United States
Securities and Exchange Commission
Washington, D.C. 20549
___________________________
Form 10-K/A
(Amendment No. 1)
x Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2005
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-2691
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1502798
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal executive offices, including zip code)
(817) 963-1234
(Registrant's telephone number, including area code)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
______________________________
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
x Yes No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes x No
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. x Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer" and "large accelerated filer" in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer x Non-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes x No
American Airlines, Inc. is a wholly-owned subsidiary of AMR
Corporation, and there is no market for the registrant's common stock.
As of February 17, 2006, 1,000 shares of the registrant's common stock
were outstanding.
The registrant meets the conditions set forth in, and is filing this
form with the reduced disclosure format prescribed by, General
Instructions I(1)(a) and (b) of Form 10-K.
EXPLANATORY NOTE
In response to comments raised by the Staff of the Securities and
Exchange Commission, this Form 10-K/A (Amendment No. 1) is being filed
by American Airlines, Inc. (the Company) to supplement the Company's
description of its decision to change the depreciable lives of certain
of its aircraft types in Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) in the Form 10-K
for the year ended December 31, 2005 that was originally filed with
the Securities and Exchange Commission on February 24, 2006.
As the amendment only relates to Item 7, MD&A, the previously issued
consolidated financial statements and footnotes thereto are unchanged.
No attempt has been made in this Form 10-K/A to modify or update
disclosures in the original report on Form 10-K (original Form 10-K)
except as required to address the additional description of the change
in depreciable lives. This Form 10-K/A does not reflect events
occurring after the filing of the original Form 10-K or modify or
update any related disclosures. Information not affected by the
amendment is unchanged and reflects the disclosure made at the time of
the filing of the original Form 10-K with the Securities and Exchange
Commission on February 24, 2006. Accordingly, this Form 10-K/A should
be read in conjunction with the original Form 10-K and the Company's
filings made with the Securities and Exchange Commission subsequent to
the filing of the original Form 10-K, including any amendments to
those filings.
In accordance with Rule 12b-15 promulgated under the Securities and
Exchange Act of 1934, as amended, the complete text of Item 7, MD&A,
is set forth herein, including those portions of the text that have
not been amended from that set forth in the original Form 10-K. The
only changes to the text in Item 7 of the original Form 10-K are as
follows:
- The paragraph under Results of Operations (page 30 of the
original Form 10-K) was amended to detail the location of additional
description related to the change in depreciable lives of the
Company's aircraft.
- A paragraph was added to Result of Operations (page 30 of the
original Form 10-K).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Abbreviated pursuant to General Instructions I(2)(a) of Form 10-K).
Forward-Looking Information
The discussions under Business, Risk Factors, Properties and Legal
Proceedings and the following discussions under Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative Disclosures about Market
Risk 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," "indicates,"
"believes," "forecast," "guidance," "outlook," "may," "will,"
"should," 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, future financing plans and needs, overall economic conditions,
plans and objectives for future operations, and the impact on the
Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate
solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events, or otherwise. The Risk Factors listed in Item 1A, in
addition to other possible factors not listed, could cause the
Company's actual results to differ materially from historical results
and from those expressed in forward-looking statements.
Overview
The Company has incurred very large operating and net losses during
the past five years, as shown in the following table:
Year ended December 31,
(in millions) 2005 2004 2003 2002 2001
Operating loss $ (351) $ (421) $ (1,129) $ (3,313) $(2,274)
Net loss (892) (821) (1,318) (3,495) (1,562)
These losses reflect, among other things, a substantial decrease in
the Company's revenues in 2001 and 2002. This revenue decrease was
primarily driven by (i) a steep fall-off in the demand for air travel,
particularly business travel, primarily caused by weakness in the U.S.
economy, (ii) reduced pricing power, resulting mainly from greater
cost sensitivity on the part of travelers (especially business
travelers), increasing competition from LCCs, and the use of the
Internet and (iii) the aftermath of the Terrorist Attacks, which
accelerated and exacerbated the trend of decreased demand and reduced
industry revenues. Subsequent to 2002, passenger traffic significantly
improved, reflecting a general economic improvement. In 2005,
mainline passenger load factor increased 3.8 points year-over-year to
78.6 percent. In addition, mainline passenger revenue yield began
rebounding in 2005 and increased 4.0 percent year-over-year. However,
passenger revenue yield remains depressed by historical standards. The
Company believes this depressed passenger yield is the result of its
reduced pricing power resulting from the factors listed in clause (ii)
above, and other factors, which the Company believes will persist
indefinitely and possibly permanently.
