATIONS The Company's current international
activities and prospects could be adversely affected by factors such as
reversals or delays in the opening of foreign markets, exchange controls,
currency and political risks, taxation and changes in international government
regulation of the Company's operations.
ADVERSE IMPACT OF THE TERRORIST ATTACKS As described elsewhere in this Report,
the events of September 11, 2001 had and continue to have a material adverse
impact on the Company. Among the effects experienced by the Company from the
September 11, 2001 terrorist attacks have been significant flight disruption
costs caused by the FAA's imposed grounding of the U.S. airline industry's
fleet, significantly increased security and other costs, a reduction in the
availability of insurance coverage by insurance carriers, significantly higher
ticket refunds, significantly reduced load factors, and significantly reduced
yields. The occurrence of another terrorist attack (whether domestic or
international and whether against the Company or another entity) could again
have a material adverse impact on the Company, its finances and/or its
operations by further aggravating the aforementioned effects.
AVAILABILITY OF FUTURE FINANCING In the aftermath of the events of September 11,
2001, the Company raised substantial amounts of money to finance capital
commitments and day-to-day operations. Although the Company has a substantial
amount of unencumbered assets, there is no guarantee that it will be able to use
those assets for financing activities or that these assets will maintain their
current market value. To the extent that the Company may be unable to access the
capital markets for long-term capital spending requirements or short-term
liquidity needs, the Company's finances and/or operations could be adversely
impacted. As noted elsewhere in this Report, in the aftermath of the events of
September 11, 2001, credit ratings for the Company's debt instruments were
downgraded. To the extent the Company's credit ratings are further downgraded,
it could have an adverse impact on the ability of the Company to access capital
markets and/or the costs of such financing.
AVAILABILITY OF THE ACT As reported elsewhere in this Report, the Act has
mitigated some of the material adverse consequences of the events of September
11, 2001. To the extent there are amendments to, or interpretations of, the Act
or successful challenges to the Act, any of which are contrary to such
mitigation, the Company's finances and/or operations could be adversely
impacted.
31
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
fuel, foreign currency exchange rates and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management may take to mitigate the Company's exposure to such changes.
Actual results may differ. See Note 8 to the consolidated financial statements
for accounting policies and additional information.
AIRCRAFT FUEL The Company's earnings are affected by changes in the price and
availability of aircraft fuel. In order to provide a measure of control over
price and supply, the Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. The Company also manages the price
risk of fuel costs primarily by utilizing jet fuel, heating oil, and crude swap
and option contracts. Market risk is estimated as a hypothetical 10 percent
increase in the December 31, 2001 and 2000 cost per gallon of fuel. Based on
projected 2002 fuel usage, such an increase would result in an increase to
aircraft fuel expense of approximately $169 million in 2002, net of fuel hedge
instruments outstanding at December 31, 2001, and assumes the Company's fuel
hedging program remains effective under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Comparatively, based on projected 2001 fuel usage, such an increase
would have resulted in an increase to aircraft fuel expense of approximately
$194 million in 2001, net of fuel hedge instruments outstanding at December 31,
2000. The change in market risk is due primarily to the decrease in fuel prices.
As of December 31, 2001, the Company had hedged approximately 40 percent of its
estimated 2002 fuel requirements, approximately 21 percent of its estimated 2003
fuel requirements, and approximately five percent of its estimated 2004 fuel
requirements, compared to approximately 40 percent of its estimated 2001 fuel
requirements, 15 percent of its estimated 2002 fuel requirements, and
approximately seven percent of its estimated 2003 fuel requirements hedged at
December 31, 2000.
FOREIGN CURRENCY The Company is exposed to the effect of foreign exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated operating
revenues and expenses. The Company's largest exposure comes from the British
pound, Euro, Canadian dollar, Japanese yen and various Latin American
currencies. The Company uses options to hedge a portion of its anticipated
foreign currency-denominated ticket sales. The result of a uniform 10 percent
strengthening in the value of the U.S. dollar from December 31, 2001 and 2000
levels relative to each of the currencies in which the Company has foreign
currency exposure would result in a decrease in operating income of
approximately $40 million and $33 million for the years ending December 31, 2002
and 2001, respectively, net of hedge instruments outstanding at December 31,
2001 and 2000, due to the Company's foreign-denominated revenues exceeding its
foreign-denominated expenses. This sensitivity analysis was prepared based upon
projected 2002 and 2001 foreign currency-denominated revenues and expenses as of
December 31, 2001 and 2000.
INTEREST The Company's earnings are also affected by changes in interest rates
due to the impact those changes have on its interest income from cash and
short-term investments, and its interest expense from variable-rate debt
instruments. The Company has variable-rate debt instruments representing
approximately 35 percent and 29 percent of its total long-term debt at December
31, 2001 and 2000, respectively, and interest rate swaps on notional amounts of
approximately $148 million and $158 million, respectively, at December 31, 2001
and 2000. If interest rates average 10 percent more in 2002 than they did at
December 31, 2001, the Company's interest expense would increase by
approximately $10 million and interest income from cash and short-term
investments would increase by approximately $16 million. In comparison, at
December 31, 2000, the Company estimated that if interest rates averaged 10
percent more in 2001 than they did at December 31, 2000, the Company's interest
expense would have increased by approximately $11 million and interest income
from cash and short-term investments would have increased by approximately $15
million. These amounts are determined by considering the impact of the
hypothetical interest rates on the Company's variable-rate long-term debt,
interest rate swap agreements, and cash and short-term investment balances at
December 31, 2001 and 2000.
32
Market risk for fixed-rate long-term debt is estimated as the potential
increase in fair value resulting from a hypothetical 10 percent decrease in
interest rates, and amounts to approximately $318 million and $148 million as of
December 31, 2001 and 2000, respectively. The change in market risk is due
primarily to the increase in the Company's fixed-rate long-term debt during
2001. The fair values of the Company's long-term debt were estimated using
quoted market prices or discounted future cash flows based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
In addition, the Company holds investments in certain other entities
which are subject to market risk. However, the impact of such market risk on
earnings is not significant due to the immateriality of the carrying value and
the geographically diverse nature of these holdings.
33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Page
------------
Report of Independent Auditors 35
Consolidated Statements of Operations 36
Consolidated Balance Sheets 38
Consolidated Statements of Cash Flows 40
Consolidated Statements of Stockholders' Equity 41
Notes to Consolidated Financial Statements 42
34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AMR Corporation
We have audited the accompanying consolidated balance sheets of AMR
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AMR
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 8 to the consolidated financial statements,
effective January 1, 2001 the Company changed its method of accounting for its
derivative and hedging activities as required by Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 15, 2002
35
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
--------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES
Passenger - American Airlines $ 15,780 $ 16,394 $ 14,724
- AMR Eagle 1,378 1,452 1,294
Cargo 662 721 643
Other revenues 1,143 1,136 1,069
------------ ------------ ------------
Total operating revenues 18,963 19,703 17,730
------------ ------------ ------------
EXPENSES
Wages, salaries and benefits 8,032 6,783 6,120
Aircraft fuel 2,888 2,495 1,696
Depreciation and amortization 1,404 1,202 1,092
Other rentals and landing fees 1,197 999 942
Maintenance, materials and repairs 1,165 1,095 1,003
Commissions to agents 835 1,037 1,162
Aircraft rentals 829 607 630
Food service 778 777 740
Other operating expenses 3,695 3,327 3,189
Special charges, net of U.S. Government grant 610 -- --
------------ ------------ ------------
Total operating expenses 21,433 18,322 16,574
------------ ------------ ------------
OPERATING INCOME (LOSS) (2,470) 1,381 1,156
OTHER INCOME (EXPENSE)
Interest income 110 154 95
Interest expense (538) (467) (393)
Interest capitalized 144 151 118
Miscellaneous - net (2) 68 30
------------ ------------ ------------
(286) (94) (150)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY LOSS (2,756) 1,287 1,006
Income tax provision (benefit) (994) 508 350
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY LOSS (1,762) 779 656
INCOME FROM DISCONTINUED OPERATIONS, NET OF APPLICABLE
INCOME TAXES AND MINORITY INTEREST -- 43 265
GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF
APPLICABLE INCOME TAXES -- -- 64
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (1,762) 822 985
EXTRAORDINARY LOSS, NET OF APPLICABLE INCOME TAXES -- (9) --
------------ ------------ ------------
NET EARNINGS (LOSS) $ (1,762) $ 813 $ 985
============ ============ ============
--------------------------------------------------------------------------------
Continued on next page.
