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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, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-2691.
AMERICAN AIRLINES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1502798
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 963-1234
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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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NONE NONE
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 [ ].
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]
American Airlines, Inc. is a wholly-owned subsidiary of AMR Corporation, and
there is no market for the registrant's common stock. As of March 20, 2000,
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.
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PART I
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ITEM 1. BUSINESS
American Airlines, Inc. (American or the Company), the principal subsidiary of
AMR Corporation (AMR), was founded in 1934.
American is one of the largest scheduled passenger airlines in the world.
At the end of 1999, American provided scheduled jet service to more than 169
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.
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 four hubs: Dallas/Fort Worth (DFW), Chicago O'Hare, Miami and
San Juan, Puerto Rico. Delta Air Lines and United Airlines also have hub
operations at DFW and Chicago O'Hare, respectively.
The American Eagle carriers, owned by AMR Eagle Holding Corporation, an
AMR subsidiary, increase the number of markets American serves by providing
connections 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 John F. Kennedy International Airport.
American's competitors also own or have marketing agreements with regional
carriers which provide service at their major hubs.
In addition to its extensive domestic service, American provides
international service to the Caribbean, Canada, Latin America, Europe and the
Pacific. American's operating revenues from foreign operations were
approximately $5.0 billion in 1999 and $5.1 billion in 1998 and 1997. Additional
information about the Company's foreign operations is included in Note 11 to the
consolidated financial statements.
The domestic airline industry is fiercely competitive. Currently, any
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, American faces
competing service from at least one, and sometimes more than one, major domestic
airline including: America West Airlines, Continental Airlines, Delta Air Lines,
Northwest Airlines, Southwest Airlines, Trans World Airlines, United Airlines,
US Airways and their affiliated regional airlines. Competition is even greater
between cities that require a connection, where as many as nine airlines may
compete via their respective hubs. American also competes with national,
regional, all-cargo, and charter carriers and, particularly on shorter segments,
ground transportation.
On all of its routes, pricing decisions are affected, impart, by
competition from other airlines, some of which have cost structures
significantly lower than American's and can therefore operate profitably at
lower fare levels. As of December 31, 1999, approximately 56 percent of
American's bookings were impacted by competition from low-cost carriers.
The majority of the tickets for travel on American 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 at a
maximum of $50 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 and Priceline.com. The base
commission for sales through Internet travel providers is significantly lower
than traditional travel agencies.
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International air transportation is subject to extensive government
regulation. In providing international air transportation, American 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. American'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 American's international operations. Bilateral
agreements between the U.S. and various foreign countries served by American are
subject to frequent renegotiation. In addition, at most foreign airports, a
carrier needs slots (landing and take-off authorizations) before the carrier can
introduce new service or increase existing service. The availability of such
slots is not assured and can therefore inhibit a carrier's efforts to compete in
certain markets.
The major U.S. 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
American's foreign competitors, limit U.S. 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 carriers -- including American -- have
established marketing relationships with other airlines. American currently has
code-sharing programs with Air Pacific, Alaska Airlines, Asiana Airlines,
Canadian Airlines International Limited (Canadian), China Eastern Airlines, EVA,
Finnair, Gulf Air, Hawaiian Airlines, Iberia, Japan Airlines, LanChile, LOT
Polish Airlines, Qantas Airways, Sabena, SNCF, Swissair, TACA Group and the TAM
Group. Certain of these relationships also include reciprocity between American
and the other airlines' frequent flyer programs. In addition, the Company
expects to implement or expand alliances with other international carriers,
including Aeropostal, Aer Lingus, Avianca, Aerolineas Argentinas, British
Airways, Cathay Pacific Airways and Turkish Airlines, pending regulatory
approval. In the coming years, the Company expects to develop these programs
further and to evaluate new alliances with other international carriers.
In February 1999, American, British Airways, Canadian, Cathay Pacific
Airways and Qantas Airways formed the global alliance oneworld(TM). In September
1999, these five founding members were joined by Finnair and Iberia. 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. Following the acquisition of Canadian by
Air Canada, Canadian will terminate its membership in oneworld in June 2000.
Also in June 2000, Aer Lingus and LanChile will join the oneworld alliance.
In December 1999, American reached a comprehensive agreement with
Canadian and Air Canada to resolve outstanding issues arising from Air Canada's
acquisition of Canadian. Under this agreement, American will continue to
codeshare on Canadian for ten years, or as long as the Canadian brand remains in
existence. Should Canadian be absorbed fully into Air Canada within the ten-year
period, American will be allowed to place its code on Air Canada services which
have replaced services operated by Canadian prior to its acquisition by Air
Canada.
American believes that it has several advantages relative to its
competition. Its fleet is efficient and quiet, and is one of the youngest fleets
in the U.S. airline industry. 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,
and its superior service also gives it a competitive advantage. In addition, in
February 2000, the Company announced a new program -- "More Room Throughout
Coach" -- which will provide more room for passengers throughout its coach
cabins. American's entire fleet will be reconfigured to increase the seat pitch
for more than 75,000 coach seats, thereby increasing the seat pitch from the
present industry standard of 31 and 32 inches to a predominant seat pitch level
of 34 and 35 inches. American believes that by providing greater comfort in the
coach cabin, it will achieve a competitive advantage to its competition.
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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 Federal Aviation Administration (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, baggage liability and computer reservations systems.
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 American is incorporating into its
maintenance program. These matters relate to, among other things, inspection and
maintenance of aging aircraft, corrosion control, the installation of upgraded
digital flight data recorders, enhanced ground proximity warning systems and
cargo compartment smoke detection and fire suppression systems. Based on its
current implementation schedule, American expects to be in compliance with the
applicable requirements within the required time periods.
The U.S. Department of Justice 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 certain regulatory functions with respect to
disputes between airlines and labor unions relating to union representation and
collective bargaining agreements. To the extent American continues to increase
its alliances with international carriers, American may be subject to certain
regulations of foreign agencies.
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 3. 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.
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 American 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.
Legislation (sometimes referred to as the "Passengers' Bill of Rights")
has been discussed in various legislatures, including the Congress. This
legislation would, if enacted, (i) place various limitations on airline fares
and/or (ii) affect operating practices such as baggage handling and overbooking.
To the extent legislation is enacted that would inhibit American's flexibility
with respect to fares, its revenue management system or other aspects of its
customer service operations, American's financial results could be adversely
affected. 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 (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.
Fare discounting by competitors has historically had a negative effect on
American's financial results because American 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 American, 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,
American's operating results will be negatively impacted.
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AIRPORT ACCESS In 1968, the FAA issued a rule designating New York John F.
Kennedy, New York LaGuardia, Washington Reagan, Chicago O'Hare and Newark
airports as high density traffic airports. Newark was subsequently removed from
the high density airport classification. The rule limits the number of
Instrument Flight Rule (IFR) operations - take-offs and landings - permitted per
hour and requires that a slot support each operation. Recently, legislation has
been passed in Congress that would eliminate slots at Chicago O'Hare in 2002 and
New York's John F. Kennedy and LaGuardia airports in 2007. The Company is
currently evaluating what impact, if any, the elimination of slots will have on
the Company's operations and its financial condition or results of operations.
At December 31, 1999, the net book value of the Company's slots at New York John
F. Kennedy, New York LaGuardia and Chicago O'Hare airports was approximately
$160 million. Currently, the FAA permits the purchasing, selling (except those
designated for international or essential air service), leasing, transferring
and trading of these slots by airlines and others, subject to certain
restrictions. 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 American 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 American will be able to obtain slots for these
purposes in the future because, among other factors, slot allocations are
subject to changes in government policies.
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.
For purposes of noise standards, jet aircraft are rated by categories or
"stages." The ANCA required the phase-out by December 31, 1999, of Stage II
aircraft operations, subject to certain exceptions. Under final regulations
issued by the FAA in 1991, air carriers were required to reduce, by modification
or retirement, the number of Stage II aircraft in their fleets 75 percent by
December 31, 1998 and 100 percent by December 31, 1999. Alternatively, a carrier
may have satisfied the regulations by operating a fleet that was at least 75
percent and 100 percent Stage III by the dates set forth in the preceding
sentence, respectively. At December 31, 1999, all of American's active fleet was
Stage III, the quietest rating category.
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 Stage III
aircraft first effective after October 1990, and establishes a regulatory notice
and review process for local restrictions on Stage II aircraft first proposed
after October 1990. While American has had sufficient scheduling flexibility to
accommodate local noise restrictions imposed to date, American's operations
could be adversely affected if locally-imposed regulations become more
restrictive or widespread.
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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
PRP's at these sites. In 1998, the EPA named American a de minimis PRP at the
Casmalia Waste Disposal Site in California. American, along with other tenants
at the Luis Munoz Marin International Airport in San Juan, Puerto Rico, has been
named as a PRP for environmental claims at the airport.
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.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (the
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
since certain of the PRPs are no longer in business. The future increase in
landing fees and/or other charges may be material but 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, AMR entered a plea agreement with the United States government
with respect to a one count indictment relating to the storage of hazardous
materials. As part of the plea agreement, AMR was placed on probation for three
years and has adopted a comprehensive compliance program. To the extent AMR
fails to abide by the terms of the probation or its compliance program,
American's operations may be adversely impacted.
In 1999, American was ordered by the New York State Department of
Environmental Conservation to conduct remediation of environmental contamination
located at Terminal 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.
American does not expect these matters, individually or collectively, to
have a material impact on its financial position or liquidity.
LABOR
The airline business is labor intensive. Wages, salaries and benefits
represented approximately 38 percent of American's consolidated operating
expenses for the year ended December 31, 1999.
The majority of American's employees are represented by labor unions and
covered by collective bargaining agreements. American's relations with such
labor organizations are governed by the Railway Labor Act. Under this act, the
collective bargaining agreements among American 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 National Mediation Board (NMB) to appoint a federal mediator. If
no agreement is reached in mediation, the NMB may determine, at any 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, a 30-day "cooling-off" period commences, following
which 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.
