10-Q 1 aalq110-q033118.htm 10-Q Document


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 FORM 10-Q
 
 
 
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2018
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From                     to
Commission file number 1-8400
 
 
 
American Airlines Group Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
75-1825172
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155
 
(817) 963-1234
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
Commission file number 1-2691
 
 
 
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-1502798
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155
 
(817) 963-1234
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
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. 
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
American Airlines Group Inc.
☒ Large Accelerated Filer
☐ Accelerated Filer
☐ Non-accelerated Filer
☐ Smaller Reporting Company
☐ Emerging Growth Company
American Airlines, Inc.
☐ Large Accelerated Filer
☐ Accelerated Filer
☒ Non-accelerated Filer
☐ Smaller Reporting Company
☐ Emerging Growth Company
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
American Airlines Group Inc.
 
American Airlines, Inc.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. 
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
As of April 20, 2018, there were 468,152,649 shares of American Airlines Group Inc. common stock outstanding.
As of April 20, 2018, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.
 




American Airlines Group Inc.
American Airlines, Inc.
Form 10-Q
Quarterly Period Ended March 31, 2018
Table of Contents
 
 
Page
PART I: FINANCIAL INFORMATION
Item 1A.
 
 
 
 
 
Item 1B.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II: OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.


1



This report is filed by American Airlines Group Inc. (formerly named AMR Corporation) (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this report to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and its acquisition of US Airways Group, Inc. (US Airways Group) on December 9, 2013. References to “US Airways Group” and “US Airways,” a subsidiary of US Airways Group, represent the entities during the period of time prior to the dissolution of those entities in connection with AAG’s internal corporate restructuring on December 30, 2015. References in this report to “mainline” refer to the operations of American only and exclude regional operations.
Note Concerning Forward-Looking Statements
Certain of the statements contained in this report should be considered forward-looking statements within the meaning of the Securities Act of 1933, as amended (the Securities Act), the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “would,” “continue,” “seek,” “target,” “guidance,” “outlook,” “if current trends continue,” “optimistic,” “forecast” and other similar words. Such statements include, but are not limited to, statements about our plans, objectives, expectations, intentions, estimates and strategies for the future, and other statements that are not historical facts. These forward-looking statements are based on our current objectives, beliefs and expectations, and they are subject to significant risks and uncertainties that may cause actual results and financial position and timing of certain events to differ materially from the information in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 1A. Risk Factors and other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission (the SEC).
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A. Risk Factors and elsewhere in this report. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We do not assume any obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting such statements other than as required by law. Forward-looking statements speak only as of the date of this report or as of the dates indicated in the statements.

2



PART I: FINANCIAL INFORMATION
This report on Form 10-Q is filed by both AAG and American and includes the Condensed Consolidated Financial Statements of each company in Item 1A and Item 1B, respectively.


3



ITEM 1A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares and per share amounts)(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Operating revenues:
 
Passenger
$
9,480

 
$
8,997

Cargo
227

 
191

Other
694

 
632

Total operating revenues
10,401

 
9,820

Operating expenses:
 
 
 
Aircraft fuel and related taxes
1,763

 
1,402

Salaries, wages and benefits
3,017

 
2,859

Regional expenses
1,698

 
1,573

Maintenance, materials and repairs
469

 
492

Other rent and landing fees
462

 
440

Aircraft rent
304

 
295

Selling expenses
356

 
318

Depreciation and amortization
445

 
405

Special items, net
195

 
119

Other
1,261

 
1,180

Total operating expenses
9,970

 
9,083

Operating income
431

 
737

Nonoperating income (expense):
 
 
 
Interest income
25

 
21

Interest expense, net
(265
)
 
(257
)
Other income, net
82

 
34

Total nonoperating expense, net
(158
)
 
(202
)
Income before income taxes
273

 
535

Income tax provision
87

 
195

Net income
$
186

 
$
340

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.39

 
$
0.67

Diluted
$
0.39

 
$
0.67

Weighted average shares outstanding (in thousands):
 
 
 
Basic
472,297

 
503,902

Diluted
474,598

 
507,797

Cash dividends declared per common share
$
0.10

 
$
0.10

See accompanying notes to condensed consolidated financial statements.

4



AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)(Unaudited) 
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
186

 
$
340

Other comprehensive loss, net of tax:
 
 
 
Pension, retiree medical and other postretirement benefits
(16
)
 
(14
)
Investments
(2
)
 

Total other comprehensive loss, net of tax
(18
)
 
(14
)
Total comprehensive income
$
168

 
$
326

See accompanying notes to condensed consolidated financial statements.


5



AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except shares and par value)
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
Current assets
 
 
 
Cash
$
297

 
$
295

Short-term investments
4,994

 
4,771

Restricted cash and short-term investments
294

 
318

Accounts receivable, net
1,809

 
1,752

Aircraft fuel, spare parts and supplies, net
1,455

 
1,359

Prepaid expenses and other
824

 
651

Total current assets
9,673

 
9,146

Operating property and equipment
 
 
 
Flight equipment
40,662

 
40,318

Ground property and equipment
8,599

 
8,267

Equipment purchase deposits
1,231

 
1,217

Total property and equipment, at cost
50,492

 
49,802

Less accumulated depreciation and amortization
(16,159
)
 
(15,646
)
Total property and equipment, net
34,333

 
34,156

Other assets
 
 
 
Goodwill
4,091

 
4,091

Intangibles, net of accumulated amortization of $632 and $622, respectively
2,193

 
2,203

Deferred tax asset
1,581

 
1,816

Other assets
1,409

 
1,373

Total other assets
9,274

 
9,483

Total assets
$
53,280

 
$
52,785

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt and capital leases
$
2,793

 
$
2,554

Accounts payable
1,953

 
1,688

Accrued salaries and wages
1,178

 
1,672

Air traffic liability
5,549

 
4,042

Loyalty program liability
3,176

 
3,121

Other accrued liabilities
2,359

 
2,281

Total current liabilities
17,008

 
15,358

Noncurrent liabilities
 
 
 
Long-term debt and capital leases, net of current maturities
21,946

 
22,511

Pension and postretirement benefits
7,259

 
7,497

Loyalty program liability
5,610

 
5,701

Other liabilities
2,475

 
2,498

Total noncurrent liabilities
37,290

 
38,207

Commitments and contingencies

 

Stockholders’ equity (deficit)
 
 
 
Common stock, $0.01 par value; 1,750,000,000 shares authorized, 467,390,481 shares issued and outstanding at March 31, 2018; 475,507,887 shares issued and outstanding at December 31, 2017
5

 
5

Additional paid-in capital
5,279

 
5,714

Accumulated other comprehensive loss
(5,172
)
 
(5,154
)
Accumulated deficit
(1,130
)
 
(1,345
)
Total stockholders’ deficit
(1,018
)
 
(780
)
Total liabilities and stockholders’ equity (deficit)
$
53,280

 
$
52,785

See accompanying notes to condensed consolidated financial statements.