36
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(in millions, except per share amounts)
--------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
EARNINGS (LOSS) APPLICABLE TO COMMON SHARES $ (1,762) $ 813 $ 985
============ ============ ============
EARNINGS (LOSS) PER SHARE:
BASIC
Income (loss) from continuing operations $ (11.43) $ 5.20 $ 4.30
Discontinued operations -- 0.30 2.16
Extraordinary loss -- (0.07) --
------------ ------------ ------------
Net earnings (loss) $ (11.43) $ 5.43 $ 6.46
============ ============ ============
DILUTED
Income (loss) from continuing operations $ (11.43) $ 4.81 $ 4.17
Discontinued operations -- 0.27 2.09
Extraordinary loss -- (0.05) --
------------ ------------ ------------
Net earnings (loss) $ (11.43) $ 5.03 $ 6.26
============ ============ ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
AMR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
--------------------------------------------------------------------------------
December 31,
-----------------------------
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 120 $ 89
Short-term investments 2,872 2,144
Receivables, less allowance for uncollectible
accounts (2001 - $52; 2000 - $27) 1,414 1,303
Inventories, less allowance for obsolescence
(2001 - $383; 2000 - $332) 822 757
Deferred income taxes 790 695
Other current assets 522 191
------------ ------------
Total current assets 6,540 5,179
EQUIPMENT AND PROPERTY
Flight equipment, at cost 21,707 20,041
Less accumulated depreciation 6,727 6,320
------------ ------------
14,980 13,721
Purchase deposits for flight equipment 929 1,700
Other equipment and property, at cost 4,202 3,639
Less accumulated depreciation 2,123 1,968
------------ ------------
2,079 1,671
------------ ------------
17,988 17,092
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 2,658 2,618
Other equipment and property 163 159
------------ ------------
2,821 2,777
Less accumulated amortization 1,154 1,233
------------ ------------
1,667 1,544
OTHER ASSETS
Route acquisition costs and airport operating
and gate lease rights, less accumulated
amortization (2001 - $556; 2000 - $498) 1,325 1,143
Goodwill, less accumulated amortization
(2001 - $110; 2000 - $83) 1,392 385
Other 3,929 870
------------ ------------
6,646 2,398
------------ ------------
TOTAL ASSETS $ 32,841 $ 26,213
============ ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
AMR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
--------------------------------------------------------------------------------
December 31,
------------------------------
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,785 $ 1,267
Accrued salaries and wages 721 955
Accrued liabilities 1,471 1,276
Air traffic liability 2,763 2,696
Current maturities of long-term debt 556 569
Current obligations under capital leases 216 227
------------ ------------
Total current liabilities 7,512 6,990
LONG-TERM DEBT, LESS CURRENT MATURITIES 8,310 4,151
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,524 1,323
OTHER LIABILITIES AND CREDITS
Deferred income taxes 1,627 2,385
Deferred gains 520 508
Postretirement benefits 2,538 1,706
Other liabilities and deferred credits 5,437 1,974
------------ ------------
10,122 6,573
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - 20,000,000 shares authorized; None issued -- --
Common stock - $1 par value; 750,000,000 shares authorized;
182,278,766 shares issued 182 182
Additional paid-in capital 2,865 2,911
Treasury shares at cost: 2001 - 27,794,380; 2000 - 30,216,218 (1,716) (1,865)
Accumulated other comprehensive loss (146) (2)
Retained earnings 4,188 5,950
------------ ------------
5,373 7,176
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,841 $ 26,213
============ ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
AMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
--------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations after extraordinary loss $ (1,762) $ 770 $ 656
Adjustments to reconcile income (loss) from continuing operations after
extraordinary loss to net cash provided by operating activities:
Depreciation 1,122 928 864
Amortization 282 274 228
Provisions for asset impairments 1,214 -- --
Deferred income taxes (731) 461 183
Extraordinary loss on early extinguishment of debt -- 14 --
Gain on disposition of equipment and property and other investments (24) (57) (110)
Change in assets and liabilities:
Decrease (increase) in receivables 120 (169) 261
Increase in inventories (39) (111) (140)
Increase in accounts payable and accrued liabilities 379 579 42
Increase (decrease) in air traffic liability (276) 438 84
Other, net 226 15 196
------------ ------------ ------------
Net cash provided by operating activities 511 3,142 2,264
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including purchase deposits on flight
equipment (3,640) (3,678) (3,539)
Acquisition of Trans World Airlines, Inc. (742) -- --
Net increase in short-term investments (728) (438) (253)
Proceeds from:
Sale of equipment and property and other investments 401 332 164
Dividend from Sabre Holdings Corporation -- 559 --
Sale of discontinued operations -- -- 259
Other 18 (50) (81)
------------ ------------ ------------
Net cash used for investing activities (4,691) (3,275) (3,450)
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (922) (766) (280)
Proceeds from:
Issuance of long-term debt 4,744 836 1,956
Sale-leaseback transactions 352 -- 54
Exercise of stock options 37 67 25
Short-term loan from Sabre Holdings Corporation -- -- 300
Repurchase of common stock -- -- (871)
------------ ------------ ------------
Net cash provided by financing activities 4,211 137 1,184
------------ ------------ ------------
Net increase (decrease) in cash 31 4 (2)
Cash at beginning of year 89 85 87
------------ ------------ ------------
Cash at end of year $ 120 $ 89 $ 85
============ ============ ============
ACTIVITIES NOT AFFECTING CASH
Distribution of Sabre Holdings Corporation shares to AMR
shareholders $ -- $ 581 $ --
============ ============ ============
Payment of short-term loan from Sabre Holdings Corporation $ -- $ -- $ 300
============ ============ ============
Capital lease obligations incurred $ -- $ -- $ 54
============ ============ ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
AMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions, except share amounts)
--------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Treasury Comprehensive Retained
Stock Capital Stock Loss Earnings Total
----------- ----------- ----------- ------------- ----------- -----------
Balance at January 1, 1999 $ 182 $ 3,075 $ (1,288) $ (4) $ 4,733 $ 6,698
Net earnings -- -- -- -- 985 985
Adjustment for minimum pension
liability, net of tax of $1 -- -- -- 3 -- 3
Unrealized loss on investments, net of
tax of $1 -- -- -- (1) -- (1)
-----------
Total comprehensive income 987
Repurchase of 14,062,358 common shares -- -- (871) -- -- (871)
Issuance of 955,940 shares from
Treasury pursuant to stock option,
deferred stock and restricted stock
incentive plans, net of tax of $4 -- (14) 58 -- -- 44
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 182 3,061 (2,101) (2) 5,718 6,858
Net earnings -- -- -- -- 813 813
Adjustment for minimum pension
liability, net of tax of $3 -- -- -- (5) -- (5)
Unrealized gain on investments, net of
tax of $2 -- -- -- 5 -- 5
-----------
Total comprehensive income 813
Distribution of Sabre Holdings
Corporation shares to AMR shareholders -- -- -- -- (581) (581)
Issuance of 3,817,892 shares from
Treasury pursuant to stock option,
deferred stock and restricted stock
incentive plans, net of tax of $11 -- (150) 236 -- -- 86
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 182 2,911 (1,865) (2) 5,950 7,176
Net loss -- -- -- -- (1,762) (1,762)
Adjustment for minimum pension
liability, net of tax of $60 -- -- -- (101) -- (101)
Changes in fair value of derivative
financial instruments, net of tax
of $29 -- -- -- (46) -- (46)
Unrealized gain on investments, net of
tax of $2 -- -- -- 3 -- 3
-----------
Total comprehensive loss (1,906)
Issuance of 2,421,838 shares from
Treasury pursuant to stock option,
deferred stock and restricted stock
incentive plans, net of tax of $58 -- (46) 149 -- -- 103
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 $ 182 $ 2,865 $ (1,716) $ (146) $ 4,188 $ 5,373
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of AMR Corporation (AMR or the Company) and its wholly owned subsidiaries,
including its principal subsidiary American Airlines, Inc. (American). On April
9, 2001, American purchased substantially all of the assets and assumed certain
liabilities of Trans World Airlines, Inc. (TWA). Accordingly, the operating
results of TWA since the date of acquisition have been included in the
accompanying consolidated financial statements for the year ended December 31,
2001. All significant intercompany transactions have been eliminated. The
results of operations, cash flows and net assets for Sabre Holdings Corporation
(Sabre), AMR Services Corporation (AMR Services), AMR Combs, Inc. (AMR Combs)
and TeleService Resources, Inc. (TSR) have been reflected in the consolidated
financial statements as discontinued operations. Unless specifically indicated
otherwise, the information in the footnotes relates to the continuing operations
of AMR. Certain amounts from prior years have been reclassified to conform with
the 2001 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES Spare parts, materials and supplies relating to flight equipment are
carried at average acquisition cost and are expensed when incurred in
operations. Allowances for obsolescence are provided - over the estimated useful
life of the related aircraft and engines - for spare parts expected to be on
hand at the date aircraft are retired from service, plus allowances for spare
parts currently identified as excess. These allowances are based on management
estimates, which are subject to change.
EQUIPMENT AND PROPERTY The provision for depreciation of operating equipment and
property is computed on the straight-line method applied to each unit of
property, except that major rotable parts, avionics and assemblies are
depreciated on a group basis. The depreciable lives used for the principal
depreciable asset classifications are:
Depreciable Life
----------------------------------
Boeing 727-200 aircraft 2002(1)
Fokker 100 aircraft 2010(1)
ATR 42 and Saab 340 aircraft 2005(1)
Other American jet aircraft 20 - 30 years
Other regional aircraft and engines 16 - 20 years
Major rotable parts, avionics and assemblies Life of equipment to which
applicable
Improvements to leased flight equipment Term of lease
Buildings and improvements (principally on 10-30 years or term of lease
leased land)
Furniture, fixtures and other equipment 3-20 years
Capitalized software 3-10 years
(1) Approximate final aircraft retirement date.
Residual values for aircraft, engines, major rotable parts, avionics and
assemblies are generally five to 10 percent, except when a guaranteed residual
value or other agreements exist to better estimate the residual value.
Equipment and property under capital leases are amortized over the term
of the leases or, in the case of certain aircraft, over their expected useful
lives, and such amortization is included in depreciation and amortization. Lease
terms vary but are generally 10 to 25 years for aircraft and seven to 40 years
for other leased equipment and property.
42
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
MAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased
flight equipment are charged to operating expense as incurred, except engine
overhaul costs incurred by AMR Eagle Holding Corporation (AMR Eagle) and costs
incurred for maintenance and repair under power by the hour maintenance contract
agreements, which are accrued on the basis of hours flown.
INTANGIBLE ASSETS Route acquisition costs and airport operating and gate lease
rights represent the purchase price attributable to route authorities (including
international airport take-off and landing slots), airport take-off and landing
slots and airport gate leasehold rights acquired. These assets are being
amortized on a straight-line basis over 40 years for route authorities,
primarily 25 years for airport take-off and landing slots, and the term of the
lease for airport gate leasehold rights.
PASSENGER REVENUE Passenger ticket sales are initially recorded as a component
of air traffic liability. Revenue derived from ticket sales is recognized at the
time service is provided. However, due to various factors, including the complex
pricing structure and interline agreements throughout the industry, certain
amounts are recognized in revenue using estimates regarding both the timing of
the revenue recognition and the amount of revenue to be recognized. These
estimates are generally based upon the evaluation of historical trends,
including the use of regression analysis and other methods to model the outcome
of future events based on the Company's historical experience.
ADVERTISING COSTS The Company expenses the costs of advertising as incurred.
Advertising expense was $202 million, $221 million and $206 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
FREQUENT FLYER PROGRAM The estimated incremental cost of providing free travel
awards is accrued when such award levels are reached. American sells mileage
credits and related services to companies participating in its frequent flyer
program. The portion of the revenue related to the sale of mileage credits is
deferred over 28 months, which approximates the expected period over which the
mileage credits are used. The remaining portion of the revenue is recognized
upon sale as the related services have been provided.
STATEMENTS OF CASH FLOWS Short-term investments, without regard to remaining
maturity at acquisition, are not considered as cash equivalents for purposes of
the statements of cash flows.
STOCK OPTIONS The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations. Under APB 25,
no compensation expense is recognized for stock option grants if the exercise
price of the Company's stock option grants is at or above the fair market value
of the underlying stock on the date of grant.
EMPLOYEE ACCRUALS The Company estimates the amount of potential retroactive pay
expected to be provided upon finalization of a labor agreement for work groups
working under contracts that have become amendable. These estimates are based
upon management's expectation of the most likely outcome of the contract
negotiations.
MEASUREMENT OF ASSET IMPAIRMENTS In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), the Company
records impairment charges on long-lived assets (including goodwill) used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. The impairment charge
is determined based upon the amount the net book value of the assets exceeds
their fair market value. In making these determinations, the Company utilizes
certain assumptions, including, but not limited to: (i) estimated fair market
value of the assets, and (ii) estimated future cash flows expected to be
generated by these assets, which are based on additional assumptions such as
asset utilization, length of service the asset will be used in the Company's
operations and estimated salvage values.
43
2. SPECIAL CHARGES - NET OF U.S. GOVERNMENT GRANT
On September 11, 2001, two American Airlines aircraft were hijacked and
destroyed in terrorist attacks on The World Trade Center in New York City and
the Pentagon in northern Virginia. On the same day, two United Air Lines
aircraft were also hijacked and used in terrorist attacks. In addition to the
loss of life on board the aircraft, these attacks resulted in untold deaths and
injuries to persons on the ground and massive property damage. In response to
those terrorist attacks, the Federal Aviation Administration issued a federal
ground stop order on September 11, 2001, prohibiting all flights to, from, and
within the United States. Airports did not reopen until September 13, 2001
(except for Washington Reagan Airport, which was partially reopened on October
4, 2001). The Company was able to operate only a portion of its scheduled
flights for several days thereafter. When flights were permitted to resume,
passenger traffic and yields on the Company's flights were significantly lower
than prior to the attacks. As a result, the Company announced that it would
reduce its operating schedule to approximately 80 percent of the schedule it
flew prior to September 11, 2001. In addition, the Company also announced that,
as a result of its schedule reduction and the sharp fall off in passenger
traffic, it would eliminate approximately 20,000 jobs. The Company's future
schedule will vary as the Company reacts to continuing changes in demand and
yields, as well as normal factors such as seasonality and fleet composition.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act), which for all U.S.
airlines and air cargo carriers (collectively, air carriers) provides for, among
other things: (i) $5 billion in compensation for direct losses (including lost
revenues) incurred as a result of the federal ground stop order and for
incremental losses incurred through December 31, 2001 as a direct result of the
attacks; (ii) subject to certain conditions, the availability of up to $10
billion in federal government guarantees of certain loans made to air carriers
for which credit is not reasonably available as determined by a newly
established Air Transportation Stabilization Board; (iii) the authority of the
Secretary of Transportation to reimburse air carriers (which authority expires
180 days after the enactment of the Act) for the increase in the cost of
insurance, for coverage ending before October 1, 2002, over the premium in
effect for the period September 4, 2001 to September 10, 2001; (iv) at the
discretion of the Secretary of Transportation, a $100 million limit on the
liability of any air carrier to third parties with respect to acts of terrorism
committed on or to such air carrier during the 180-day period following the
enactment of the Act; (v) the extension of the due date for the payment by air
carriers of certain excise taxes; and (vi) compensation to individual claimants
who were physically injured or killed as a result of the terrorist attacks of
September 11, 2001. In addition, the Act provides that, notwithstanding any
other provision of law, liability for all claims, whether compensatory or
punitive, arising from the terrorist-related events of September 11, 2001
against any air carrier shall not exceed the liability coverage maintained by
the air carrier.
