<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999.
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to
.
Commission file number 1-2691.
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1502798
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, (817) 963-1234
including area code
Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $1 par value - 1,000 shares as of October 29, 1999
The registrant meets the conditions set forth in, and is filing
this form with the reduced disclosure format prescribed by,
General Instructions H(1)(a) and (b) of Form 10-Q.
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INDEX
AMERICAN AIRLINES, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -- Three and nine months
ended September 30, 1999 and 1998
Condensed Consolidated Balance Sheets -- September 30, 1999 and
December 31, 1998
Condensed Consolidated Statements of Cash Flows -- Nine months
ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements -- September
30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Passenger $3,900 $3,871 $10,971 $11,238
Cargo 158 157 463 485
Other 257 244 764 702
Total operating revenues 4,315 4,272 12,198 12,425
Expenses
Wages, salaries and
benefits 1,434 1,376 4,281 4,070
Aircraft fuel 436 387 1,167 1,180
Commissions to agents 294 292 845 882
Depreciation and
amortization 247 239 713 708
Other rentals and
landing fees 228 206 661 596
Maintenance, materials
and repairs 218 216 616 606
Food service 195 183 543 520
Aircraft rentals 147 133 445 399
Other operating expenses 737 682 2,157 1,960
Total operating expenses 3,936 3,714 11,428 10,921
Operating Income 379 558 770 1,504
Other Income (Expense)
Interest income 19 29 53 81
Interest expense (62) (50) (165) (147)
Interest capitalized 25 27 83 66
Related party interest-net 10 (1) 31 (18)
Miscellaneous - net (7) 1 16 (16)
(15) 6 18 (34)
Earnings Before Income Taxes 364 564 788 1,470
Income tax provision 144 218 317 572
Net Earnings $ 220 $ 346 $ 471 $ 898
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Note 1)
Assets
<S> <C> <C>
Current Assets
Cash $ 83 $ 85
Short-term investments 1,401 1,398
Receivables, net 1,372 1,152
Receivable from affiliates, net 660 884
Inventories, net 615 520
Deferred income taxes 426 426
Other current assets 194 167
Total current assets 4,751 4,632
Equipment and Property
Flight equipment, net 9,696 7,698
Other equipment and property, net 1,433 1,293
Purchase deposits for flight equipment 1,239 1,536
12,368 10,527
Equipment and Property Under Capital Leases
Flight equipment, net 1,649 1,732
Other equipment and property, net 97 94
1,746 1,826
Route acquisition costs, net 894 916
Other assets, net 1,372 1,323
$ 21,131 $ 19,224
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 1,051 $ 940
Accrued liabilities 1,769 2,070
Air traffic liability 2,596 2,163
Current maturities of long-term debt 71 23
Current obligations under capital leases 143 129
Total current liabilities 5,630 5,325
Long-term debt, less current maturities 1,790 920
Obligations under capital leases, less
current obligations 1,487 1,542
Deferred income taxes 1,402 1,301
Other liabilities, deferred gains, deferred
credits and postretirement benefits 3,924 3,708
Stockholder's Equity
Common stock - -
Additional paid-in capital 1,743 1,743
Accumulated other comprehensive income (3) (3)
Retained earnings 5,158 4,688
6,898 6,428
$ 21,131 $ 19,224
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Net Cash Provided by Operating Activities $1,343 $2,214
Cash Flow from Investing Activities:
Capital expenditures, including net change
in purchase deposits for flight equipment (2,412) (1,393)
Acquisitions and other investments (44) -
Net decrease (increase) in short-term
investments (3) 83
Proceeds from sale of other investments 31 -
Proceeds from sale of equipment
and property 55 195
Net cash used for investing activities (2,373) (1,115)
Cash Flow from Financing Activities:
Payments on long-term debt and capital
lease obligations (173) (129)
Proceeds from issuance of long-term debt 923 -
Sale-leaseback transactions 54 108
Funds transferred from (to) affiliates, net 224 (1,059)
Net cash provided by (used for)
financing activities 1,028 (1,080)
Net increase (decrease) in cash (2) 19
Cash at beginning of period 85 47
Cash at end of period $ 83 $ 66
Cash Payments For:
Interest $ 112 $ 128
Income taxes 97 161
Financing Activities Not Affecting Cash:
Capital lease obligations incurred $ 54 $ 108
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. The balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the American Airlines, Inc.