1
The Company's 2004 and 2005 financial results were also adversely
affected by significant increases in the price of jet fuel. The
average price per gallon of fuel increased 33.7 cents from 2003 to
2004 and 51.1 cents from 2004 to 2005. These price increases
negatively impacted fuel expense by $1.0 billion and $1.5 billion in
2004 and 2005, respectively. Continuing high fuel prices, additional
increases in the price of fuel, and/or disruptions in the supply of
fuel, would further adversely affect the Company's financial condition
and its results of operations.
In response to the challenges faced by the Company, during the past
five years the Company has implemented several restructuring and other
initiatives:
- Following the Terrorist Attacks, the Company reduced its
operating schedule by approximately 20 percent and reduced its
workforce by approximately 20,000 jobs.
- In 2002, the Company announced a series of initiatives to reduce
its annual costs by $2 billion. These initiatives involved: (i)
scheduling efficiencies, (ii) fleet simplification, (iii) streamlined
customer interaction, (iv) distribution modifications, (v) in-flight
product changes, (vi) operational changes and (vii)
headquarters/administration efficiencies. As a result of these
initiatives, the Company reduced an estimated 7,000 jobs by March
2003.
- In February 2003, the Company asked its employees for
approximately $1.8 billion in annual savings through a combination of
changes in wages, benefits and work rules. In April 2003, American
reached agreements with its three unions (the Labor Agreements) and
also implemented various changes in the pay plans and benefits for non-
unionized personnel, including officers and other management (the
Management Reductions). The Labor Agreements and Management Reductions
resulted in an estimated $1.8 billion in annual savings and included a
workforce reduction of approximately 9,300 jobs. In addition,
American reached concessionary agreements with certain vendors,
lessors, lenders and suppliers (collectively, the Vendors, and the
agreements, the Vendor Agreements), resulting in an estimated $200
million in annual cost savings. Generally, under the terms of these
Vendor Agreements, American received the benefit of lower rates and
charges for certain goods and services, and more favorable rent and
financing terms with respect to certain of its aircraft.
- Subsequent to the April 2003 Labor Agreements and Management
Reductions, the Company announced the Turnaround Plan. The Turnaround
Plan is the Company's strategic framework for returning to sustained
profitability and emphasizes: (i) lower costs, (ii) an increased focus
on what customers' truly value and are prepared to pay for, (iii)
increased union and employee involvement in the operation of the
Company and (iv) the need for a more sound balance sheet and financial
structure.
- Subsequent to the announcement of the Turnaround Plan, the
Company has worked with its unions and employees to identify and
implement additional initiatives designed to increase efficiencies and
revenues and reduce costs. These initiatives included: (i) the return
of under-used gate space and the consolidation of terminal space, (ii)
the de-peaking of its hub at Miami, the reduction in the size of its
St. Louis hub and the simplification of its domestic operations, (iii)
the acceleration of the retirement of certain aircraft and the
cancellation or deferral of aircraft deliveries, (iv) the improvement
of aircraft utilization across its fleet and an increase in seating
density on certain fleet types, (v) the sale of certain non-core
assets, (vi) the expansion of its international network, where the
Company believes that higher revenue generating opportunities
currently exist, (vii) the implementation of an on-board food purchase
program and new fees for ticketing and baggage services, (viii) lower
distribution costs, (ix) the implementation of fuel conservation
initiatives, (x) the increase in third-party maintenance contracts
obtained by the Company's Maintenance and Engineering group, (xi)
upgrading of flight navigation systems to provide more direct routings
and (xii) numerous other initiatives.
- As part of its effort to build greater employee involvement, the
Company has sought to make its labor unions and its employees its
business partners in working for continuous improvement under the
Turnaround Plan. Among other things, the senior management of the
Company meets regularly with union officials to discuss the Company's
financial results as well as the competitive landscape. These
discussions include (i) the Company's own cost reduction and revenue
enhancement initiatives, (ii) a review of initiatives, in-place or
contemplated, at other airlines and the impact of those initiatives on
the Company's competitive position, and (iii) benchmarking the
Company's revenues and costs against what would be considered "best in
class" (the Company's Performance Leadership Initiative).