6



AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Net cash provided by operating activities
$
1,799

 
$
2,250

Cash flows from investing activities:
 
 
 
Capital expenditures and aircraft purchase deposits
(779
)
 
(1,714
)
Proceeds from sale of property and equipment and other investments
22

 
32

Purchases of short-term investments
(1,252
)
 
(1,922
)
Sales of short-term investments
1,029

 
1,660

Decrease in restricted short-term investments
24

 
74

Net cash used in investing activities
(956
)
 
(1,870
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
236

 
899

Payments on long-term debt and capital leases
(569
)
 
(686
)
Deferred financing costs
(1
)
 
(31
)
Treasury stock repurchases
(461
)
 
(484
)
Dividend payments
(48
)
 
(51
)
Other financing activities
2

 
4

Net cash used in financing activities
(841
)
 
(349
)
Net increase in cash and restricted cash
2

 
31

Cash and restricted cash at beginning of period
398

 
436

Cash and restricted cash at end of period (a)
$
400

 
$
467

 
 
 
 
Supplemental information:
 
 
 
Interest paid, net
258

 
255

Income taxes paid
3

 
4

 
   
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the condensed consolidated balance sheets:
Cash
$
297

 
$
374

Restricted cash included in restricted cash and short-term investments
103

 
93

Total cash and restricted cash
$
400

 
$
467


See accompanying notes to condensed consolidated financial statements.


7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.
On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. On December 30, 2015, in order to simplify AAG’s internal corporate structure, US Airways Group merged with and into AAG, with AAG as the surviving corporation. Immediately thereafter, US Airways, Inc. (US Airways), a wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, valuation allowance for deferred tax assets, as well as pension and retiree medical and other postretirement benefits.
(b) Recent Accounting Pronouncements
Standards Effective for 2018 Reporting Periods
Effective January 1, 2018, we adopted the accounting pronouncements described below.
ASU 2014-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)
The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services. We adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods.
The adoption of the New Revenue Standard impacted our accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members. There was no change in accounting for sales of mileage credits to co-branded card or other partners. Prior to the adoption of the New Revenue Standard, we used the incremental cost method to account for the portion of our loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger. The New Revenue Standard required us to change our policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method.
The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue. Additionally, the New Revenue Standard required a gross presentation on the face of our condensed consolidated statement of operations for certain revenues and expenses that had previously been presented on a net basis.
See recast condensed consolidated statement of operations data for the three months ended March 31, 2017 and recast consolidated balance sheet data as of December 31, 2017 presented below for the effects of adoption.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


ASU 2017-07: Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)
The New Retirement Standard required all components of our net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented. The adoption of the New Retirement Standard had no impact on pre-tax income or net income reported.
See recast condensed consolidated statement of operations data for the three months ended March 31, 2017 presented below for the effects of adoption.
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)
This ASU made several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This standard was adopted prospectively as of January 1, 2018 and resulted in a $77 million cumulative effect adjustment credit to retained earnings related to our investment in China Southern Airlines Company Limited, which was previously accounted for under the cost method.
ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash
This ASU required that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents and also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard was applied retrospectively, which resulted in the recast of the prior reporting period in the statement of cash flows. For the three months ended March 31, 2018 and 2017, $103 million and $93 million, respectively, of restricted cash is included in the total of cash and restricted cash balance at the end of period. A reconciliation of cash and restricted cash from our condensed consolidated statement of cash flows to the amounts reported within our condensed consolidated balance sheet is also included in a table below our condensed consolidated statement of cash flows.
Impacts to Prior Period Results
The effects of adoption of the New Revenue Standard and New Retirement Standard to our condensed consolidated statement of operations for the three months ended March 31, 2017 were as follows (in millions, except per share amounts):
 
 
 
New Revenue Standard
 
New Retirement Standard
 
 
 
As Reported
 
Deferred Revenue Method
 
Reclassifications
 
Reclassifications
 
As Recast
Operating revenues:
 
 
 
 
 
 
 
 
 
    Passenger
$
8,155

 
$
170

 
$
672

 
$

 
$
8,997

    Cargo
172

 

 
19

 

 
191

    Other
1,297

 

 
(665
)
 

 
632

    Total operating revenues
9,624

 
170

 
26

 

 
9,820

    Total operating expenses
9,023

 

 
26

 
34

 
9,083

Operating income
601

 
170

 

 
(34
)
 
737

    Total nonoperating expense, net
(236
)
 

 

 
34

 
(202
)
Income before income taxes
365

 
170

 

 

 
535

Income tax provision
131

 
64

 

 

 
195

Net income
$
234

 
$
106

 
$

 
$

 
$
340

Diluted earnings per common share
$
0.46

 
 
 
 
 
 
 
$
0.67



9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


The effects of adoption of the New Revenue Standard to our December 31, 2017 consolidated balance sheet are as follows (in millions):
 
As Reported
 
New Revenue Standard
 
As Recast
Deferred tax asset
$
427

 
$
1,389

 
$
1,816

Air traffic liability
3,978

 
64

 
4,042

Current loyalty program liability
2,791

 
330

 
3,121

Noncurrent loyalty program liability

 
5,701

 
5,701

Total stockholders' equity (deficit)
3,926

 
(4,706
)
 
(780
)
Standards Effective for 2019 Reporting Periods
ASU 2016-02: Leases (Topic 842) (the New Lease Standard)
The New Lease Standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the New Revenue Standard. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We will adopt the New Lease Standard effective January 1, 2019. We are currently evaluating how the adoption of the New Lease Standard will impact our consolidated financial statements. Interpretations are on-going and could have a material impact on our implementation. Currently, we expect that the adoption of the New Lease Standard will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.
ASU 2018-02: Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S. federal corporate income tax rate change as a result of H.R. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act). The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We expect we will adopt this standard effective January 1, 2019. The adoption of the standard may impact tax amounts stranded in accumulated other comprehensive income related to our pension and retiree medical and other postretirement benefit plans.