Based upon estimates provided by the Company's insurance providers, the
Company has recorded a liability of approximately $2.3 billion for claims
arising from the events of September 11, 2001, after considering the liability
protections provided for by the Act. In addition, the Company has recorded a
receivable for the same amount which the Company expects to recover from its
insurance carriers as claims are resolved. This insurance receivable and
liability are classified as Other assets and Other liabilities and deferred
credits on the accompanying consolidated balance sheets, respectively, and are
based on reserves established by the Company's insurance carriers. These
estimates may be revised as additional information becomes available concerning
the expected claims.
Under the airline compensation provisions of the Act, each air carrier is
entitled to receive the lesser of: (i) its direct and incremental losses for the
period September 11, 2001 to December 31, 2001 or (ii) its proportional
available seat mile allocation of the $5 billion compensation available under
the Act. The Company has received a total of $728 million from the U.S.
Government under the Act. The Company expects to receive additional payments in
2002 aggregating approximately $128 million. As of December 31, 2001, the
Company recognized approximately $856 million as compensation under the Act,
which is included in special charges - net of U.S. Government grant on the
accompanying consolidated statements of operations. Adjustments to the amount of
compensation received by the Company may be recognized in 2002 as the rules
governing the distribution of the government grant are finalized. The finalized
rules could result in more or less compensation to the Company under the Act.
44
2. SPECIAL CHARGES - NET OF U.S. GOVERNMENT GRANT (CONTINUED)
Special charges - net of U.S. Government grant for the year ended
December 31, 2001 included the following (in millions):
Year Ended
December 31, 2001
------------------
Aircraft charges $ 1,237
Facility exit costs 115
Employee charges 71
Other 43
-------------
Total special charges 1,466
Less: U.S. Government grant (856)
-------------
$ 610
=============
Aircraft charges
In conjunction with the acquisition of TWA, coupled with revisions to the
Company's fleet plan to accelerate the retirement dates of its Fokker 100, Saab
340 and ATR 42 aircraft, during the second quarter of 2001 the Company
determined these aircraft were impaired under SFAS 121. As a result, during the
second quarter of 2001, the Company recorded an asset impairment charge of
approximately $685 million relating to the write-down of the carrying value of
71 Fokker 100 aircraft, 74 Saab 340 aircraft and 20 ATR 42 aircraft and related
rotables to their estimated fair market values. Management estimated the
undiscounted future cash flows utilizing models used by the Company in making
fleet and scheduling decisions. In determining the fair market value of these
aircraft, the Company considered outside third party appraisals and recent
transactions involving sales of similar aircraft.
Following the events of September 11, 2001, and decisions by other
carriers to ground their Fokker 100 fleets, the Company determined that the
estimated fair market value of its Fokker 100, Saab 340 and ATR 42 aircraft had
further declined in value. Therefore, during the third quarter of 2001, the
Company recorded an additional charge of approximately $423 million reflecting
the diminution in the estimated fair market value of these aircraft and related
rotables.
In addition, due primarily to fleet plan changes implemented by the
Company as a result of the events of September 11, 2001, the Company recorded a
charge of approximately $64 million related primarily to the write-down of
certain other aircraft and aircraft modifications to their estimated fair market
value. Included in this charge is the write-down of five owned Boeing 727-200
non-operating aircraft and one owned McDonnell Douglas MD-80 non-operating
aircraft.
As a result of the write-down of these aircraft to fair market value, as
well as the acceleration of the retirement dates, including the acceleration of
the Company's remaining 50 owned Boeing 727-200 aircraft to May 2002, and
changes in salvage values, depreciation and amortization expense will decrease
by approximately $57 million on an annualized basis.
Due to the events of September 11, 2001, and subsequent impact on the
Company and the rest of the airline industry, during the fourth quarter of 2001,
the Company completed an impairment analysis of its long-lived assets, including
aircraft fleets, route acquisition costs, airport operating and gate lease
rights, and goodwill in accordance with applicable accounting standards. The
impairment analysis did not result in any additional impairment charges beyond
those recorded in the second and third quarters of 2001.
45
2. SPECIAL CHARGES - NET OF U.S. GOVERNMENT GRANT (CONTINUED)
The Company also retired all McDonnell Douglas DC-9 aircraft and eight
McDonnell Douglas MD-80 aircraft during the third and fourth quarters of 2001,
and accelerated the retirement of its entire Boeing 717-200 fleet to June 2002
(these aircraft were acquired from TWA). In conjunction therewith, the Company
recorded a charge of approximately $65 million related primarily to future lease
commitments and return condition costs on the operating leased aircraft past the
dates they will be removed from service. As of December 31, 2001, cash outlays
are estimated to be approximately $58 million and will occur over the remaining
lease terms, which extend through 2010.
Facility exit costs
Also in response to the September 11, 2001 terrorist attacks, the Company
announced that it would discontinue service at Dallas Love Field and discontinue
or reduce service on several of its international routes. In addition, the
Company announced it would close six Admiral's Clubs, five airport Platinum
Service Centers and approximately 105 off-airport Travel Centers in 37 cities,
all effective September 28, 2001. As a result of these announcements, the
Company recorded an $87 million charge related primarily to future lease
commitments and the write-off of leasehold improvements and fixed assets. As of
December 31, 2001, cash outlays related to the accrual of future lease
commitments are estimated to be approximately $20 million and will occur over
the remaining lease terms, which extend through 2018.
In addition, in December 2001, American agreed to sell its terminal
facilities lease rights at the Raleigh-Durham International Airport to the
Raleigh-Durham Airport Authority. As a result of this transaction, the Company
recorded a $28 million charge in the fourth quarter of 2001 to accrue the
residual cost less sales proceeds.
Employee charges
On September 19, 2001, the Company announced that it would be forced to
reduce its workforce by approximately 20,000 jobs across all work groups
(pilots, flight attendants, mechanics, fleet service clerks, agents, management
and support staff personnel). The reduction in workforce, which the Company
accomplished through various measures, including leaves of absence, job sharing,
elimination of open positions, furloughs in accordance with collective
bargaining agreements, and permanent layoffs, resulted from the September 11,
2001 terrorist attacks and the Company's subsequent reduction of its operating
schedule by approximately 20 percent. In connection therewith, the Company
recorded a charge of approximately $71 million for employee termination
benefits. Cash outlays for the employee charges were incurred substantially
during 2001 and approximated the amount of the charge recorded.
3. ACQUISITION OF TWA ASSETS
On April 9, 2001, American purchased substantially all of the assets of
TWA and assumed certain liabilities. TWA was the eighth largest U.S. carrier,
with a primary domestic hub in St. Louis. American funded the acquisition of
TWA's assets with its existing cash and short-term investments. The acquisition
of TWA was accounted for under the purchase method of accounting and,
accordingly, the operating results of TWA since the date of acquisition have
been included in the accompanying consolidated financial statements for the year
ended December 31, 2001.
The accompanying consolidated financial statements reflect the allocation
of the purchase price, which was based on estimated fair values of the assets
acquired and liabilities assumed. American paid approximately $742 million in
cash (subject to certain working capital adjustments) for the purchase of TWA,
which included the $625 million purchase price paid to TWA and various other
acquisition costs, primarily the purchase of aircraft security deposits and
prepaid rent, and assumed the following obligations: $638 million in current
liabilities, $734 million in postretirement benefits other than pensions, $519
million in capital lease obligations and approximately $175 million of other
long-term liabilities. The purchase price was allocated as follows:
approximately $812 million to current assets, $574 million to fixed assets,
primarily capital lease aircraft, and approximately $320 million to other
assets, resulting in goodwill of approximately $1 billion, which is being
amortized on a straight-line basis over 40 years.
46
3. ACQUISITION OF TWA ASSETS (CONTINUED)
The following table provides unaudited pro forma consolidated results of
operations, assuming the acquisition had occurred as of January 1, 2000 (in
millions, except per share amounts):
(Unaudited)
Year Ended December 31,
-------------------------------
2001 2000
------------ ------------
Operating revenues $ 19,830 $ 23,265
Income (loss) from continuing operations (1,769) 687
Net earnings (loss) (1,769) 730
Earnings (loss) per share - diluted $ (11.48) $ 4.51
The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only. These amounts are not indicative of the
combined results which would have occurred had the transaction actually been
consummated on the date indicated above and are not indicative of the
consolidated results of operations which may occur in the future.
4. INVESTMENTS
Short-term investments consisted of (in millions):
December 31,
------------------------------
2001 2000
------------ ------------
Overnight investments and time deposits $ 460 $ 361
U. S. Government agency notes 722 --
Corporate and bank notes 649 906
U. S. Treasury notes 500 --
Asset backed securities 333 361
U. S. Government agency mortgages 130 442
Other 78 74
------------ ------------
$ 2,872 $ 2,144
============ ============
Short-term investments at December 31, 2001, by contractual maturity
included (in millions):
Due in one year or less $ 1,950
Due between one year and three years 692
Due after three years 230
-------------
$ 2,872
=============
All short-term investments are classified as available-for-sale and
stated at fair value. Unrealized gains and losses, net of deferred taxes, are
reflected as an adjustment to stockholders' equity.
American has standby letter of credit agreements (see Note 6) which are
secured by approximately $490 million of short-term investments.
During 1999, the Company entered into an agreement with priceline.com
Incorporated (priceline) whereby ticket inventory provided by the Company may be
sold through priceline's e-commerce system. In conjunction with this agreement,
the Company received warrants to purchase approximately 5.5 million shares of
priceline common stock. In the second quarter of 2000, the Company sold these
warrants for proceeds of approximately $94 million, and recorded a gain of $57
million which is included in Miscellaneous - net on the accompanying
consolidated statements of operations.
47
4. INVESTMENTS (CONTINUED)
Also during 1999, the Company sold approximately 2.7 million depository
certificates which were convertible, subject to certain restrictions, into the
common stock of Equant N.V. (Equant), a public company, for a net gain of
approximately $118 million, after taxes and minority interest. Of this amount,
approximately $75 million is included in Miscellaneous - net and approximately
$71 million, net of taxes and minority interest, related to depository
certificates held by the Company on behalf of Sabre is included in income from
discontinued operations on the accompanying consolidated statements of
operations. During 2001, as a result of the merger between France Telecom and
Equant, the Company converted its remaining depository certificates into France
Telecom common stock and subsequently sold those shares for a net gain of
approximately $5 million which is included in Miscellaneous - net on the
accompanying consolidated statements of operations.
In December 1999, the Company entered into an agreement to sell its
investment in the cumulative mandatorily redeemable convertible preferred stock
of Canadian Airlines International Limited (Canadian) for approximately $40
million, resulting in a gain of $40 million which is included in Miscellaneous -
net on the accompanying consolidated statements of operations. In addition, the
Company recognized a tax benefit of $67 million resulting from the tax loss on
the investment, representing the reversal of a deferred tax valuation allowance
since it is more likely than not that the tax benefit will be realized. The
valuation allowance was established in 1996 when the investment was written-off
because, at that time, it was not more likely than not that the tax benefit of
the write-off would be realized. During 2000, the Company recorded a gain of
approximately $41 million from the recovery of start-up expenses (previously
written-off) from the Canadian services agreement entered into during 1995 which
is included in Miscellaneous - net on the accompanying consolidated statements
of operations.
5. COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 2001, the Company reached an agreement with
Boeing that included a combination of aircraft delivery deferrals, substitutions
and limited additional aircraft orders. As a direct result of the agreement with
Boeing, the Company's 2002 and 2003 aircraft commitment amounts have been
reduced, in the aggregate, by approximately $700 million. Following this
agreement, at December 31, 2001, the Company had commitments to acquire the
following aircraft: 47 Boeing 737-800s, 14 Boeing 777-200ERs, nine Boeing
767-300ERs, seven Boeing 757-200s, 124 Embraer regional jets and 24 Bombardier
CRJ-700s. Deliveries of all aircraft extend through 2008. Future payments for
all aircraft, including the estimated amounts for price escalation, will
approximate $1.3 billion in 2002, $1.7 billion in 2003, $1.2 billion in 2004 and
an aggregate of approximately $1.9 billion in 2005 through 2008. These future
payments are net of approximately $470 million related to deposits made for 2002
aircraft deliveries - which have been deferred as part of the agreement with
Boeing - that will be applied to future aircraft deliveries. In addition to
these commitments for aircraft, the Company expects to spend approximately $500
million in 2002 for modifications to aircraft, renovations of - and additions to
- airport and off-airport facilities, and the acquisition of various other
equipment and assets.
Miami-Dade County is currently investigating and remediating various
environmental conditions at the Miami International Airport (MIA) and funding
the remediation costs through landing fees and various cost recovery methods.
American and AMR Eagle have been named as potentially responsible parties (PRPs)
for the contamination at MIA. During the second quarter of 2001, the County
filed a lawsuit against 17 defendants, including American, in an attempt to
recover its past and future cleanup costs (Miami-Dade County, Florida v. Advance
Cargo Services, Inc., et al. in the Florida Circuit Court). In addition to the
17 defendants named in the lawsuit, 243 other agencies and companies were also
named as PRPs and contributors to the contamination. American's and AMR Eagle's
portion of the cleanup costs cannot be reasonably estimated due to various
factors, including the unknown extent of the remedial actions that may be
required, the proportion of the cost that will ultimately be recovered from the
responsible parties, and uncertainties regarding the environmental agencies that
will ultimately supervise the remedial activities and the nature of that
supervision. In addition, the Company is subject to environmental issues at
various other airport and non-airport locations. Management believes, after
considering a number of factors, that the ultimate disposition of these
environmental issues is not expected to materially affect the Company's
consolidated financial position, results of operations or cash flows. Amounts
recorded for environmental issues are based on the Company's current assessments
of the ultimate outcome and, accordingly, could increase or decrease as these
assessments change.
48
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in certain claims and litigation related to its
operations. In the opinion of management, liabilities, if any, arising from
these claims and litigation (including those matters identified in Item 3 -
Legal Proceedings) would not have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
The Company has agreed to sell its McDonnell Douglas MD-11 aircraft to
FedEx Corporation (FedEx). No significant gain or loss is expected to be
recognized as a result of this transaction. As of December 31, 2001, the
carrying value of the remaining aircraft American has committed to sell was
approximately $143 million. The Company expects to deliver the remaining
aircraft to FedEx by the third quarter of 2002.
AMR and American have event risk covenants in approximately $2.2 billion
of indebtedness as of December 31, 2001. These covenants permit the holders of
such indebtedness to receive a higher rate of return (between 75 and 650 basis
points above the stated rate) if a designated event, as defined, should occur
and the credit rating of such indebtedness is downgraded below certain levels
within a certain period of time following the event. No designated event, as
defined, has occurred as of December 31, 2001.
6. LEASES
AMR's subsidiaries lease various types of equipment and property,
primarily aircraft and airport facilities. The future minimum lease payments
required under capital leases, together with the present value of such payments,
and future minimum lease payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2001, were (in millions):
Capital Operating
Year Ending December 31, Leases Leases
------------- -------------
2002 $ 326 $ 1,336
2003 243 1,276
2004 295 1,199
2005 229 1,138
2006 231 1,073
2007 and subsequent 1,233 11,639
------------- -------------
2,557 $ 17,661(1)
=============
Less amount representing interest 817
-------------
Present value of net minimum lease payments $ 1,740
=============
(1) As of December 31, 2001, included in Other liabilities and
deferred credits on the accompanying consolidated balance sheets
is approximately $1.6 billion relating to rent expense being
recorded in advance of future operating lease payments.
At December 31, 2001, the Company had 342 jet aircraft and 41 turboprop
aircraft under operating leases and 76 jet aircraft and 55 turboprop aircraft
under capital leases - which includes both operating and non-operating aircraft.
The aircraft leases can generally be renewed at rates based on fair market value
at the end of the lease term for one to five years. Most aircraft leases have
purchase options at or near the end of the lease term at fair market value, but
generally not to exceed a stated percentage of the defined lessor's cost of the
aircraft or at a predetermined fixed amount.
49
6. LEASES (CONTINUED)
Special facility revenue bonds have been issued by certain municipalities
primarily to purchase equipment and improve airport facilities that are leased
by American and accounted for as operating leases. Approximately $2.3 billion of
these bonds (with total future payments of approximately $6 billion as of
December 31, 2001) are guaranteed by AMR and American. These guarantees can only
be invoked in the event American defaults on the lease obligation and certain
other remedies are not available. In addition, of the $2.3 billion, American may
be required to purchase up to $558 million under various remarketing agreements
which are supported by standby letters of credit with terms ranging from one to
three years.
Rent expense, excluding landing fees, was $1.7 billion for 2001 and $1.3
billion for 2000 and 1999.
7. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted of
(in millions):
December 31,
------------------------------
2001 2000
------------ ------------
Secured variable and fixed rate indebtedness due through 2021
(effective rates from 2.4% - 9.6% at December 31, 2001) $ 3,591 $ 2,656
Enhanced equipment trust certificates due through 2019
(rates from 6.8% - 9.1% at December 31, 2001) 3,006 553
Credit facility agreement due in 2005
(5.09% at December 31, 2001) 814 --
9.0% - 10.20% debentures due through 2021 332 332
7.875% - 10.55% notes due through 2039 302 345
6.0% - 7.10% bonds due through 2031 176 176
Unsecured variable rate indebtedness due through 2024
(3.55% at December 31, 2001) 86 86
Other 3 3
------------ ------------
Long-term debt, less current maturities $ 8,310 $ 4,151
============ ============
Maturities of long-term debt (including sinking fund requirements) for
the next five years are: 2002 - $556 million; 2003 - $296 million; 2004 - $359
million; 2005 - $1.2 billion; 2006 - $886 million.
During 2001, American issued approximately $2.6 billion of enhanced
equipment trust certificates and entered into approximately $1.1 billion of
various debt agreements. These financings are secured by aircraft. Effective
rates on these financings are fixed or variable (based upon the London Interbank
Offered Rate (LIBOR) plus a spread).
In April 2001, the Board of Directors of American approved the
guarantee by American of AMR's existing debt obligations. As of December 31,
2001, this guarantee covered approximately $676 million of unsecured debt and
approximately $573 million of secured debt. (American is a Securities and
Exchange Commission registrant and has filed consolidated financial statements
included in its Form 10-K for the year ended December 31, 2001.)
During the third quarter of 2000, the Company repurchased prior to
scheduled maturity approximately $167 million in face value of long-term debt.
Cash from operations provided the funding for the repurchases. These
transactions resulted in an extraordinary loss of $14 million.
50
7. INDEBTEDNESS (CONTINUED)
American has an $834 million credit facility that expires December 15,
2005. At American's option, interest on this facility can be calculated on one
of several different bases. For most borrowings, American would anticipate
choosing a floating rate based upon LIBOR. During the fourth quarter of 2001,
American amended this credit facility to include, among other items, a revision
of its financial covenants, including modifications to its fixed charge covenant
and the addition of certain liquidity requirements. The next test of the fixed
charge covenant will occur on June 30, 2003 and will consider only the preceding
six-month period. American secured the facility with previously unencumbered
aircraft. In addition, the facility requires that American maintain at least
$1.5 billion of liquidity, as defined in the facility, which consists primarily
of cash and short-term investments, and 50 percent of the net book value of its
unencumbered aircraft. The interest rate on the entire credit facility will be
reset on March 18, 2002.
In addition, American has available a $1 billion credit facility that
expires September 30, 2002. Interest on this facility is based upon LIBOR plus a
spread. This facility is immediately available subject to the Company providing
specified aircraft collateral as security at the time of borrowing. At December
31, 2001, no borrowings were outstanding under this facility.
Certain debt is secured by aircraft, engines, equipment and other
assets having a net book value of approximately $8.5 billion. In addition,
certain of American's debt and letter of credit agreements contain restrictive
covenants, including a minimum net worth requirement, which could limit
American's ability to pay dividends. At December 31, 2001, under the most
restrictive provisions of those debt and credit facility agreements,
approximately $400 million of the retained earnings of American was available
for payment of dividends to AMR.
Cash payments for interest, net of capitalized interest, were $343
million, $301 million and $237 million for 2001, 2000 and 1999, respectively.
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, AMR uses a variety of
financial instruments, including fuel swap and option contracts, interest rate
swaps, and currency option contracts and exchange agreements. The Company does
not hold or issue derivative financial instruments for trading purposes.
The Company is exposed to credit losses in the event of non-performance
by counterparties to these financial instruments, but it does not expect any of
the counterparties to fail to meet its obligations. The credit exposure related
to these financial instruments is represented by the fair value of contracts
with a positive fair value at the reporting date, reduced by the effects of
master netting agreements. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position of the
program and its relative market position with each counterparty. The Company
also maintains industry-standard security agreements with the majority of its
counterparties which may require the Company or the counterparty to post
collateral if the value of these instruments falls below certain mark-to-market
thresholds. The Company's outstanding collateral as of December 31, 2001 was not
material.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended (SFAS 133). SFAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS 133 did not result in a cumulative
effect adjustment being recorded to net income for the change in accounting.
However, the Company recorded a transition adjustment of approximately $64
million in Accumulated other comprehensive loss in the first quarter of 2001.
The amounts included in the following discussion are not comparable in that the
2001 amounts reflect the January 1, 2001 adoption of SFAS 133 whereas the 2000
amounts do not.
51
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
FUEL PRICE RISK MANAGEMENT
American enters into jet fuel, heating oil and crude swap and option
contracts to protect against increases in jet fuel prices. These instruments
generally have maturities of up to 36 months. In accordance with SFAS 133, the
Company accounts for its fuel swap and option contracts as cash flow hedges.
Upon the adoption of SFAS 133, the Company recorded the fair value of its fuel
hedging contracts in Other assets and Accumulated other comprehensive loss on
the consolidated balance sheets. Effective gains or losses on fuel hedging
agreements are deferred in Accumulated other comprehensive loss and are
recognized in earnings as a component of fuel expense when the underlying fuel
being hedged is used. The ineffective portion of the fuel hedge agreements is
based on the change in the total value of the derivative relative to the change
in the value of the fuel being hedged and is recognized as a component of fuel
expense on the accompanying consolidated statements of operations.
For the year ended December 31, 2001 and 2000, the Company recognized net
gains of approximately $29 million and $545 million, respectively, as a
component of fuel expense on the accompanying consolidated statements of
operations related to its fuel hedging agreements. The net gains recognized in
2001 included approximately $72 million of ineffectiveness expense relating to
the Company's fuel hedging agreements. At December 31, 2001, American had fuel
hedging agreements with broker-dealers on approximately 2.3 billion gallons of
fuel products, which represented approximately 40 percent of its expected 2002
fuel needs, approximately 21 percent of its expected 2003 fuel needs, and
approximately five percent of its expected 2004 fuel needs. The fair value of
the Company's fuel hedging agreements at December 31, 2001 and 2000,
representing the amount the Company would receive to terminate the agreements,
totaled $39 million and $223 million, respectively.
INTEREST RATE RISK MANAGEMENT
American utilizes interest rate swap contracts to effectively convert a
portion of its fixed-rate obligations to floating-rate obligations. Under SFAS
133, the Company accounts for its interest rate swap contracts as fair value
hedges whereby the fair value of the related interest rate swap agreement is
reflected in Other assets with the corresponding liability being recorded as a
component of Long-term debt on the consolidated balance sheets. The Company has
no ineffectiveness with regard to its interest rate swap contracts. The fair
value of the Company's interest rate swap agreements, representing the amount
the Company would receive if the agreements were terminated at December 31, 2001
and 2000, was approximately $11 million and $4 million, respectively.