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In 1995, American reached agreements with the members of the Association
of Professional Flight Attendants (APFA) and the Transport Workers Union (TWU)
on their labor contracts. American's collective bargaining agreement with the
APFA became amendable on November 1, 1998 and the collective bargaining
agreement with the TWU becomes amendable on March 1, 2001. American exchanged
proposals and commenced negotiations with the APFA on September 2, 1998. The
parties reached a tentative agreement in mid-1999, which the membership
subsequently did not ratify. Direct negotiations continue. American's current
collective bargaining agreement with the Allied Pilots Association (APA) was
ratified by the APA membership on May 5, 1997. That contract becomes amendable
August 31, 2001.
In early February 1999, some members of the 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 in December 1998. On February
10, 1999, American obtained a temporary restraining order prohibiting the union
from unilaterally taking actions in violation of the Railway Labor Act. Because
of certain actions by the APA and its leaders after the entry of the temporary
restraining order, American filed a motion to have the APA and its leaders held
in contempt of the court's order. The court granted that motion on February 13,
1999, and the airline's operations thereafter returned to normal. The Company
and the APA subsequently agreed to a method for combining the Reno pilot
workforce into American. The parties also are engaged in discussions over
certain other issues in an effort to improve their relationship, which includes
a possible extension to the existing APA contract.
The Communications Workers of America (CWA) filed a petition with the NMB
on October 8, 1998, seeking to represent American's passenger service employees,
who currently are not so represented. The mail ballots in the election conducted
by the NMB were counted on December 15, 1998. Forty-one percent of the employees
voted to unionize, short of the 50 percent plus one needed for unionization to
occur. The CWA challenged the results, claiming that certain of American's
actions during the campaign interfered with the employees' ability to make a
free choice. The NMB found that American's actions did not interfere and
dismissed the CWA's petition. Under the NMB's rules, no further petitions to
represent American's passenger service employees may be filed with the NMB until
August 2000.
FUEL
American's operations are significantly affected by the availability and price
of jet fuel. American's fuel costs and consumption for the years 1997 through
1999 were:
<TABLE>
<CAPTION>
Average Cost
Per Gallon, Percent of
Gallons Average Cost Excluding American's
Consumed Total Cost Per Gallon Fuel Tax Operating
Year (in millions) (in millions) (in cents) (in cents) Expenses
---- ------------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
1997 2,773 $1,860 67.1 62.1 12.9
1998 2,826 1,551 54.9 50.1 10.7
1999 2,957 1,622 54.8 50.1 10.6
</TABLE>
The impact of fuel price changes on the Company and its competitors is
dependent upon various factors, including hedging strategies. Although
American's average cost per gallon of fuel in 1999 was flat in comparison to
1998, actual fuel prices began to increase in April 1999 and continued
significantly throughout 1999 and into 2000. However, American has a fuel
hedging program in which it enters into fuel swap and option contracts to
protect against increases in jet fuel prices, which has had the effect of
dampening American's average cost per gallon. To reduce the impact of potential
continuing fuel price increases in 2000, American had hedged approximately 48
percent of its 2000 fuel requirements as of December 31, 1999. Based on
projected fuel usage, American estimates that a 10 percent increase in the price
per gallon of fuel would result in an increase to aircraft fuel expense of
approximately $125 million in 2000, net of fuel hedge instruments outstanding at
December 31, 1999. 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 American 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.
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While American does not 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. If
there were major reductions in the availability of jet fuel, American's business
would be adversely affected.
Additional information regarding American's fuel program is included in
Item 7(A) -- Quantitative and Qualitative Disclosures about Market Risk and in
Note 7 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, blackout dates and 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
blackout dates and 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 accounts for its frequent flyer obligation on an accrual basis
using the incremental cost method. 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. 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. American defers the portion of
revenues received from companies participating in the AAdvantage program related
to the sale of mileage credits and recognizes such revenues over a period
approximating the period during which the mileage credits are used.
At December 31, 1999 and 1998, American estimated that approximately 5.4
million and 4.9 million free travel awards, respectively, were expected to be
redeemed for free travel on American. In making this estimate of free travel
awards, American has excluded mileage in inactive accounts, mileage related to
accounts that has not yet reached the lowest level of free travel award, and
mileage in active accounts that has reached the lowest level of free travel
award but which is 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 $827 million and $695 million, representing
15.6 percent and 13.0 percent of American's total current liabilities, at
December 31, 1999 and 1998, respectively.
The number of free travel awards used for travel on American was 2.7
million in 1999, 2.3 million in 1998 and 2.2 million in 1997, representing 9.3
percent of total revenue passenger miles in 1999, 8.8 percent in 1998 and 8.6
percent in 1997. American believes displacement of revenue passengers is minimal
given American's load factors, its ability to manage frequent flyer seat
inventory, and the relatively low ratio of free award usage to revenue passenger
miles.
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OTHER MATTERS
SEASONALITY AND OTHER FACTORS American'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, 1999, is included in Note 12 to
the consolidated financial statements.
No material part of the business of American 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 American.
INSURANCE American 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.
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.
8
<PAGE> 10
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
Owned and leased aircraft operated by American at December 31, 1999, included:
<TABLE>
<CAPTION>
Weighted
Current Average
Seating Capital Operating Age
Equipment Type Capacity(1) Owned Leased Leased Total (Years)
- ------------------------------ ----------- ----- ------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Airbus A300-600R 192/266/267 10 -- 25 35 10
Boeing 727-200 150 60 8 -- 68 22
Boeing 737-800 146 24 -- -- 24 1
Boeing 757-200 188 56 15 31 102 7
Boeing 767-200 172 8 -- -- 8 17
Boeing 767-200 Extended Range 165 9 13 -- 22 14
Boeing 767-300 Extended Range 207 26 13 10 49 7
Boeing 777-200 IGW 237 11 -- -- 11 1
Fokker 100 97 66 5 4 75 7
McDonnell Douglas DC-10-10 237/290/297 3 -- -- 3 21
McDonnell Douglas DC-10-30 271/282 4 -- 1 5 25
McDonnell Douglas MD-11 238/255 11 -- -- 11 7
McDonnell Douglas MD-80 133/139 125 25 129 279 12
McDonnell Douglas MD-90 148 -- -- 5 5 3
---- ---- ---- ---- ----
Total 413 79 205 697 11
==== ==== ==== ==== ====
</TABLE>
(1) In February 2000, American announced its "More Room Throughout Coach"
program whereby American's entire fleet will be reconfigured to increase
the seat pitch for more than 75,000 coach seats. As a result of this
program, approximately 7,200 seats will be removed from American's
aircraft.
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 5 to the consolidated financial
statements.
In April 1995, American announced an agreement to sell 12 of its 19
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). In
March 1998, the Company exercised its option to sell its remaining seven MD-11
aircraft to FedEx. Eight aircraft had been delivered as of December 31, 1999.
The remaining 11 aircraft will be delivered between 2000 and 2002.
In addition, during 1999, the Company reached agreements to dispose of
its remaining owned Boeing 727-200 and McDonnell Douglas DC-10-10 aircraft.
These aircraft will be removed from the fleet between 2000 and 2003.
9
<PAGE> 11
Lease expirations for the leased aircraft included in the preceding table
as of December 31, 1999, were:
<TABLE>
<CAPTION>
2005
and
Equipment Type 2000 2001 2002 2003 2004 Thereafter
- ----------------------------- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Airbus A300-600R -- -- -- -- -- 25
Boeing 727-200 -- 5 -- 3 -- --
Boeing 757-200 2 2 2 -- 3 37
Boeing 767-200 Extended Range -- -- -- -- -- 13
Boeing 767-300 Extended Range 6 -- 1 -- 4 12
Fokker 100 -- 2 3 -- -- 4
McDonnell Douglas DC-10-30 -- 1 -- -- -- --
McDonnell Douglas MD-80 1 10 13 6 2 122
McDonnell Douglas MD-90 -- -- -- -- -- 5
---- ---- ---- ---- ---- ----
9 20 19 9 9 218
==== ==== ==== ==== ==== ====
</TABLE>
Substantially all of American'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.
GROUND PROPERTIES
American 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 base at Tulsa International Airport, Tulsa, Oklahoma; 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
American. American also utilizes public airports for its flight operations under
lease or uses 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, 4 and 5 to the consolidated financial statements.
10
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
In connection with its frequent flyer program, American was sued in several
purported class action cases currently pending in the Circuit Court of Cook
County, Illinois. In Wolens et al. v. American Airlines, Inc. and Tucker v.
American Airlines, Inc. (hereafter, "Wolens"), plaintiffs seek money damages and
attorneys' fees claiming that a change made to American's AAdvantage program in
May 1988, which limited the number of seats available to participants travelling
on certain awards, breached American's agreement with its AAdvantage members.
(Although the Wolens complaint originally asserted several state law claims,
only the plaintiffs' breach of contract claim remains after the U.S. Supreme
Court ruled that the Airline Deregulation Act preempted the other claims). In
Gutterman et al. v. American Airlines, Inc. (hereafter, "Gutterman"), plaintiffs
also seek money damages and attorneys' fees claiming that the February 1995
increase in the award mileage required to claim a certain AAdvantage travel
award breached the agreement between American and its AAdvantage members. On
June 23, 1998, the court certified the Gutterman case as a class action,
although to date no notice has been sent to the class.
In February 2000, American and the Wolens and Gutterman plaintiffs
reached a settlement of both lawsuits. Pursuant to the agreement, American and
the plaintiffs agreed to ask the court to consolidate the Wolens and Gutterman
lawsuits for purposes of settlement. Further, American and the Wolens plaintiffs
agreed to ask the court to certify a Wolens class of AAdvantage members who had
at least 35,000 unredeemed AAdvantage miles as of December 31, 1988. In
addition, American and the Gutterman plaintiffs agreed to ask the court to
decertify the existing Gutterman class and to certify a new Gutterman class of
AAdvantage members who as of December 31, 1993 (a) had redeemed 25,000 or 50,000
AAdvantage miles for certain AAdvantage awards and/or (b) had at least 4,700
unredeemed new miles in his or her account that were earned before January 1,
1992. Depending upon certain factors, Wolens and Gutterman class members will be
entitled to receive certificates entitling them to mileage off certain
AAdvantage awards or dollars off certain American fares.