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


2. Special Items, Net
Special items, net on the condensed consolidated statements of operations consisted of the following (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Fleet restructuring expenses (1)
$
82

 
$
63

Merger integration expenses (2)
59

 
63

Labor contract expenses
13

 

Other operating charges, net
41

 
(7
)
Mainline operating special items, net
195

 
119

 
 
 
 
Regional operating special items, net

 
2

 
 
 
 
Debt refinancing and extinguishment charges

 
5

Nonoperating special items, net

 
5

 
 
 
 
Income tax special items, net (3)
22

 

 
     
(1) 
Fleet restructuring expenses principally included the acceleration of depreciation and impairments for aircraft and related equipment grounded or expected to be grounded earlier than planned.
(2) 
Merger integration expenses included costs associated with our remaining integration projects, principally our flight attendant, human resources, payroll and technical operations integrations.
(3) 
Income tax special items included a $22 million charge to income tax expense to establish a required valuation allowance related to our estimated refund for Alternative Minimum Tax (AMT) credits.
3. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (EPS) (in millions, except share and per share amounts):
 
Three Months Ended March 31,
 
2018
 
2017
Basic EPS:
 
 
 
Net income
$
186

 
$
340

Weighted average common shares outstanding (in thousands)
472,297

 
503,902

Basic EPS
$
0.39

 
$
0.67

 
 
 
 
Diluted EPS:
 
 
 
Net income for purposes of computing diluted EPS
$
186

 
$
340

Share computation for diluted EPS (in thousands):
 
 
 
Basic weighted average common shares outstanding
472,297

 
503,902

Dilutive effect of stock awards
2,301

 
3,895

Diluted weighted average common shares outstanding
474,598

 
507,797

Diluted EPS
$
0.39

 
$
0.67

 
 
 
 
Restricted stock unit awards excluded from the calculation of diluted EPS because inclusion would be antidilutive (in thousands)
1

 
395


11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


4. Share Repurchase Programs and Dividends
Since July 2014, our Board of Directors has approved six share repurchase programs aggregating $11.0 billion of authority. As of March 31, 2018, there was no remaining authority to repurchase shares under our share repurchase programs.
During the three months ended March 31, 2018, we repurchased 8.4 million shares of AAG common stock for $450 million at a weighted average cost per share of $53.32. Since the inception of our share repurchase programs in July 2014, we have repurchased 270.7 million shares of AAG common stock for $11.0 billion at a weighted average cost per share of $40.63.
Our Board of Directors declared a cash dividend of $0.10 per share for stockholders of record as of February 6, 2018 and paid on February 20, 2018, totaling $48 million in the first three months of 2018.
5. Revenue Recognition
(a) Revenue
Effective January 1, 2018, we adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods. See Recent Accounting Pronouncements in Note 1(b) above for effects of adoption on our condensed consolidated statement of operations for the three months ended March 31, 2017 and on our consolidated balance sheet as of December 31, 2017. Under the New Revenue Standard, revenue is recognized upon transfer of control of promised products or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.
The following are the significant categories comprising our reported operating revenues (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Passenger revenue:
 
 
 
Passenger travel
$
8,630

 
$
8,195

Loyalty revenue - travel (1)
850

 
802

Total passenger revenue
9,480

 
8,997

Cargo
227

 
191

Other:
 
 
 
Loyalty revenue - marketing services
570

 
514

Other revenue
124

 
118

Total other revenue
694

 
632

Total operating revenues
$
10,401

 
$
9,820

 
    
(1) 
Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions for air travel awards from mileage credits earned through travel and mileage credits sold to co-branded card and other partners. See discussion of Loyalty Revenue below.
The following is our total passenger revenue by geographic region (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Domestic
$
6,963

 
$
6,781

Latin America
1,445

 
1,231

Atlantic
669

 
624

Pacific
403

 
361

Total passenger revenue
$
9,480

 
$
8,997

We attribute passenger revenue by geographic region based upon the origin and destination of each flight segment.

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


Passenger Revenue
We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the condensed consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates.
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. We have consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of our estimates. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.
Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying condensed consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.
Loyalty Revenue
We currently operate the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclays US co-branded cards, hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, we apply the deferred revenue method in accordance with the New Revenue Standard.
Mileage credits earned through travel
For mileage credits earned through travel, we apply a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach which uses historical data, including award redemption patterns by geographic region and class of service as well as similar fares as those used to settle award redemptions. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.
Mileage credits sold to co-branded cards and other partners
We sell mileage credits to participating airline partners and non-airline business partners including our co-branded card partners, under contracts with terms extending generally for one to nine years. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. We allocate the consideration received from the sale of mileage credits based on the relative selling price of each product or service delivered.
Our most significant partner agreements are our co-branded card program agreements with Citi and Barclays US that we entered into in 2016. We identified the following revenue elements in these co-branded card agreements: the transportation component; and the use of intellectual property including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed. Our estimates are based on analysis of historical redemptions.
Cargo Revenue
Cargo revenue is recognized when we provide the transportation.
Other Revenue
Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded card and other partners and other marketing related payments. For the three months ended March 31, 2018 and 2017, loyalty revenue included in other revenue was $570 million and $514 million, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in Loyalty Revenue. The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.
(b) Contract Balances
Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on our condensed consolidated balance sheet and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our condensed consolidated balance sheet.
 
March 31, 2018
 
December 31, 2017
 
(In millions)
Loyalty program liability
$
8,786

 
$
8,822

Air traffic liability
5,549

 
4,042

Total
$
14,335

 
$
12,864

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
Balance at December 31, 2017
$
8,822

Deferral of revenue
865

Recognition of revenue (1)
(901
)
Balance at March 31, 2018 (2)
$
8,786

 
(1) 
Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period as well as miles that were issued during the period.
(2) 
Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. As of March 31, 2018, our current loyalty program liability was $3.2 billion and represents our current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.
The air traffic liability principally represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in our air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is one year. Accordingly, any revenue associated with tickets sold for future travel dates will be recognized within twelve months. For the three months ended March 31, 2018, $2.1 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2017.