(American or the Company) Annual Report on Form 10-K for the year
ended December 31, 1998. Certain amounts from 1998 have been
reclassified to conform with the 1999 presentation.
2.Accumulated depreciation of owned equipment and property at
September 30, 1999 and December 31, 1998, was $6.8 billion and $6.3
billion, respectively. Accumulated amortization of equipment and
property under capital leases at September 30, 1999 and December
31, 1998, was $1.1 billion.
Effective January 1, 1999, in order to more accurately reflect the
expected useful life of its aircraft, the Company changed its
estimate of the depreciable lives of certain aircraft types from 20
to 25 years and increased the residual value from five to 10
percent. As a result of this change, depreciation and amortization
expense was reduced by approximately $39 million and net earnings
was increased by approximately $23 million for the three months
ended September 30, 1999. For the nine months ended September 30,
1999, depreciation and amortization expense was reduced by
approximately $119 million and net earnings was increased by
approximately $70 million.
3.The Miami International Airport Authority is currently remediating
various environmental conditions at Miami International Airport
(Airport) and funding the remediation costs through landing fee
revenues. Future costs of the remediation effort may be borne by
carriers operating at the Airport, including American, through
increased landing fees and/or other charges. The ultimate
resolution of this matter is not expected to have a significant
impact on the financial position or liquidity of American.
4.As of September 30, 1999, the Company had commitments to acquire
the following aircraft: 85 Boeing 737-800s and 26 Boeing 777-200IGWs.
Deliveries of these aircraft extend through 2004. Payments for these
aircraft approximate $700 million during the remainder of 1999, $1.9
billion in 2000, $1.3 billion in 2001 and an aggregate of
approximately $750 million in 2002 through 2004.
In April 1999, the Company announced that it will accelerate the
retirement of nine McDonnell Douglas DC-10 and 16 Boeing 727-200
aircraft, thereby eliminating American's entire DC-10 fleet by the
end of 2000 and advancing the retirement of the Boeing 727 fleet to
the end of 2003.
5.In early February 1999, some members of the Allied Pilots
Association (APA) engaged in certain activities (increased sick
time and declining to fly additional trips) that resulted in
numerous cancellations across American's system. These actions
were taken in response to the acquisition of Reno Air, Inc. (Reno)
and adversely impacted the Company's 1999 net earnings. On October
30, 1999, American and the APA reached agreement on a number of
issues, including the integration of Reno and American pilot
workforces, and new processes to facilitate and foster the amicable
resolution of future issues between American and the APA.
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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6.In connection with a secondary offering by Equant N.V. in
February 1999, the Company sold approximately 433,000 depository
certificates for proceeds of $31 million, excluding sales made on
behalf of Sabre, a majority-owned subsidiary of AMR Corporation. The
Company recorded a pre-tax gain of $31 million as a result of this
transaction.
Based upon a reallocation between the owners of the certificates in
July 1999 and the acquisition of additional depository certificates
from other airlines, as of September 30, 1999, the Company holds
approximately 1.8 million depository certificates, excluding
certificates held for the benefit of Sabre, with an estimated
market value of approximately $150 million.
7.On March 17, 1999, the Company and Sabre Holdings Corporation
(Sabre), an affiliate company, entered into a short-term credit
agreement pursuant to which American may borrow from Sabre up to a
maximum of $300 million. Upon entering into this agreement,
American's ability to borrow up to $100 million from Sabre under a
separate credit agreement was terminated. During the first half
of 1999, American borrowed $300 million under the short-term
credit agreement. In June 1999, American paid the $300 million
outstanding under this agreement and American's ability to borrow
up to $100 million from Sabre under the original credit agreement
was reinstated through June 30, 2000. In addition, the renewed
credit agreement allows Sabre to borrow up to $300 million from
American.