As part of the settlement, American agreed to pay the Wolens and
Gutterman plaintiffs' attorneys and the cost of administering the settlement,
which amounts were accrued as of December 31, 1999. In consideration for the
relief provided for in the settlement agreement, Wolens and Gutterman class
members will release American from all claims arising from any changes that
American has made to the AAdvantage program and reaffirming American's right to
make changes to the AAdvantage program in the future. Before the settlement can
become effective, the court must approve the settlement agreement after
providing any objectors an opportunity to be heard.
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 a labor disagreement that disrupted operations 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 because American has a $45.5
million judgment against the APA. APA filed cross claims against American
alleging that American must indemnify pilots who put themselves on the sick
list. APA also filed a motion to dismiss all claims against it. A United States
District Court Magistrate recommended that the court dismiss all the claims in
the lawsuit, concluding that certain claims are preempted by federal law and
that certain other claims should be brought in state court, rather than federal
court. The Magistrate's recommendations are pending before the court. American
is vigorously defending all claims against it.
11
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
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. Defendants' motion
to dismiss all claims is pending. 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. 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. American intends to defend these lawsuits vigorously.
On March 1, 2000, American was served with a federal grand jury subpoena
calling for American to produce documents relating to de-icing operations at DFW
since 1992. American is not able at this time to determine either the full scope
of the grand jury's investigation or American's role in the investigation.
American intends to fully cooperate with the government's investigation.
12
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
American is a wholly-owned subsidiary of AMR Corporation and there is no market
for the Registrant's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Abbreviated pursuant to General Instruction I(2)(a) of Form 10-K).
RESULTS OF OPERATIONS
American recorded net earnings in 1999 of $627 million. A labor disagreement
that disrupted operations during the first quarter of 1999 negatively impacted
1999 results by an estimated $225 million ($140 million after tax). The results
for 1999 also include American's December 1998 acquisition of Reno Air, Inc.
(Reno), a gain of approximately $75 million ($47 million after tax) resulting
from the sale of a portion of the Company's holding in Equant N.V. (Equant) and
a charge of approximately $37 million ($25 million after tax) relating to the
provision for certain litigation items. American's net earnings in 1998 were
$1.1 billion.
REVENUES
1999 COMPARED TO 1998 American's operating revenues of $16.3 billion in 1999
were up $29 million, or 0.2 percent, versus 1998. American's passenger revenues
increased 0.1 percent, or $12 million. American's yield (the average amount one
passenger pays to fly one mile) of 13.12 cents decreased by 2.7 percent compared
to 1998. For the year, domestic yields decreased 1.1 percent while European,
Pacific and Latin American yields decreased 7.2 percent, 6.0 percent and 4.5
percent, respectively. The decrease in domestic yield was due primarily to
increased capacity, the labor disagreement during the first quarter of 1999, and
the impact of international yield decreases on domestic yields. The decrease in
international yields was due primarily to weak economies in certain parts of the
world, large industry capacity additions and increased fare sale activity.
American's domestic traffic increased 2.1 percent to 76.4 billion revenue
passenger miles (RPMs), while domestic capacity, as measured by available seat
miles (ASMs), increased 4.1 percent. The increase in domestic traffic was due
primarily to the addition of Reno. International traffic grew 4.6 percent to
35.7 billion RPMs on a capacity increase of 3.1 percent. The increase in
international traffic was led by a 44.2 percent increase in the Pacific on
capacity growth of 44.1 percent, a 5.7 percent increase in Europe on capacity
growth of 7.3 percent, partially offset by a 1.9 percent decrease in Latin
America on capacity decrease of 5.1 percent. In 1999, American derived
approximately 70 percent of its passenger revenues from domestic operations and
approximately 30 percent from international operations.
13
<PAGE> 15
OPERATING EXPENSES
1999 COMPARED TO 1998 American's operating expenses of $15.3 billion in 1999
were up $778 million, or 5.4 percent, versus 1998. American's cost per ASM
increased 1.5 percent to 9.39 cents. Wages, salaries and benefits increased $260
million, or 4.7 percent, due 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, partially offset by a decrease in the
provision for profit-sharing. Fuel expense increased $71 million, or 4.6
percent, due to a 4.6 percent increase in American's fuel consumption, partially
offset by a 0.2 percent decrease in American's average price per gallon. The
increase in fuel expense is net of gains of approximately $104 million
recognized during 1999 related to the Company's fuel hedging program.
Commissions to agents decreased 6.0 percent, or $69 million, despite a 0.1
percent increase in passenger revenues, due to the benefit from the changes in
the international commission structure in late 1998 and the base commission
structure change in October 1999 and a decrease in the percentage of
commissionable transactions. Depreciation and amortization expense increased $36
million, or 3.8 percent, due primarily to the addition of new aircraft,
partially offset by the change in depreciable lives and residual values for
certain types of aircraft in 1999 (see Note 1 to the consolidated financial
statements). Other rentals and landing fees increased 11.4 percent, or $89
million, due primarily to higher facilities rent and landing fees across
American's system and the addition of Reno. Food service increased $63 million,
or 9.4 percent, due primarily to rate increases and the addition of Reno.
Aircraft rentals increased $50 million, or 9.4 percent, primarily due to the
addition of Reno aircraft. Other operating expenses increased $248 million, or
9.5 percent, due primarily to increases in outsourced services, travel and
incidental costs and booking fees.
OTHER INCOME (EXPENSE)
1999 COMPARED TO 1998 Interest income decreased $25 million, or 22.9 percent,
due primarily to lower investment balances throughout most of 1999. Interest
expense increased $18 million, or 9.1 percent, resulting from an increase in
long-term debt. Interest capitalized increased 14.4 percent, or $14 million, due
primarily to the increase in purchase deposits for flight equipment throughout
most of 1999. Related party interest - net increased $55 million due primarily
to higher affiliate intercompany balances with American throughout most of 1999.
Miscellaneous - net increased $32 million due primarily to the sale of a portion
of American's interest in Equant in 1999, which resulted in an approximate $75
million gain which was partially offset by the provision for the settlement of
litigation items.
OTHER INFORMATION
YEAR 2000 PROJECT The Company did not experience any significant malfunctions or
errors in its operating or business systems on January 1, 2000, and has not
since that date. Although it is possible that the full impact of the date change
has not been fully recognized, the Company believes any such problems are likely
to be minor and correctable. In addition, the Company could still be negatively
affected if its customers or major suppliers are adversely affected by the Year
2000 or similar issues. However, the Company is not currently aware of any
significant Year 2000 or similar problems that have arisen for its customers or
major suppliers.
As of December 31, 1999, the Company's total cost of the Year 2000
Project was approximately $124 million. Costs associated with the Year 2000
Project were expensed as incurred, other than capitalized hardware costs, and
were funded through cash from operations.
14
<PAGE> 16
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 the United States
District Court for the Northern District of Texas, Dallas Division, 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 Dallas
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. These two federal court lawsuits were consolidated and
stayed.
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 appealed the DOT's order to the Fifth
Circuit Court of Appeals, and on February 1, 2000, the Fifth Circuit affirmed
the DOT's order in all respects.
In January 2000, the Department of Justice, at the behest of the DOT,
filed a lawsuit in the United States District Court for the Northern District of
Texas, Dallas Division, against Fort Worth and American seeking to enforce the
DOT's order and to prevent any party from interfering with any carrier operating
under that order.
American has announced new service from Love Field beginning May 1, 2000,
to Chicago and Los Angeles and is seeking facilities at Love Field from Dallas.
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.
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.
American does not expect these matters, individually or collectively, to have a
significant impact on its results of operations, financial position or
liquidity. Additional information is included in Note 4 to the consolidated
financial statements.
15
<PAGE> 17
WORKING CAPITAL 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.
CREDIT FACILITIES American has a $1.0 billion credit facility agreement that
expires December 19, 2001. At American's option, interest on the agreement can
be calculated on one of several different bases. For most borrowings, American
would anticipate choosing a floating rate based upon the London Interbank
Offered Rate (LIBOR). At December 31, 1999, no borrowings were outstanding under
the agreement.
AIRCRAFT COMMITMENTS At December 31, 1999, the Company had commitments to
acquire the following aircraft: 81 Boeing 737-800s and 26 Boeing 777-200IGWs.
Deliveries of these aircraft commence in 2000 and will continue through 2004.
Future payments, including estimated amounts for price escalation, will
approximate $1.8 billion in 2000, $1.3 billion in 2001, $400 million in 2002 and
an aggregate of approximately $300 million in 2003 through 2004. The Company
expects to fund its 2000 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.
FORWARD-LOOKING INFORMATION
The preceding discussions under Business 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," and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include, without limitation, expectations as to results of operations
and financial condition, including changes in capacity, revenues and costs,
expectations as to future financing needs, Year 2000 expectations, overall
economic projections and the Company's plans and objectives for future
operations, including plans to develop future code-sharing programs and to
evaluate new alliances. 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 or by an
agreement with a 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, consumer perceptions of airline safety,
costs of safety, security and environmental measures, and weather.
COMMODITY PRICES Due to the competitive nature of the airline industry, in the
event of any increase in the price of jet fuel, there can be no assurance that
American would be able to pass on increased fuel prices to its customers by
increasing fares.
16
<PAGE> 18
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of American's routes
is highly competitive. American faces vigorous competition from major domestic
airlines, national, regional, all-cargo and charter carriers, foreign carriers,
low-cost carriers and, particularly on shorter segments, ground transportation.
Pricing decisions are affected by competition from other airlines. Fare
discounting by competitors has historically had a negative effect on American's
financial results because American 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 improves 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.
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., new regulations which would curtail an airline's
ability to respond to a competitor), the adoption of regulations that impact
customer service 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.
17
<PAGE> 19
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 its exposure to such changes. Actual
results may differ. See Note 7 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 utilizing swap and option contracts. Market risk is
estimated as a hypothetical 10 percent increase in the December 31, 1999 and
1998 cost per gallon of fuel. Based on projected 2000 fuel usage, such an
increase would result in an increase to aircraft fuel expense of approximately
$125 million in 2000, net of fuel hedge instruments outstanding at December 31,
1999. Comparatively, based on projected 1999 fuel usage, such an increase would
have resulted in an increase to aircraft fuel expense of approximately $73
million in 1999, net of fuel hedge instruments outstanding at December 31, 1998.