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


With respect to contract receivables, reflected as accounts receivable, net on the accompanying condensed consolidated balance sheet, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards. These receivables are short-term, mostly settled within seven days after sale. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.
6. Debt
Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):
 
March 31, 2018
 
December 31, 2017
Secured
 
 
 
2013 Credit Facilities, variable interest rate of 3.88%, installments through 2020
$
1,825

 
$
1,825

2014 Credit Facilities, variable interest rate of 3.74%, installments through 2021
728

 
728

April 2016 Credit Facilities, variable interest rate of 3.88%, installments through 2023
990

 
990

December 2016 Credit Facilities, variable interest rate of 3.78%, installments through 2023
1,238

 
1,238

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, averaging 4.25%, maturing from 2018 to 2029
11,764

 
11,881

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.34% to 8.48%, averaging 3.70%, maturing from 2018 to 2029
5,062

 
5,259

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2018 to 2035
857

 
857

Other secured obligations, fixed interest rates ranging from 3.81% to 12.24%, maturing from 2021 to 2028
755

 
773

 
23,219

 
23,551

Unsecured
 
 
 
5.50% senior notes, interest only payments until due in 2019
750

 
750

6.125% senior notes, interest only payments until due in 2018
500

 
500

4.625% senior notes, interest only payments until due in 2020
500

 
500

 
1,750

 
1,750

Total long-term debt and capital lease obligations
24,969

 
25,301

Less: Total unamortized debt discount, premium and issuance costs
230

 
236

Less: Current maturities
2,793

 
2,554

Long-term debt and capital lease obligations, net of current maturities
$
21,946

 
$
22,511

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of March 31, 2018 (in millions):
2013 Revolving Facility
$
1,200

2014 Revolving Facility
1,000

April 2016 Revolving Facility
300

Total
$
2,500

The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future.

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


2018 Aircraft Financing Activities
2017-2 EETCs
During the first quarter of 2018, $210 million of the $1.0 billion total net proceeds from the issuance of certain enhanced equipment trust certificates in August and October 2017 (the 2017-2 EETCs) were used to purchase equipment notes issued by American in connection with financing 4 of the 30 aircraft financed under the 2017-2 EETCs. Approximately $735 million of proceeds from the 2017-2 EETCs were used in 2017 to purchase equipment notes issued by American in connection with the financing of 24 aircraft. Interest and principal payments on equipment notes issued in connection with the 2017-2 EETCs are payable semi-annually in April and October of each year, with interest payments beginning in April 2018 and principal payments beginning in October 2018. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2017-2 EETCs. The remaining net proceeds of $73 million of 2017-2 EETCs is being held in escrow for the benefit of the holders of the 2017-2 EETCs until such time as American issues additional Series AA, A and B equipment notes to the pass-through trusts, which will purchase additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depository are not American's assets.
Certain information regarding the 2017-2 EETC equipment notes and the remaining escrowed proceeds of the 2017-2 EETCs, as of March 31, 2018, is set forth in the table below.
 
2017-2 EETCs
 
Series AA
 
Series A
 
Series B
Aggregate principal issued
$545 million
 
$252 million
 
$221 million
Remaining escrowed proceeds
$39 million
 
$18 million
 
$16 million
Fixed interest rate per annum
3.35%
 
3.60%
 
3.70%
Maturity date
October 2029
 
October 2029
 
October 2025
7. Income Taxes
At December 31, 2017, we had approximately $10.0 billion of federal net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which we expect to be available for use in 2018. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $3.4 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2017, which will expire in years 2018 through 2037 if unused.
At December 31, 2017, we had an AMT credit carryforward of approximately $339 million available for federal income tax purposes, which is expected to be substantially refunded in 2019 and 2020 as a result of the repeal of corporate AMT.
During the three months ended March 31, 2018, we recorded an income tax provision of $87 million, which was substantially non-cash as we utilized our NOLs described above. This provision included a $22 million special income tax charge to establish a required valuation allowance related to our estimated refund for AMT credits, which is now subject to a sequestration reduction rate of approximately 6.6%. Substantially all of our income before income taxes is attributable to the United States.
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act is the most comprehensive tax change in more than 30 years. As of March 31, 2018, we have not completed our evaluation of the 2017 Tax Act; however, to the extent possible, we have made a reasonable estimate of its effects, including the impact of lower corporate income tax rates (21% vs. 35%) on our deferred tax assets and liabilities and the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.
The 2017 Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the Treasury and Internal Revenue Service. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. Accordingly, we have not yet been able to make a reasonable estimate of the impact of certain items and continue to account for those items based on the tax laws in effect prior to the 2017 Tax Act.
As further interpretations, clarifications and amendments to the 2017 Tax Act are made, our future financial statements could be materially impacted.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


8. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
We utilize the market approach to measure fair value for our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the three months ended March 31, 2018.
Assets measured at fair value on a recurring basis are summarized below (in millions):
 
Fair Value Measurements as of March 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments (1) (2):
 
 
 
 
 
 
 
Money market funds
$
14

 
$
14

 
$

 
$

Corporate obligations
1,712

 

 
1,712

 

Bank notes/certificates of deposit/time deposits
2,843

 

 
2,843

 

Repurchase agreements
425

 

 
425

 

 
4,994

 
14

 
4,980

 

Restricted cash and short-term investments (1)
294

 
164

 
130

 

Long-term investments (3)
281

 
281

 

 

Total
$
5,569

 
$
459

 
$
5,110

 
$

 
     
(1) 
Unrealized gains or losses on short-term investments are recorded in accumulated other comprehensive loss at each measurement date.
(2) 
All short-term investments are classified as available-for-sale and stated at fair value. Our short-term investments mature in one year or less except for $425 million of bank notes/certificates of deposit/time deposits and $145 million of corporate obligations.
(3) 
Long-term investments primarily include our investment in China Southern Airlines Company Limited and are classified in other assets on our condensed consolidated balance sheets.
Fair Value of Debt
The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.
The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions): 
 
March 31, 2018
 
December 31, 2017
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current maturities
$
24,739

 
$
25,286

 
$
25,065

 
$
25,848


17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


9. Employee Benefit Plans
The following table provides the components of net periodic benefit cost (income) (in millions):
 
 
Pension Benefits
 
Retiree Medical and Other
Postretirement Benefits
Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
1

 
$
1

 
$
1

 
$
1

Interest cost
 
169

 
180

 
9

 
10

Expected return on assets
 
(226
)
 
(197
)
 
(6
)
 
(5
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
7

 
7

 
(59
)
 
(59
)
Unrecognized net loss (gain)
 
36

 
36

 
(5
)
 
(6
)
Net periodic benefit cost (income)
 
$
(13
)
 
$
27

 
$
(60
)
 
$
(59
)
Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen.
The components of net periodic benefit income other than the service cost component are included in nonoperating other income, net in the condensed consolidated statements of operations.
During the first three months of 2018, we contributed $155 million to our defined benefit pension plans, including supplemental contributions of $116 million in addition to a $39 million minimum required contribution.
10. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive income (loss) (AOCI) are as follows (in millions):
 
Pension, Retiree
Medical and
Other
Postretirement
Benefits
 
Unrealized Gain (Loss) on Investments
 
Income Tax
Benefit
(Provision) 
(1)
 