FOREIGN EXCHANGE RISK MANAGEMENT
To hedge against the risk of future exchange rate fluctuations on a
portion of American's foreign cash flows, the Company enters into various
currency put option agreements on a number of foreign currencies. These
instruments generally have maturities of up to 12 months. In accordance with
SFAS 133, the Company accounts for its currency put option agreements as cash
flow hedges. Upon the adoption of SFAS 133, the Company recorded the fair value
of its foreign currency put option agreements in Other assets and Accumulated
other comprehensive loss on the consolidated balance sheets. Effective gains and
losses on currency put option agreements are deferred in Accumulated other
comprehensive loss and are recognized in earnings as a component of passenger
revenue when the underlying hedged revenues are recognized. The ineffectiveness
associated with the Company's currency put option agreements was not material.
For the year ended December 31, 2001, the Company recognized net gains of
approximately $14 million as a component of passenger revenue related to its
foreign currency put option agreements. The fair value of the Company's foreign
currency put option agreements totaled approximately $12 million and $20 million
as of December 31, 2001 and 2000, respectively, representing the amount the
Company would receive to terminate these agreements.
52
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
The Company has entered into Japanese yen currency exchange agreements to
effectively convert certain yen-based lease obligations into dollar-based
obligations. Under SFAS 133, the Company accounts for its Japanese yen currency
exchange agreements as cash flow hedges whereby the fair value of the related
Japanese yen currency exchange agreements is reflected in Other liabilities and
deferred credits and Accumulated other comprehensive loss on the consolidated
balance sheets. The Company has no ineffectiveness with regard to its Japanese
yen currency exchange agreements. The fair value of the Company's yen currency
exchange agreements, representing the amount the Company would pay to terminate
the agreements, were $45 million and $5 million as of December 31, 2001 and
2000, respectively. The exchange rates on the Japanese yen agreements range from
66.5 to 113.5 yen per U.S. dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt were estimated using
quoted market prices where available. For long-term debt not actively traded,
fair values were estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts and estimated fair values of the Company's
long-term debt, including current maturities, were (in millions):
December 31,
---------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
Secured variable and fixed rate
indebtedness $ 3,989 $ 3,751 $ 2,799 $ 2,879
Enhanced equipment trust certificates 3,094 3,025 567 576
Credit facility agreement 814 814 -- --
7.875% - 10.55% notes 343 310 749 759
9.0% - 10.20% debentures 332 293 332 358
6.0% - 7.10% bonds 176 143 176 179
Unsecured variable rate indebtedness 86 86 86 86
Other 32 32 11 11
------------ ------------ ------------ ------------
$ 8,866 $ 8,454 $ 4,720 $ 4,848
============ ============ ============ ============
All other financial instruments are either carried at fair value or their
carrying value approximates fair value.
9. INCOME TAXES
The significant components of the income tax provision (benefit) were (in
millions):
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Current $ (263) $ 47 $ 167
Deferred (731) 461 183
------------ ------------ ------------
$ (994) $ 508 $ 350
============ ============ ============
The income tax provision (benefit) includes a federal income tax
provision (benefit) of $(911) million, $454 million and $290 million and a state
income tax provision (benefit) of $(90) million, $47 million and $49 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
53
9. INCOME TAXES (CONTINUED)
The income tax provision (benefit) differed from amounts computed at the
statutory federal income tax rate as follows (in millions):
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Statutory income tax provision (benefit) $ (965) $ 450 $ 352
State income tax provision (benefit), net of federal
tax effect (58) 30 32
Foreign tax credit carryforwards (7) -- --
Meal expense 18 19 19
Change in valuation allowance 7 -- (67)
Other, net 11 9 14
------------ ------------ ------------
Income tax provision (benefit) $ (994) $ 508 $ 350
============ ============ ============
The change in valuation allowance in 2001 related to the Company's
uncertainty regarding the realization of the foreign tax credit carryforward,
and in 1999 related to the realization of a tax loss on the sale of the
Company's investment in Canadian (see Note 4).
The components of AMR's deferred tax assets and liabilities were (in
millions):
December 31,
------------------------------
2001 2000
------------ ------------
Deferred tax assets:
Postretirement benefits other than pensions $ 925 $ 632
Rent expense 765 522
Alternative minimum tax credit carryforwards 572 184
Operating loss carryforwards 412 --
Frequent flyer obligation 409 362
Gains from lease transactions 216 225
Other 784 541
Valuation allowance (7) --
------------ ------------
Total deferred tax assets 4,076 2,466
------------ ------------
Deferred tax liabilities:
Accelerated depreciation and amortization (4,065) (3,822)
Purchased intangible assets (369) --
Pensions (157) (89)
Other (322) (245)
------------ ------------
Total deferred tax liabilities (4,913) (4,156)
------------ ------------
Net deferred tax liability $ (837) $ (1,690)
============ ============
At December 31, 2001, AMR had available for federal income tax purposes
an alternative minimum tax credit carryforward of approximately $572 million
which is available for an indefinite period, and federal and state net operating
losses of approximately $1.1 billion for regular tax purposes which will fully
expire, if unused, in 2021.
Cash payments (receipts) for income taxes were $(28) million, $49 million
and $71 million for 2001, 2000 and 1999, respectively.
54
10. STOCK AWARDS AND OPTIONS
Under the 1998 Long Term Incentive Plan, as amended, officers and key
employees of AMR and its subsidiaries may be granted stock options, stock
appreciation rights (SARs), restricted stock, deferred stock, stock purchase
rights, other stock-based awards and/or performance-related awards, including
cash bonuses. The total number of common shares authorized for distribution
under the 1998 Long Term Incentive Plan is 23,700,000 shares. The 1998 Long Term
Incentive Plan, the successor to the 1988 Long Term Incentive Plan, which
expired May 18, 1998, will terminate no later than May 21, 2008. Options granted
under the 1988 and 1998 Long Term Incentive Plans (collectively, the Plans) are
awarded with an exercise price equal to the fair market value of the stock on
date of grant, become exercisable in equal annual installments over five years
following the date of grant and expire 10 years from the date of grant. SARs may
be granted in tandem with options awarded; however, no SARs have been granted.
As of December 31, 2001, approximately 3.5 million shares were available for
future grant under the Plans.
As a result of the Sabre spin-off in March 2000, AMR's stock price was
adjusted from $60 9/16 to $25 9/16 by the New York Stock Exchange. Accordingly,
all outstanding stock options and other stock-based awards, including the
related exercise prices, were adjusted to preserve the intrinsic value of the
stock options and awards. See Note 14 for information regarding the Sabre
spin-off.
In 2001, 2000 and 1999, the total charge for stock compensation expense
included in wages, salaries and benefits expense, primarily related to the
Company's performance share plan, was $21 million, $52 million and $53 million,
respectively. No compensation expense was recognized for stock option grants
under the Plans since the exercise price was the fair market value of the
underlying stock on the date of grant.
Stock option activity was:
Year Ended December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999
------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------- ---------- ------------- --------- --------- -----------
Outstanding at January 1 16,568,907 $ 25.42 5,219,634 $ 52.06 4,147,124 $ 46.60
Sabre adjustment -- - 7,150,899 -- -- --
Granted 4,180,595 28.35 6,003,111 30.21 1,539,585 63.19
Exercised (951,191) 38.34 (1,557,034) 32.85 (258,875) 68.17
Canceled (286,025) 23.04 (247,703) 23.38 (208,200) 49.96
------------- ------------- ---------
Outstanding at December 31 19,512,286 $ 26.46 16,568,907 $ 25.42 5,219,634 $ 52.06
============= ============= =========
Exercisable options outstanding at
December 31 7,161,346 $ 22.95 5,334,444 $ 19.79 2,012,889 $ 40.63
============= ============= =========
The following table summarizes information about the stock options
outstanding at December 31, 2001:
Weighted Weighted Weighted
Range of Number of Average Average Number of Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Life (years) Price Exercisable Price
---------------- ------------- ------------ ----------- ------------ -------------
Under $20 2,403,770 3.60 $ 15.16 2,368,838 $ 15.14
$20-$30 9,945,874 7.74 24.16 3,172,758 24.19
Over $30 7,162,642 8.51 33.45 1,619,750 31.92
------------- ------------ ----------- ------------- -------------
19,512,286 7.51 $ 26.46 7,161,346 $ 22.95
============= =============
55
10. STOCK AWARDS AND OPTIONS (CONTINUED)
In May 1997, in conjunction with the labor agreement reached between
American and members of the Allied Pilots Association (APA), the Company
established the Pilots Stock Option Plan (The Pilot Plan). The Pilot Plan
granted members of the APA the option to purchase 11.5 million shares of AMR
stock at $41.69 per share, $5 less than the average fair market value of the
stock on the date of grant, May 5, 1997. These shares were exercisable
immediately. In conjunction with the Sabre spin-off, the exercise price was
adjusted to $17.59 per share. Pilot Plan option activity was:
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Outstanding at January 1 10,990,190 5,420,028 5,791,381
Sabre adjustment -- 7,421,048 --
Exercised (1,174,865) (1,850,886) (371,353)
------------- ------------- -------------
Outstanding at December 31 9,815,325 10,990,190 5,420,028
============= ============= =============
The weighted-average grant date fair value per share of all stock option
awards granted during 2001, 2000 and 1999 was $12.23, $16.54 and $23.17,
respectively.
Shares of deferred stock are awarded at no cost to officers and key
employees under the Plans' Career Equity Program and will be issued upon the
individual's retirement from AMR or, in certain circumstances, will vest on a
pro rata basis. Deferred stock activity was:
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Outstanding at January 1 4,956,497 2,310,680 2,401,532
Sabre adjustment -- 3,165,632 --
Granted -- -- 146,200
Issued (98,566) (479,177) (122,042)
Canceled (72,219) (40,638) (115,010)
------------ ------------ ------------
Outstanding at December 31 4,785,712 4,956,497 2,310,680
============ ============ ============
The weighted-average grant date fair value per share of career equity
awards granted during 1999 was $63.54.
56
10. STOCK AWARDS AND OPTIONS (CONTINUED)
A performance share plan was implemented in 1993 under the terms of which
shares of deferred stock are awarded at no cost to officers and key employees
under the Plans. The fair value of the performance shares granted is equal to
the market price of the Company's stock at the date of grant. The shares vest
over a three-year performance period based upon certain specified financial
measures of the Company. Performance share activity was:
Year Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Outstanding at January 1 2,507,755 1,215,644 1,565,616
Sabre adjustment -- 1,665,432 --
Granted 913,422 1,277,539 509,822
Issued (194,128) (399,517) (208,265)
Awards settled in cash (706,302) (1,200,177) (513,370)
Canceled (33,945) (51,166) (138,159)
------------ ------------ ------------
Outstanding at December 31 2,486,802 2,507,755 1,215,644
============ ============ ============
The weighted-average grant date fair value per share of performance share
awards granted during 2001, 2000 and 1999 was $28.27, $32.93 and $62.95,
respectively.
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As required by SFAS 123, pro forma information
regarding income (loss) from continuing operations before extraordinary loss and
earnings (loss) per share from continuing operations before extraordinary loss
have been determined as if the Company had accounted for its employee stock
options and awards granted subsequent to December 31, 1994 using the fair value
method prescribed by SFAS 123. The fair value for the stock options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2001, 2000 and 1999: risk-free
interest rates ranging from 4.58% to 6.15%; dividend yields of 0%; expected
stock volatility ranging from 31.3% to 45.2%; and expected life of the options
of 4.5 years for the Plans and 1.5 years for The Pilot Plan.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
57
10. STOCK AWARDS AND OPTIONS (CONTINUED)
The following table shows the Company's pro forma income (loss) from
continuing operations before extraordinary loss and earnings (loss) per share
from continuing operations before extraordinary loss assuming the Company had
accounted for its employee stock options using the fair value method (in
millions, except per share amounts):
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Income (loss) from continuing operations before
extraordinary loss:
As reported $ (1,762) $ 779 $ 656
Pro forma (1,779) 772 651
Basic earnings (loss) per share from continuing
operations before extraordinary loss:
As reported $ (11.43) $ 5.20 $ 4.30
Pro forma (11.54) 5.15 4.27
Diluted earnings (loss) per share from continuing
operations before extraordinary loss:
As reported $ (11.43) $ 4.81 $ 4.17
Pro forma (11.54) 4.77 4.14
11. RETIREMENT BENEFITS
All regular employees of the Company are eligible to participate in
pension plans. The defined benefit plans provide benefits for participating
employees based on years of service and average compensation for a specified
period of time before retirement. Airline pilots also participate in a defined
contribution plan for which Company contributions are determined as a percentage
of participant compensation.