2
These initiatives have significantly improved the Company's cost
structure and resulted in the Company achieving what the Company
believes to be the lowest unit costs of the traditional carriers in
2004. However, a significant number of the Company's competitors have
recently reorganized or are reorganizing, including under the
protection of Chapter 11 of the Bankruptcy Code, including Delta,
United, US Airways and Northwest. These competitors are significantly
reducing their cost structures through bankruptcy, resulting in the
Company's cost structure once again becoming less competitive.
The Company's ability to become profitable and its ability to continue
to fund its obligations on an ongoing basis will depend on a number of
factors, many of which are largely beyond the Company's control. Some
of the risk factors that affect the Company's business and financial
results are discussed in the Risk Factors listed in Item 1A. As the
Company seeks to improve its financial condition, it must continue to
take steps to generate additional revenues and significantly reduce
its costs. Although the Company has a number of initiatives underway
to address its cost and revenue challenges, the ultimate success of
these initiatives is not known at this time and cannot be assured. It
will be very difficult, absent continued restructuring of its
operations, for the Company to continue to fund its obligations on an
ongoing basis, or to become profitable, if the overall industry
revenue environment does not continue to improve and fuel prices
remain at historically high levels for an extended period.
3
Cash, Short-Term Investments and Restricted Assets
At December 31, 2005, the Company had $3.8 billion in unrestricted
cash and short-term investments and $510 million in restricted cash
and short-term investments.
Significant Indebtedness and Future Financing
Substantial indebtedness is a significant risk to the Company as
discussed in the Risk Factors listed in Item 1A. During 2003, 2004
and 2005, in addition to refinancing its Credit Facility and certain
debt with an institutional investor (see Note 6 to the consolidated
financial statements), the Company raised an aggregate of
approximately $2.2 billion of financing to fund capital commitments
(mainly for aircraft and ground properties) and operating losses and
to bolster its liquidity. As of the date of this Form 10-K, the
Company believes that it should have sufficient liquidity to fund its
operations for the foreseeable future, including repayment of debt and
capital leases, capital expenditures and other contractual
obligations. However, to maintain sufficient liquidity as the Company
continues to implement its restructuring and cost reduction
initiatives, and because the Company has significant debt, lease and
other obligations in the next several years, as well as substantial
pension funding obligations (refer to Commitments in this Item 7), the
Company will need access to additional funding. The Company's possible
financing sources primarily include: (i) a limited amount of
additional secured aircraft debt (a very large majority of the
Company's owned aircraft, including virtually all of the Company's
Section 1110-eligible aircraft, are encumbered) or sale-leaseback
transactions involving owned aircraft, (ii) debt secured by new
aircraft deliveries, (iii) debt secured by other assets, (iv)
securitization of future operating receipts, (v) the sale or
monetization of certain assets and (vi) unsecured debt. However, the
availability and level of these financing sources cannot be assured,
particularly in light of American's recent financial results,
substantial indebtedness, reduced credit ratings, high fuel prices,
historically weak revenues and the financial difficulties being
experienced in the airline industry. The inability of the Company to
obtain additional funding on acceptable terms would have a material
adverse impact on the ability of the Company to sustain its operations
over the long-term.
Credit Ratings
American's credit ratings are significantly below investment grade.
Additional reductions in its credit ratings could further increase its
borrowing or other costs and further restrict the availability of
future financing.
Credit Facility Covenants
American has a credit facility consisting of a fully drawn $540
million senior secured revolving credit facility, with a final
maturity on June 17, 2009, and a fully drawn $248 million term loan
facility, with a final maturity on December 17, 2010 (the Revolving
Facility and the Term Loan Facility, respectively, and collectively,
the Credit Facility). American's obligations under the Credit Facility
are guaranteed by AMR.
