10-Q 1 d900175d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2015

 

¨

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.

  

x  Yes

       ¨  No

American Airlines, Inc.

  

x  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.

  

x  Yes

       ¨  No

American Airlines, Inc.

  

x  Yes

       ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

American Airlines Group Inc.

 

x  Large Accelerated Filer

 

¨  Accelerated Filer

 

¨  Non-accelerated Filer

 

¨  Smaller Reporting Company

American Airlines, Inc.

 

¨  Large Accelerated Filer

 

¨  Accelerated Filer

 

x  Non-accelerated Filer

 

¨  Smaller Reporting Company

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

       x  No

American Airlines, Inc.

  

¨  Yes

       x  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.

  

x  Yes

       ¨  No

American Airlines, Inc.

  

x  Yes

       ¨  No

As of April 17, 2015, there were 692,798,851 shares of American Airlines Group Inc. common stock outstanding.

As of April 17, 2015, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.

 

 

 


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American Airlines Group Inc.

American Airlines, Inc.

Form 10-Q

Quarterly Period Ended March 31, 2015

Table of Contents

 

          Page  
   PART I: FINANCIAL INFORMATION   

Item 1A.

  

Condensed Consolidated Financial Statements of American Airlines Group Inc.

     6   
  

Condensed Consolidated Statements of Operations

     6   
  

Condensed Consolidated Statements of Comprehensive Income

     7   
  

Condensed Consolidated Balance Sheets

     8   
  

Condensed Consolidated Statements of Cash Flows

     9   
  

Notes to the Condensed Consolidated Financial Statements

     10   

Item 1B.

  

Condensed Consolidated Financial Statements of American Airlines, Inc.

     30   
  

Condensed Consolidated Statements of Operations

     30   
  

Condensed Consolidated Statements of Comprehensive Income

     31   
  

Condensed Consolidated Balance Sheets

     32   
  

Condensed Consolidated Statements of Cash Flows

     33   
  

Notes to the Condensed Consolidated Financial Statements

     34   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     65   

Item 4.

  

Controls and Procedures

     67   
   PART II: OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     68   

Item 1A.

  

Risk Factors

     69   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     86   

Item 5.

  

Other Information

     86   

Item 6.

  

Exhibits

     86   

SIGNATURES

     87   

 

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This combined Quarterly Report on Form 10-Q is filed by American Airlines Group Inc. (formerly named AMR Corporation) (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. As more fully described below, on December 9, 2013, a subsidiary of AMR Corporation merged with and into US Airways Group, Inc. (US Airways Group), which survived as a wholly-owned subsidiary of AAG (the Merger). “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. References in this Quarterly Report on Form 10-Q to “mainline” refer to the operations of American and US Airways, Inc., as applicable, 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 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 the benefits of the Merger, including future financial and operating results, our plans, objectives, expectations and intentions, and other statements that are not historical facts, such as, without limitation, statements that discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. 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 II, Item 1A. Risk Factors and the following: significant operating losses in the future; downturns in economic conditions that adversely affect our business; the impact of continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel; competitive practices in the industry, including the impact of low cost carriers, airline alliances and industry consolidation; the challenges and costs of integrating operations and realizing anticipated synergies and other benefits of the Merger; our substantial indebtedness and other obligations and the effect they could have on our business and liquidity; an inability to obtain sufficient financing or other capital to operate successfully and in accordance with our current business plan; increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates; the effect our high level of fixed obligations may have on our ability to fund general corporate requirements, obtain additional financing and respond to competitive developments and adverse economic and industry conditions; our significant pension and other post-employment benefit funding obligations; the impact of any failure to comply with the covenants contained in financing arrangements; provisions in credit card processing and other commercial agreements that may materially reduce our liquidity; the impact of union disputes, employee strikes and other labor-related disruptions; any inability to maintain labor costs at competitive levels; interruptions or disruptions in service at one or more of our hub airports; costs of ongoing data security compliance requirements and the impact of any significant data security breach; any inability to obtain and maintain adequate facilities, infrastructure and Slots to operate our flight schedule and expand or change our route network; our reliance on third-party regional operators or third-party service providers that have the ability to affect our revenue and the public’s perception about our services; any inability to effectively manage the costs, rights and functionality of third-party distribution channels on which we rely; extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages; the impact of the heavy taxation on the airline industry; changes to our business model that may not successfully increase revenues and may cause operational difficulties or decreased demand; the loss of key personnel or inability to attract and retain additional qualified personnel; the impact of conflicts overseas, terrorist attacks and ongoing security concerns; the global scope of our business and any associated economic and political instability or adverse effects of events, circumstances or government actions beyond our control, including the impact of foreign currency exchange rate fluctuations and limitations on the repatriation of cash held in foreign countries; the impact of environmental regulation; our reliance on technology and automated systems and the impact of any failure of these technologies or systems; challenges in integrating our computer, communications and other technology systems; losses and adverse publicity stemming from any accident involving any of our aircraft or the aircraft of our regional or codeshare operators; delays in scheduled aircraft deliveries, or other loss of anticipated fleet capacity, and failure of new aircraft to perform as expected; our dependence on a limited number of suppliers for aircraft, aircraft engines and parts; the impact of changing economic and other conditions beyond our control, including global events that affect travel behavior such as an outbreak of a contagious disease, and volatility and fluctuations in our results of operations due to seasonality; the effect of a higher than normal number of pilot retirements and a potential shortage of pilots; the impact of possible future increases in insurance costs or reductions in available insurance coverage; the effect of a lawsuit that was filed in connection with the Merger remains pending; an inability to use net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards); any impairment in the amount of goodwill we recorded as a result of the application of the acquisition method of accounting and an inability to realize the full value of AAG’s and American’s respective intangible or long-lived assets and any material impairment charges that would be recorded as a result; price volatility of our common stock; the effects of our capital deployment program and the limitation, suspension or discontinuation of our share repurchase program or dividend payments thereunder; delay or prevention of stockholders’ ability to change the composition of our Board of Directors and the effect this may

 

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have on takeover attempts that some of our stockholders might consider beneficial; the effect of provisions of our Restated Certificate of Incorporation (the Certificate of Incorporation) and Amended and Restated Bylaws (the Bylaws) that limit ownership and voting of our equity interests, including our common stock; the effect of limitations in our Certificate of Incorporation on acquisitions and dispositions of our common stock designed to protect our NOL Carryforwards and certain other tax attributes, which may limit the liquidity of our common stock; other economic, business, competitive, and/or regulatory factors affecting our business, including those set forth in this Quarterly Report on Form 10-Q (especially in Part II, Item 1A. Risk Factors and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations) and in our other filings with the Securities and Exchange Commission (the SEC), and other risks and uncertainties listed from time to time in our filings with 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 Quarterly Report on Form 10-Q or as of the dates indicated in the statements.

 

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PART I: FINANCIAL INFORMATION

This combined Quarterly 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.

 

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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,  
     2015     2014  

Operating revenues:

  

Mainline passenger

   $ 6,989      $ 7,258   

Regional passenger

     1,452        1,407   

Cargo

     194        206   

Other

     1,192        1,124   
  

 

 

   

 

 

 

Total operating revenues

  9,827      9,995   

Operating expenses:

Aircraft fuel and related taxes

  1,544      2,711   

Salaries, wages and benefits

  2,373      2,119   

Regional expenses

  1,462      1,594   

Maintenance, materials and repairs

  494      485   

Other rent and landing fees

  408      424   

Aircraft rent

  317      320   

Selling expenses

  336      401   

Depreciation and amortization

  336      307   

Special items, net

  303      (137

Other

  1,038      1,041   
  

 

 

   

 

 

 

Total operating expenses

  8,611      9,265   
  

 

 

   

 

 

 

Operating income

  1,216      730   

Nonoperating income (expense):

Interest income

  10      7   

Interest expense, net of capitalized interest

  (210   (243

Other, net

  (73   (1
  

 

 

   

 

 

 

Total nonoperating expense, net

  (273   (237
  

 

 

   

 

 

 

Income before income taxes

  943      493   

Income tax provision

  11      13   
  

 

 

   

 

 

 

Net income

$ 932    $ 480   
  

 

 

   

 

 

 

Earnings per share:

Basic

$ 1.34    $ 0.66   

Diluted

$ 1.30    $ 0.65   

Weighted average shares outstanding (in thousands):

Basic

  696,415      723,971   

Diluted

  716,930      741,335   

Cash dividends declared per common share

$ 0.10    $ —     

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended March 31,  
     2015     2014  