The change in market risk is due primarily to the increase in fuel prices. As of
December 31, 1999, the Company had hedged approximately 48 percent of its 2000
fuel requirements and approximately 10 percent of its 2001 fuel requirements,
compared to approximately 48 percent of its 1999 fuel requirements and 19
percent of its 2000 fuel requirements hedged at December 31, 1998.
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 Japanese
yen, British pound, Canadian dollar, Euro and various Latin and South American
currencies. The Company uses options to hedge a portion of its anticipated
foreign currency-denominated net cash flows. The result of a uniform 10 percent
strengthening in the value of the U.S. dollar from December 31, 1999 and 1998
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 $39 million and $22 million for the years ending December 31, 2000
and 1999, respectively, net of hedge instruments outstanding at December 31,
1999 and 1998, due to the Company's foreign-denominated revenues exceeding its
foreign-denominated expenses. This sensitivity analysis was prepared based upon
projected 2000 and 1999 foreign currency-denominated revenues and expenses as of
December 31, 1999 and 1998. Furthermore, this calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar.
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 39 percent and 14 percent of its total long-term debt,
respectively, at December 31, 1999 and 1998, and interest rate swaps on notional
amounts of approximately $696 million and $1.1 billion, respectively, at
December 31, 1999 and 1998. If interest rates average 10 percent more in 2000
than they did at December 31, 1999, the Company's interest expense would
increase by approximately $10 million and interest income from cash and
short-term investments would increase by approximately $10 million. In
comparison, at December 31, 1998, the Company estimated that if interest rates
averaged 10 percent more in 1999 than they did at December 31, 1998, the
Company's interest expense would have increased by approximately $6 million and
interest income from cash and short-term investments would have increased by
approximately $8 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, 1999 and 1998.
18
<PAGE> 20
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 $71 million and $34 million as of
December 31, 1999 and 1998, respectively. 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.
INVESTMENTS American is subject to market risk related to its ownership of,
excluding the depository certificates held on behalf of Sabre, approximately 1.2
million and 1.4 million depository certificates convertible, subject to certain
restrictions, into the common stock of Equant, as of December 31, 1999 and 1998,
respectively. The estimated fair value of these depository certificates was
approximately $136 million and $100 million as of December 31, 1999 and 1998,
respectively, based upon the market value of Equant common stock.
19
<PAGE> 21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 21
Consolidated Statements of Operations 22
Consolidated Balance Sheets 23
Consolidated Statements of Cash Flows 25
Consolidated Statements of Stockholder's Equity 26
Notes to Consolidated Financial Statements 27
</TABLE>
20
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited the accompanying consolidated balance sheets of American
Airlines, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1999. 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
American Airlines, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 17, 2000
21
<PAGE> 23
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Passenger $ 14,707 $ 14,695 $ 14,310
Cargo 635 649 678
Other 996 965 878
-------- -------- --------
Total operating revenues 16,338 16,309 15,866
-------- -------- --------
EXPENSES
Wages, salaries and benefits 5,747 5,487 5,225
Aircraft fuel 1,622 1,551 1,860
Commissions to agents 1,090 1,159 1,212
Depreciation and amortization 977 941 950
Maintenance, materials and repairs 833 803 736
Other rentals and landing fees 867 778 787
Food service 734 671 672
Aircraft rentals 582 532 531
Other operating expenses 2,866 2,618 2,446
-------- -------- --------
Total operating expenses 15,318 14,540 14,419
-------- -------- --------
OPERATING INCOME 1,020 1,769 1,447
OTHER INCOME (EXPENSE)
Interest income 84 109 109
Interest expense (215) (197) (213)
Interest capitalized 111 97 19
Related party interest - net 44 (11) (84)
Miscellaneous - net 10 (22) 9
-------- -------- --------
34 (24) (160)
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 1,054 1,745 1,287
Income tax provision 427 682 507
-------- -------- --------
NET EARNINGS $ 627 $ 1,063 $ 780
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 72 $ 86
Short-term investments 1,645 1,398
Receivables, less allowance for uncollectible
accounts (1999 - $53; 1998 - $17) 1,124 1,153
Receivable from affiliates, net 651 882
Inventories, less allowance for obsolescence
(1999 - $ 255; 1998 - $196) 616 520
Deferred income taxes 597 426
Other current assets 176 167
------- -------
Total current assets 4,881 4,632
EQUIPMENT AND PROPERTY
Flight equipment, at cost 15,149 12,389
Less accumulated depreciation 5,233 4,691
------- -------
9,916 7,698
Purchase deposits for flight equipment 1,495 1,536
Other equipment and property, at cost 3,131 2,899
Less accumulated depreciation 1,748 1,605
------- -------
1,383 1,294
------- -------
12,794 10,528
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 2,731 2,750
Other equipment and property 155 146
------- -------
2,886 2,896
Less accumulated amortization 1,165 1,070
------- -------
1,721 1,826
OTHER ASSETS
Route acquisition costs, less accumulated
amortization (1999- $269; 1998- $240) 887 916
Airport operating and gate lease rights, less
accumulated amortization (1998 - $156; 1998- $139) 261 278
Prepaid pension cost 257 304
Other 918 740
------- -------
2,323 2,238
------- -------
TOTAL ASSETS $21,719 $19,224
======= =======
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 991 $ 940
Accrued salaries and wages 821 893
Accrued liabilities 969 1,180
Air traffic liability 2,255 2,163
Current maturities of long-term debt 61 23
Current obligations under capital leases 210 129
------- -------
Total current liabilities 5,307 5,328
LONG-TERM DEBT, LESS CURRENT MATURITIES 2,231 920
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,414 1,542
OTHER LIABILITIES AND CREDITS
Deferred income taxes 1,581 1,301
Deferred gains 613 573
Postretirement benefits 1,669 1,598
Other liabilities and deferred credits 1,754 1,537
------- -------
5,617 5,009
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock - $1 par value;
1,000 shares authorized, issued and outstanding -- --
Additional paid-in capital 1,840 1,743
Accumulated other comprehensive income (2) (3)
Retained earnings 5,312 4,685
------- -------
7,150 6,425
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $21,719 $19,224
======= =======
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 26
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 627 $ 1,063 $ 780
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 776 722 744
Amortization 201 219 206
Deferred income taxes 216 243 286
Gain on sale of other investments (75) -- --
Gain on disposition of equipment and property (15) (18) (24)
Change in assets and liabilities:
Decrease (increase) in receivables 41 (95) 30
Increase in inventories (123) (24) (30)
Increase in accounts payable
and accrued liabilities (212) 525 60
Increase in air traffic liability 89 119 155
Other, net 209 89 36
------- ------- -------
Net cash provided by operating activities 1,734 2,843 2,243
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including purchase deposits for
flight equipment (3,066) (1,942) (973)
Net decrease (increase) in short-term investments (247) 364 (450)
Proceeds from:
Sale of other investments 85 -- --
Sale of equipment and property 77 225 282
Acquisitions and other investments (44) (110) --
------- ------- -------
Net cash used for investing activities (3,195) (1,463) (1,141)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of long-term debt 1,388 -- --
Short-term loan from affiliate 300 -- --
Funds transferred to affiliates, net (69) (1,479) (933)
Sale-leaseback transactions 54 270 --
Payments on long-term debt and capital lease obligations (226) (133) (158)
------- ------- -------
Net cash provided by (used for) financing activities 1,447 (1,342) (1,091)
------- ------- -------
Net increase (decrease) in cash (14) 38 11
Cash at beginning of year 86 48 37
------- ------- -------
Cash at end of year $ 72 $ 86 $ 48
======= ======= =======
ACTIVITIES NOT AFFECTING CASH
Capital lease obligations incurred $ 54 $ 270 $ --
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income Earnings Total
------- ---------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- $ 1,717 $ (22) $ 2,830 $ 4,525
Net earnings -- -- -- 780 780
Adjustment for minimum pension
liability, net of tax expense of $13 -- -- 19 -- 19
-------
Total comprehensive income 799
-------
Transfer of net pension
obligation of The Sabre
Group to Parent -- -- -- 12 12
Other -- 15 -- -- 15
------- ------- ------- ------- -------
Balance at December 31, 1997 -- 1,732 (3) 3,622 5,351
Net earnings and total comprehensive
income -- -- -- 1,063 1,063
Other -- 11 -- -- 11
------- ------- ------- ------- -------
Balance at December 31, 1998 -- 1,743 (3) 4,685 6,425
Net earnings -- -- -- 627 627
Adjustment for minimum pension
liability, net of tax expense of $1 -- -- 2 -- 2
Unrealized loss on investments,
net of tax benefit of $1 -- -- (1) -- (1)
-------
Total comprehensive income -- -- -- -- 628
-------
Contribution of assets from
Parent -- 94 -- -- 94
Other -- 3 -- -- 3
------- ------- ------- ------- -------
Balance at December 31, 1999 $ -- $ 1,840 $ (2) $ 5,312 $ 7,150
======= ======= ======= ======= =======
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION American Airlines, Inc. (American or the Company) is a
wholly-owned subsidiary of AMR Corporation (AMR). The consolidated financial
statements include the accounts of American and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated. Certain amounts
from prior years have been reclassified to conform with the 1999 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 major rotable parts, avionics and assemblies are depreciated on
a group basis. The depreciable lives and residual values used for the principal
depreciable asset classifications are:
<TABLE>
<CAPTION>
Depreciable Life
---------------------------
<S> <C>
Boeing 727-200 aircraft August 31, 2003(1)
DC-10 aircraft December 31, 2000(1)
Other aircraft 20 - 30 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
</TABLE>
(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.
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. It also established a 30-year life
for its new Boeing 777 aircraft, first delivered in the first quarter of 1999.
As a result of this change, depreciation and amortization expense was reduced by
approximately $158 million and net earnings were increased by approximately $99
million for the year ended December 31, 1999.