4
The Credit Facility contains a covenant (the Liquidity Covenant)
requiring American to maintain, as defined, unrestricted cash,
unencumbered short term investments and amounts available for drawing
under committed revolving credit facilities of not less than $1.25
billion for each quarterly period through the remaining life of the
credit facility. American was in compliance with the Liquidity
Covenant as of December 31, 2005 and expects to be able to continue to
comply with this covenant. In addition, the Credit Facility contains
a covenant (the EBITDAR Covenant) requiring AMR to maintain a ratio of
cash flow (defined as consolidated net income, before interest expense
(less capitalized interest), income taxes, depreciation and
amortization and rentals, adjusted for certain gains or losses and non-
cash items) to fixed charges (comprising interest expense (less
capitalized interest) and rentals). AMR was in compliance with the
EBITDAR covenant as of December 31, 2005 and expects to be able to
continue to comply with this covenant for the period ending March 31,
2006. However, given the historically high price of fuel and the
volatility of fuel prices and revenues, it is difficult to assess
whether AMR and American will, in fact, be able to continue to comply
with the Liquidity Covenant and, in particular, the EBITDAR Covenant,
and there are no assurances that AMR and American will be able to
comply with these covenants. Failure to comply with these covenants
would result in a default under the Credit Facility which - - if the
Company did not take steps to obtain a waiver of, or otherwise
mitigate, the default - - could result in a default under a
significant amount of the Company's other debt and lease obligations
and otherwise adversely affect the Company. See Note 6 to the
consolidated financial statements for the required ratios at each
measurement date through the life of the Credit Facility.
Cash Flow Activity
The Company recorded the following debt (1) during the year ended
December 31, 2005 (in millions):
JFK Facilities Sublease Revenue Bonds, net (2) $491
Sale and leaseback of spare engines 133
Re-marketing of DFW-FIC Revenue Refunding
Bonds, Series 2000A, maturing in 2029 198
$822
(1) The table does not include a transaction in which American
purchased certain obligations due October 2006 with a face value of
$261 million at par value from an institutional investor. In
conjunction with the purchase, American borrowed an additional $245
million under an existing mortgage agreement with a final maturity in
December 2012 from the same investor.
(2) Amount shown is net of $207 million the Company will receive to
fund future capital spending at JFK, $77 million held by a trustee for
future debt service on the bonds and a discount of $25 million.
See Notes 5 and 6 to the consolidated financial statements for
additional information regarding the debt issuances listed above.
The Company's cash flow from operating activities improved in 2005.
Net cash provided by operating activities during the year ended
December 31, 2005 was $732 million, an increase of $312 million over
2004, due primarily to an improved revenue environment.
Capital expenditures during 2005 were $381 million and primarily
included the cost of improvements at JFK. A portion of the
improvements at JFK were reimbursed to the Company through a financing
transaction discussed further above and in Note 6 to the consolidated
financial statements.
During 2004, the Company sold its remaining interest in Orbitz,
resulting in total proceeds of $185 million and a gain of $146
million.
5
Working Capital
American historically operates with a working capital deficit, as do
most other airline companies. In addition, the Company has
historically relied heavily on external financing to fund capital
expenditures. More recently, the Company has also relied on external
financing to fund operating losses.
Off Balance Sheet Arrangements
American has determined that it holds a significant variable interest
in, but is not the primary beneficiary of, certain trusts that are the
lessors under 84 of its aircraft operating leases. These leases
contain a fixed price purchase option, which allows American to
purchase the aircraft at a predetermined price on a specified date.
However, American does not guarantee the residual value of the
aircraft. As of December 31, 2005, future lease payments required
under these leases totaled $2.6 billion.
Certain 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 $1.9 billion of these bonds (with total future
payments of approximately $4.8 billion as of December 31, 2005) are
guaranteed by American, AMR, or both. Approximately $523 million of
these special facility revenue bonds contain mandatory tender
provisions that require American to make operating lease payments
sufficient to repurchase the bonds at various times: $28 million in
2006, $100 million in 2007, $218 million in 2008, $112 million in 2014
and $65 million in 2015. Although American has the right to remarket
the bonds, there can be no assurance that these bonds will be
successfully remarketed. Any payments to redeem or purchase bonds
that are not remarketed would generally reduce existing rent leveling
accruals or be considered prepaid facility rentals and would reduce
future operating lease commitments. Approximately $198 million of
special facility revenue bonds with mandatory tender provisions were
successfully remarketed in 2005. They were acquired by American in
2003 under a mandatory tender provision. Thus, the receipt by
American of the proceeds from the remarketing in July 2005 resulted in
an increase to Other liabilities and deferred credits where the
tendered bonds had been classified pending their use to offset certain
future operating lease obligations.
In addition, the Company has other operating leases, primarily for
aircraft and airport facilities, with total future lease payments of
$4.7 billion as of December 31, 2005. Entering into aircraft leases
allows the Company to obtain aircraft without immediate cash outflows.