Net income

   $ 932      $ 480   
  

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

Defined benefit pension plans and retiree medical

  (27   (45

Derivative financial instruments:

Change in fair value

  —        (67

Reclassification into earnings

  (6   7   

Unrealized gain on investments:

Net change in value

  2      2   
  

 

 

   

 

 

 

Other comprehensive loss before tax

  (31   (103

Non-cash tax provision

  —        —     
  

 

 

   

 

 

 

Comprehensive income

$ 901    $ 377   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     March 31, 2015     December 31, 2014  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 1,048      $ 994   

Short-term investments

     8,125        6,309   

Restricted cash and short-term investments

     757        774   

Accounts receivable, net

     1,826        1,771   

Aircraft fuel, spare parts and supplies, net

     995        1,004   

Prepaid expenses and other

     1,378        1,260   
  

 

 

   

 

 

 

Total current assets

  14,129      12,112   

Operating property and equipment

Flight equipment

  29,273      28,213   

Ground property and equipment

  6,013      5,900   

Equipment purchase deposits

  1,265      1,230   
  

 

 

   

 

 

 

Total property and equipment, at cost

  36,551      35,343   

Less accumulated depreciation and amortization

  (12,509   (12,259
  

 

 

   

 

 

 

Total property and equipment, net

  24,042      23,084   

Other assets

Goodwill

  4,091      4,091   

Intangibles, net of accumulated amortization of $465 and $447, respectively

  2,281      2,240   

Other assets

  2,211      2,244   
  

 

 

   

 

 

 

Total other assets

  8,583      8,575   
  

 

 

   

 

 

 

Total assets

$ 46,754    $ 43,771   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Current maturities of long-term debt and capital leases

$ 1,284    $ 1,708   

Accounts payable

  1,587      1,377   

Accrued salaries and wages

  1,009      1,194   

Air traffic liability

  5,415      4,252   

Frequent flyer liability

  2,776      2,807   

Other accrued liabilities

  2,162      2,097   
  

 

 

   

 

 

 

Total current liabilities

  14,233      13,435   

Noncurrent liabilities

Long-term debt and capital leases, net of current maturities

  17,638      16,196   

Pension and postretirement benefits

  7,517      7,562   

Deferred gains and credits, net

  788      829   

Bankruptcy settlement obligations

  275      325   

Other liabilities

  3,539      3,403   
  

 

 

   

 

 

 

Total noncurrent liabilities

  29,757      28,315   

Commitments and contingencies

Stockholders’ equity

Common stock, $0.01 par value; 1,750,000,000 shares authorized, 693,800,651 shares issued and outstanding at March 31, 2015; 697,474,535 shares issued and outstanding at December 31, 2014

  7      7   

Additional paid-in capital

  15,049      15,135   

Accumulated other comprehensive loss

  (4,590   (4,559

Accumulated deficit

  (7,702   (8,562
  

 

 

   

 

 

 

Total stockholders’ equity

  2,764      2,021   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 46,754    $ 43,771   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Three Months Ended March 31,  
     2015     2014  

Net cash provided by operating activities

   $ 2,494      $ 1,256   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (1,409     (1,047

Purchases of short-term investments

     (3,474     (1,176

Sales of short-term investments

     1,660        882   

Decrease in restricted cash and short-term investments

     17        88   

Net proceeds from slot transaction

     —          307   

Proceeds from sale of property and equipment

     4        3   
  

 

 

   

 

 

 

Net cash used in investing activities

  (3,202   (943

Cash flows from financing activities:

Payments on long-term debt and capital leases

  (746   (501

Proceeds from issuance of long-term debt

  1,766      224   

Deferred financing costs

  (25   (7

Sale-leaseback transactions

  —        165   

Exercise of stock options

  —        9   

Treasury stock repurchases

  (181   (84

Dividend payment

  (70   —     

Other financing activities

  18      —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  762      (194
  

 

 

   

 

 

 

Net increase in cash

  54      119   

Cash at beginning of period

  994      1,140   
  

 

 

   

 

 

 

Cash at end of period

$ 1,048    $ 1,259   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

Settlement of bankruptcy obligations

$ 35    $ 3,557   

Capital lease obligations

  5      122   

Supplemental information:

Interest paid, net of amounts capitalized

  219      204   

Income taxes paid

  3      3   

See accompanying notes to condensed consolidated financial statements.

 

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

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (AAG or the Company) should be read in conjunction with the consolidated financial statements contained in AAG’s Annual Report on Form 10-K for the year ended December 31, 2014. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Principal subsidiaries include American Airlines, Inc. (American) and US Airways Group, Inc. (US Airways Group). All significant intercompany transactions have been eliminated.

On December 9, 2013 (the Effective Date), AMR Merger Sub, Inc. (Merger Sub) merged with and into US Airways Group (the Merger), with US Airways Group surviving as a wholly-owned subsidiary of AAG, a Delaware corporation (formerly known as AMR Corporation) following the Merger. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and the Effective Date of the Merger.

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 frequent traveler programs, pensions and retiree medical and other benefits and the deferred tax asset valuation allowance.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

2. Emergence from Chapter 11 and Merger with US Airways Group

Chapter 11 Reorganization

On November 29, 2011 (the Petition Date), AMR Corporation (AMR, renamed American Airlines Group Inc., upon the closing of the Merger), its principal subsidiary, American, and certain of AMR’s other direct and indirect domestic subsidiaries (collectively, the Debtors), filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the 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 (the Confirmation Order) approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan).

On the Effective Date, the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by an Agreement and Plan of Merger (as amended, the Merger Agreement), dated as of February 13, 2013, by and among AMR, Merger Sub and US Airways Group, pursuant to which Merger Sub merged with and into US Airways Group, with US Airways Group surviving as a wholly-owned subsidiary of the Company following the Merger.

From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect

 

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

(Unaudited)

 

repayment of liabilities preceding the Petition Date generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the U.S. Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.

In connection with the Chapter 11 Cases, trading in AMR’s common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and AMR’s common stock and such debt securities were delisted by the SEC from the NYSE on January 30, 2012. On January 5, 2012, AMR’s common stock began trading under the symbol “AAMRQ” (CUSIP 001765106) on the OTCQB marketplace, operated by OTC Markets Group. Pursuant to the Plan, on the Effective Date (i) all existing shares of AAG’s old common stock formerly traded under the symbol “AAMRQ” were canceled and (ii) the Company was authorized to issue up to approximately 544 million shares of common stock, par value $0.01 per share, of AAG (AAG Common Stock) by operation of the Plan (excluding shares of AAG Common Stock issuable pursuant to the Merger Agreement). On the Effective Date, the AAG Common Stock was listed on the NASDAQ Global Select Market under the symbol “AAL,” and AAMRQ ceased trading on the OTCQB marketplace.

Upon emergence from Chapter 11, AAG issued approximately 53 million shares of AAG Common Stock to AMR’s old equity holders and certain of the Debtors’ employees, and issued 168 million shares of AAG Series A Convertible Preferred Stock, par value $0.01 per share (the AAG Series A Preferred Stock), which was mandatorily convertible into new AAG Common Stock during the 120-day period after the Effective Date, to certain creditors and employees of the Debtors (including shares deposited in the Disputed Claims Reserve (as defined in the Plan)). In accordance with the terms of the Plan, former holders of AMR common stock (previously traded under the symbol “AAMRQ”) received, for each share of AMR common stock, an initial distribution of approximately 0.0665 shares of the AAG Common Stock as of the Effective Date. Following the Effective Date, former holders of AMR common stock and those deemed to be treated as such in connection with the elections made pursuant to the Plan have received through December 31, 2014, additional aggregate distributions of shares of AAG Common Stock of approximately 0.6776 shares of AAG Common Stock for each share of AMR common stock previously held, and may continue to receive additional distributions. As of the Effective Date, the adjusted total Double-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.45 billion and the Allowed Single-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.45 billion.

The Disputed Claims Reserve established under the Plan initially was issued 30.4 million shares, which shares are reserved for distributions to holders of disputed Single-Dip Unsecured Claims (Single-Dip Equity Obligations) whose claims ultimately become allowed as well as to certain AMR labor groups and employees who received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and the Company repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then prevailing market price in order to fund cash tax obligations resulting from this distribution. As of March 31, 2015, there were approximately 26.0 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 on the same basis as if such distributions had been made on or about the Effective Date. 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 the Company but rather will be distributed to former AMR shareholders as of the Effective Date. The Company is not required to distribute additional shares above the limits contemplated by the Plan.