Total
Balance at December 31, 2017
$
(4,523
)
 
$
(1
)
 
$
(630
)
 
$
(5,154
)
Other comprehensive loss before reclassifications

 
(2
)
 

 
(2
)
Amounts reclassified from AOCI
(21
)
 

 
5

(2)
(16
)
Net current-period other comprehensive income (loss)
(21
)
 
(2
)
 
5

 
(18
)
Balance at March 31, 2018
$
(4,544
)
 
$
(3
)
 
$
(625
)
 
$
(5,172
)
 
     
(1) 
Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income until the obligations are fully extinguished.
(2) 
Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.
Reclassifications out of AOCI are as follows (in millions):
 
 
Amounts reclassified from AOCI
 
Affected line items on the
condensed consolidated
statements of operations
AOCI Components
 
Three Months Ended March 31,
 
2018
 
2017
 
Amortization of pension, retiree medical and other postretirement benefits:
 
 
 
 
 
 
Prior service benefit
 
$
(40
)
 
$
(33
)
 
Nonoperating other income, net
Actuarial loss
 
24

 
19

 
Nonoperating other income, net
Total reclassifications for the period, net of tax
 
$
(16
)
 
$
(14
)
 
 

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


11. Regional Expenses
Expenses associated with American Eagle operations are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Aircraft fuel and related taxes
$
398

 
$
318

Salaries, wages and benefits
383

 
345

Capacity purchases from third-party regional carriers
354

 
393

Maintenance, materials and repairs
80

 
69

Other rent and landing fees
147

 
152

Aircraft rent
9

 
9

Selling expenses
85

 
80

Depreciation and amortization
82

 
79

Special items, net

 
2

Other
160

 
126

Total regional expenses
$
1,698

 
$
1,573

12. Legal Proceedings
Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.
Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. As of March 31, 2018, there were approximately 24.5 million shares of AAG common stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve. However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders.
There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non-union employees, concluding that their benefits were not vested and could be terminated. The summary judgment motion was denied with respect to all other retirees. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees. Our financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding.
DOJ Antitrust Civil Investigative Demand. In June 2015, we received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from us, and other airlines have announced that they have received similar requests. We are cooperating fully with the DOJ investigation.
Private Party Antitrust Action. Subsequent to announcement of the delivery of CIDs by the DOJ, we, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity, although Southwest has entered into a settlement with the plaintiffs that is pending approval by the court.

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


The U.S. lawsuits have been consolidated in the Federal District Court for the District of Columbia. On October 28, 2016, the Court denied a motion by the airline defendants to dismiss all claims in the class actions. We believe these lawsuits are without merit.
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the United States Bankruptcy Court for the Southern District of New York. The complaint named as defendants US Airways Group, US Airways, AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On March 26, 2018, the Court held a hearing on motions for summary judgment filed by defendants and plaintiffs. The Court has not yet issued an order. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, we received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating fully with the DOJ with regard to its investigation.
General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.
13. Subsequent Events
Aircraft Purchase Commitments
In April 2018, American agreed with The Boeing Company (Boeing) to acquire an additional 47 Boeing 787 aircraft, consisting of 22 787-8 aircraft and 25 787-9 aircraft with deliveries scheduled to commence in 2020 and continue through 2026. American also has options to acquire an additional 14 Boeing 787 family aircraft in 2026 and 2027 plus, subject to satisfying certain conditions, options to acquire 14 more Boeing 787 family aircraft in 2027 and 2028. Boeing has committed to provide sale-leaseback financing (in the form of operating leases) for the 22 787-8 aircraft and backstop debt financing for the 25 787-9 aircraft. Additionally, American agreed with Boeing to defer the delivery of 40 737 MAX aircraft currently scheduled for delivery in 2020, 2021 and 2022. These aircraft are now scheduled to be delivered in 2025 and 2026.
Also, in April 2018, American and Airbus S.A.S. (Airbus) agreed to terminate the parties' A350 XWB purchase agreement and cancel the parties' obligations thereunder. American was scheduled to acquire 22 Airbus A350 aircraft with deliveries commencing in 2020 and continuing through 2024.
Share Repurchase Program and Dividend Declaration
In April 2018, we announced that our Board of Directors authorized a new $2.0 billion share repurchase program that expires on December 31, 2020. Share repurchases under our share repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.
Also, in April 2018, we announced that our Board of Directors declared a $0.10 per share dividend for stockholders of record as of May 8, 2018, and payable on May 22, 2018. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended at any time at our discretion.

20



ITEM 1B. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Operating revenues:
 
 
 
Passenger
$
9,480

 
$
8,997

Cargo
227

 
191

Other
691

 
629

Total operating revenues
10,398

 
9,817

Operating expenses:
 
 
 
Aircraft fuel and related taxes
1,763

 
1,402

Salaries, wages and benefits
3,014

 
2,857

Regional expenses
1,682

 
1,569

Maintenance, materials and repairs
469

 
492

Other rent and landing fees
462

 
440

Aircraft rent
304

 
295

Selling expenses
356

 
318

Depreciation and amortization
445

 
405

Special items, net
195

 
119

Other
1,261

 
1,180

Total operating expenses
9,951

 
9,077

Operating income
447

 
740

Nonoperating income (expense):
 
 
 
Interest income
73

 
49

Interest expense, net
(253
)
 
(241
)
Other income, net
82

 
33

Total nonoperating expense, net
(98
)
 
(159
)
Income before income taxes
349

 
581

Income tax provision
113

 
212

Net income
$
236

 
$
369

See accompanying notes to condensed consolidated financial statements.


21



AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
236

 
$
369

Other comprehensive loss, net of tax:
 
 
 
Pension, retiree medical and other postretirement benefits
(16
)
 
(14
)
Investments
(2
)
 

Total other comprehensive loss, net of tax
(18
)
 
(14
)
Total comprehensive income
$
218

 
$
355

See accompanying notes to condensed consolidated financial statements.