Commitments
Pension Obligations The Company is required to make contributions to
its defined benefit pension plans under the minimum funding
requirements of the Employee Retirement Income Security Act (ERISA).
The Company's estimated 2006 contributions to its defined benefit
pension plans are approximately $250 million. This estimate reflects
the provisions of the Pension Funding Equity Act of 2004. (The effect
of the Pension Funding Equity Act was to defer to later years a
portion of the minimum required contributions that would otherwise
have been due for the 2004 and 2005 plan years.)
Under Generally Accepted Accounting Principles, the Company's defined
benefit plans are underfunded as of December 31, 2005 by $3.2 billion
based on the Projected Benefit Obligation (PBO) and by $2.3 billion
based on the Accumulated Benefit Obligation (ABO) (refer to Note 10 to
the consolidated financial statements). The Company's funded status
at December 31, 2005 under the relevant ERISA funding standard is
similar to its funded status using the ABO methodology. Due to
uncertainties regarding significant assumptions involved in estimating
future required contributions to its defined benefit pension plans,
such as interest rate levels, the amount and timing of asset returns,
and, in particular, the impact of proposed legislation currently
pending the reconciliation process of the U.S. Congress, the Company
is not able to reasonably estimate its future required contributions
beyond 2006. However, absent significant legislative relief or
significant favorable changes in market conditions, or both, the
Company could be required to fund in 2007 a majority of the
underfunded balance under the relevant ERISA funding standard. Even
with significant legislative relief (including proposed airline-
specific relief), the Company's 2007 required minimum contributions
are expected to be higher than the Company's 2006 contributions.
6
Other Commitments As of December 31, 2005, the Company had
commitments to acquire two Boeing 777-200ERs in 2006 and an aggregate
of 47 Boeing 737-800s and seven Boeing 777-200ERs in 2013 through
2016. Future payments for all aircraft, including the estimated
amounts for price escalation, will approximate $102 million in 2006,
and an aggregate of approximately $2.8 billion in 2011 through 2016.
The Company has pre-arranged backstop financing available for the
aircraft scheduled to be delivered in 2006.
The Company has contracts related to facility construction or
improvement projects, primarily at airport locations. The contractual
obligations related to these projects totaled approximately $236
million as of December 31, 2005. The Company expects to make payments
of $176 million and $60 million in 2006 and 2007, respectively. See
Footnote 6 for information related to financing of JFK construction
costs which are included in these amounts. In addition, the Company
has an information technology support related contract that requires
minimum annual payments of $152 million through 2013.
The Company has capacity purchase agreements with two regional
airlines, Chautauqua Airlines, Inc. (Chautauqua) and Trans States
Airlines, Inc. (collectively the American Connection carriers) to
provide Embraer EMB-140/145 regional jet services to certain markets
under the brand "American Connection". Under these arrangements, the
Company pays the American Connection carriers a fee per block hour to
operate the aircraft. The block hour fees are designed to cover the
American Connection carriers' fully allocated costs plus a margin.
Assumptions for certain costs such as fuel, landing fees, insurance,
and aircraft ownership are trued up to actual values on a pass
through basis. In consideration for these payments, the Company
retains all passenger and other revenues resulting from the operation
of the American Connection regional jets. Minimum payments under the
contracts are $90 million in 2006, $64 million in 2007, $65 million
in 2008 and $18 million in 2009. In addition, if the Company
terminates the Chautauqua contract without cause, Chautauqua has the
right to put its 15 Embraer aircraft to the Company. If this were to
happen, the Company would take possession of the aircraft and become
liable for lease obligations totaling approximately $21 million per
year with lease expirations in 2018 and 2019.
Effective January 2003, American Airlines and AMR Eagle implemented a
capacity purchase agreement. Under this agreement, American pays AMR
Eagle a fee per block hour and departure to operate regional aircraft.
The block hour and departure fees are designed to cover AMR Eagle's
costs (before taxes) plus a margin. Certain costs such as fuel,
landing fees, and aircraft ownership are trued up to actual values on
a pass through basis. In consideration for these payments, American
retains all passenger and other revenue resulting from the AMR Eagle
airline operation. In addition, American incurs certain expenses in
connection with the operation of its affiliate relationship with AMR
Eagle. These amounts primarily relate to marketing, passenger and
ground handling costs. The current agreement will expire on December
31, 2006.