Several parties have filed appeals seeking reconsideration of the Confirmation Order. See Note 13 for more information.

The reconciliation process with respect to the remaining claims will take considerable time post-emergence. The Company’s estimate of the amounts of disputed claims that will ultimately become allowed Single-Dip Unsecured Claims are included in bankruptcy settlement obligations on the Company’s condensed consolidated balance sheet as of March 31, 2015. As these claims are resolved, or where better information becomes available and is evaluated, the Company will make adjustments to the liabilities recorded on its condensed consolidated financial statements as appropriate. Any such adjustments could be material to the Company’s financial position or results of operations in any given period.

Merger

Pursuant to the Merger Agreement and consistent with the Plan, each share of common stock, par value $0.01 per share, of US Airways Group (the US Airways Group Common Stock) was converted into the right to receive one share of AAG Common Stock. The aggregate number of shares of AAG Common Stock issuable in the Merger to holders of US Airways Group equity instruments (including stockholders, holders of convertible notes, optionees, and holders of restricted stock units (RSUs)) represented 28% of the

 

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

(Unaudited)

 

diluted equity ownership of AAG. The remaining 72% diluted equity ownership in AAG (up to approximately 544 million shares) was or is distributable, pursuant to the Plan, to stakeholders, labor unions, certain employees of AMR and the other Debtors, and former holders of AMR common stock (previously traded under the symbol “AAMRQ”) such that the aggregate number of shares of AAG Common Stock issuable under the Plan will not exceed 72% of the diluted equity ownership of AAG as of the time of the Merger.

Availability and Utilization of Net Operating Losses

Upon emergence from bankruptcy, the Debtors experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), which could potentially limit the ability to utilize certain tax attributes including the Debtors’ substantial net operating losses (NOLs). The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. The Debtors elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.0 billion of the federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382.

Moreover, an ownership change subsequent to the Debtors’ emergence from bankruptcy may further limit or effectively eliminate the ability to utilize the Debtors’ NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on the Debtors’ ability to utilize the NOL Carryforwards, AAG’s Certificate of Incorporation contains transfer restrictions applicable to certain substantial shareholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, there can be no assurance that an ownership change will not occur even with these transfer restrictions. A copy of AAG’s Certificate of Incorporation was attached as Exhibit 3.1 to a Current Report on Form 8-K filed by the Company with the SEC on December 9, 2013.

3. Bankruptcy Settlement Obligations

The components of bankruptcy settlement obligations on the condensed consolidated balance sheets are as follows (in millions):

 

     March 31, 2015      December 31, 2014  

Single-Dip Equity Obligations

   $ 210       $ 248   

Labor-related deemed claim

     65         77   
  

 

 

    

 

 

 

Total

$ 275    $ 325   
  

 

 

    

 

 

 

The amount of the remaining Single-Dip Equity Obligations at March 31, 2015 is the Company’s estimate of its obligation for disputed claims of $210 million and is calculated based on the fair value of the shares expected to be issued, measured as if the obligations were settled using the closing price of AAG Common Stock at March 31, 2015. Additional allowed claims will receive 30.7553 shares, subject to reduction for expenses of the Disputed Claims Reserve, including tax liabilities, for each $1,000 of allowed claims. For accounting purposes, the value of the shares expected to be issued is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

In exchange for employees’ contributions to the successful reorganization of the Company, including agreeing to reductions in pay and benefits, the Company agreed in the Plan to provide each employee group a deemed claim which was used to provide a distribution of a portion of the equity of the reorganized entity to those employees. Each employee group received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. The fair value based on the expected number of shares to be distributed to satisfy this deemed claim, as adjusted, was approximately $1.5 billion. As of March 31, 2015, the remaining liability to certain AMR labor groups and employees of $65 million represents the estimated fair value of the remaining shares expected to be issued in satisfaction of such obligation, measured as if the obligation were settled using the closing price of AAG Common Stock at March 31, 2015. For accounting purposes, the value of the remaining shares expected to be issued to satisfy the labor claim is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

As described above, on February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and shares were withheld or sold on account of related tax obligations.

4. Special Items

Special items, net on the condensed consolidated statements of operations are as follows (in millions):

 

     Three Months Ended March 31,  
     2015      2014  

Mainline operating special items, net (a)

   $ 303       $ (137

 

 

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

(Unaudited)

 

(a) 

The 2015 first quarter mainline operating special items totaled a net charge of $303 million, which principally included $216 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, fleet restructuring, re-branding of aircraft and airport facilities, relocation and training. In addition, the Company recorded a net $99 million charge principally related to its new pilot joint collective bargaining agreement. These charges were offset in part by a net $6 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations.

The 2014 first quarter mainline operating special items totaled a net credit of $137 million, which principally included a $309 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $32 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $202 million of merger integration expenses related to alignment of labor union contracts, information technology, professional fees, severance and retention, share-based compensation, re-branding of aircraft and airport facilities, relocation and training.

The following additional amounts are also included in the condensed consolidated statements of operations as follows (in millions):

 

     Three Months Ended March 31,  
     2015      2014  

Regional operating special items, net(a)

   $ 7       $ 4   

Nonoperating special items, net (b)

     (8      47   

Income tax special items, net (c)

     9         8   

 

(a) 

The 2015 and 2014 first quarter regional operating special items principally related to merger integration expenses.

 

(b) 

The 2015 first quarter nonoperating special items totaled a net credit of $8 million primarily due to a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank, offset in part by a $9 million charge principally related to a non-cash write off of unamortized debt discount associated with the prepayment of certain aircraft financings.

The 2014 first quarter nonoperating special items totaled a net charge of $47 million principally due to non-cash interest accretion of $31 million on the bankruptcy settlement obligations and $13 million for Venezuelan foreign currency losses.

 

(c) 

The 2015 and 2014 first quarter tax special items were the result of a non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

5. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS) (in millions, except share and per share amounts in thousands):

 

     Three Months Ended March 31,  
     2015      2014  

Basic EPS:

     

Net income

   $ 932       $ 480   

Weighted-average common shares outstanding (in thousands)

     696,415         723,971   
  

 

 

    

 

 

 

Basic EPS

$ 1.34    $ 0.66   
  

 

 

    

 

 

 

Diluted EPS:

Net income

$ 932    $ 480   

Change in fair value of conversion feature on 7.25% convertible senior notes (a)

  —        5   
  

 

 

    

 

 

 

Net income for purposes of computing diluted EPS

$ 932    $ 485   

Share computation for diluted earnings per share (in thousands):

Weighted-average shares outstanding

  696,415      723,971   

Dilutive effect of stock awards

  20,515      13,534   

Assumed conversion of convertible senior notes

  —        3,830   
  

 

 

    

 

 

 

Weighted average common shares outstanding

  716,930      741,335   
  

 

 

    

 

 

 

Diluted earnings per share

$ 1.30    $ 0.65   
  

 

 

    

 

 

 

The following were excluded from the calculation of diluted EPS (in thousands):

Stock options, SARs and RSUs because inclusion would be antidilutive

  1      33   

 

 

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(Unaudited)

 

(a) 

In March 2014, the Company notified the holders of US Airways Group’s 7.25% convertible senior notes that it had elected to settle all future conversions solely in cash instead of shares of AAG Common Stock in accordance with the related indenture. Thus, the diluted shares included the weighted average impact of the 7.25% convertible senior notes only for the period from January 1, 2014 to March 12, 2014. In addition, under GAAP, the Company was required to adjust the numerator for purposes of calculating diluted earnings per share by the change in fair value of the conversion feature from March 12, 2014 to March 31, 2014, which increased GAAP net income for purposes of computing diluted earnings per share by $5 million for the three months ended March 31, 2014.

6. Share Repurchase Program and Dividend

On January 27, 2015, the Company announced that its Board of Directors had authorized a new $2.0 billion share repurchase program to be completed by the end of 2016. Shares repurchased under the program 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. The program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company’s discretion. During the three months ended March 31, 2015, the Company repurchased 3.8 million shares of AAG Common Stock for $190 million at a weighted average cost per share of $49.47.

Also on January 27, 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on February 9, 2015, and payable on February 23, 2015. The total cash payment for dividends during the three months ended March 31, 2015 was $70 million. Any future dividends that may be declared and paid from time to time under the Company’s capital deployment program will be subject to market and economic conditions, applicable legal requirements and other relevant factors. The Company’s capital deployment program does not obligate it to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at the Company’s discretion.