22



AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except shares and par value)
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
283

 
$
287

Short-term investments
4,984

 
4,768

Restricted cash and short-term investments
294

 
318

Accounts receivable, net
1,865

 
1,755

Receivables from related parties, net
9,405

 
8,822

Aircraft fuel, spare parts and supplies, net
1,387

 
1,294

Prepaid expenses and other
820

 
647

Total current assets
19,038

 
17,891

Operating property and equipment
 
 
 
Flight equipment
40,340

 
39,993

Ground property and equipment
8,329

 
8,006

Equipment purchase deposits
1,230

 
1,217

Total property and equipment, at cost
49,899

 
49,216

Less accumulated depreciation and amortization
(15,860
)
 
(15,354
)
Total property and equipment, net
34,039

 
33,862

Other assets
 
 
 
Goodwill
4,091

 
4,091

Intangibles, net of accumulated amortization of $632 and $622, respectively
2,193

 
2,203

Deferred tax asset
1,757

 
2,071

Other assets
1,309

 
1,283

Total other assets
9,350

 
9,648

Total assets
$
62,427

 
$
61,401

 
 
 
 
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt and capital leases
$
2,297

 
$
2,058

Accounts payable
1,884

 
1,625

Accrued salaries and wages
1,126

 
1,613

Air traffic liability
5,549

 
4,042

Loyalty program liability
3,176

 
3,121

Other accrued liabilities
2,266

 
2,209

Total current liabilities
16,298

 
14,668

Noncurrent liabilities
 
 
 
Long-term debt and capital leases, net of current maturities
20,669

 
21,236

Pension and postretirement benefits
7,214

 
7,452

Loyalty program liability
5,610

 
5,701

Other liabilities
2,429

 
2,456

Total noncurrent liabilities
35,922

 
36,845

Commitments and contingencies

 

Stockholder’s equity
 
 
 
Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding

 

Additional paid-in capital
16,740

 
16,716

Accumulated other comprehensive loss
(5,269
)
 
(5,251
)
Accumulated deficit
(1,264
)
 
(1,577
)
Total stockholder’s equity
10,207

 
9,888

Total liabilities and stockholder’s equity
$
62,427

 
$
61,401

See accompanying notes to condensed consolidated financial statements.

23



AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Net cash provided by operating activities
$
1,262

 
$
1,696

Cash flows from investing activities:
 
 
 
Capital expenditures and aircraft purchase deposits
(762
)
 
(1,695
)
Proceeds from sale of property and equipment and other investments
19

 
31

Purchases of short-term investments
(1,244
)
 
(1,920
)
Sales of short-term investments
1,029

 
1,660

Decrease in restricted short-term investments
24

 
74

Net cash used in investing activities
(934
)
 
(1,850
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
236

 
899

Payments on long-term debt and capital leases
(569
)
 
(686
)
Deferred financing costs
(1
)
 
(31
)
Other financing activities
2

 
4

Net cash provided by (used in) financing activities
(332
)
 
186

Net increase (decrease) in cash and restricted cash
(4
)
 
32

Cash and restricted cash at beginning of period
390

 
424

Cash and restricted cash at end of period (a)
$
386

 
$
456

 
 
 
 
Supplemental information:
 
 
 
Interest paid, net
246

 
243

Income taxes paid
3

 
4

 
   
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the condensed consolidated balance sheets:
Cash
$
283

 
$
363

Restricted cash included in restricted cash and short-term investments
103

 
93

Total cash and restricted cash
$
386

 
$
456


See accompanying notes to condensed consolidated financial statements.


24



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Airlines, Inc. (American) should be read in conjunction with the consolidated financial statements contained in American’s Annual Report on Form 10-K for the year ended December 31, 2017. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.
On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. On December 30, 2015, in order to simplify AAG’s internal corporate structure, US Airways Group merged with and into AAG, with AAG as the surviving corporation. Immediately thereafter, US Airways, Inc. (US Airways), a wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, valuation allowance for deferred tax assets, as well as pension and retiree medical and other postretirement benefits.
(b) Recent Accounting Pronouncements
Standards Effective for 2018 Reporting Periods
Effective January 1, 2018, American adopted the accounting pronouncements described below.
ASU 2014-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)
The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services. American adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods.
The adoption of the New Revenue Standard impacted American’s accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members. There was no change in accounting for sales of mileage credits to co-branded card or other partners. Prior to the adoption of the New Revenue Standard, American used the incremental cost method to account for the portion of its loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger. The New Revenue Standard required American to change its policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method.
The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue. Additionally, the New Revenue Standard required a gross presentation on the face of American’s condensed consolidated statement of operations for certain revenues and expenses that had previously been presented on a net basis.
See recast condensed consolidated statement of operations data for the three months ended March 31, 2017 and recast consolidated balance sheet data as of December 31, 2017 presented below for the effects of adoption.

25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


ASU 2017-07: Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)
The New Retirement Standard required all components of American’s net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented. The adoption of the New Retirement Standard had no impact on pre-tax income or net income reported.
See recast condensed consolidated statement of operations data for the three months ended March 31, 2017 presented below for the effects of adoption.
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)
This ASU made several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This standard was adopted prospectively as of January 1, 2018 and resulted in a $77 million cumulative effect adjustment credit to retained earnings related to American's investment in China Southern Airlines Company Limited, which was previously accounted for under the cost method.
ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash
This ASU required that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents and also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard was applied retrospectively, which resulted in the recast of the prior reporting period in the statement of cash flows. For the three months ended March 31, 2018 and 2017, $103 million and $93 million, respectively, of restricted cash is included in the total of cash and restricted cash balance at the end of period. A reconciliation of cash and restricted cash from American's condensed consolidated statement of cash flows to the amounts reported within its condensed consolidated balance sheet is also included in a table below its condensed consolidated statement of cash flows.
Impacts to Prior Period Results
The effects of adoption of the New Revenue Standard and New Retirement Standard to American’s condensed consolidated statement of operations for the three months ended March 31, 2017 were as follows (in millions):
 
 
 
New Revenue Standard
 
New Retirement Standard
 
 
 
As Reported
 
Deferred Revenue Method
 
Reclassifications
 
Reclassifications
 
As Recast
Operating revenues:
 
 
 
 
 
 
 
 
 
    Passenger
$
8,155

 
$
170

 
$
672

 
$

 
$
8,997

    Cargo
172

 

 
19

 

 
191

    Other
1,294

 

 
(665
)
 

 
629

    Total operating revenues
9,621

 
170

 
26

 

 
9,817

    Total operating expenses
9,017

 

 
26

 
34

 
9,077

Operating income
604

 
170

 

 
(34
)
 
740

    Total nonoperating expense, net
(193
)
 

 

 
34

 
(159
)
Income before income taxes
411

 
170

 

 

 
581

Income tax provision
148

 
64

 

 

 
212

Net income
$
263

 
$
106

 
$

 
$

 
$
369


26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


The effects of adoption of the New Revenue Standard to American’s December 31, 2017 consolidated balance sheet are as follows (in millions):
 
As Reported
 
New Revenue Standard
 
As Recast
Deferred tax asset
$
682

 
$
1,389

 
$
2,071

Air traffic liability
3,978

 
64

 
4,042

Current loyalty program liability
2,791

 
330

 
3,121

Noncurrent loyalty program liability

 
5,701

 
5,701

Total stockholder’s equity (deficit)
14,594

 
(4,706
)
 
9,888

Standards Effective for 2019 Reporting Periods
ASU 2016-02: Leases (Topic 842) (the New Lease Standard)
The New Lease Standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the New Revenue Standard. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. American will adopt the New Lease Standard effective January 1, 2019. American is currently evaluating how the adoption of the New Lease Standard will impact its consolidated financial statements. Interpretations are on-going and could have a material impact on its implementation. Currently, American expects that the adoption of the New Lease Standard will have a material impact on its consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.
ASU 2018-02: Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S. federal corporate income tax rate change as a result of H.R. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act). The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. American expects it will adopt this standard effective January 1, 2019. The adoption of the standard may impact tax amounts stranded in accumulated other comprehensive income related to American's pension and retiree medical and other postretirement benefit plans.