8.During 1999, American entered into various debt agreements
which are secured by aircraft. Interest rates on these agreements
range from 5.6 percent to 6.6 percent and mature in 2011. As of
September 30, 1999, the Company had borrowed approximately $753
million under these agreements.
On October 6, 1999, American issued $600 million of pass-through
certificates which are secured by 15 Boeing aircraft. Interest on
these certificates range from 6.855 to 7.324 percent and mature in
2004 and 2009. A portion of these proceeds were used to repay $170
million of secured debt borrowed by American during September
1999.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 1999 and 1998
American recorded net earnings for the nine months ended September
30, 1999 of $471 million. This compares to net earnings of $898
million for the same period in 1998. American's operating income of
$770 million decreased 48.8 percent, or $734 million, compared to
$1.5 billion for the same period in 1998.
American's net earnings were adversely impacted by an illegal job
action by some members of the APA during the first quarter of 1999,
which negatively impacted the Company's net earnings by an estimated
$140 million. This was partially offset by the gain of $31 million
from the sale of the Equant N.V. depository certificates.
American's results for the nine months ended September 30, 1999
reflect the acquisition of Reno. American's passenger revenues
decreased by 2.4 percent, or $267 million, largely as a result of the
illegal job action by some members of the APA during the first
quarter of 1999. American's yield (the average amount one passenger
pays to fly one mile) of 12.98 cents decreased by 4.8 percent
compared to the same period in 1998. Domestic yields decreased 3.0
percent from the first nine months of 1998. International yields
decreased 8.7 percent, reflecting a 9.1 percent decrease in Europe,
an 8.9 percent decrease in the Pacific and a 7.5 percent decrease in
Latin America. The decrease in domestic yield was due primarily to
increased capacity and fare sale activity in the first half of 1999
compared to the same period in 1998, the APA job action, and the
impact of international yield decreases on domestic yields. The
decrease in international yields was due primarily to weak
international economies, large industry capacity additions and
increased fare sale activity.
American's traffic or revenue passenger miles (RPMs) increased 2.5
percent to 84.5 billion miles for the nine months ended September 30,
1999. American's capacity or available seat miles (ASMs) increased
3.3 percent to 120.4 billion miles in the first nine months of 1999.
American's domestic traffic increased 1.8 percent on capacity growth
of 3.5 percent and international traffic grew 4.1 percent on capacity
increases of 2.9 percent. The increase in international traffic was
driven by a 46.7 percent increase in traffic to the Pacific on
capacity growth of 50.2 percent and a 4.5 percent increase in traffic
to Europe on capacity growth of 7.5 percent. This was partially
offset by a 2.1 percent decrease in traffic to Latin America on a
capacity decline of 6.0 percent.
American's operations were adversely impacted by several external
factors primarily in the second quarter of 1999. First, American
experienced record delays and cancellations due to weather, primarily
at its Dallas-Fort Worth and Chicago hubs. In addition, the
implementation of the Federal Aviation Administration's new Display
Screen Replacement (DSR) system caused numerous delays and
cancellations across American's system as three of the first five
centers to receive the new DSR system - Fort Worth, New York, and
Chicago - are high-traffic cities in American's network which are
responsible for a significant amount of American's traffic.
American's operating expenses increased 4.6 percent, or $507 million.
American's cost per ASM increased by 1.2 percent to 9.38 cents.
Wages, salaries and benefits increased $211 million, or 5.2 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, partially offset by a
decrease in the provision for profit-sharing. Other rentals and
landing fees increased $65 million, or 10.9 percent, due to higher
facilities rent and landing fees across American's system and the
addition of Reno. Aircraft rentals increased $46 million, or 11.5
percent, due primarily to the addition of Reno aircraft. Other
operating expense increased $197 million, or 10.1 percent, due
primarily to an increase in outsourced services, travel and
incidental costs, booking fees, aircraft maintenance work performed
by American for other airlines, and the acquisition of Reno.