7. Debt

Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):

 

     March 31, 2015      December 31, 2014  

Secured

     

2013 Credit Facilities, variable interest rate of 3.75%, installments through 2019

   $ 1,867       $ 1,872   

2014 Credit Facilities, variable interest rate of 4.25%, installments through 2021

     750         750   

2013 Citicorp Credit Facility tranche B-1, variable interest rate of 3.50%, installments through 2019

     990         990   

2013 Citicorp Credit Facility tranche B-2, variable interest rate of 3.00%, installments through 2016

     594         594   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.38% to 9.75%, maturing from 2015 to 2027

     7,912         7,028   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.50% to 8.48%, maturing from 2015 to 2027

     3,025         2,952   

Special facility revenue bonds, fixed interest rates ranging from 5.50% to 8.50%, maturing from 2016 to 2035

     1,100         1,100   

AAdvantage Loan, effective rate of 8.30%

     —           433   

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2015 to 2028

     983         994   
  

 

 

    

 

 

 
  17,221      16,713   
  

 

 

    

 

 

 

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      —     
  

 

 

    

 

 

 
  1,750      1,250   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

  18,971      17,963   

Less: Total unamortized debt discount

  49      59   

Less: Current maturities

  1,284      1,708   
  

 

 

    

 

 

 

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

$ 17,638    $ 16,196   
  

 

 

    

 

 

 

 

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

(Unaudited)

 

2015-1 EETCs

In March 2015, American created two pass-through trusts which issued approximately $1.2 billion aggregate face amount of Series 2015-1 Class A and Class B EETCs in connection with the financing of 28 aircraft currently owned or scheduled to be delivered from July 2015 to September 2015 (the 2015 EETC Aircraft). The 2015-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of American. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until American issues equipment notes to the pass-through trusts, which purchase the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on the Company’s condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

As of March 31, 2015, $1.0 billion of the escrowed proceeds from the 2015-1 EETCs have been used to purchase equipment notes issued by American in two series: Series A equipment notes in the amount of $796 million bearing interest at 3.375% per annum and Series B equipment notes in the amount of $223 million bearing interest at 3.70% per annum. Interest and principal payments on the equipment notes are payable semiannually in May and November of each year, beginning in November 2015. The final payments on the Series A and Series B equipment notes will be due in May 2027 and May 2023, respectively. These equipment notes are secured by liens on 19 of the 2015 EETC Aircraft. The remaining $195 million of escrowed proceeds will be used to purchase equipment notes as the remaining nine new aircraft are delivered.

4.625% Senior Notes

In March 2015, the Company issued $500 million aggregate principal amount of 4.625% senior notes due 2020 (the 4.625% senior notes). These notes bear interest at a rate of 4.625% per annum and are payable semi-annually in arrears on each March 1 and September 1, beginning on September 1, 2015. The 4.625% senior notes mature on March 1, 2020 and are fully and unconditionally guaranteed by American, US Airways Group and US Airways. The 4.625% senior notes are senior unsecured obligations of the Company. The indenture for the 4.625% senior notes contains covenants and events of default generally customary for similar financings. In addition, if the Company experiences specific kinds of changes of control, the Company must offer to repurchase the 4.625% senior notes in whole or in part at a repurchase price of 101% of the aggregate principal amount plus accrued and unpaid interest, if any, to (but not including) the repurchase date. Upon the occurrence of certain events of default, the 4.625% senior notes may be accelerated and become due and payable.

Other Aircraft Financing Transactions

In the first quarter of 2015, the Company entered into loan agreements to borrow $247 million in connection with the financing of certain aircraft deliveries. The notes mature in 2025 through 2027 and bear interest at a rate of LIBOR plus an applicable margin.

AAdvantage Loan

American had the right to repay in cash, without premium or penalty, any or all of the amounts owed to Citibank under the AAdvantage Loan. Effective January 2, 2015, American exercised its loan repayment right with respect to the full value of the outstanding balance to Citibank for $400 million. In connection with the repayment, in the first quarter of 2015, American recognized an early debt extinguishment gain of approximately $17 million.

8. Income Taxes

At December 31, 2014, the Company had approximately $10.1 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2015. The federal NOL Carryforwards will expire beginning in 2022 if unused. These NOL Carryforwards include an unrealized tax benefit of $867 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. The Company also had approximately $4.6 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2014, which will expire in years 2015 through 2034 if unused. The Company’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. The Company experienced an ownership change in connection with its emergence from the Chapter 11 Cases, and US Airways Group experienced an ownership change in connection with the Merger. As a result of the Merger, US Airways Group is now included in the AAG consolidated federal and state income tax return. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. The Company elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.0 billion of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of the Company’s remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, the Company’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. The Company’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

 

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(Unaudited)

 

At December 31, 2014, the Company had an Alternative Minimum Tax (AMT) credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period. The Company’s net deferred tax assets, which include the NOL Carryforwards, are subject to a full valuation allowance. At December 31, 2014, the federal and state valuation allowances were $4.5 billion and $264 million, respectively. In accordance with GAAP, utilization of the NOL Carryforwards after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset the Company’s tax provision dollar for dollar.

The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers all available positive and negative evidence and makes certain assumptions. The Company considers many factors in evaluating the realizability of its deferred tax assets including risks associated with merger integration as well as other factors, which continue to be affected by conditions beyond its control, such as the condition of the economy, the level and volatility of fuel prices and travel demand. The Company has concluded as of March 31, 2015 that the valuation allowance was still needed on its deferred tax asset based on the weight of the factors described above.

For the three months ended March 31, 2015, the Company recorded a special $9 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $2 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used.

For the three months ended March 31, 2014, the Company recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $5 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used.

9. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’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, 2015.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):

 

     Fair Value Measurements as of March 31, 2015  
     Total      Level 1      Level 2      Level 3  

Short-term investments (1), (2):

           

Money market funds

   $ 1,130       $ 1,130       $ —         $ —     

Government agency investments

     101         —           101         —     

Repurchase agreements

     46         —           46         —     

Corporate obligations

     4,110         —           4,110         —     

Bank notes / certificates of deposit / time deposits

     2,738         —           2,738         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  8,125      1,130      6,995      —     

Restricted cash and short-term investments (1)

  757      757      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 8,882    $ 1,887    $ 6,995    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Unrealized gains or losses on short-term investments and restricted cash and short-term investments are recorded in accumulated other comprehensive loss at each measurement date.

(2) 

The Company’s short-term investments mature in one year or less except for $1.0 billion of corporate obligations and $990 million of bank notes/certificates of deposit/time deposits.

There were no Level 1 to Level 2 transfers during the three months ended March 31, 2015.

All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are reflected as a component of accumulated other comprehensive loss.

 

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(Unaudited)

 

Venezuela Cash and Short-term Investments

As of March 31, 2015, the Company had approximately $644 million of unrestricted cash and short-term investments held in Venezuelan bolivars. This balance includes approximately $621 million valued at 6.3 bolivars to the U.S. dollar and approximately $23 million valued at 12.0 bolivars to the U.S. dollar, with the rate depending on the date the Company submitted its repatriation request to the Venezuelan government. These rates are materially more favorable than the exchange rates currently prevailing for other transactions conducted outside of the Venezuelan government’s currency exchange system. The Company’s cash balance held in Venezuelan bolivars decreased $12 million from the December 31, 2014 balance of $656 million, due to payments made in bolivars for local operating expenditures.

During 2014, the Company significantly reduced capacity in the Venezuelan market and is no longer accepting bolivars as payment for airline tickets. The Company is monitoring this situation closely and continues to evaluate its holdings of Venezuelan bolivars for additional foreign currency losses or other accounting adjustments, which could be material, particularly in light of the additional uncertainty posed by the February 2015 changes to the foreign exchange regulations and the continued deterioration of economic conditions in Venezuela. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by the Company and can significantly affect the value of the Company’s assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect the Company’s business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.

Fair Value of Debt

The fair value of the Company’s long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If the Company’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 the Company’s long-term debt, including current maturities, were as follows (in millions):

 

     March 31, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 18,922       $ 19,640       $ 17,904       $ 18,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. Retirement Benefits

The following tables provide the components of net periodic benefit cost (in millions):

 

     Pension Benefits      Retiree Medical and Other Benefits  

Three Months Ended March 31,

                           
     2015      2014      2015      2014  

Service cost

   $ 1       $ —         $ 1       $ —     

Interest cost

     184         186         13         15   

Expected return on assets

     (213      (196      (5      (5

Settlements

     —           2         —           —     

Amortization of:

           

Prior service cost (benefit) (1)

     7         7         (61      (61

Unrecognized net loss (gain)

     28         11         (2      (2
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

$ 7    $ 10    $ (54 $ (53
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The 2015 first quarter prior service cost does not include amortization of less than $1 million related to other post-employment benefits.