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.
27
<PAGE> 29
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 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, 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, 25 years for airport take-off and landing slots, and over the term
of the lease for airport gate leasehold rights.
PASSENGER REVENUES 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. Actual
results could differ from those estimates.
ADVERTISING COSTS The Company expenses the costs of advertising as incurred.
Advertising expense was $201 million, $192 million, and $178 million for the
years ended December 31, 1999, 1998, and 1997, 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 and recognized over a period approximating the period during which the
mileage credits are used.
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.
2. TRANSACTIONS WITH RELATED PARTIES
American is a party to various agreements with Sabre Holdings Corporation
(Sabre), an 83 percent owned subsidiary of AMR. On February 7, 2000, AMR
declared its intention to distribute its entire ownership interest in Sabre as a
dividend on all outstanding shares of its common stock. In connection with the
spin-off, AMR, American and Sabre agreed to amend certain of these agreements.
The significant agreements with Sabre and the effect of these amendments are
described below.
INFORMATION TECHNOLOGY SERVICES AGREEMENT American is party to the Information
Technology Services Agreement with Sabre dated July 1, 1996 (the Technology
Services Agreement), whereby Sabre provides American with certain information
technology services, including data center and data network services, services
relating to client server operations and distributed systems and voice network
services. The base term of the Technology Services Agreement expires June 30,
2006; however, the terms of the specific services to be provided by Sabre to
American expire at various dates beginning in June 2001. The Technology Services
Agreement provides for annual price adjustments. For certain prices, adjustments
are made according to formulas which are reset every two years and which may
take into account the market for similar services provided by other companies.
The resulting rates may reflect an increase or decrease over the previous rates.
With limited exceptions, under the Technology Services Agreement, Sabre
will continue to be the exclusive provider of all information technology
services that were provided by Sabre to American immediately prior to the
execution of the Technology Services Agreement. Any new information technology
services, including most new application development services, requested by the
Company can be outsourced pursuant to competitive bidding by the Company or
performed by the Company on its own behalf.
28
<PAGE> 30
2. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
In connection with the plan to spin-off Sabre from AMR, American and
Sabre agreed to certain amendments to the Technology Services Agreement. These
amendments include the following: (i) Sabre will provide services relating to
American's real time environment until June 30, 2008, (ii) Sabre will provide
services relating to American's client server operations until June 30, 2002,
(iii) American will have the right to hire up to 25 of Sabre's operations
research personnel, (iv) Sabre's obligations to pay certain ongoing royalty
payments to American are terminated in exchange for a one time payment of $10
million, (v) the intellectual property rights of Sabre and American are modified
to provide American additional rights in certain software applications, and (vi)
American is granted access to Sabre's commercial portfolio of software on a
license fee free basis. American and Sabre have also agreed to negotiate
market-based pricing and market-based terms and conditions during calendar year
2000.
American paid Sabre approximately $521 million, $523 million and $499
million in 1999, 1998 and 1997, respectively, for services provided under the
Technology Services Agreement, as well as airline booking fees, for which
American is billed by Sabre at rates similar to those charged to other carriers.
MARKETING COOPERATION AGREEMENT Sabre and American are parties to the Marketing
Cooperation Agreement dated as of July 1, 1996 (the Marketing Cooperation
Agreement), pursuant to which American will provide marketing support for
Sabre's products targeted to travel agencies until June 30, 2006. For such
support, Sabre will pay American a fee based upon booking volumes. That fee was
approximately $18 million, $17 million and $22 million in 1999, 1998 and 1997,
respectively. Additionally, American will support Sabre's promotion of certain
other products until 2001, for which Sabre will pay American a marketing fee
based upon booking volume. With limited exceptions, the Marketing Cooperation
Agreement does not restrict American from distributing its airline products and
services directly to corporate or individual consumers. Additionally, Sabre has
guaranteed to American certain cost savings in the fifth year of the Marketing
Cooperation Agreement. If American does not achieve those savings, Sabre will
pay American any shortfall, up to a maximum of $50 million. In connection with
the plan to spin-off Sabre from AMR, Sabre and American agreed to terminate
Sabre's obligation to guarantee those cost savings.
TRAVEL AGREEMENTS American and Sabre are parties to travel agreements dated July
1, 1996, pursuant to which Sabre is entitled to purchase personal travel for its
employees and retirees at reduced fares, and business travel at a discount for
certain flights on American. The Travel Privileges Agreement expires on June 30,
2008 and the Corporate Travel Agreement expires on June 30, 2001. Sabre paid
American approximately $45 million in 1999 and 1998 and $48 million in 1997,
respectively, pursuant to these agreements.
The Company and Sabre agreed to certain amendments to the Travel
Privileges Agreement in connection with the plan to spin-off Sabre from AMR.
These amendments allow American to provide certain employees with additional
limited travel privileges and require Sabre to indemnify American for costs
related to Sabre's continued use of the Travel Privileges Agreement.
CREDIT AGREEMENT On July 1, 1996, Sabre and American entered into a Credit
Agreement pursuant to which Sabre is required to borrow from American, and
American is required to lend to Sabre, amounts required by Sabre to fund its
daily cash requirements. In addition, American may, but is not required to,
borrow from Sabre to fund its daily cash requirements. The maximum amount Sabre
may borrow at any time from American under the Credit Agreement is $300 million.
The maximum amount that American may borrow at any time from Sabre under the
Credit Agreement is $100 million. The interest rate to be charged to Sabre is a
function of American's cost of capital and Sabre's credit rating. The interest
rate to be charged to American is Sabre's average portfolio rate for the months
in which borrowing occurred plus an additional spread based upon American's
credit risk. At the end of each quarter, American must pay all amounts owed
under the Credit Agreement to Sabre.
29
<PAGE> 31
2. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
On March 17, 1999, the Company and Sabre 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's $300 million payable to
Sabre was applied against American's receivable from AMR as part of a
transaction between AMR and Sabre whereby American's payable to Sabre of $300
million was applied against an AMR receivable from Sabre. Additionally,
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. At
December 31, 1999, no borrowings were outstanding under the agreement. In
addition, no borrowings occurred by either Sabre or American during 1998 and
1997.
In connection with the plan to spin-off Sabre from AMR, American and
Sabre agreed to terminate the Credit Agreement as of April 15, 2000.
INDEMNIFICATION AGREEMENTS Airline Management Services Holdings, Inc. (AMS), a
subsidiary of AMR, and Canadian Airlines International Limited (Canadian)
entered into an agreement pursuant to which AMR and American supplied to
Canadian various services, including technology services. American subsequently
entered into the Canadian Technical Services Subcontract (the Canadian
Subcontract) with Sabre to provide data processing and network distributed
systems services to Canadian. Under the terms of the Canadian Subcontract,
American guaranteed full payment for services actually performed by Sabre and
deferred costs associated with the installation and implementation of certain
systems. Additionally, AMS guaranteed full payment to American for any services
actually performed by American in connection with the Canadian services
agreement, certain deferred costs incurred by American, and any amounts paid by
American to Sabre under the indemnification provisions of the Canadian
Subcontract.
In connection with the plan to spin-off Sabre from AMR, American and Sabre
agreed to terminate the Canadian Sub-Contract. However, AMR and American will
continue to supply various other services to Canadian, other than the technology
services described above.
Additionally, during 1999, AMR contributed certain assets related to its
investment in Canadian with a net book value of approximately $94 million to
American and the AMS guarantee to American was terminated.
OTHER AGREEMENTS WITH SABRE American and Sabre are also parties to a Management
Services Agreement dated July 1, 1996, pursuant to which American performs
various management services for Sabre, including treasury, risk management and
other administrative services that American has historically provided to Sabre,
for a fee approximating American's cost of providing the services plus a margin.
Sabre paid American approximately $6 million, $10 million and $11 million in
1999, 1998 and 1997, respectively, pursuant to the Management Services
Agreement.
In connection with the plan to spin-off Sabre from AMR, American and
Sabre agreed to the early termination of certain services effective March 2000
and the continuation of certain services with termination dates through June 30,
2001. American and Sabre also negotiated separate agreements for payroll-related
services and workers compensation administration.
AMR, American and Sabre have also entered into a Non-Competition
Agreement dated July 1, 1996, pursuant to which AMR and American, on behalf of
themselves and certain of their subsidiaries, have agreed to limit their
competition with Sabre's businesses of (i) electronic travel distribution; (ii)
development, maintenance, marketing and licensing of software for travel agency,
travel, transportation and logistics management; (iii) computer system
integration; (iv) development, maintenance and operation of a data processing
center providing data processing services to third parties; and (v) travel
industry, transportation and logistics consulting services relating primarily to
computer technology and automation. The Non-Competition Agreement expires on
December 31, 2001.
30
<PAGE> 32
OTHER RELATED PARTY TRANSACTIONS American invests funds, including funds of
certain affiliates, if any, in a combined short-term investment portfolio and
passes through interest income on such funds at the average rate earned on the
portfolio. These amounts are classified as Receivable from affiliate, net on the
accompanying consolidated balance sheets.
2. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
American issues tickets for flights on its American Eagle affiliate
regional carriers, owned by AMR Eagle Holding Corporation, a subsidiary of AMR.
As a result, the revenue collected for such tickets is prorated between American
and the AMR Eagle carriers based on the segments flown by the respective
carriers. The aggregate amount prorated for the segments flown by the AMR Eagle
carriers was approximately $1.0 billion, $956 million and $853 million for 1999,
1998 and 1997, respectively. In 1999, 1998 and 1997, American paid fees of $160
million, $165 million and $164 million, respectively, recorded as a reduction in
passenger revenues, to AMR Eagle primarily for passengers connecting with
American flights. In addition, American provides each of the regional carriers,
among other things, communication and reservation services and other services,
including yield management and participation in American's frequent flyer
program. In consideration for certain services provided, each regional carrier
pays American a service charge, based primarily on passengers boarded, which
approximated $72 million, $66 million and $63 million for 1999, 1998 and 1997,
respectively.