The following table summarizes the combined capacity purchase activity
for the American Connection carriers and AMR Eagle for 2005 and 2004
(in millions):
Year Ended December 31,
2005 2004
Revenues:
Regional Affiliates $ 2,148 $ 1,876
Other 88 78
$ 2,236 $ 1,954
Expenses:
Regional payments $ 2,238 $ 1,869
Other incurred expenses 277 235
$ 2,515 $ 2,104
In addition, passengers connecting to American's flights from American
Connection and AMR Eagle flights generated passenger revenues for
American flights of $1.5 billion and $1.4 billion in 2005 and 2004,
respectively, which are included in Revenues - Passenger in the
consolidated statements of operations.
See Note 13 to the consolidated financial statements for additional
information regarding the capacity purchase arrangement with AMR
Eagle.
7
Results of Operations
American incurred an $892 million net loss in 2005 compared to a net
loss of $821 million in 2004. The Company's 2005 results were
impacted by the continuing increase in fuel prices and certain other
costs, offset by an improvement in revenues, a $108 million decrease
in depreciation expense related to a change in the depreciable lives
of certain aircraft types described in the paragraph below and Note 1
to the consolidated financial statements, and productivity
improvements and other cost reductions resulting from progress under
the Turnaround Plan. The Company's 2005 results were also impacted by
a $155 million aircraft charge, a $73 million facility charge, an $80
million charge for the termination of a contract, a $37 million gain
related to the resolution of a debt restructuring and a $22 million
credit for the reversal of an insurance reserve. All of these amounts
are included in Other operating expenses in the consolidated statement
of operations, except for a portion of the facility charge which is
included in Other rentals and landing fees. Also included in the 2005
results was a $69 million fuel tax credit. Of this amount, $55
million is included in Aircraft fuel expense and $14 million is
included in Interest income in the consolidated statement of
operations. The Company's 2004 results include a $146 million gain on
the sale of the Company's remaining investment in Orbitz that is
included in Miscellaneous, net in the consolidated statement of
operations and net restructuring charges of $10 million included in
Other operating expenses in the consolidated statement of operations.
In addition, the Company did not record a tax benefit associated with
its 2005 or 2004 losses.
Although the Company is currently receiving a depreciation expense
benefit from the change in estimate of depreciable lives discussed
above, the Company's operating expenses excluding depreciation will
likely be higher than operating new aircraft during the extended life
of the MD-80 aircraft. For example, based on current estimates, the
Company's MD-80 aircraft consume more fuel and incur higher
maintenance expense than a new aircraft that requires minimal
maintenance during the first several years of operation. For
additional information on the change in depreciable lives, see the
Critical Accounting Policies in AMR's 2005 Form 10-K/A filed with the
Securities and Exchange Commission on July 17, 2006.
Revenues
2005 Compared to 2004 The Company's revenues increased approximately
$2.0 billion, or 11.0 percent, to $20.7 billion in 2005 compared to
2004. American's passenger revenues increased by 10.6 percent, or $1.6
billion, on a capacity (available seat mile) (ASM) increase of 1.2
percent. American's passenger load factor increased 3.8 points to
78.6 percent and passenger revenue yield per passenger mile increased
4.0 percent to 12.01 cents. This resulted in an increase in passenger
revenue per available seat mile (RASM) of 9.3 percent to 9.43 cents.
In 2005, American derived approximately 65 percent of its passenger
revenues from domestic operations and approximately 35 percent from
international operations. Following is additional information
regarding American's domestic and international RASM and capacity:
Year Ended December 31, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 9.37 10.6% 115 (2.3) %
International 9.56 6.6 61 8.6
DOT Latin America 9.48 7.9 30 6.0
DOT Atlantic 10.08 9.0 24 6.7
DOT Pacific 8.12 (7.7) 7 30.1
The Company's Regional Affiliates include carriers with which it has
capacity purchase agreements: AMR Eagle and the American Connection
carriers.
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $272 million, or 14.5 percent, to $2.1 billion as a
result of increased capacity and load factors. See Note 13 to the
consolidated financial statements for more information.
Cargo revenues decreased 0.5 percent, or $3 million, primarily due to
a 0.5 percent decrease in cargo revenue yield per ton mile. However,
the cargo division saw a $49 million increase in fuel surcharges and
other service fees. These amounts are included in Other revenues
which are discussed below.