Effective November 1, 2012, the Company’s defined benefit pension plans were frozen.

The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, the Pension Relief Act of 2010 and the Moving Ahead for Progress in the 21st Century Act of 2012. Based on current funding assumptions, the Company has no minimum required contributions until 2019. Currently, American’s minimum funding obligation for its pension plans is subject to temporary favorable rules that are scheduled to expire at the end of

 

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

(Unaudited)

 

2017. Upon expiration of these rules, American’s funding obligations are likely to increase materially. The amount of these obligations will depend on the performance of the Company’s investments held in trust by the pension plans, interest rates for determining liabilities and the Company’s actuarial experience.

11. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows (in millions):

 

     Pension and
Retiree
Medical
Liability
    Unrealized
Gain/(Loss)
on
Investments
    Derivative
Financial
Instruments
    Income Tax
Benefit
(Expense)
    Total  

Balance at December 31, 2014

   $ (3,683   $ (5   $ 9      $ (880   $ (4,559

Other comprehensive income (loss) before reclassifications

     —          —          —          —          —     

Amounts reclassified from accumulated other comprehensive income (loss)

     (27     2        (6     —          (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

  (27   2      (6   —        (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

$ (3,710 $ (3 $ 3    $ (880 $ (4,590
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2015 and 2014 are as follows (in millions):

 

     Amount reclassified from accumulated
other comprehensive income (loss)
    

Affected line item in the statement

where net income (loss) is presented

     Three Months Ended March 31,     

Details about accumulated other comprehensive
income (loss) components

   2015      2014     

Amortization of pension and retiree medical liability:

        

Prior service cost

   $ (53    $ (54    Wages, salaries and benefits

Actuarial loss

     26         9       Wages, salaries and benefits

Derivative financial instruments:

        

Cash flow hedges

     (6      7       Aircraft fuel and related taxes

Net unrealized change on investments:

        

Net change in value

     2         2       Other, net
  

 

 

    

 

 

    

Total reclassifications for the period

$ (31 $ (36
  

 

 

    

 

 

    

12. Regional Expenses

Expenses associated with the Company’s wholly-owned regional airlines and third-party regional carriers operating under the brand names American Eagle and US Airways Express 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,  
     2015      2014  

Aircraft fuel and related taxes

   $ 311       $ 500   

Salaries, wages and benefits

     292         265   

Capacity purchases from third-party regional carriers

     379         347   

Maintenance, materials and repairs

     75         87   

Other rent and landing fees

     106         96   

Aircraft rent

     9         14   

Selling expenses

     77         72   

Depreciation and amortization

     58         53   

Special items, net

     7         4   

Other

     148         156   
  

 

 

    

 

 

 

Total regional expenses

$ 1,462    $ 1,594   
  

 

 

    

 

 

 

13. Legal Proceedings

Chapter 11 Cases. As previously disclosed, on the Petition Date, November 29, 2011, the Debtors filed the Chapter 11 Cases. On October 21, 2013, the Bankruptcy Court entered the Confirmation Order confirming the Plan. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by the Merger Agreement pursuant to which Merger Sub merged with and into US Airways Group, with US Airways Group surviving as a wholly-owned subsidiary of AAG. From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, actions to enforce or otherwise effect repayment of liabilities preceding

 

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

(Unaudited)

 

the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date, generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the Bankruptcy Court to determine the amount, if any, of such litigation claims for purposes of treatment under the Plan.

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 Single-Dip Unsecured Claims. The shares provided for under the Plan were determined based upon a Disputed Claims Reserve amount of claims of approximately $755 million, representing the maximum amount of additional distributions to subsequently allowed Single-Dip Unsecured Claims under the Plan. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and the Company repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then prevailing market price in order to fund cash tax obligations resulting from this distribution. As of March 31, 2015, there were approximately 26 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 on the same basis as if such distributions had been made on or about the Effective Date. However, the Company is 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 the Company but rather will be distributed to former AMR shareholders as of the Effective Date. However, resolution of disputed claims could have a material effect on recoveries by holders of additional allowed Single-Dip Unsecured Claims under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.

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, post-employee benefits (OPEB) 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. The Company’s 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. Separately, both the Association of Professional Flight Attendants and Transport Workers Union have filed grievances asserting that American was “successful” in its Chapter 11 with respect to matters related to OPEB and, accordingly, by operation of the underlying collective bargaining agreements, American’s prior contributions to certain OPEB prefunding trusts attributable to active employees should be returned to those active employees. These amounts aggregate approximately $212 million. The Company has denied both grievances and intends to defend these matters vigorously.

Private Party Antitrust Action. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint named as defendants US Airways Group and US Airways, and alleged that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint included an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants, and on October 2, 2013, dismissed the initial California action. The Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On January 10, 2014, the plaintiffs moved to amend their complaint to add additional factual allegations, a claim for money damages and a request for preliminary injunctive relief requiring the carriers to hold separate their assets. On March 14, 2014, the Court allowed plaintiffs to add certain allegations but denied plaintiffs’ requests to add a damages claim or seek preliminary injunctive relief requiring the carriers to hold separate their assets. On June 2, 2014, plaintiffs filed an amended motion for leave to file a second amended and supplemental complaint. On March 31, 2015, the Court denied plaintiffs’ motion. There is currently no trial date set. The Company believes this lawsuit is without merit and intends to vigorously defend against the allegations.

US Airways Sabre Matter. On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, Sabre) in the Federal District Court for the Southern District of New York. The lawsuit, as amended to date, alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its market

 

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

(Unaudited)

 

power by restricting the Company’s ability to distribute its products to its customers. The lawsuit also alleges that these actions have permitted Sabre to charge supracompetitive booking fees and to use technologies that are not as robust and as efficient as alternatives in a competitive market. The lawsuit seeks money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011, allowing two of the four counts in the complaint to proceed. In January 2015, the court denied in part and granted in part Sabre’s motions for summary judgment. A trial date is expected to be set soon. The Company intends to pursue its claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.

General. The Company and its 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 the control of the Company. Therefore, although the Company will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on the Company are uncertain.

14. Financial Information for Subsidiary Guarantors and Non-guarantor Subsidiaries

There are various cross-guarantees among the Company, American, US Airways Group and US Airways with respect to publicly held debt securities. In connection with the Merger, the Company and American entered into a second supplemental indenture under which they jointly and severally guaranteed the payment obligations of US Airways Group under the 6.125% senior notes. In addition, on March 31, 2014, the Company, US Airways Group and US Airways entered into amended and restated guarantees of the payment obligations of US Airways under the equipment notes relating to each of its Series 2010-1, 2011-1, 2012-1, 2012-2 and 2013-1 Pass Through Certificates the result of which was to add AAG as a guarantor of such equipment notes on a joint and several basis with US Airways Group.

In connection with the issuance of these guarantees, in accordance with Rule 3-10 of Regulation S-X and Rule 12h-5 under the Securities Exchange Act of 1934, as amended, US Airways Group and US Airways discontinued filing separate periodic and current reports with the SEC. As a result, in accordance with Rule 3-10, the Company is providing the following condensed consolidating financial information for the periods after Merger close for American Airlines Group (Parent Company Only), American, US Airways Group Parent, US Airways and all other non-guarantor subsidiaries, together with the consolidating adjustments necessary to present the Company’s results on a consolidated basis.