27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


2. Special Items, Net
Special items, net on the condensed consolidated statements of operations consisted of the following (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Fleet restructuring expenses (1)
$
82

 
$
63

Merger integration expenses (2)
59

 
63

Labor contract expenses
13

 

Other operating charges, net
41

 
(7
)
Mainline operating special items, net
195

 
119

 
 
 
 
Regional operating special items, net

 
2

 
 
 
 
Debt refinancing and extinguishment charges

 
5

Nonoperating special items, net

 
5

 
 
 
 
Income tax special items, net (3)
30

 

 
     
(1) 
Fleet restructuring expenses principally included the acceleration of depreciation and impairments for aircraft and related equipment grounded or expected to be grounded earlier than planned.
(2) 
Merger integration expenses included costs associated with American's remaining integration projects, principally its flight attendant, human resources, payroll and technical operations integrations.
(3) 
Income tax special items included a $30 million charge to income tax expense to establish a required valuation allowance related to American's estimated refund for Alternative Minimum Tax (AMT) credits.
3. Revenue Recognition
(a) Revenue
Effective January 1, 2018, American adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods. See Recent Accounting Pronouncements in Note 1(b) above for effects of adoption on American's condensed consolidated statement of operations for the three months ended March 31, 2017 and on American's consolidated balance sheet as of December 31, 2017. Under the New Revenue Standard, revenue is recognized upon transfer of control of promised products or services to American's customers in an amount that reflects the consideration it expects to receive in exchange for those products or services.

28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


The following are the significant categories comprising American's reported operating revenues (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Passenger revenue:


 


Passenger travel
$
8,630

 
$
8,195

Loyalty revenue - travel (1)
850

 
802

Total passenger revenue
9,480

 
8,997

Cargo
227

 
191

Other:


 


Loyalty revenue - marketing services
570

 
514

Other revenue
121

 
115

Total other revenue
691

 
629

Total operating revenues
$
10,398

 
$
9,817

 
    
(1) 
Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions for air travel awards from mileage credits earned through travel and mileage credits sold to co-branded card and other partners. See discussion of Loyalty Revenue below.
The following is American's total passenger revenue by geographic region (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Domestic
$
6,963

 
$
6,781

Latin America
1,445

 
1,231

Atlantic
669

 
624

Pacific
403

 
361

Total passenger revenue
$
9,480

 
$
8,997

American attributes passenger revenue by geographic region based upon the origin and destination of each flight segment.
Passenger Revenue
American recognizes all revenues generated from transportation on American and its regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the condensed consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates.
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of American's historical data. American has consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of American's estimates. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.
Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying condensed consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.

29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


Loyalty Revenue
American currently operates the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclays US co-branded cards, hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, American applies the deferred revenue method in accordance with the New Revenue Standard.
Mileage credits earned through travel
For mileage credits earned through travel, American applies a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach which uses historical data, including award redemption patterns by geographic region and class of service as well as similar fares as those used to settle award redemptions. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.
Mileage credits sold to co-branded cards and other partners
American sells mileage credits to participating airline partners and non-airline business partners including American's co-branded card partners, under contracts with terms extending generally for one to nine years. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. American allocates the consideration received from the sale of mileage credits based on the relative selling price of each product or service delivered.
American's most significant partner agreements are its co-branded card program agreements with Citi and Barclays US that American entered into in 2016. American identified the following revenue elements in these co-branded card agreements: the transportation component; and the use of intellectual property including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, American recognizes the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.
For the portion of American's outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed. American's estimates are based on analysis of historical redemptions.
Cargo Revenue
Cargo revenue is recognized when American provides the transportation.
Other Revenue
Other revenue includes revenue associated with American's loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded card and other partners and other marketing related payments. For the three months ended March 31, 2018 and 2017, loyalty revenue included in other revenue was $570 million and $514 million, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in Loyalty Revenue. The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.


30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


(b) Contract Balances
American's significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on American's condensed consolidated balance sheet and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on American's condensed consolidated balance sheet.
 
March 31, 2018
 
December 31, 2017
 
(In millions)
Loyalty program liability
$
8,786

 
$
8,822

Air traffic liability
5,549

 
4,042

Total
$
14,335

 
$
12,864

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
Balance at December 31, 2017
$
8,822

Deferral of revenue
865

Recognition of revenue (1)
(901
)
Balance at March 31, 2018 (2)
$
8,786

 
(1) 
Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period as well as miles that were issued during the period.
(2) 
Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. As of March 31, 2018, American's current loyalty program liability was $3.2 billion and represents American's current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.
The air traffic liability principally represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in American's air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is one year. Accordingly, any revenue associated with tickets sold for future travel dates will be recognized within twelve months. For the three months ended March 31, 2018, $2.1 billion of revenue was recognized in passenger revenue that was included in American's air traffic liability at December 31, 2017.
With respect to contract receivables, reflected as accounts receivable, net on the accompanying condensed consolidated balance sheet, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards. These receivables are short-term, mostly settled within seven days after sale. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.