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Other revenues increased 17.2 percent, or $187 million, to $1.3
billion due in part to increased cargo fuel surcharges, increased
third-party maintenance contracts obtained by the Company's
maintenance and engineering group and increases in certain passenger
fees.
Operating Expenses
2005 Compared to 2004 The Company's total operating expenses
increased 10.4 percent, or $2.0 billion, to $21.0 billion in 2005
compared to 2004. American's mainline operating expenses per ASM in
2005 increased 7.9 percent compared to 2004 to 10.50 cents. This
increase in operating expenses per ASM is due primarily to a 42.1
percent increase in American's price per gallon of fuel (net of the
impact of a fuel tax credit and fuel hedging) in 2005 relative to
2004.
(in millions) Year ended
Operating Expenses December 31, Change Percentage
2005 from 2004 Change
Wages, salaries and benefits $ 6,173 $ (51) (0.8) %
Aircraft fuel 5,080 1,427 39.1 (a)
Regional payments to AMR Eagle 2,048 348 20.5 (b)
Other rentals and landing fees 1,145 79 7.4
Commissions, booking fees
and credit card expense 1,113 6 0.5
Depreciation and amortization 977 (147) (13.1) (c)
Maintenance, materials
and repairs 802 (19) (2.3)
Aircraft rentals 571 (17) (2.9)
Food service 500 (52) (9.4)
Other operating expenses 2,599 405 18.5 (d)
Total operating expenses $21,008 $1,979 10.4 %
(a) Aircraft fuel expense increased primarily due to a 42.1 percent
increase in the Company's price per gallon of fuel (including the
benefit of a $55 million fuel excise tax refund received in March 2005
and the impact of fuel hedging) offset by a 2.2 percent decrease in
the Company's fuel consumption.
(b) Regional payments to AMR Eagle increased primarily as a result of
increased capacity and fuel costs.
(c) Effective January 1, 2005, in order to more accurately reflect
the expected useful lives of its aircraft, the Company changed its
estimate of the depreciable lives of its Boeing 737-800, Boeing 757-
200 and McDonnell Douglas MD-80 aircraft from 25 to 30 years. As a
result of this change, Depreciation and amortization expense was
reduced by approximately $108 million during the year.
(d) Other operating expenses increased due to a $155 million charge
for the retirement of 27 MD-80 aircraft, facilities charges of $56
million as part of the Company's restructuring initiatives and an $80
million charge for the termination of an airport construction
contract. These charges were somewhat offset by a $37 million gain
related to the resolution of a debt restructuring and a $22 million
credit for the reversal of an insurance reserve. The account was also
impacted by an increase in communications charges of $50 million year-
over-year due to increased international flying and higher rates.
Other Income (Expense)
Other income (expense) consists of interest income and expense,
interest capitalized and miscellaneous - net.
2005 Compared to 2004 Increases in both short-term investment
balances and interest rates caused an increase in Interest income of
$82 million, or 128.1 percent, to $146 million. Interest expense
increased $62 million, or 9.5 percent to $712 million primarily as a
result of increases in interest rates. Miscellaneous-net for 2004
includes a $146 million gain on the sale of the Company's remaining
interest in Orbitz.
Income Tax Benefit
2005 and 2004 The Company did not record a net tax benefit
associated with its 2005 and 2004 losses due to the Company providing
a valuation allowance, as discussed in Note 8 to the consolidated
financial statements.
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Outlook
The Company currently expects first quarter mainline unit costs to be
approximately 10.7 cents. Capacity for American's mainline jet
operations is expected to be essentially flat in the first quarter of
2006 compared to the first quarter of 2005. American's mainline
capacity for the full year 2006 is expected to decrease by 1.3
percent, with a decrease in domestic capacity of 4.1 percent and an
increase in international capacity of 4.0 percent.
Other Information
Environmental Matters American has been notified of potential
liability with regard to several environmental cleanup sites and
certain airport locations. At sites where remedial litigation has
commenced, potential liability is joint and several. American's
alleged volumetric contributions at these sites are minimal compared
to others. American 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 Item 1 and Note 4 to the consolidated financial statements.
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Exhibit Listing
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a).
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
American Airlines, Inc.
By: /s/ Gerard J. Arpey
Gerard J. Arpey
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: July 17, 2006
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