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Other Income (Expense) increased $52 million primarily as a result of
an increase of $49 million in related party interest - net due
primarily to an increase in the balance of American's intercompany
receivable balance with its parent company, an increase of $17
million in capitalized interest on aircraft purchase deposits, and a
$31 million gain on the sale of a portion of American's interest in
Equant N.V. These increases were partially offset by a decrease of
approximately $28 million in interest income as a result of lower
investment balances and a decline in interest rates and an increase
in interest expense of approximately $18 million resulting from an
increase in long-term debt for aircraft financing.
AIRCRAFT COMMITMENTS
As of September 30, 1999, the Company had commitments to acquire the
following aircraft: 85 Boeing 737-800s and 26 Boeing 777-200IGWs.
Deliveries of these aircraft extend through 2004. Payments for these
aircraft approximate $700 million during the remainder of 1999, $1.9
billion in 2000, $1.3 billion in 2001 and an aggregate of
approximately $750 million in 2002 through 2004. In April 1999, the
Company announced that it will accelerate the retirement of nine
McDonnell Douglas DC-10 and 16 Boeing 727-200 aircraft, thereby
eliminating American's entire DC-10 fleet by the end of 2000 and
advancing the retirement of the Boeing 727 fleet to the end of 2003.
The Company expects to fund its remaining 1999 capital expenditures
from the Company's existing cash and short-term investments,
internally generated cash, and new financing depending upon capital
market conditions and the Company's evolving view of its long-term
needs.
YEAR 2000 READINESS
State of Readiness In 1995, the Company, in conjunction with Sabre,
which operates and maintains substantially all of the computer systems
and applications utilized by the Company, implemented a project (the
Year 2000 Project) to ensure that hardware and software systems
operated by the Company are designed to operate and properly manage
dates beyond December 31, 1999 (Year 2000 Readiness). The Year 2000
Project consists of six phases: (i) awareness, (ii) assessment,
(iii) analysis, design and remediation, (iv) testing and validation,
(v) quality assurance review (to ensure consistency throughout the
Year 2000 Project) and (vi) creation of business continuity strategy,
including plans in the event of Year 2000 failures. In developing the
Company's proprietary software analysis, remediation and testing
methodology for Year 2000 Readiness, it studied the best practices of
the Institute of Electrical and Electronics Engineers and the British
Standards Institution. The Company has assessed (i) the Company's over
1,000 information technology and operating systems that will be
utilized after December 31, 1999 (IT Systems); (ii) non-information
technology systems, including embedded technology, facilities, and
other systems (Non-IT Systems); and (iii) the Year 2000 Readiness of
its critical third party service providers.
IT Systems The Company has completed the first five phases of
the Year 2000 Project for all of its IT Systems, including its
computer reservations and flight operating system applications that
perform such "mission critical" functions as passenger bookings,
ticketing, passenger check-in, aircraft weight and balance, flight
planning and baggage and cargo processing. As of October 1, 1999,
approximately 44 percent of those IT Systems (including the computer
reservations systems) are already successfully processing Year 2000
dates in actual use. The Company has installed Year 2000 Readiness
hardware and software at all of its locations worldwide. The Company
is following structured clean management processes to keep all of its
IT Systems Year 2000 ready.
Non-IT Systems The Company has completed the first five phases
of the Year 2000 project for all of its Non-IT Systems which includes
aircraft avionics and flight simulators. The Company believes that is
has adequate contingency plans to ensure business continuity if any of
its Non-IT systems are not Year 2000 ready.
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Third Party Services The Company's business is dependent upon
entities which supply critical infrastructure to the airline
industry, such as the air traffic control and related systems of the
Federal Aviation Administration and international aviation
authorities, the Department of Transportation, and airport
authorities. Those service providers depend on their hardware and
software systems and on interfaces with the Company's IT Systems.