American paid subsidiaries of AMR approximately $32 million, $113 million
and $121 million in 1999, 1998 and 1997, respectively, for ground handling
services provided at selected airports, consulting services and investment
management and advisory services with respect to short-term investments and the
assets of its retirement benefit plans. The decrease in amounts American paid to
subsidiaries of AMR in 1999 is due to AMR's sale of AMR Services, which prior to
March of 1999, was a wholly-owned subsidiary of AMR that provided ground
handling services to American.
American recognizes compensation expense associated with certain AMR
common stock-based awards for employees of American (see Note 9).
3. INVESTMENTS
Short-term investments consisted of (in millions):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
------ ------
<S> <C> <C>
Overnight investments and time deposits $ -- $ 133
Corporate and bank notes 1,173 705
U. S. Government agency notes 234 --
Asset backed securities 144 353
U. S. Government agency mortgages 94 102
Other -- 105
------ ------
$1,645 $1,398
====== ======
Short-term investments at December 31, 1999, by contractual maturity
included (in millions):
Due in one year or less $ 689
Due between one year and three years 899
Due after three years 57
------
$1,645
======
</TABLE>
All short-term investments are classified as available-for-sale and
stated at fair value. Net unrealized gains and losses, net of deferred taxes,
are reflected as an adjustment to stockholder's equity.
31
<PAGE> 33
3. INVESTMENTS (CONTINUED)
At December 31, 1998, the Company owned approximately 3.1 million
depository certificates convertible, subject to certain restrictions, into the
common stock of Equant N.V. (Equant), which completed an initial public offering
in July 1998. Approximately 1.7 million of the certificates were held for the
benefit of Sabre. As of December 31, 1998, the estimated fair value of the
depository certificates, excluding the value of the certificates held for the
benefit of Sabre, was approximately $100 million, based upon the publicly traded
market value of Equant common stock. The carrying value (cost basis) of the
Company's investment in depository certificates as of December 31, 1998 was de
minimis.
During 1999, the Company acquired approximately 400,000 Equant depository
certificates from other airlines. In addition, based upon a reallocation between
the owners of the certificates in July 1999, the Company received an additional
2.6 million certificates, of which approximately 2.2 million certificates were
held for the benefit of Sabre. In connection with two secondary offerings by
Equant in February and December 1999, the Company sold approximately 1.0 million
depository certificates, excluding sales made on behalf of Sabre, for a pre-tax
gain of approximately $75 million, which is included in Miscellaneous - net on
the accompanying consolidated statements of operations ($47 million after tax).
Accordingly, as of December 31, 1999, the Company holds approximately 3.5
million depository certificates with an estimated market value of approximately
$395 million, of which approximately 2.3 million depository certificates with an
estimated market value of approximately $259 million, are held by the Company on
behalf of Sabre. The carrying value of the Company's investment in the
depository certificates as of December 31, 1999 was approximately $20 million.
4. COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Company had commitments to acquire the
following aircraft: 81 Boeing 737-800s and 26 Boeing 777-200IGWs. Deliveries of
these aircraft commence in 2000 and will continue through 2004. Future payments,
including estimated amounts for price escalation, will approximate $1.8 billion
in 2000, $1.3 billion in 2001, $400 million in 2002 and an aggregate of
approximately $300 million in 2003 through 2004. In addition to these
commitments for aircraft, the Company's Board of Directors has authorized
expenditures of approximately $450 million over the next five years for
modifications to aircraft, renovations of, and additions to, airport and
off-airport facilities, and the acquisition of various other equipment and
assets. American expects to spend approximately $380 million of this authorized
amount in 2000.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (the
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
since certain of the potentially responsible parties are no longer in business.
The future increase in landing fees and/or other charges may be material but
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.
In April 1995, American announced an agreement to sell 12 of its 19
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). In
March 1998, the Company exercised its option to sell its remaining seven MD-11
aircraft to FedEx. No gain or loss is expected to be recognized as a result of
these transactions. Eight aircraft had been delivered as of December 31, 1999.
The remaining 11 aircraft will be delivered between 2000 and 2002. The carrying
value of the 11 remaining aircraft American has committed to sell was
approximately $690 million as of December 31, 1999.
32
<PAGE> 34
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
American has included event risk covenants in approximately $2.8 billion
of indebtedness. 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. AMR's March 15,
2000 distribution of its ownership interest in Sabre represents a designated
event under these debt covenants. However, AMR and American have not received
indication that the credit rating on any such indebtedness will be downgraded.
Special facility revenue bonds have been issued by certain
municipalities, primarily to purchase equipment and improve airport facilities
that are leased by American. In certain cases, the bond issue proceeds were
loaned to American and are included in long-term debt. Certain bonds have rates
that are periodically reset and are remarketed by various agents. In certain
circumstances, American may be required to purchase up to $437 million of the
special facility revenue bonds prior to scheduled maturity, in which case
American has the right to resell the bonds or to use the bonds to offset its
lease or debt obligations. American may borrow the purchase price of these bonds
under standby letter of credit agreements. At American's option, these letters
of credit are secured by funds held by bond trustees and by approximately $489
million of short-term investments.
5. LEASES
American leases various types of equipment and property, including
aircraft, and airport and off-airport facilities. The future minimum lease
payments required under capital leases, together with the present value of net
minimum lease 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, 1999, were (in millions):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------- ---------
<S> <C> <C>
2000 $ 304 $ 965
2001 286 972
2002 237 929
2003 155 944
2004 206 934
2005 and subsequent 1,002 12,096
------ -------
2,190(1) $16,840(2)
=======
Less amount representing interest 566
-----
Present value of net minimum lease payments $1,624
======
</TABLE>
(1) Future minimum payments required under capital leases include $187
million guaranteed by AMR relating to special facility revenue
bonds issued by municipalities.
(2) Future minimum payments required under operating leases include
$6.5 billion guaranteed by AMR relating to special facility
revenue bonds issued by municipalities.
At December 31, 1999, the Company had 205 aircraft under operating leases
and 79 aircraft under capital leases. 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.
33
<PAGE> 35
5. LEASES (CONTINUED)
During 1996, American made prepayments on the cancelable operating leases
it had on 12 of its Boeing 767-300 aircraft. Upon the expiration of the amended
leases, American can purchase the aircraft for a nominal amount. As a result,
the aircraft were recorded as flight equipment under capital leases. During
1999, the Company exercised its option to purchase two of the Boeing 767-300
aircraft for a nominal fee. As such, these two aircraft were reclassified from
flight equipment under capital leases to owned flight equipment.
Rent expense, excluding landing fees, was $1.2 billion in 1999 and $1.1
billion in 1998 and 1997.
6. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted of
(in millions):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
------ ------
<S> <C> <C>
Secured variable and fixed rate indebtedness due through 2015
(effective rates from 6.491% - 9.597% at December 31, 1999) $1,940 $ 626
6.0% - 7.1% bonds due through 2031 176 176
Variable rate indebtedness due through 2024
(3.55% at December 31, 1999) 86 86
Other 29 32
------ ------
Long-term debt, less current maturities $2,231 $ 920
====== ======
</TABLE>
Maturities of long-term debt (including sinking fund requirements) for
the next five years are: 2000 - $61 million; 2001 - $71 million; 2002 - $68
million; 2003 - $72 million; 2004 - $77 million.
American has a $1.0 billion credit facility agreement that expires
December 19, 2001. At American's option, interest on the agreement can be
calculated on one of several different bases. For most borrowings, American
would anticipate choosing a floating rate based upon the London Interbank
Offered Rate (LIBOR). At December 31, 1999, no borrowings were outstanding under
the agreement.
Certain debt is secured by aircraft, engines, equipment and other assets
having a net book value of approximately $2.0 billion. In addition, certain of
American's debt and credit facility agreements contain restrictive covenants,
including a minimum net worth requirement, which could limit American's ability
to pay dividends. At December 31, 1999, under the most restrictive provisions of
those debt and credit facility agreements, approximately $2.6 billion of the
retained earnings of American were available for payment of dividends to AMR.
Cash payments for interest, net of capitalized interest, were $123
million, $145 million and $300 million for 1999, 1998 and 1997, respectively.
34
<PAGE> 36
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, American uses a variety
of financial instruments, including interest rate swaps, fuel swap and option
contracts and currency exchange agreements. The Company does not hold or issue
derivative financial instruments for trading purposes.
NOTIONAL AMOUNTS AND CREDIT EXPOSURES OF DERIVATIVES
The notional amounts of derivative financial instruments summarized in
the tables which follow do not represent amounts exchanged between the parties
and, therefore, are not a measure of the Company's exposure resulting from its
use of derivatives. The amounts exchanged are calculated based on the notional
amounts and other terms of the instruments, which relate to interest rates,
exchange rates or other indices.
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. As of December 31, 1999, no collateral was required under these
agreements, and the Company does not expect to post collateral in the near
future.
INTEREST RATE RISK MANAGEMENT
American enters into interest rate swap contracts to effectively convert
a portion of its fixed-rate obligations to floating-rate obligations. These
agreements involve the exchange of amounts based on a floating interest rate for
amounts based on fixed interest rates over the life of the agreement without an
exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the obligation. The
related amount payable to or receivable from counterparties is included in
current liabilities or assets. The fair values of the swap agreements are not
recognized in the financial statements. Gains and losses on terminations of
interest rate swap agreements are deferred as an adjustment to the carrying
amount of the outstanding obligation and amortized as an adjustment to interest
expense related to the obligation over the remaining term of the original
contract life of the terminated swap agreement. In the event of the early
extinguishment of a designated obligation, any realized or unrealized gain or
loss from the swap would be recognized in income coincident with the
extinguishment.
The following table indicates the notional amounts and fair values of the
Company's interest rate swap agreements (in millions):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
Notional Notional
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Interest rate swap agreements $ 696 $ (9) $ 1,054 $ 38
</TABLE>
The fair values represent the amount the Company would pay or receive if
the agreements were terminated at December 31, 1999 and 1998, respectively.
35
<PAGE> 37
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
At December 31, 1999, the weighted-average remaining duration of the
interest rate swap agreements in effect was 5.1 years. The weighted-average
floating rates and fixed rates on the contracts outstanding were:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
------ ------
<S> <C> <C>
Average floating rate 5.855% 5.599%
Average fixed rate 6.593% 6.277%
</TABLE>
Floating rates are primarily based on LIBOR and may change significantly,
affecting future cash flows.