Effective January 1, 2001, American established a defined contribution
plan for non-contract employees in which the Company will contribute a match up
to 5.5 percent on employee contributions of pensionable earnings to the
Company's existing 401(k) plan. During 2000, American provided a one-time
election for current non-contract employees to remain in the defined benefit
plan or discontinue accruing future credited service in the defined benefit plan
as of January 1, 2001 and begin participation in the defined contribution plan.
Effective January 1, 2002, all new non-contract employees of the Company will
become members of the defined contribution plan.
In addition to pension benefits, other postretirement benefits, including
certain health care and life insurance benefits, are also provided to retired
employees. The amount of health care benefits is limited to lifetime maximums as
outlined in the plan. Substantially all regular employees of American and
employees of certain other subsidiaries may become eligible for these benefits
if they satisfy eligibility requirements during their working lives.
Certain employee groups make contributions toward funding a portion of
their retiree health care benefits during their working lives. AMR funds
benefits as incurred and makes contributions to match employee prefunding.
58
11. RETIREMENT BENEFITS (CONTINUED)
In connection with the acquisition of TWA in April 2001 (see Note 3), the
Company assumed certain retiree benefit plan liabilities of TWA, primarily its
postretirement benefit obligation. As such, the following information reflects
the inclusion of these obligations from the date of acquisition. In addition,
effective January 1, 2002, TWA employees were eligible to begin participation in
American's pension plans. However, these employees were not granted prior
credited service.
The following table provides a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended December
31, 2001 and 2000, and a statement of funded status as of December 31, 2001 and
2000 (in millions):
Pension Benefits Other Benefits
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Reconciliation of benefit obligation
Obligation at January 1 $ 6,434 $ 5,628 $ 1,708 $ 1,306
Service cost 260 213 66 43
Interest cost 515 467 175 108
Actuarial loss 416 499 205 328
Plan amendments 168 -- (12) --
Acquisition of TWA -- -- 734 --
Benefit payments (371) (373) (117) (77)
------------ ------------ ------------ ------------
Obligation at December 31 $ 7,422 $ 6,434 $ 2,759 $ 1,708
============ ============ ============ ============
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 5,731 $ 5,282 $ 88 $ 72
Actual return on plan assets 1 735 (5) 5
Employer contributions 121 85 129 88
Benefit payments (371) (373) (117) (77)
Transfers -- 2 -- --
------------ ------------ ------------ ------------
Fair value of plan assets at December 31 $ 5,482 $ 5,731 $ 95 $ 88
============ ============ ============ ============
Funded status
Accumulated benefit obligation (ABO) $ 6,041 $ 5,306 $ -- $ --
Projected benefit obligation (PBO) 7,422 6,434 -- --
Accumulated postretirement benefit
obligation (APBO) -- -- 2,759 1,708
Fair value of assets 5,482 5,731 95 88
Funded status at December 31 (1,940) (703) (2,664) (1,620)
Unrecognized loss (gain) 1,454 523 168 (51)
Unrecognized prior service cost 286 129 (42) (35)
Unrecognized transition asset (5) (6) -- --
------------ ------------ ------------ ------------
Accrued benefit cost $ (205) $ (57) $ (2,538) $ (1,706)
============ ============ ============ ============
As of December 31, 2001, the accumulated benefit obligation and the fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were approximately $4.2 billion and $3.6 billion,
respectively.
59
11. RETIREMENT BENEFITS (CONTINUED)
At December 31, 2001 and 2000, other benefits plan assets of
approximately $93 million and $88 million, respectively, were invested in shares
of mutual funds managed by a subsidiary of AMR.
The following tables provide the components of net periodic benefit cost
for the years ended December 31, 2001, 2000 and 1999 (in millions):
Pension Benefits
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Components of net periodic benefit cost
Defined benefit plans:
Service cost $ 260 $ 213 $ 236
Interest cost 515 467 433
Expected return on assets (539) (490) (514)
Amortization of:
Transition asset (1) (1) (4)
Prior service cost 11 10 5
Unrecognized net loss 22 17 21
------------ ------------ ------------
Net periodic benefit cost for
defined benefit plans 268 216 177
Defined contribution plans 244 174 155
------------ ------------ ------------
Total $ 512 $ 390 $ 332
============ ============ ============
Other Benefits
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Components of net periodic benefit cost
Service cost $ 66 $ 43 $ 56
Interest cost 175 108 108
Expected return on assets (9) (7) (6)
Amortization of:
Prior service cost (5) (5) (5)
Unrecognized net gain -- (14) --
------------ ------------ ------------
Net periodic benefit cost $ 227 $ 125 $ 153
============ ============ ============
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 2001 and 2000 (in millions):
Pension Benefits Other Benefits
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Prepaid benefit cost $ 123 $ 107 $ -- $ --
Accrued benefit liability (328) (225) (2,538) (1,706)
Additional minimum liability (335) (21) -- --
Intangible asset 163 72 -- --
Accumulated other comprehensive income
172 10 -- --
------------ ------------ ------------ ------------
Net amount recognized $ (205) $ (57) $ (2,538) $ (1,706)
============ ============ ============ ============
60
11. RETIREMENT BENEFITS (CONTINUED)
Pension Benefits Other Benefits
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Weighted-average assumptions as of December 31
Discount rate 7.50% 7.75% 7.50% 7.75%
Salary scale 4.26 4.26 -- --
Expected return on plan assets 9.50 9.50 9.50 9.50
The assumed health care cost trend rate was six percent in 2001,
decreasing gradually to an ultimate rate of 4.5 percent by 2004. The previously
assumed health care cost trend rate was seven percent in 2000, decreasing
gradually to an ultimate rate of four percent by 2004.
A one percentage point change in the assumed health care cost trend rates
would have the following effects (in millions):
One percent One percent
increase decrease
------------ ------------
Impact on 2001 service and interest cost $ 26 $ (24)
Impact on postretirement benefit obligation
as of December 31, 2001 $ 206 $ (196)
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows (in
millions):
Unrealized
Unrealized Gain/(Loss)
Minimum Gain/(Loss) on Derivative
Pension on Financial
Liability Investments Instruments Total
------------ ------------ ------------- ------------
Balance at December 31, 1998 $ (4) $ -- $ -- $ (4)
Current year net change 3 (1) -- 2
------------ ------------ ------------ ------------
Balance at December 31, 1999 (1) (1) -- (2)
Current year net change (5) 5 -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 (6) 4 -- (2)
Current year net change (101) 3 -- (98)
Cumulative effect of adoption of SFAS
133 as of January 1, 2001, net of
tax of $38 -- -- 64 64
Reclassification of derivative
financial instruments into earnings,
net of tax of $37 -- -- (62) (62)
Change in fair value of derivative
financial instruments, net of tax
of $30 -- -- (48) (48)
------------ ------------ ------------ ------------
Balance at December 31, 2001 $ (107) $ 7 $ (46) $ (146)
============ ============ ============ ============
As of December 31, 2001, the Company estimates during the next twelve
months it will reclassify from accumulated other comprehensive loss into net
earnings approximately $33 million relating to its derivative financial
instruments.
61
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in millions, except per share amounts):
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
------------- ------------- -------------
NUMERATOR:
Numerator for earnings (loss) per share - income
(loss) from continuing operations before
extraordinary loss $ (1,762) $ 779 $ 656
============= ============= =============
DENOMINATOR:
Denominator for basic earnings (loss) per share -
weighted-average shares 154 150 152
Effect of dilutive securities:
Employee options and shares -- 27 12
Assumed treasury shares purchased -- (15) (7)
------------- ------------- -------------
Dilutive potential common shares -- 12 5
Denominator for diluted earnings (loss) per share
- adjusted weighted-average shares 154 162 157
============= ============= =============
Basic earnings (loss) per share from continuing
operations before extraordinary loss $ (11.43) $ 5.20 $ 4.30
============= ============= =============
Diluted earnings (loss) per share from continuing
operations before extraordinary loss $ (11.43) $ 4.81 $ 4.17
============= ============= =============
For the year ended December 31, 2001, approximately 11 million potential
dilutive shares were not added to the denominator because inclusion of such
shares would be antidilutive.
14. DISCONTINUED OPERATIONS
During the first quarter of 1999, the Company sold AMR Services, AMR
Combs and TSR. As a result of these sales, the Company recorded a gain of
approximately $64 million, net of income taxes of approximately $19 million.
62
14. DISCONTINUED OPERATIONS (CONTINUED)
On February 7, 2000, the Company declared its intent to distribute AMR's
entire ownership interest in Sabre as a dividend on all outstanding shares of
its common stock. To effect the dividend, AMR exchanged all of its 107,374,000
shares of Sabre's Class B common stock for an equal number of shares of Sabre's
Class A common stock. Effective after the close of business on March 15, 2000,
AMR distributed 0.722652 shares of Sabre Class A common stock for each share of
AMR stock owned by AMR's shareholders. The record date for the dividend of Sabre
stock was the close of business on March 1, 2000. In addition, on February 18,
2000, Sabre paid a special one-time cash dividend of $675 million to
shareholders of record of Sabre common stock at the close of business on
February 15, 2000. Based upon its approximate 83 percent interest in Sabre, AMR
received approximately $559 million of this dividend. The dividend of AMR's
entire ownership interest in Sabre's common stock resulted in a reduction to
AMR's retained earnings in March of 2000 equal to the carrying value of the
Company's investment in Sabre on March 15, 2000, which approximated $581
million. The fair market value of AMR's investment in Sabre on March 15, 2000,
based upon the quoted market closing price of Sabre Class A common stock on the
New York Stock Exchange, was approximately $5.2 billion. In addition, effective
March 15, 2000, the Company reduced the exercise price and increased the number
of employee stock options and awards by approximately 19 million to offset the
dilution to the holders, which occurred as a result of the spin-off. These
changes were made to keep the holders in the same economic position as before
the spin-off. This dilution adjustment was determined in accordance with
Emerging Issues Task Force Consensus No. 90-9, "Changes to Fixed Employee Stock
Option Plans as a Result of Equity Restructuring", and had no impact on
earnings.
The results of operations for Sabre, AMR Services, AMR Combs and TSR have
been reflected in the consolidated statements of operations as discontinued
operations. Summarized financial information of the discontinued operations is
as follows (in millions):
Year Ended December 31,
------------------------------
2000 1999
------------ -------------
SABRE
Revenues $ 542 $ 2,435
Minority interest 10 57
Income taxes 36 196
Net income 43 265
AMR SERVICES, AMR COMBS AND TSR
Revenues $ -- $ 97
Income taxes -- --
Net income -- --
15. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", as amended (SFAS 131),
requires that a public company report annual and interim financial and
descriptive information about its reportable operating segments. Operating
segments, as defined, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
The Company has two primary operating segments, consisting primarily of
American and AMR Eagle, which represent one reportable segment. Following the
acquisition of TWA in April 2001 (see Note 3), American is the largest scheduled
passenger airlines in the world. At the end of 2001, American provided scheduled
jet service to more than 161 destinations throughout North America, the
Caribbean, Latin America, Europe and the Pacific. American is also one of the
largest scheduled air freight carriers in the world, providing a full range of
freight and mail services to shippers throughout its system. AMR Eagle owns two
regional airlines which do business as "American Eagle" - American Eagle
Airlines, Inc. and Executive Airlines, Inc. The American Eagle carriers provide
connecting service from eight of American's high-traffic cities to smaller
markets throughout the United States, Canada, the Bahamas and the Caribbean.