The Company is actively involved in the Air Transport Association
(ATA) and the International Air Transport Association (IATA) Year
2000 Airline Industry Program to ensure the readiness of airports,
air traffic service providers, and commercial airline suppliers
worldwide. As part of this program, the ATA and IATA are monitoring
approximately 2,500 airports, 185 air traffic control service
providers, and more than 5,000 commercial airline suppliers
throughout the world regarding their Year 2000 Readiness. The
results of these studies indicate that a majority of the domestic and
international airports in which American operates have made
significant progress towards their Year 2000 Readiness.
Nevertheless, the Company continues to closely monitor the progress
of a number of key airports that, if not properly prepared for the
Year 2000, could disrupt the Company's ability to provide services to
its customers.
In addition, the Company relies on third party service providers
for many services, such as telecommunications, electrical power, and
data and credit card transaction processing. Those service providers
depend on their hardware and software systems and on interfaces with
the Company's IT Systems. The Company is monitoring its critical
service providers regarding their Year 2000 Readiness and has received
responses from over 90 percent of its critical service providers.
Such respondents assured the Company that their software and hardware
is or will be Year 2000 ready. To the extent practical, the Company
will implement contingencies for the third party critical service
providers that have not responded.
The Company does not expect the Year 2000 issues it might
encounter with third parties to be materially different from those
encountered by other airlines, including the Company's competitors.
Costs of Year 2000 Project The Company expects to incur significant
hardware, software and labor costs, as well as consulting and other
expenses, in its Year 2000 Project. The Company's total estimated cost
of the project is $125 to $130 million, of which approximately
$123 million was incurred as of September 30, 1999. Costs associated
with the Year 2000 Project are expensed as incurred, other than
capitalized hardware costs, and have been funded through cash from
operations.
Risks of Year 2000 Non- readiness The economy in general, and the
travel and transportation industries in particular, may be adversely
affected by risks associated with the Year 2000. The Company's
business, financial condition, and results of operations could be
materially adversely affected if systems that it operates or systems
that are operated by third party service providers upon which the
Company relies are not Year 2000 ready in time. There can be no
assurance that these systems will continue to properly function and
interface and will otherwise be Year 2000 ready. Management believes
that its most likely Year 2000 risks relate to the failure of third
parties with whom it has material relationships to be Year 2000 ready.
Although the Company is not aware of any threatened claims related
to the Year 2000, the Company may be subject to litigation arising
from such claims and, depending on the outcome, such litigation could
have a material adverse affect on the Company. There can be no
assurance that the Company's insurance coverage would be adequate to
offset these and other business risks related to the Year 2000 issue.
Business Continuity Plans The Company has identified four potential
risk areas related to the Year 2000 and is developing and refining
plans to continue its business in the event of Year 2000 failures in
response to those risks. The Company believes that its most likely
Year 2000 risks relate to the failure of third parties with whom it
has material relationships to be Year 2000 ready. In response to this
risk, the Company has been actively participating with the ATA and
IATA Year 2000 Airline Industry Program to ensure the readiness of
airports and air traffic services worldwide. The Company is in the
process of collecting additional business continuity information from
such suppliers in order to effectively manage any failures. The
second risk area relates to the effective prioritization and
management of any Year 2000 failures. The Company is establishing an
Enterprise Command Center in order to prioritize issues, manage
resources, coordinate problem resolution and communicate status in the
event of Year 2000 failures. The third risk area relates to the
possibility that the Company's employees will fail to report to work
on or around December 31, 1999, thereby potentially disrupting the
Company's operations. Somewhat mitigating this risk is that the Company
will be operating a reduced holiday schedule due to soft passenger demand.