 

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Three Months Ended March 31, 2015  
    American
Airlines Group
(Parent
Company
Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

Operating revenues:

             

Mainline passenger

  $ —        $ 4,690      $ —        $ 2,299      $ —        $ —        $ 6,989   

Regional passenger

    —          699        —          753        —          —          1,452   

Cargo

    —          162        —          32        —          —          194   

Other

    —          818        —          389        726        (741     1,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

  6,369      —        3,473      726      (741   9,827   

Operating expenses:

Aircraft fuel and related taxes

  —        1,070      —        474      —        —        1,544   

Salaries, wages and benefits

  —        1,585      —        786      193      (191   2,373   

Regional expenses

  —        728      —        765      —        (31   1,462   

Maintenance, materials and repairs

  —        304      —        190      75      (75   494   

Other rent and landing fees

  —        270      —        138      10      (10   408   

Aircraft rent

  —        225      —        92      32      (32   317   

Selling expenses

  —        235      —        101      —        —        336   

Depreciation and amortization

  —        236      —        100      11      (11   336   

Special items, net

  —        198      —        105      4      (4   303   

Other

  1      758      —        281      385      (387   1,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  1      5,609      —        3,032      710      (741   8,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (1   760      —        441      16      —        1,216   

Nonoperating income (expense):

Interest income

  2      6      —        4      —        (2   10   

Interest expense, net

  (13   (126   (9   (64   —        2      (210

Equity in earnings of subsidiaries

  944      —        251      —        —        (1,195   —     

Other, net

  —        (63   —        (11   1      —        (73
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

  933      (183   242      (71   1      (1,195   (273
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  932      577      242      370      17      (1,195   943   

Income tax provision

  —        8      —        131      3      (131   11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

$ 932    $ 569    $ 242    $ 239    $ 14    $ (1,064 $ 932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Three Months Ended March 31, 2014  
    American
Airlines Group

(Parent
Company

Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

Operating revenues:

             

Mainline passenger

  $ —        $ 4,906      $ —        $ 2,352      $ —        $ —        $ 7,258   

Regional passenger

    —          669        —          738        —          —          1,407   

Cargo

    —          168        —          38        —          —          206   

Other

    —          726        —          418        744        (764     1,124   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

  —        6,469      —        3,546      744      (764   9,995   

Operating expenses:

Aircraft fuel and related taxes

  —        1,871      —        840      —        —        2,711   

Salaries, wages and benefits

  —        1,398      —        719      197      (195   2,119   

Regional expenses

  —        758      —        828      —        8      1,594   

Maintenance, materials and repairs

  —        332      —        153      85      (85   485   

Other rent and landing fees

  —        285      —        139      7      (7   424   

Aircraft rent

  —        216      —        104      21      (21   320   

Selling expenses

  —        284      —        117      —        —        401   

Depreciation and amortization

  —        214      —        95      10      (12   307   

Special items, net

  24      (216   —        55      3      (3   (137

Other

  2      749      —        308      431      (449   1,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  26      5,891      —        3,358      754      (764   9,265   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (26   578      —        188      (10   —        730   

Nonoperating income (expense):

Interest income

  2      7      —        1      1      (4   7   

Interest expense, net

  (4   (168   (10   (65   —        4      (243

Equity in earnings of subsidiaries

  453      —        118      —        —        (571   —     

Other, net

  —        (5   (56   3      1      56      (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

  451      (166   52      (61   2      (515   (237
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  425      412      52      127      (8   (515   493   

Income tax provision

  1      11      —        1      —        —        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

$ 424    $ 401    $ 52    $ 126    $ (8 $ (515 $ 480   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)(Unaudited)

 

    Three Months Ended March 31, 2015  
    American
Airlines Group
(Parent
Company
Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

Net income

  $ 932      $ 569      $ 242      $ 239      $ 14      $ (1,064   $ 932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before tax:

Defined benefit pension plans and retiree medical

  —        (26   —        (1   —        —        (27

Derivative financial instruments:

Change in fair value

  —        —        —        —        —        —        —     

Reclassification into earnings

  —        (6   —        —        —        —        (6

Unrealized gain on investments:

Net change in value

  —        1      —        1      —        —        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

  —        (31   —        —        —        —        (31

Non-cash tax provision

  —        —        —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

$ 932    $ 538    $ 242    $ 239    $ 14    $ (1,064 $ 901   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)(Unaudited)

 

    Three Months Ended March 31, 2014  
    American
Airlines Group
(Parent
Company
Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

Net income (loss)

  $ 424      $ 401      $ 52      $ 126      $ (8   $ (515   $ 480   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax:

Defined benefit pension plans and retiree medical

  —        (44   —        (1   —        —        (45

Derivative financial instruments:

Change in fair value

  —        (67   —        —        —        —        (67

Reclassification into earnings

  —        7      —        —        —        —        7   

Unrealized gain on investments:

Net change in value

  —        2      —        —        —        —        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

  —        (102   —        (1   —        —        (103

Non-cash tax provision

  —        —        —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

$ 424    $ 299    $ 52    $ 125    $ (8 $ (515 $ 377   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)(Unaudited)

 

    March 31, 2015  
   

 

American
Airlines Group
(Parent
Company
Only)

    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

ASSETS

             

Current assets

             

Cash

  $ 1      $ 884      $ 5      $ 153      $ 5      $ —        $ 1,048   

Short-term investments

    —          4,853        —          3,270        2        —          8,125   

Restricted cash and short-term investments

    —          646        —          111        —          —          757   

Accounts receivable, net

    —          1,437        —          383        19        (13     1,826   

Receivables from related parties, net

    2,409        —          —          242        —          (2,651     —     

Aircraft fuel, spare parts and supplies, net

    —          623        —          298        74        —          995   

Prepaid expenses and other

    79        635        —          623        41        —          1,378   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  2,489      9,078      5      5,080      141      (2,664   14,129   

Operating property and equipment

  —        17,130      —        6,627      285      —        24,042   

Other assets

Investments in subsidiaries

  1,636      —        7,145      —        —        (8,781   —     

Goodwill

  —        —        —        4,089      —        2      4,091   

Intangibles, net of accumulated amortization

  —        872      —        1,409      —        —        2,281   

Other assets

  58      1,885      —        256      47      (35   2,211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

  1,694      2,757      7,145      5,754      47      (8,814   8,583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 4,183    $ 28,965    $ 7,150    $ 17,461    $ 473    $ (11,478 $ 46,754   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities

Current maturities of long-term debt and capital leases

$ —      $ 802    $ —      $ 482    $ —      $ —      $ 1,284   

Accounts payable

  —        1,175      —        362      52      (2   1,587   

Payables to related parties, net

  —        2,168      480      —        3      (2,651   —     

Air traffic liability

  —        3,691      —        1,724      —        —        5,415   

Frequent flyer liability

  —        2,776      —        —        —        —        2,776   

Other accrued liabilities

  39      1,835      11      1,164      124      (2   3,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

  39      12,447      491      3,732      179      (2,655   14,233   

Noncurrent liabilities

Long-term debt and capital leases, net of current maturities

  1,257      10,972      524      4,919      —        (34   17,638   

Pension and postretirement benefits

  —        7,355      —        122      40      —        7,517   

Bankruptcy settlement obligations

  —        275      —        —        —        —        275   

Other liabilities

  123      2,868      —        1,599      44      (307   4,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

  1,380      21,470      524      6,640      84      (341   29,757   

Stockholders’ equity (deficit)

Common stock

  7      —        —        —        —        —        7   

Additional paid-in capital

  15,049      10,714      4,727      5,566      199      (21,206   15,049   

Accumulated other comprehensive loss

  (4,590   (4,676   (16   (8   (12   4,712      (4,590

Retained earnings (deficit)

  (7,702   (10,990   1,424      1,531      23      8,012      (7,702
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

  2,764      (4,952   6,135      7,089      210      (8,482   2,764   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

$ 4,183    $ 28,965    $ 7,150    $ 17,461    $ 473    $ (11,478 $ 46,754   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)(Unaudited)

 

    December 31, 2014  
    American
Airlines Group
(Parent
Company
Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

ASSETS

             

Current assets

             

Cash

  $ 1      $ 785      $ 2      $ 199      $ 7      $ —        $ 994   

Short-term investments

    —          3,290        —          3,016        3        —          6,309   

Restricted cash and short-term investments

    —          650        —          124        —          —          774   

Accounts receivable, net

    —          1,445        —          324        15        (13     1,771   

Receivables from related parties, net

    1,893        —          157        933        526        (3,509     —     

Aircraft fuel, spare parts and supplies, net

    —          625        —          294        85        —          1,004   

Prepaid expenses and other

    —          462        —          912        41        (155     1,260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  1,894      7,257      159      5,802      677      (3,677   12,112   

Operating property and equipment

  —        16,299      —        6,506      279      —        23,084   

Other assets

Investments in subsidiaries

  847      —        6,870      —        —        (7,717   —     

Goodwill

  —        —        —        4,090      —        1      4,091   

Intangibles, net of accumulated amortization

  —        815      —        1,425      —        —        2,240   

Other assets

  53      1,921      —        267      38      (35   2,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

  900      2,736      6,870      5,782      38      (7,751   8,575   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 2,794    $ 26,292    $ 7,029    $ 18,090    $ 994    $ (11,428 $ 43,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities

Current maturities of long-term debt and capital leases

$ —      $ 1,230    $ —      $ 477    $ 1    $ —      $ 1,708   

Accounts payable

  —        1,029      —        287      61      —        1,377   

Payables to related parties, net

  —        2,563      634      73      239      (3,509   —     

Air traffic liability

  —        2,989      —        1,263      —        —        4,252   

Frequent flyer liability

  —        1,823      —        984      —        —        2,807   

Other accrued liabilities

  14      1,886      3      1,253      138      (3   3,291   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