FUEL PRICE RISK MANAGEMENT
American enters into fuel swap and option contracts to protect against
increases in jet fuel prices. Under the fuel swap agreements, American receives
or makes payments based on the difference between a fixed price and a variable
price for certain fuel commodities. Under the fuel option agreements, American
pays a premium to cap prices at a fixed level. The changes in market value of
such agreements have a high correlation to the price changes of the fuel being
hedged. Gains or losses on fuel hedging agreements are recognized as a component
of fuel expense when the underlying fuel being hedged is used. Any premiums paid
to enter into option contracts are recorded as a prepaid expense and amortized
to fuel expense over the respective contract periods. Gains and losses on fuel
hedging agreements would be recognized immediately should the changes in the
market value of the agreements cease to have a high correlation to the price
changes of the fuel being hedged. At December 31, 1999, American had fuel
hedging agreements with broker-dealers on approximately two billion gallons of
fuel products, which represents approximately 48 percent of its expected 2000
fuel needs and approximately 10 percent of its expected 2001 fuel needs. The
fair value of the Company's fuel hedging agreements at December 31, 1999,
representing the amount the Company would receive to terminate the agreements,
totaled $232 million. At December 31, 1998, American had fuel hedging agreements
with broker-dealers on approximately two billion gallons of fuel products, which
represented approximately 48 percent of its expected 1999 fuel needs and
approximately 19 percent of its 2000 fuel needs. The fair value of the Company's
fuel hedging agreements at December 31, 1998, representing the amount the
Company would pay to terminate the agreements, totaled $108 million.
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. The option
contracts are denominated in the same foreign currency in which the projected
foreign cash flows are expected to occur. These contracts are designated and
effective as hedges of probable quarterly foreign cash flows for various periods
through December 31, 2000, which otherwise would expose the Company to foreign
currency risk. Realized gains on the currency put option agreements are
recognized as a component of passenger revenues. At December 31, 1999 and 1998,
the notional amount related to these options totaled approximately $445 million
and $597 million, respectively, and the fair value, representing the amount
American would receive to terminate the agreements, totaled approximately $14
million and $10 million, respectively.
36
<PAGE> 38
7. 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. Changes in the value of the agreements due to exchange rate
fluctuations are offset by changes in the value of the yen-denominated lease
obligations translated at the current exchange rate. Discounts or premiums are
accreted or amortized as an adjustment to interest expense over the lives of the
underlying lease obligations. The related amounts due to or from counterparties
are included in other liabilities or other assets. The net fair values of the
Company's yen currency exchange agreements, representing the amount American
would receive or pay to terminate the agreements, were (in millions):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
Notional Notional
Amount Fair Value Amount Fair Value
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Japanese yen 33.6 billion $41 33.7 billion $(5)
</TABLE>
The exchange rates on the Japanese yen agreements range from 66.50 to
116.89 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 fair values of the Company's long-term
debt, including current maturities, were (in millions):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Secured variable and fixed rate
indebtedness $1,997 $2,022 $ 645 $ 751
6.0% - 7.1 % bonds 176 175 176 189
Variable rate indebtedness 86 86 86 86
Other 33 33 36 36
------ ------ ------ ------
$2,292 $2,316 $ 943 $1,062
====== ====== ====== ======
</TABLE>
All other financial instruments, except for the investment in Equant, are
either carried at fair value or their carrying value approximates fair value.
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended, is required to be adopted in fiscal years
beginning after June 15, 2000. SFAS 133 will require 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 Company is currently evaluating the impact of SFAS
133 on the Company's financial condition and results of operations.
37
<PAGE> 39
8. INCOME TAXES
American, as a wholly-owned subsidiary, is included in AMR's consolidated
tax return. Under the terms of American's tax sharing agreement with AMR,
American's provision for income taxes has been computed on the basis that
American files separate consolidated income tax returns with its subsidiaries.
The significant components of the income tax provision were (in
millions):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $211 $439 $221
Deferred 216 243 286
---- ---- ----
$427 $682 $507
==== ==== ====
</TABLE>
The income tax provision includes a federal income tax provision of $376
million, $602 million and $447 million and a state income tax provision of $44
million, $73 million and $54 million for the years ended December 31, 1999, 1998
and 1997, respectively.
The income tax provision differed from amounts computed at the statutory
federal income tax rate as follows (in millions):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory income tax provision $369 $612 $451
State income tax provision, net 29 47 35
Meal expense 17 16 18
Change in valuation allowance -- 3 --
Other, net 12 4 3
---- ---- ----
Income tax provision $427 $682 $507
==== ==== ====
</TABLE>
The change in the valuation allowance in 1998 relates to the utilization
of foreign tax credits.
The components of American's deferred tax assets and liabilities were (in
millions):
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions $ 627 $ 594
Alternative minimum tax credit carryforwards 238 437
Rent expense 387 315
Frequent flyer obligation 310 258
Gains from lease transactions 243 223
Other 508 340
------- -------
Total deferred tax assets 2,313 2,167
------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization (2,983) (2,757)
Pensions (51) (68)
Other (263) (217)
------- -------
Total deferred tax liabilities (3,297) (3,042)
------- -------
Net deferred tax liability $ (984) $ (875)
======= =======
</TABLE>
38
<PAGE> 40
8. INCOME TAXES (CONTINUED)
At December 31, 1999, American had available under the terms of its tax
sharing agreement with AMR approximately $238 million of alternative minimum tax
credit carryforwards which are available for an indefinite period.
Cash payments for income taxes were $232 million, $434 million and $350
million for 1999, 1998 and 1997, respectively.
9. STOCK AWARDS AND OPTIONS
The Company participates in AMR's 1998 and 1988 Long Term Incentive
Plans, as amended, (collectively, the Plans) whereby officers and key employees
of AMR and its subsidiaries may be granted stock options, stock appreciation
rights, restricted stock, deferred stock, stock purchase rights, other
stock-based awards and/or performance-related awards, including cash bonuses.
The Company also participates in AMR's Pilot 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.
The Company accounts for participation in AMR's stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations. In 1999, 1998 and
1997, the total charge for stock compensation expense included in wages,
salaries and benefits expense was $52 million, $51 million and $66 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.
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 net earnings has been determined as if the Company had accounted for
employee stock options and awards granted by AMR 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 1999, 1998 and 1997:
risk-free interest rates of 5.01% to 6.07%; dividend yields of 0%; expected
stock volatility ranging from 25.5% to 31.3%; and a weighted-average expected
life of the options of 4.5 years 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. In addition,
because SFAS 123 is applicable only to options and stock-based awards granted
subsequent to December 31,1994, its pro forma effect is not fully reflected in
years prior to 1999.
The Company's pro forma net earnings assuming the Company had accounted
for employee stock options issued by AMR to employees of American using the fair
value method would have resulted in 1999, 1998 and 1997 net earnings of $622
million, $1,063 million and $755 million, respectively.
39
<PAGE> 41
10. RETIREMENT BENEFITS
All employees of American and employees of certain other subsidiaries 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
and flight engineers also participate in defined contribution plans for which
Company contributions are determined as a percentage of participant
compensation.
In October 1997, the portion of American's defined benefit pension plan
applicable to employees of Sabre was spun-off to Sabre. At the date of the
spin-off, the net obligation attributable to Sabre employees participating in
American's plan of approximately $20 million, net of deferred taxes of
approximately $8 million, was credited to retained earnings.
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 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.
40
<PAGE> 42
10. RETIREMENT BENEFITS (CONTINUED)
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, 1999 and 1998, and a statement of funded status as of December 31, 1999 and
1998 (in millions):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation
Obligation at January 1 $ 6,117 $ 5,666 $ 1,526 $ 1,355
Service cost 214 179 53 48
Interest cost 393 352 102 91
Actuarial loss (gain) (787) 400 (302) 97
Plan amendments 75 -- -- --
Benefit payments (388) (464) (70) (65)
Curtailments/ Special termination benefits 4 -- (3) --
Settlements -- (16) -- --
------- ------- ------- -------
Obligation at December 31 $ 5,628 $ 6,117 $ 1,306 $ 1,526
======= ======= ======= =======
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 5,564 $ 5,127 $ 62 $ 49
Actual return on plan assets 7 850 1 4
Employer contributions 100 70 79 74
Benefit payments (388) (464) (70) (65)
Settlements -- (16) -- --
Transfer to affiliates (1) (3) -- --
------- ------- ------- -------
Fair value of plan assets at December 31 $ 5,282 $ 5,564 $ 72 $ 62
======= ======= ======= =======
Funded status
Accumulated benefit obligation (ABO) $ 4,700 $ 5,073 $ 1,306 $ 1,526
Projected benefit obligation (PBO) 5,628 6,117 -- --
Fair value of assets 5,282 5,564 72 62
Funded status at December 31 (346) (553) (1,234) (1,464)
Unrecognized loss (gain) 288 651 (395) (89)
Unrecognized prior service cost 139 68 (40) (45)
Unrecognized transition asset (7) (11) -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost $ 74 $ 155 $(1,669) $(1,598)
======= ======= ======= =======
</TABLE>
At December 31, 1999 and 1998, plan assets of approximately $71 million
and $61 million, respectively, were invested in shares of mutual funds managed
by an affiliate of American.