In addition, the Company may undertake initiatives to encourage personnel
to work as scheduled. The fourth risk area relates to
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the failure of critical internal business processes, services, systems
and facilities. The Company has tested all systems including those
not impacted by dates and has completed approximately 98 percent of
its business continuity plans to manage potential internal Year 2000
failures. The Company's business continuity plans include performing
certain processes manually; maintaining dedicated staff to be
available at crucial dates to remedy unforeseen problems; installing
defensive code to protect real-time systems from improperly formatted
date data supplied by third parties; repairing or obtaining
replacement systems; and reducing or suspending certain non-critical
aspects of the Company's services or operations. In addition, the
Company will assess its operational readiness by evaluating mission
critical systems and reporting the status to the Enterprise Command
Center. Appropriate actions will be taken when issues regarding
industry readiness impacts the airline's operations. Because of the
pervasiveness and complexity of the Year 2000 issue, and in particular
the uncertainty concerning the efforts and success of third parties to
be Year 2000 ready, the Company will continue to refine its
contingency plans during the fourth quarter.
The costs of the project and the date on which the Company plans
to complete the Year 2000 Readiness program are based on management's
best estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third party modification plans and other factors. Even
though the Company has met all established deadlines and the cost
estimates have remained constant, actual results could differ
materially from these estimates. Specific factors that might cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability
to locate and correct all relevant computer codes, the failure of
third parties to be Year 2000 ready, and similar uncertainties.
DALLAS LOVE FIELD
In 1968, as part of an agreement between the cities of Fort Worth and
Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond
ordinance was enacted by both cities (the Bond Ordinance). The Bond
Ordinance required both cities to direct all scheduled interstate
passenger operations to DFW and was an integral part of the bonds
issued for the construction and operation of DFW. In 1979, as part of
a settlement to resolve litigation with Southwest Airlines, the cities
agreed to expand the scope of operations allowed under the Bond
Ordinance at Dallas' Love Field. Congress enacted the Wright
Amendment to prevent the federal government from acting inconsistent
with this agreement. The Wright Amendment limited interstate
operations at Love Field to the four states contiguous to Texas (New
Mexico, Oklahoma, Arkansas and Louisiana) and prohibited through
ticketing to any destination outside that perimeter. In 1997, without
the consent of either city, Congress amended the Wright Amendment by
(i) adding three states (Kansas, Mississippi and Alabama) to the
perimeter and (ii) removing some federal restrictions on large
aircraft configured with 56 seats or less (the 1997 Amendment). In
October 1997, the City of Fort Worth filed suit in state district
court against the City of Dallas and others seeking to enforce the
Bond Ordinance. Fort Worth contends that the 1997 Amendment does not
preclude the City of Dallas from exercising its proprietary rights to
restrict traffic at Love Field in a manner consistent with the Bond
Ordinance and, moreover, that Dallas has an obligation to do so.
American joined in this litigation. On October 15, 1998, the state
district court granted summary judgment in favor of Fort Worth and
American, which summary judgment is being appealed to the Fort Worth
Court of Appeals. In the same lawsuit, DFW filed claims alleging that
irrespective of whether the Bond Ordinance is enforceable, the DFW Use
Agreement prohibits American and other DFW signatory airlines from
moving any interstate operations to Love Field. These claims remain
unresolved. Dallas filed a separate declaratory judgment action in
federal district court seeking to have the court declare that, as a
matter of law, the 1997 Amendment precludes Dallas from exercising any
restrictions on operations at Love Field. Further, in May 1998,
Continental Airlines and Continental Express filed a lawsuit in
federal court seeking a judicial declaration that the Bond Ordinance
cannot be enforced to prevent them from operating flights from Love
Field to Cleveland using regional jets. In December 1998, the
Department of Transportation (DOT) issued an order on the federal law
questions concerning the Bond Ordinance, local proprietary powers,
DFW's Use Agreement with DFW carriers such as American, and the Wright
and 1997 Amendments, and concluded that the Bond Ordinance was
preempted by federal law and was therefore, not enforceable. The DOT
also found that the DFW Use Agreement did not preclude American from
conducting interstate operations at Love Field. Fort Worth, American
and DFW have appealed the DOT's order to the Fifth Circuit Court of
Appeals.