  14      11,520      637      4,337      439      (3,512   13,435   

Noncurrent liabilities

Long-term debt and capital leases, net of current maturities

  758      10,004      524      4,945      —        (35   16,196   

Pension and postretirement benefits

  —        7,400      —        122      40      —        7,562   

Mandatorily convertible preferred stock and other bankruptcy settlement obligations

  —        325      —        —        —        —        325   

Other liabilities

  1      2,615      —        1,861      317      (562   4,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

  759      20,344      524      6,928      357      (597   28,315   

Stockholders’ equity (deficit)

Common stock

  7      —        —        —        —        —        7   

Additional paid-in capital

  15,135      10,632      4,703      5,542      199      (21,076   15,135   

Accumulated other comprehensive loss

  (4,559   (4,645   (16   (8   (12   4,681      (4,559

Retained earnings (deficit)

  (8,562   (11,559   1,181      1,291      11      9,076      (8,562
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

  2,021      (5,572   5,868      6,825      198      (7,319   2,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

$ 2,794    $ 26,292    $ 7,029    $ 18,090    $ 994    $ (11,428 $ 43,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)(Unaudited)

 

    Three Months Ended March 31, 2015  
    American
Airlines Group
(Parent
Company
Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

Net cash provided by (used in) operating activities

  $ (242   $ 2,285      $ 3      $ 430      $ 18      $ —        $ 2,494   

Cash flows from investing activities:

             

Capital expenditures and aircraft purchase deposits

    —          (1,160     —          (229     (20     —          (1,409

Purchases of short-term investments

    —          (1,945     —          (1,529     —          —          (3,474

Sales of short-term investments

    —          382        —          1,278        —          —          1,660   

Decrease in restricted cash and short-term investments

    —          4        —          13        —          —          17   

Proceeds from sale of property and equipment

    —          4        —          —          —          —          4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  —        (2,715   —        (467   (20   —        (3,202

Cash flows from financing activities:

Payments on long-term debt and capital leases

  —        (680   —        (66   —        —        (746

Proceeds from issuance of long-term debt

  500      1,227      —        39      —        —        1,766   

Deferred financing costs

  (7   (18   —        —        —        —        (25

Treasury stock repurchases

  (181   —        —        —        —        —        (181

Dividend payment

  (70   —        —        —        —        —        (70

Other financing activities

  —        —        —        18      —        —        18   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  242      529      —        (9   —        —        762   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

  —        99      3      (46   (2   —        54   

Cash at beginning of period

  1      785      2      199      7      —        994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

$ 1    $ 884    $ 5    $ 153    $ 5    $ —      $ 1,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)(Unaudited)

 

    Three Months Ended March 31, 2014  
    American
Airlines Group
(Parent
Company
Only)
    American     US
Airways
Group
(Parent
Company
Only)
    US Airways     Non-
Guarantor
Subsidiaries
    Eliminations
and
Reclassifications
    American
Airlines
Group Inc.
Consolidated
 

Net cash provided by (used in) operating activities

  $ (9   $ 742      $ —        $ 515      $ 8      $ —        $ 1,256   

Cash flows from investing activities:

             

Capital expenditures and aircraft purchase deposits

    —          (722     —          (316     (9     —          (1,047

Purchases of short-term investments

    —          (499     —          (677     —          —          (1,176

Sales of short-term investments

    —          682        —          200        —          —          882   

Decrease in restricted cash and short-term investments

    —          3        —          85        —          —          88   

Net proceeds from slot transaction

    —          299        —          8        —          —          307   

Proceeds from sale of property and equipment

    —          3        —          —          —          —          3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  —        (234   —        (700   (9   —        (943

Cash flows from financing activities:

Payments on long-term debt and capital leases

  —        (430   —        (71   —        —        (501

Proceeds from issuance of long-term debt

  —        —        —        224      —        —        224   

Deferred financing costs

  —        (5   —        (2   —        —        (7

Sale-leaseback transactions

  —        165      —        —        —        —        165   

Exercise of stock options

  9      —        —        —        —        —        9   

Treasury stock repurchases

  (84   —        —        —        —        —        (84

Funds transferred from (to) affiliates, net

  84      (84   —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  9      (354   —        151      —        —        (194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

  —        154      (34   (1   —        119   

Cash at beginning of period

  1      829      1      303      6      —        1,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

$ 1    $ 983    $ 1    $ 269    $ 5    $  —      $ 1,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

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

(Unaudited)

 

15. Subsequent Events

Dividend Declaration

In April 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on May 4, 2015, and payable on May 18, 2015. Any future dividends that may be declared and paid from time to time under the Company’s capital deployment program will be subject to market and economic conditions, applicable legal requirements and other relevant factors. The Company’s capital deployment program does not obligate it to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at the Company’s discretion.

Refinancing of 2014 Credit Facilities

On April 20, 2015, American refinanced its $750 million term loan facility (the new 2015 Term Loan Facility and together with a $400 million revolving credit facility, the 2014 Credit Facilities) to reduce the LIBOR margin from 3.50% to 3.00% and entered into certain amendments to reflect the release of certain existing collateral and the addition of certain new collateral and to allow American to make future modifications to the collateral pledged. For more information on these amendments, see Part II, Item 5. Other Information.

 

29


Table of Contents
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,  
     2015     2014  

Operating revenues:

  

Mainline passenger

   $ 4,690      $ 4,906   

Regional passenger

     699        669   

Cargo

     162        168   

Other

     818        726   
  

 

 

   

 

 

 

Total operating revenues

  6,369      6,469   

Operating expenses:

Aircraft fuel and related taxes

  1,070      1,871   

Salaries, wages and benefits

  1,585      1,398   

Regional expenses

  728      758   

Maintenance, materials and repairs

  304      332   

Other rent and landing fees

  270      285   

Aircraft rent

  225      216   

Selling expenses

  235      284   

Depreciation and amortization

  236      214   

Special items, net

  198      (216

Other

  758      749   
  

 

 

   

 

 

 

Total operating expenses

  5,609      5,891   
  

 

 

   

 

 

 

Operating income

  760      578   

Nonoperating income (expense):

Interest income

  6      7   

Interest expense, net of capitalized interest

  (126   (168

Other, net

  (63   (5
  

 

 

   

 

 

 

Total nonoperating expense, net

  (183   (166
  

 

 

   

 

 

 

Income before income taxes

  577      412   

Income tax provision

  8      11   
  

 

 

   

 

 

 

Net income

$ 569    $ 401   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

30


Table of Contents

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended March 31,  
     2015     2014  

Net income

   $ 569      $ 401   
  

 

 

   

 

 

 

Other comprehensive loss before tax:

Defined benefit pension plans and retiree medical

  (26   (44

Derivative financial instruments:

Change in fair value

  —        (67

Reclassification into earnings

  (6   7   

Unrealized gain on investments:

Net change in value

  1      2   
  

 

 

   

 

 

 

Other comprehensive loss before tax

  (31   (102

Non-cash tax provision

  —        —     
  

 

 

   

 

 

 

Comprehensive income

$ 538    $ 299   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

31


Table of Contents

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     March 31, 2015     December 31, 2014  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 884      $ 785   

Short-term investments

     4,853        3,290   

Restricted cash and short-term investments

     646        650   

Accounts receivable, net

     1,437        1,445   

Aircraft fuel, spare parts and supplies, net

     623        625   

Prepaid expenses and other

     635        462   
  

 

 

   

 

 

 

Total current assets

  9,078      7,257   

Operating property and equipment

Flight equipment

  22,462      21,646   

Ground property and equipment

  5,326      5,217   

Equipment purchase deposits

  1,199      1,128   
  

 

 

   

 

 

 

Total property and equipment, at cost

  28,987      27,991   

Less accumulated depreciation and amortization

  (11,857   (11,692
  

 

 

   

 

 

 

Total property and equipment, net

  17,130      16,299   

Other assets

Intangibles, net of accumulated amortization of $379 and $376, respectively

  872      815   

Other assets

  1,885      1,921   
  

 

 

   

 

 

 

Total other assets

  2,757      2,736   
  

 

 

   

 

 

 

Total assets

$ 28,965    $ 26,292   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

Current liabilities

Current maturities of long-term debt and capital leases

$ 802    $ 1,230   

Accounts payable

  1,175      1,029   

Accrued salaries and wages

  591      650   

Air traffic liability

  3,691      2,989   

Frequent flyer liability

  2,776      1,823   

Payable to affiliates

  2,168      2,563   

Other accrued liabilities

  1,244      1,236   
  

 