41
<PAGE> 43
10. RETIREMENT BENEFITS (CONTINUED)
The following tables provide the components of net periodic benefit cost
for the years ended December 31, 1999, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
Pension Benefits
---------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Components of net periodic benefit cost
Defined benefit plans:
Service cost $ 214 $ 179 $ 159
Interest cost 393 352 350
Expected return on assets (467) (403) (375)
Amortization of:
Transition asset (4) (11) (12)
Prior service cost 5 4 4
Unrecognized net loss 19 20 25
Settlement loss -- 6 --
----- ----- -----
Net periodic benefit cost for defined
benefit plans 160 147 151
Defined contribution plans 151 153 142
----- ----- -----
Total $ 311 $ 300 $ 293
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Other Benefits
---------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 53 $ 48 $ 42
Interest cost 102 91 88
Expected return on assets (6) (5) (4)
Amortization of:
Prior service cost (5) (5) (5)
Unrecognized net gain -- (2) (8)
----- ----- -----
Net periodic benefit cost $ 144 $ 127 $ 113
===== ===== =====
</TABLE>
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Prepaid benefit cost $ 244 $ 297 $ -- $ --
Accrued benefit liability (170) (142) (1,669) (1,598)
Additional minimum liability (15) (13) -- --
Intangible asset 13 7 -- --
Accumulated other comprehensive income 2 6 -- --
------- ------- ------- -------
Net amount recognized $ 74 $ 155 $(1,669) $(1,598)
======= ======= ======= =======
</TABLE>
42
<PAGE> 44
10. RETIREMENT BENEFITS (CONTINUED)
The following assumptions were used by the Company in the measurement of
the benefit obligation as of December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted-average assumptions
Discount rate 8.25% 7.00% 8.25% 7.00%
Salary scale 4.26 4.26 -- --
Expected return on plan assets 9.50 9.50 9.50 9.50
</TABLE>
The assumed health care cost trend rate was five percent in 1999 and
1998, decreasing gradually to an ultimate rate of four percent by 2001.
A one percentage point change in the assumed health care cost trend rates
would have the following effects (in millions):
<TABLE>
<CAPTION>
One percent One percent
increase decrease
----------- -----------
<S> <C> <C>
Impact on 1999 service and interest cost $ 24 $ (22)
Impact on postretirement benefit obligation
as of December 31, 1999 $ 115 $(105)
</TABLE>
11. SEGMENT REPORTING
American is one of the largest scheduled passenger airlines in the world.
At the end of 1999, American provided scheduled jet service to more than 169
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.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (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. American has
one reportable segment.
American's operating revenues by geographic region are summarized below
(in millions):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Domestic $11,311 $11,176 $10,759
Latin America 2,557 2,709 2,716
Europe 1,984 2,039 2,035
Pacific 486 385 356
------- ------- -------
Total operating revenues $16,338 $16,309 $15,866
======= ======= =======
</TABLE>
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.
43
<PAGE> 45
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1999 and 1998 (in
millions):
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------ ------- ------- -------
<S> <C> <C> <C> <C>
1999
Operating revenues $3,709 $4,177 $4,317 $4,135
Operating income 27 364 380 249
Net earnings 35 216 220 156
1998
Operating revenues $3,962 $4,196 $4,275 $3,876
Operating income 395 551 559 264
Net earnings 221 331 346 165
</TABLE>
Results for the first quarter of 1999 include an after-tax gain of
approximately $19 million related to the sale of a portion of the Company's
holdings in Equant (see Note 3). Results for the fourth quarter of 1999 include:
(i) an after-tax gain of approximately $28 million related to the sale of a
portion of the Company's holdings of Equant (see Note 3), (ii) a $28 million
after-tax increase in passenger revenue resulting from a change in estimate
related to certain passenger revenue earned during the first nine months of
1999, and (iii) a $25 million after-tax provision for certain litigation
settlements.
44
<PAGE> 46
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 21
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 22
Consolidated Balance Sheets at December 31, 1999 and 1998 23-24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 25
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1999, 1998 and 1997 26
Notes to Consolidated Financial Statements 27
(2) The following financial statement schedule and Independent
Auditors' Report are filed as part of this report:
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 48
Schedule II Valuation and Qualifying Accounts and Reserves 49
</TABLE>
45
<PAGE> 47
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 American's long-term debt agreements does not exceed 10 percent
of American's assets, pursuant to paragraph (b)(4) of Item 601 of
Regulation S-K, in lieu of filing such as an exhibit, American
hereby agrees to furnish to the Commission upon request a copy of
any agreement with respect to such long-term debt.)
EXHIBIT
3.1 Composite of the Certificate of Incorporation of American,
incorporated by reference to Exhibit 3(a) to American's
report on Form 10-K for the year ended December 31, 1982.
10.3 Bylaws of American Airlines, Inc., amended November 18,
1998.
10.1 Aircraft Sales Agreement by and between American Airlines,
Inc. and Federal Express Corporation, dated April 7, 1995,
incorporated by reference to Exhibit 10(ee) to American's
report on Form 10-K for the year ended December 31, 1995.
Confidential treatment was granted as to a portion of this
document.
10.2 Information Technology Services Agreement, dated July 1,
1996, between American and The Sabre Group, Inc.,
incorporated by reference to Exhibit 10.6 to The Sabre
Group Holdings, Inc.'s Registration Statement on Form S-1,
file number 333-09747. Confidential treatment was granted
as to a portion of this document.
10.3 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
Corporation's report on Form 10-K for the year ended
December 31, 1997. Confidential treatment was granted as to
a portion of this document.
12 Computation of ratio of earnings to fixed charges for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K: None
46
<PAGE> 48
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.
AMERICAN AIRLINES, INC.
/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 - Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date: March 27, 2000
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/ David L. Boren /s/ Ann D. McLaughlin
- -------------------------- --------------------------
David L. Boren Ann D. McLaughlin
/s/ Edward A. Brennan /s/ Charles H. Pistor, Jr.
- -------------------------- --------------------------
Edward A. Brennan Charles H. Pistor, Jr.
/s/ Armando M. Codina /s/ Philip J. Purcell
- -------------------------- --------------------------
Armando M. Codina Philip J. Purcell
/s/ Earl G. Graves /s/ Joe M. Rodgers
- -------------------------- --------------------------
Earl G. Graves Joe M. Rodgers
/s/ Dee J. Kelly /s/ Judith Rodin
- -------------------------- --------------------------
Dee J. Kelly Judith Rodin
Date: March 27, 2000
47
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited the consolidated financial statements of American
Airlines, Inc. as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
January 17, 2000. 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 17, 2000
48
<PAGE> 50
AMERICAN AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
<TABLE>
<CAPTION>
INCREASES SALES,
BALANCE CHARGED TO RETIRE- BALANCE
AT INCOME WRITE-OFFS MENTS AT
BEGINNING STATEMENT (NET OF AND END OF
OF YEAR ACCOUNTS PAYMENTS RECOVERIES) TRANSFERS YEAR
------- -------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for
uncollectible accounts $ 17 $ 34 $ -- $ 2 $ -- $ 53
Allowance for
obsolescence of inventories 196 54 -- -- 5 255
Reserves for environmental
remediation costs 23 48 (6) -- -- 65
Reserves for litigation -- 39 (8) -- -- 31
YEAR ENDED DECEMBER 31, 1998
Allowance for
uncollectible accounts 8 12 -- (3) -- 17
Allowance for
obsolescence of inventories 189 35 -- -- (28) 196
Reserves for environmental
remediation costs 14 12 (3) -- -- 23
YEAR ENDED DECEMBER 31, 1997
Allowance for
uncollectible accounts 6 11 -- (9) -- 8
Allowance for
obsolescence of inventories 197 33 -- -- (41) 189
Reserves for environmental
remediation costs 18 -- (4) -- -- 14
</TABLE>
49
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Composite of the Certificate of Incorporation of American,
incorporated by reference to Exhibit 3(a) to American's report on
Form 10-K for the year ended December 31, 1982.
10.3 Bylaws of American Airlines, Inc., amended November 18, 1998.
10.1 Aircraft Sales Agreement by and between American Airlines, Inc.
and Federal Express Corporation, dated April 7, 1995, incorporated
by reference to Exhibit 10(ee) to American's report on Form 10-K
for the year ended December 31, 1995. Confidential treatment was
granted as to a portion of this document.
10.2 Information Technology Services Agreement, dated July 1, 1996,
between American and The Sabre Group, Inc., incorporated by
reference to Exhibit 10.6 to The Sabre Group Holdings, Inc.'s
Registration Statement on Form S-1, file number 333-09747.
Confidential treatment was granted as to a portion of this
document.
10.3 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 Corporation's report on Form
10-K for the year ended December 31, 1997. Confidential treatment
was granted as to a portion of this document.
12 Computation of ratio of earnings to fixed charges for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12
AMERICAN AIRLINES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings from continuing operations before
income taxes and extraordinary loss $ 20 $ 957 $1,287 $1,745 $1,054
Add: Total fixed charges (per below) 1,283 1,076 995 906 989
Less: Interest capitalized 14 10 19 97 111
------ ------ ------ ------ ------
Total earnings $1,289 $2,023 $2,263 $2,554 $1,932
====== ====== ====== ====== ======
Fixed charges:
Interest $ 547 $ 371 $ 297 $ 208 $ 215
Portion on rental expense representative
of the interest factor 733 704 697 697 773
Amortization of debt expense 3 1 1 1 1
------ ------ ------ ------ ------
Total fixed charges $1,283 $1,076 $ 995 $ 906 $ 989
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 1.00 1.88 2.27 2.82 1.95
====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post Effective Amendment No. 2
to the Registration Statement (Form S-3 No. 33-42998 and Form S-3 No. 333-74937)
of American Airlines, Inc., and in the related Prospectus, of our reports dated
January 17, 2000, with respect to the consolidated financial statements and
schedule of American Airlines, Inc. included in this Annual Report (Form 10-K)
for the year ended December 31, 1999.
ERNST & YOUNG LLP
Dallas, Texas
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000004515
<NAME> AMERICAN AIRLINES,INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 72
<SECURITIES> 1,645
<RECEIVABLES> 1,177
<ALLOWANCES> 53
<INVENTORY> 616
<CURRENT-ASSETS> 4,881
<PP&E> 22,661
<DEPRECIATION> 8,146
<TOTAL-ASSETS> 21,719
<CURRENT-LIABILITIES> 5,307
<BONDS> 3,645
0
0
<COMMON> 1,840
<OTHER-SE> 5,310
<TOTAL-LIABILITY-AND-EQUITY> 21,719
<SALES> 0
<TOTAL-REVENUES> 16,338
<CGS> 0
<TOTAL-COSTS> 15,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> 1,054
<INCOME-TAX> 427
<INCOME-CONTINUING> 627
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