As a result of the foregoing, the future of interstate flight
operations at Love Field and American's DFW hub are uncertain. An
increase in operations at Love Field to new interstate destinations
could adversely impact American's business.
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FORWARD-LOOKING INFORMATION
Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this report, the words
"expects," "plans," "anticipates," and similar expressions are
intended to identify forward-looking statements. All forward-looking
statements in this report are based upon information available to the
Company on the date of this report. The Company undertakes no
obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expectations.
Additional information concerning these and other factors is contained
in the Company's Securities and Exchange Commission filings, including
but not limited to the Form 10-K for the year ended December 31, 1998.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the
information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk of the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
-10-
<PAGE> 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In connection with its frequent flyer program, American was sued in
two purported class action cases (Wolens et al v. American Airlines,
Inc. and Tucker v. American Airlines, Inc.) that were consolidated and
are currently pending in the Circuit Court of Cook County, Illinois.
The litigation arises from certain changes made to American's
AAdvantage frequent flyer program in May 1988 which limited the number
of seats available to participants traveling on certain awards. In the
consolidated action, the plaintiffs seek to represent all persons who
joined the AAdvantage program before May 1988 and accrued mileage
credits before the seat limitations were introduced and allege that
these changes breached American's contract with AAdvantage members.
Plaintiffs seek money damages and attorneys' fees. The complaint
originally asserted several state law claims, however only the
plaintiffs' breach of contract claim remains after the U. S. Supreme
Court ruled that the Airline Deregulation Act preempted the other
claims. Although the case has been pending for numerous years, it
still is in its preliminary stages. The court has not ruled on the
plaintiffs' motion for class certification. American has a motion for
judgement on the pleadings pending and is vigorously defending the
lawsuit.
Gutterman et al. v. American Airlines, Inc. is also pending in the
Circuit Court of Cook County, Illinois. In December 1993, American
announced that the number of miles required to claim a certain travel
award under American's AAdvantage frequent flyer program would be
increased effective February 1, 1995, giving rise to the Gutterman
litigation filed on that same date. The Gutterman plaintiffs claim
that the increase in award mileage level violated the terms and
conditions of the agreement between American and AAdvantage members.
On June 23, 1998, the Court certified the case as a class action,
although to date no notice has been sent to the class. The class
consists of all members who earned miles between January 1, 1992 and
February 1, 1995 (the date the change became effective). On July 13,
1998, the Court denied American's motion for summary judgment as to
the claims brought by plaintiff Steven Gutterman. On July 30, 1998,
the plaintiffs filed a motion for summary judgment as to liability,
which motion has not been ruled upon. American is vigorously
defending the lawsuit.
A federal grand jury in Miami is investigating whether American
and American Eagle handled hazardous materials and processed courier
shipments, cargo and excess baggage in accordance with applicable
laws and regulations. In connection with this investigation, federal
agents executed a search warrant at American's Miami facilities on
October 22, 1997. Since that time, a number of employees have
testified before the grand jury. In addition, American has been
served with three subpoenas calling for the production of documents
relating to the handling of courier shipments, cargo, excess baggage
and hazardous materials handling and spills. American produced
documents responsive to the three subpoenas. American intends to
cooperate fully with the government's investigation.
On August 7, 1998, a purported class action was filed against
American Airlines in state court in Travis County, Texas (Boon Ins.
Agency v. American Airlines, Inc., et al.) claiming that the $75
reissuance fee for changes to non-refundable tickets is an
unenforceable liquidated damages clause and seeking a refund of the
fee on behalf of all passengers who paid it, as well as interest and
attorneys' fees. On September 23, 1998, Continental, Delta and
America West were added as defendants to the lawsuit. On February 2,
1999, prior to any discovery being taken and a class being certified,
the court granted the defendants' motion for summary judgment holding
that Plaintiff's claims are preempted by the Airline Deregulation Act.