63
15. SEGMENT REPORTING (CONTINUED)
Revenues from other segments are below the quantitative threshold for
determining reportable segments and consist primarily of revenues from AMR
Investment Services, Inc. and Americas Ground Services, Inc. The difference
between the financial information of the Company's one reportable segment and
the financial information included in the consolidated statements of operations
and balance sheets as a result of these entities is not material.
The Company's operating revenues by geographic region are summarized
below (in millions):
Year Ended December 31,
----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Domestic $ 13,657 $ 13,881 $ 12,563
Latin America 2,732 2,907 2,697
Europe 2,076 2,338 1,984
Pacific 498 577 486
------------ ------------ ------------
Total consolidated revenues $ 18,963 $ 19,703 $ 17,730
============ ============ ============
The Company attributes operating revenues by geographic region based upon
the origin and destination of each flight segment. The Company's tangible assets
consist primarily of flight equipment which is mobile across geographic markets
and, therefore, has not been allocated.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 2001 and 2000 (in
millions, except per share amounts):
First Second Third Fourth
Quarter (*) Quarter Quarter Quarter
------------ ------------ ------------ ------------
2001
Operating revenues $ 4,760 $ 5,583 $ 4,816 $ 3,804
Operating loss (4) (760) (558) (1,148)
Net loss (43) (507) (414) (798)
Loss per share:
Basic (0.28) (3.29) (2.68) (5.17)
Diluted (0.28) (3.29) (2.68) (5.17)
2000
Operating revenues $ 4,577 $ 5,011 $ 5,256 $ 4,859
Operating income 212 517 572 80
Income from continuing operations
before extraordinary loss 89 321 322 47
Net earnings 132 321 313 47
Earnings per share:
Basic
From continuing operations
before extraordinary loss 0.60 2.15 2.14 0.31
Net earnings 0.89 2.15 2.08 0.31
Diluted
From continuing operations
before extraordinary loss 0.57 1.96 1.96 0.29
Net earnings 0.86 1.96 1.91 0.29
(*) Certain amounts for the first quarter of 2001 related to the Company's
fuel hedging program have been reclassified to conform with the 2001
presentation.
64
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The following table summarizes the special charges - net of U.S.
Government grant recorded by the Company during the second, third and fourth
quarters of 2001 (in millions):
Second Third Fourth
Quarter Quarter Quarter
------------- ------------- -------------
Aircraft charges $ 685 $ 496 $ 56
Facility exit costs - 61 54
Employee charges - 55 16
Other - 20 23
------------- ------------- -------------
Total special charges 685 632 149
Less: U.S. Government grant - (809) (47)
------------- ------------- -------------
$ 685 $ (177) $ 102
============= ============= =============
See Note 2 for a further discussion of special charges - net of U.S.
Government grant.
In addition to the above items, during the second quarter of 2001, the
Company recorded a gain of $45 million from the settlement of a legal matter
related to the Company's 1999 labor disruption.
During the second quarter of 2000, the Company recorded a gain of
approximately $57 million from the sale of the Company's warrants to purchase
5.5 million shares of priceline common stock (see Note 4). During the third
quarter of 2000, the Company recorded a $14 million extraordinary loss on the
repurchase prior to scheduled maturity of long-term debt (see Note 7). Results
for the fourth quarter of 2000 included a gain of approximately $41 million for
the recovery of start-up expenses related to the Canadian services agreement
(see Note 4) and a charge of approximately $56 million for the Company's
employee home computer program.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders on May 15, 2002. Information
concerning the executive officers is included in Part I of this report on pages
18 and 19.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders on May 15, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders on May 15, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders on May 15, 2002.
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and Independent Auditors'
Report are filed as part of this report:
Page
--------------
Report of Independent Auditors 35
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 36-37
Consolidated Balance Sheets at December 31, 2001 and 2000 38-39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 40
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999 41
Notes to Consolidated Financial Statements 42-65
66
(2) The following financial statement schedule and Independent
Auditors' Report are filed as part of this report:
Page
--------------
Report of Independent Auditors 75
Schedule II Valuation and Qualifying Accounts and Reserves 76
Schedules not included have been omitted because they are not
applicable or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
(Where the amount of securities authorized to be issued under any
of 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.)
EXHIBIT
-------
3.1 Restated Certificate of Incorporation of AMR,
incorporated by reference to AMR's Registration
Statement on Form S-4, file number 33-55191.
3.2 Bylaws of AMR, amended as of November 18, 1998,
incorporated by reference to Exhibit 3.2 to AMR's
report on Form 10-K for the year ended December 31,
1998.
3.3 Bylaws of AMR, amended as of January 19, 2000,
incorporated by reference to Exhibit 3.3 to AMR's
report on Form 10-K for the year ended December 31,
1999.
10.1 Amended and Restated Employment Agreement among AMR,
American Airlines and Robert L. Crandall, dated
January 21, 1998, incorporated by reference to
Exhibit 10.2 to AMR's report on Form 10-K for the
year ended December 31, 1997.
10.2 Compensation and Benefit Agreement relative to the
retirement of Robert L. Crandall, between AMR and
Robert L. Crandall, dated September 18, 1998,
incorporated by reference to Exhibit 10.3 to AMR's
report on Form 10-K for the year ended December 31,
1998.
10.3 Description of informal arrangement relating to
deferral of payment of directors' fees, incorporated
by reference to Exhibit 10(c)(11) to American's
Registration Statement No. 2-76709.
10.4 Deferred Compensation Agreement, dated as of June 1,
1998, between AMR and Edward A. Brennan, incorporated
by reference to Exhibit 10.15 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.5 Deferred Compensation Agreement, dated as of January
11, 2000, between AMR and Edward A. Brennan,
incorporated by reference to Exhibit 10.15(a) to
AMR's report on Form 10-K for the year ended December
31, 1999.
10.6 Changes to the Deferred Compensation Agreement, dated
as of June 2, 1998, between AMR and Edward A.
Brennan, incorporated by reference to Exhibit 10.14
to AMR's report on Form 10-K for the year ended
December 31, 2000.
10.7 Deferred Compensation Agreement, dated as of February
19, 1998, between AMR and Armando M. Codina,
incorporated by reference to Exhibit 10.15 to AMR's
report on Form 10-K for the year ended December 31,
1997.
67
10.8 Deferred Compensation Agreement, dated as of January
13, 1999, between AMR and Armando M. Codina,
incorporated by reference to Exhibit 10.19 to AMR's
report on Form 10-K for the year ended December 31,
1998.
10.9 Deferred Compensation Agreement, dated as of January
12, 2000, between AMR and Armando M. Codina,
incorporated by reference to Exhibit 10.20 to AMR's
report on Form 10-K for the year ended December 31,
1999.
10.10 Deferred Compensation Agreement, dated as of January
22, 2001, between AMR and Armando M. Codina,
incorporated by reference to Exhibit 10.20 to AMR's
report on Form 10-K for the year ended December 31,
2000.
10.11 Deferred Compensation Agreement, dated as of July 16,
1997, between AMR and Judith Rodin, incorporated by
reference to Exhibit 10.22 to AMR's report on Form
10-K for the year ended December 31, 1997.
10.12 Deferred Compensation Agreement, dated as of February
19, 1998, between AMR and Judith Rodin, incorporated
by reference to Exhibit 10.23 to AMR's report on Form
10-K for the year ended December 31, 1997.
10.13 Deferred Compensation Agreement, dated as of January
7, 1999, between AMR and Judith Rodin, incorporated
by reference to Exhibit 10.30 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.14 Deferred Compensation Agreement, dated as of January
12, 2000, between AMR and Judith Rodin, incorporated
by reference to Exhibit 10.29 to AMR's report on Form
10-K for the year ended December 31, 1999.
10.15 Deferred Compensation Agreement, dated as of January
22, 2001, between AMR and Judith Rodin, incorporated
by reference to Exhibit 10.25 to AMR's report on Form
10-K for the year ended December 31, 2000.
10.16 Deferred Compensation Agreement, dated as of January
19, 2001, between AMR and Philip J. Purcell,
incorporated by reference to Exhibit 10.26 to AMR's
report on Form 10-K for the year ended December 31,
2000.
10.17 Description of American's Split Dollar Insurance
Program, dated December 28, 1977, incorporated by
reference to Exhibit 10(c)(1) to American's
Registration Statement No. 2-76709.
10.18 AMR Corporation 1998 Long-Term Incentive Plan, as
amended, incorporated by reference to Exhibit 10.34
to AMR's report on Form 10-K for the year ended
December 31, 1998.
10.19 Current form of Stock Option Agreement under the AMR
1988 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.28 to AMR's report on Form
10-K for the year ended December 31, 1997.
10.20 Current form of Stock Option Agreement under the AMR
1998 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.37 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.21 Current form of Stock Option Agreement under the AMR
1998 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.37 to AMR's report on Form
10-K for the year ended December 31, 1999.
68
10.22 Current form of Stock Option Agreement under the AMR
1998 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.35 to AMR's report on Form
10-K for the year ended December 31, 2000.
10.23 Current Form of Career Equity Program Deferred Stock
Award Agreement for Corporate Officers under the AMR
1988 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.30 to AMR's report on Form
10-K for the year ended December 31, 1997.
10.24 Current form of Career Equity Program Deferred Stock
Award Agreement for non-officers under the AMR 1988
Long-Term Incentive Plan, incorporated by reference
to Exhibit 10.31 to AMR's report on Form 10-K for the
year ended December 31, 1997.
10.25 Current Form of Career Equity Program Deferred Stock
Award Agreement for Corporate Officers under the AMR
1998 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.41 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.26 Current form of Career Equity Program Deferred Stock
Award Agreement for non-officers under the AMR 1998
Long-Term Incentive Plan, incorporated by reference
to Exhibit 10.42 to AMR's report on Form 10-K for the
year ended December 31, 1998.
10.27 Current form of Career Equity Program Deferred Stock
Award Agreement for Senior Officers under the AMR
1998 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.42(a) to AMR's report on Form
10-K for the year ended December 31, 1998.
10.28 Current form of Career Equity Program Deferred Stock
Award Agreement for Employees under the AMR 1998
Long-Term Incentive Plan, incorporated by reference
to Exhibit 10.44 to AMR's report on Form 10-K for the
year ended December 31, 1999.
10.29 Form of Performance Share Program for the years 1997
to 1999 under the 1988 Long-Term Incentive Program,
incorporated by reference to Exhibit 10.37 to AMR's
report on Form 10-K for the year ended December 31,
1997.
10.30 Performance Share Program for the years 1998 to 2000
under the 1988 Long-Term Incentive Program,
incorporated by reference to Exhibit 10.38 to AMR's
report on Form 10-K for the year ended December 31,
1997.
10.31 Performance Share Program for the years 1999 to 2001
under the 1998 Long-Term Incentive Program,
incorporated by reference to Exhibit 10.50 to AMR's
report on Form 10-K for the year ended December 31,
1998.
10.32 Performance Share Program for the years 2000 to 2002
under the 1998 Long-Term Incentive Program,
incorporated by reference to Exhibit 10.53 to AMR's
report on Form 10-K for the year ended December 31,
1999.
10.33 Performance Share Program for the years 2001 to 2003
under the 1998 Long-Term Incentive Program,
incorporated by reference to Exhibit 10.52 to AMR's
report on Form 10-K for the year ended December 31,
2000.
10.34 Form of Performance Share Program for the years 2001
to 2003 under the 1998 Long-Term Incentive Program,
incorporated by reference to Exhibit 10.53 to AMR's
report on Form 10-K for the year ended December 31,
2000.
10.35 AMR Corporation 1987 Executive Deferral Plan, as
amended through 1999, incorporated by reference to
Exhibit 10.52 to AMR's report on Form 10-K for the
year ended December 31, 1998.