31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


4. Debt
Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):
 
March 31, 2018
 
December 31, 2017
Secured
 
 
 
2013 Credit Facilities, variable interest rate of 3.88%, installments through 2020
$
1,825

 
$
1,825

2014 Credit Facilities, variable interest rate of 3.74%, installments through 2021
728

 
728

April 2016 Credit Facilities, variable interest rate of 3.88%, installments through 2023
990

 
990

December 2016 Credit Facilities, variable interest rate of 3.78%, installments through 2023
1,238

 
1,238

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, averaging 4.25%, maturing from 2018 to 2029
11,764

 
11,881

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.34% to 8.48%, averaging 3.70%, maturing from 2018 to 2029
5,062

 
5,259

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 5.50%, maturing from 2018 to 2035
828

 
828

Other secured obligations, fixed interest rates ranging from 3.81% to 12.24%, maturing from 2021 to 2028
754

 
772

Total long-term debt and capital lease obligations
23,189

 
23,521

Less: Total unamortized debt discount, premium and issuance costs
223

 
227

Less: Current maturities
2,297

 
2,058

Long-term debt and capital lease obligations, net of current maturities
$
20,669

 
$
21,236

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of March 31, 2018 (in millions):
2013 Revolving Facility
$
1,200

2014 Revolving Facility
1,000

April 2016 Revolving Facility
300

Total
$
2,500

The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future.
2018 Aircraft Financing Activities
2017-2 EETCs
During the first quarter of 2018, $210 million of the $1.0 billion total net proceeds from the issuance of certain enhanced equipment trust certificates in August and October 2017 (the 2017-2 EETCs) were used to purchase equipment notes issued by American in connection with financing 4 of the 30 aircraft financed under the 2017-2 EETCs. Approximately $735 million of proceeds from the 2017-2 EETCs were used in 2017 to purchase equipment notes issued by American in connection with the financing of 24 aircraft. Interest and principal payments on equipment notes issued in connection with the 2017-2 EETCs are payable semi-annually in April and October of each year, with interest payments beginning in April 2018 and principal payments beginning in October 2018. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2017-2 EETCs. The remaining net proceeds of $73 million of 2017-2 EETCs is being held in escrow for the benefit of the holders of the 2017-2 EETCs until such time as American issues additional Series AA, A and B equipment notes to the pass-through trusts, which will purchase additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depository are not American's assets.


32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


Certain information regarding the 2017-2 EETC equipment notes and the remaining escrowed proceeds of the 2017-2 EETCs, as of March 31, 2018, is set forth in the table below.
    
 
2017-2 EETCs
 
Series AA
 
Series A
 
Series B
Aggregate principal issued
$545 million
 
$252 million
 
$221 million
Remaining escrowed proceeds
$39 million
 
$18 million
 
$16 million
Fixed interest rate per annum
3.35%
 
3.60%
 
3.70%
Maturity date
October 2029
 
October 2029
 
October 2025
5. Income Taxes
At December 31, 2017, American had approximately $10.6 billion of federal net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which, American expects to be available for use in 2018. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $10.0 billion, substantially all of which is expected to be available for use in 2018. The federal NOL Carryforwards will expire beginning in 2022 if unused. American also had approximately $3.2 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2017, which will expire in years 2018 through 2037 if unused.
At December 31, 2017, American had an AMT credit carryforward of approximately $452 million available for federal income tax purposes.
During the three months ended March 31, 2018, American recorded an income tax provision of $113 million, which was substantially non-cash as American utilized the NOLs described above. This provision included a $30 million special income tax charge to establish a required valuation allowance related to American's estimated refund for AMT credits, which is now subject to a sequestration reduction rate of approximately 6.6%. Substantially all of American’s income before income taxes is attributable to the United States.
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act is the most comprehensive tax change in more than 30 years. As of March 31, 2018, American has not completed its evaluation of the 2017 Tax Act; however, to the extent possible, American has made a reasonable estimate of its effects, including the impact of lower corporate income tax rates (21% vs. 35%) on its deferred tax assets and liabilities and the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.
The 2017 Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the Treasury and Internal Revenue Service. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. Accordingly, American has not yet been able to make a reasonable estimate of the impact of certain items and continues to account for those items based on the tax laws in effect prior to the 2017 Tax Act.
As further interpretations, clarifications and amendments to the 2017 Tax Act are made, American's future financial statements could be materially impacted.
6. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
American utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. American’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the three months ended March 31, 2018.

33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


Assets measured at fair value on a recurring basis are summarized below (in millions):
 
Fair Value Measurements as of March 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments (1) (2):
 
 
 
 
 
 
 
Money market funds
$
4

 
$
4

 
$

 
$

Corporate obligations
1,712

 

 
1,712

 

Bank notes/certificates of deposit/time deposits
2,843

 

 
2,843

 

Repurchase agreements
425

 

 
425

 

 
4,984

 
4

 
4,980

 

Restricted cash and short-term investments (1)
294

 
164

 
130

 

Long-term investments (3)
281

 
281

 

 

Total
$
5,559

 
$
449

 
$
5,110

 
$

 
     
(1) 
Unrealized gains or losses on short-term investments are recorded in accumulated other comprehensive loss at each measurement date.
(2) 
All short-term investments are classified as available-for-sale and stated at fair value. American’s short-term investments mature in one year or less except for $425 million of bank notes/certificates of deposit/time deposits and $145 million of corporate obligations.
(3) 
Long-term investments primarily include American's investment in China Southern Airlines Company Limited and are classified in other assets on its condensed consolidated balance sheets.
Fair Value of Debt
The fair value of American’s long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If American’s long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.
The carrying value and estimated fair value of American’s long-term debt, including current maturities, were as follows (in millions): 
 
March 31, 2018
 
December 31, 2017
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current maturities
$
22,966

 
$
23,481

 
$
23,294

 
$
24,029

7. Employee Benefit Plans
The following table provides the components of net periodic benefit cost (income) (in millions):
 
 
Pension Benefits
 
Retiree Medical and Other
Postretirement Benefits
Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
1

 
$

 
$
1

 
$
1

Interest cost
 
168

 
180

 
9

 
10

Expected return on assets
 
(225
)
 
(196
)
 
(6
)
 
(5
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
7

 
7

 
(59
)
 
(59
)
Unrecognized net loss (gain)
 
36

 
36

 
(5
)
 
(6
)
Net periodic benefit cost (income)
 
$
(13
)
 
$
27

 
$
(60
)
 
$
(59
)

34


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(Unaudited)


Effective November 1, 2012, substantially all of American’s defined benefit pension plans were frozen.
The components of net periodic benefit income other than the service cost component are included in nonoperating other income, net in the condensed consolidated statements of operations.
During the first three months of 2018, American contributed $155 million to its defined benefit pension plans, including supplemental contributions of $116 million in addition to a $39 million minimum required contribution.
8. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive income (loss) (AOCI) are as follows (in millions):
 
Pension, Retiree
Medical and
Other
Postretirement
Benefits
 
Unrealized Gain (Loss) on Investments
 
Income Tax
Benefit
(Provision) 
(1)
 
Total
Balance at December 31, 2017
$
(4,508
)
 
$
(1
)