Plaintiff has filed an appeal of the dismissal of the lawsuit.
American intends to vigorously defend the granting of the summary
judgment on appeal.
On May 20, 1999, several class action lawsuits filed against the
Allied Pilots Association (APA) seeking compensation for passengers
and cargo shippers adversely affected by an illegal sick-out by some
of American's pilots in February 1999 were consolidated in the United
States District Court for the Northern District of Texas, Dallas
Division (In re Allied Pilots Association Class Action Litigation).
Plaintiffs are not seeking to hold American independently liable.
Instead, Plaintiffs named American as a defendant inasmuch as
American has a $45.5 million judgment against the APA that exceeds
APA's total assets. Plaintiffs claim they are entitled to some or
all of the APA's limited funds. APA filed cross claims against
American alleging that American must indemnify pilots who put
themselves on the sick list. American is vigorously defending all
claims against it.
-11-
<PAGE> 14
PART II
Item 1. Legal Proceedings (Continued)
On July 26, 1999, a class action lawsuit 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) violates the Racketeer Influenced and
Corrupt Organizations Act of 1970 (RICO). The as yet uncertified
class includes all travel agencies who have 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. American intends to vigorously defend the lawsuit.
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. American intends to defend the lawsuit vigorously.
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, although to date no class has been
certified. American intends to defend these lawsuits vigorously.
Item 5. Other Information
The Department of Justice is investigating the competitive practices
of major carriers at major hub airports, including American's
practices at DFW (for further information, see Item 1. Legal
Proceedings). Also, in April 1998, the DOT issued proposed pricing
and capacity rules that would severely limit major carriers' ability
to compete with new entrant carriers. The outcomes of the
investigations and the proposed DOT rules are unknown. However, to
the extent that (i) restrictions are imposed upon American's ability
to respond to a competitor, or (ii) competitors have an advantage
because of federal assistance, American's business may be adversely
impacted.
-12-
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
12 Computation of ratio of earnings to fixed charges for the three
and nine months ended September 30, 1999 and 1998.
27 Financial Data Schedule
On October 6, 1999, American filed a report on Form 8-K relative
to filing documents with reference to the Registration Statement on
Form S-3 (Registration No. 333-74937) of American Airlines, Inc.
-13-
<PAGE> 16
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN AIRLINES, INC.
Date: November 5, 1999 BY: /s/ Gerard J. Arpey
Gerard J. Arpey
Senior Vice President - Finance and
Chief Financial Officer
-14-
<PAGE> 17
Exhibit 12
AMERICAN AIRLINES, INC.
Computation of Ratio of Earnings to Fixed Charges
(in millions)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Earnings:
Earnings before income taxes $364 $564 $788 $1,470
Add:Total fixed charges (per below) 260 231 757 693
Less: Interest capitalized 25 27 83 66
Total earnings $599 $768 $1,462 $2,097
Fixed charges:
Interest, including interest
capitalized $ 62 $51 $165 $165
Portion on rental expense
representative of the interest
factor 198 179 591 527
Amortization of debt expense - 1 1 1
Total fixed charges $260 $231 $757 $693
Ratio of earnings to fixed
charges 2.30 3.32 1.93 3.03
</TABLE>
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 83
<SECURITIES> 1,401
<RECEIVABLES> 2,053
<ALLOWANCES> 21
<INVENTORY> 615
<CURRENT-ASSETS> 4,751
<PP&E> 22,043
<DEPRECIATION> 7,929
<TOTAL-ASSETS> 21,131
<CURRENT-LIABILITIES> 5,630
<BONDS> 3,277
0
0
<COMMON> 1,743
<OTHER-SE> 5,155
<TOTAL-LIABILITY-AND-EQUITY> 21,131
<SALES> 0
<TOTAL-REVENUES> 12,198
<CGS> 0
<TOTAL-COSTS> 11,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 788
<INCOME-TAX> 317
<INCOME-CONTINUING> 471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 471
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