69
10.36 American Airlines, Inc. 1998 Employee Profit Sharing
Plan, incorporated by reference to Exhibit 10.43 to
AMR's report on Form 10-K for the year ended December
31, 1997.
10.37 American Airlines, Inc. 1999 Employee Profit Sharing
Plan, incorporated by reference to Exhibit 10.56 to
AMR's report on Form 10-K for the year ended December
31, 1998.
10.38 American Airlines, Inc. 2000 Employee Profit Sharing
Plan, incorporated by reference to Exhibit 10.60 to
AMR's report on Form 10-K for the year ended December
31, 1999.
10.39 American Airlines, Inc. 2001 Employee Profit Sharing
Plan, incorporated by reference to Exhibit 10.60 to
AMR's report on Form 10-K for the year ended December
31, 2000.
10.40 American Airlines, Inc. 1998 Incentive Compensation
Plan for Officers and Key Employees, incorporated by
reference to Exhibit 10.46 to AMR's report on Form
10-K for the year ended December 31, 1997.
10.41 American Airlines, Inc. 1999 Incentive Compensation
Plan for Officers and Key Employees, incorporated by
reference to Exhibit 10.60 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.42 American Airlines, Inc. 2000 Incentive Compensation
Plan for Officers and Key Employees, incorporated by
reference to Exhibit 10.65 to AMR's report on Form
10-K for the year ended December 31, 1999.
10.43 American Airlines, Inc. 2001 Incentive Compensation
Plan for Officers and Key Employees, incorporated by
reference to Exhibit 10.66 to AMR's report on Form
10-K for the year ended December 31, 2000.
10.44 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Gerard
J. Arpey, dated May 21, 1998, incorporated by
reference to Exhibit 10.61 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.45 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Robert
W. Baker, dated May 21, 1998, incorporated by
reference to Exhibit 10.62 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.46 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Peter M.
Bowler, dated May 21, 1998, incorporated by reference
to Exhibit 10.63 to AMR's report on Form 10-K for the
year ended December 31, 1998.
10.47 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Donald
J. Carty, dated May 21, 1998, incorporated by
reference to Exhibit 10.64 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.48 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Peter J.
Dolara, dated May 21, 1998, incorporated by reference
to Exhibit 10.65 to AMR's report on Form 10-K for the
year ended December 31, 1998.
10.49 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Daniel
P. Garton, dated May 21, 1998, incorporated by
reference to Exhibit 10.66 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.50 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Michael
W. Gunn, dated May 21, 1998, incorporated by
reference to Exhibit 10.67 to AMR's report on Form
10-K for the year ended December 31, 1998.
70
10.51 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Monte E.
Ford, dated November 15, 2000, incorporated by
reference to Exhibit 10.74 to AMR's report on Form
10-K for the year ended December 31, 2000.
10.52 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Thomas
W. Horton, dated January 19, 2000, incorporated by
reference to Exhibit 10.73 to AMR's report on Form
10-K for the year ended December 31, 1999.
10.53 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Henry C.
Joyner, dated January 19, 2000, incorporated by
reference to Exhibit 10.74 to AMR's report on Form
10-K for the year ended December 31, 1999.
10.54 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Thomas
J. Kiernan, dated May 21, 1998, incorporated by
reference to Exhibit 10.68 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.55 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and David L.
Kruse, dated May 21, 1998, incorporated by reference
to Exhibit 10.69 to AMR's report on Form 10-K for the
year ended December 31, 1998.
10.56 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Charles
D. MarLett, dated May 21, 1998, incorporated by
reference to Exhibit 10.70 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.57 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Anne H.
McNamara, dated May 21, 1998, incorporated by
reference to Exhibit 10.71 to AMR's report on Form
10-K for the year ended December 31, 1998.
10.58 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Susan M.
Oliver, dated September 22, 2000, incorporated by
reference to Exhibit 10.81 to AMR's report on Form
10-K for the year ended December 31, 2000.
10.59 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and William
K. Ris, Jr., dated October 20, 1999, incorporated by
reference to Exhibit 10.79 to AMR's report on Form
10-K for the year ended December 31, 1999.
10.60 Aircraft Purchase Agreement by and between American
Airlines, Inc. and The Boeing Company, dated October
31, 1997, incorporated by reference to Exhibit 10.48
to AMR's report on Form 10-K for the year ended
December 31, 1997. Confidential treatment was granted
as to a portion of this document.
10.61 Aircraft Purchase Agreement by and between AMR Eagle
Holding Corporation and Bombardier Inc., dated
January 31, 1998, incorporated by reference to
Exhibit 10.49 to AMR's report on Form 10-K for the
year ended December 31, 1997. Confidential treatment
was granted as to a portion of this document.
10.62 Aircraft Purchase Agreement by and between AMR Eagle,
Inc. and Embraer-Empresa Brasileira de Aeronautica
S.A., dated December 22, 1997, incorporated by
reference to Exhibit 10.50 to AMR's report on Form
10-K for the year ended December 31, 1997.
Confidential treatment was granted as to a portion of
this document.
71
10.63 Aircraft Purchase Agreement by and between AMR Eagle
Holding Corporation and Embraer-Empresa Brasileira de
Aeronautica S.A., dated September 30, 1998,
incorporated by reference to Exhibit 10.76 to AMR's
report on Form 10-K for the year ended December 31,
1998. Confidential treatment was granted as to a
portion of this document.
10.64 Amended and Restated Asset Purchase Agreement, dated
as of February 28, 2001, by and between American
Airlines, Inc. and Trans World Airlines, Inc.,
incorporated by reference to Exhibit 10.88 to AMR's
report on Form 10-K for the year ended December 31,
2000.
10.65 Amendment No. 1 to Amended and Restated Asset
Purchase Agreement, dated as of March 9, 2001, by and
between American Airlines, Inc. and Trans World
Airlines, Inc., incorporated by reference to Exhibit
10.89 to AMR's report on Form 10-K for the year ended
December 31, 2000.
10.66 Secured Debtor In Possession Credit and Security
Agreement dated as of January 10, 2001 between Trans
World Airlines, Inc. and AMR Finance, Inc.,
incorporated by reference to Exhibit 10.90 to AMR's
report on Form 10-K for the year ended December 31,
2000.
10.67 Letter Agreement/Amendment to Secured Debtor In
Possession Credit and Security Agreement dated as of
January 11, 2001 between Trans World Airlines, Inc.
and AMR Finance, Inc., incorporated by reference to
Exhibit 10.91 to AMR's report on Form 10-K for the
year ended December 31, 2000.
10.68 Letter Agreement/Amendment to Secured Debtor In
Possession Credit and Security Agreement dated as of
January 26, 2001 between Trans World Airlines, Inc.
and AMR Finance, Inc., incorporated by reference to
Exhibit 10.92 to AMR's report on Form 10-K for the
year ended December 31, 2000.
10.69 Letter Agreement/Amendment to Secured Debtor In
Possession Credit and Security Agreement dated as of
March 7, 2001 between Trans World Airlines, Inc. and
AMR Finance, Inc., incorporated by reference to
Exhibit 10.93 to AMR's report on Form 10-K for the
year ended December 31, 2000.
10.70 First Amendment to Secured Debtor In Possession
Credit and Security Agreement dated as of March 12,
2001 between Trans World Airlines, Inc. and AMR
Finance, Inc., incorporated by reference to Exhibit
10.94 to AMR's report on Form 10-K for the year ended
December 31, 2000.
12 Computation of ratio of earnings to fixed charges for
the years ended December 31, 1997, 1998, 1999, 2000
and 2001.
21 Significant subsidiaries of the registrant as of
December 31, 2001.
23 Consent of Independent Auditors.
72
(b) Reports on Form 8-K:
Form 8-Ks filed under Item 5 - Other Events
On November 13, 2001, AMR filed a report on Form 8-K relative to a press
release issued by American to confirm that Flight 587, an American Airlines
Airbus A300 aircraft en route from New York's John F. Kennedy (JFK) airport to
Santo Domingo, crashed near JFK airport on November 12, 2001.
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure
On November 1, 2001, AMR filed a report on Form 8-K to announce that Don
Carty, Chairman and CEO of AMR Corporation, will be speaking at the 16th Annual
Salomon Smith Barney Transportation Conference on November 6, 2001.
On December 19, 2001, AMR filed a report on Form 8-K to provide certain
data regarding its unit costs, capacity, traffic and fuel, a monthly update, and
an updated fleet plan.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMR CORPORATION
/s/ Donald J. Carty
-------------------------------------------------
Donald J. Carty
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas W. Horton
-------------------------------------------------
Thomas W. Horton
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates noted:
Directors:
/s/ John W. Bachmann /s/ Michael A. Miles
------------------------------------------------------- ----------------------------------------------------
John W. Bachmann Michael A. Miles
/s/ David L. Boren /s/ Philip J. Purcell
------------------------------------------------------- ----------------------------------------------------
David L. Boren Philip J. Purcell
/s/ Edward A. Brennan /s/ Joe M. Rodgers
------------------------------------------------------- ----------------------------------------------------
Edward A. Brennan Joe M. Rodgers
/s/ Armando M. Codina /s/ Judith Rodin
------------------------------------------------------- ----------------------------------------------------
Armando M. Codina Judith Rodin
/s/ Earl G. Graves /s/ Roger T. Staubach
------------------------------------------------------- ----------------------------------------------------
Earl G. Graves Roger T. Staubach
/s/ Ann McLaughlin Korologos
-------------------------------------------------------
Ann McLaughlin Korologos
Date: February 27, 2002
74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AMR Corporation
We have audited the consolidated financial statements of AMR Corporation
as of December 31, 2001 and 2000, and for each of the three years in the period
ended December 31, 2001, and have issued our report thereon dated January 15,
2002. Our audits also included Schedule II - Valuation and Qualifying Accounts
and Reserves. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this schedule based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 15, 2002
75
AMR CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
INCREASES SALES,
BALANCE CHARGED TO INCREASES RETIRE- BALANCE
AT INCOME CHARGED TO WRITE-OFFS MENTS AT
BEGINNING STATEMENT OTHER (NET OF AND END OF
OF YEAR ACCOUNTS ACCOUNTS PAYMENTS RECOVERIES) TRANSFERS YEAR
------------ ------------ ------------ ------------ ------------ ------------ --------
(NOTE)
YEAR ENDED DECEMBER 31, 2001
Allowance for
obsolescence of inventories $ 332 $ 67 $ -- $ -- $ -- $ (16) $ 383
Allowance for
uncollectible accounts 27 19 -- -- 6 -- 52
Reserves for maintenance
activities 35 53 -- (46) -- -- 42
Reserves for environmental
remediation costs 70 24 19 (29) -- -- 84
Reserves for litigation 29 6 -- (29) -- -- 6
YEAR ENDED DECEMBER 31, 2000
Allowance for
obsolescence of inventories 279 62 -- -- -- (9) 332
Allowance for
uncollectible accounts 57 18 -- -- (48) -- 27
Reserves for maintenance
activities 38 52 -- (55) -- -- 35
Reserves for environmental
remediation costs 65 24 -- (19) -- -- 70
Reserves for litigation 31 -- -- (2) -- -- 29
YEAR ENDED DECEMBER 31, 1999
Allowance for
obsolescence of inventories 214 59 -- -- -- 6 279
Allowance for
uncollectible accounts 19 34 -- -- 4 -- 57
Reserves for maintenance
activities 31 50 -- (43) -- -- 38
Reserves for environmental
remediation costs 23 48 -- (6) -- -- 65
Reserves for litigation -- 39 -- (8) -- -- 31
Note: Amount was established as part of the April 2001 acquisition of TWA (see
Note 3 to the consolidated financial statements) and was charged to
goodwill on the consolidated balance sheets.
76
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
12 Computation of ratio of earnings to fixed charges for
the years ended December 31, 1997, 1998, 1999, 2000
and 2001.
21 Significant subsidiaries of the registrant as of
December 31, 2001.
23 Consent of Independent Auditors.