 

   

 

 

 

Total current liabilities

  12,447      11,520   

Noncurrent liabilities

Long-term debt and capital leases, net of current maturities

  10,972      10,004   

Pension and postretirement benefits

  7,355      7,400   

Deferred gains and credits, net

  277      271   

Bankruptcy settlement obligations

  275      325   

Other liabilities

  2,591      2,344   
  

 

 

   

 

 

 

Total noncurrent liabilities

  21,470      20,344   

Commitments and contingencies

Stockholder’s deficit

Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding

  —        —     

Additional paid-in capital

  10,714      10,632   

Accumulated other comprehensive loss

  (4,676   (4,645

Accumulated deficit

  (10,990   (11,559
  

 

 

   

 

 

 

Total stockholder’s deficit

  (4,952   (5,572
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

$ 28,965    $ 26,292   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Three Months Ended March 31,  
     2015     2014  

Net cash provided by operating activities

   $ 2,285      $ 742   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (1,160     (722

Purchase of short-term investments

     (1,945     (499

Sales of short-term investments

     382        682   

Decrease in restricted cash and short-term investments

     4        3   

Net proceeds from slot transaction

     —          299   

Proceeds from sale of property and equipment

     4        3   
  

 

 

   

 

 

 

Net cash used in investing activities

  (2,715   (234

Cash flows from financing activities:

Payments on long-term debt and capital leases

  (680   (430

Proceeds from issuance of long-term debt

  1,227      —     

Deferred financing costs

  (18   (5

Sale-leaseback transactions

  —        165   

Funds transferred to affiliates

  —        (84
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  529      (354
  

 

 

   

 

 

 

Net increase in cash

  99      154   

Cash at beginning of period

  785      829   
  

 

 

   

 

 

 

Cash at end of period

$ 884    $ 983   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

Settlement of bankruptcy obligations

$ 35    $ 3,104   

Capital lease obligations

  —        122   

Supplemental information:

Interest paid, net of amounts capitalized

  189      170   

Income taxes paid

  1      2   

See accompanying notes to condensed consolidated financial statements.

 

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

(Unaudited)

1. 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, 2014. American is a wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

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 long-lived and intangible assets, the frequent traveler program, pensions and retiree medical and other benefits and the deferred tax asset valuation allowance.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. American is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on American’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 is not expected to have a material impact on American’s condensed consolidated financial statements.

2. Emergence from Chapter 11

Chapter 11 Reorganization

On November 29, 2011 (the Petition Date), AMR Corporation (AMR, renamed American Airlines Group Inc., upon the closing of the Merger), its principal subsidiary, American, and certain of AMR’s other direct and indirect domestic subsidiaries (collectively, the Debtors), filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the 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 (the Confirmation Order) approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan).

On December 9, 2013 (the Effective Date), the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by an Agreement and Plan of Merger (as amended, the Merger Agreement), dated as of February 13, 2013, by and among AMR, AMR Merger Sub, Inc. (Merger Sub) and US Airways Group, Inc. (US Airways Group), pursuant to which Merger Sub merged with and into US Airways Group (the Merger), with US Airways Group surviving as a wholly-owned subsidiary of AAG following the Merger.

From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the U.S. Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.

 

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

(Unaudited)

 

In connection with the Chapter 11 Cases, trading in AMR’s common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and AMR’s common stock and such debt securities were delisted by the SEC from the NYSE on January 30, 2012. On January 5, 2012, AMR’s common stock began trading under the symbol “AAMRQ” (CUSIP 001765106) on the OTCQB marketplace, operated by OTC Markets Group. Pursuant to the Plan, on the Effective Date (i) all existing shares of AAG’s old common stock formerly traded under the symbol “AAMRQ” were canceled and (ii) AAG was authorized to issue up to approximately 544 million shares of common stock, par value $0.01 per share, of AAG (AAG Common Stock) by operation of the Plan (excluding shares of AAG Common Stock issuable pursuant to the Merger Agreement). On the Effective Date, the AAG Common Stock was listed on the NASDAQ Global Select Market under the symbol “AAL,” and AAMRQ ceased trading on the OTCQB marketplace.

Upon emergence from Chapter 11, AAG issued approximately 53 million shares of AAG Common Stock to AMR’s old equity holders and certain of the Debtors’ employees, and issued 168 million shares of AAG Series A Convertible Preferred Stock, par value $0.01 per share (the AAG Series A Preferred Stock), which was mandatorily convertible into new AAG Common Stock during the 120-day period after the Effective Date, to certain creditors and employees of the Debtors (including shares deposited in the Disputed Claims Reserve (as defined in the Plan)). In accordance with the terms of the Plan, former holders of AMR common stock (previously traded under the symbol “AAMRQ”) received, for each share of AMR common stock, an initial distribution of approximately 0.0665 shares of the AAG Common Stock as of the Effective Date. Following the Effective Date, former holders of AMR common stock and those deemed to be treated as such in connection with the elections made pursuant to the Plan have received through December 31, 2014, additional aggregate distributions of shares of AAG Common Stock of approximately 0.6776 shares of AAG Common Stock for each share of AMR common stock previously held, and may continue to receive additional distributions. As of the Effective Date, the adjusted total Double-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.45 billion and the Allowed Single-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.45 billion.

The Disputed Claims Reserve established under the Plan initially was issued 30.4 million shares, which shares are reserved for distributions to holders of disputed Single-Dip Unsecured Claims (Single-Dip Equity Obligations) whose claims ultimately become allowed as well as to certain AMR labor groups and employees who received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and American repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then prevailing market price in order to fund cash tax obligations resulting from this distribution. As of March 31, 2015, there were approximately 26 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 on the same basis as if such distributions had been made on or about the Effective Date. 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 AAG but rather will be distributed to former AMR shareholders as of the Effective Date. American is not required to distribute additional shares above the limits contemplated by the Plan.

Several parties have filed appeals seeking reconsideration of the Confirmation Order. See Note 12 for more information.

The reconciliation process with respect to the remaining claims will take considerable time post-emergence. American’s estimate of the amounts of disputed claims that will ultimately become allowed Single-Dip Unsecured Claims are included in bankruptcy settlement obligations on American’s condensed consolidated balance sheet as of March 31, 2015. As these claims are resolved, or where better information becomes available and is evaluated, American will make adjustments to the liabilities recorded on its condensed consolidated financial statements as appropriate. Any such adjustments could be material to American’s financial position or results of operations in any given period.

Availability and Utilization of Net Operating Losses

Upon emergence from bankruptcy, American experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), which could potentially limit the ability to utilize certain tax attributes including American’s substantial net operating losses (NOLs). The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. American elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.5 billion of the federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382.

 

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

(Unaudited)

 

Moreover, an ownership change subsequent to American’s emergence from bankruptcy may further limit or effectively eliminate the ability to utilize American’s NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on American’s ability to utilize the NOL Carryforwards, AAG’s Certificate of Incorporation contains transfer restrictions applicable to certain substantial shareholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, there can be no assurance that an ownership change will not occur even with these transfer restrictions. A copy of AAG’s Certificate of Incorporation was attached as Exhibit 3.1 to a Current Report on Form 8-K filed by AAG with the SEC on December 9, 2013.

3. Bankruptcy Settlement Obligations

The components of bankruptcy settlement obligations on the condensed consolidated balance sheets are as follows (in millions):

 

     March 31, 2015      December 31, 2014  

Single-Dip and Double-Dip Equity Obligations

   $ 210       $ 248   

Labor-related deemed claim

     65         77   
  

 

 

    

 

 

 

Total

$ 275    $ 325   
  

 

 

    

 

 

 

The amount of the remaining Single-Dip Equity Obligations at March 31, 2015 is American’s estimate of its obligation for disputed claims of $210 million and is calculated based on the fair value of the shares expected to be issued, measured as if the obligations were settled using the closing price of AAG Common Stock at March 31, 2015. Additional allowed claims will receive 30.7553 shares, subject to reduction for expenses of the Disputed Claims Reserve, including tax liabilities, for each $1,000 of allowed claims. For accounting purposes, the value of the shares expected to be issued is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

In exchange for employees’ contributions to the successful reorganization of AAG, including agreeing to reductions in pay and benefits, AAG and American agreed in the Plan to provide each employee group a deemed claim which was used to provide a distribution of a portion of the equity of the reorganized entity to those employees. Each employee group received a deemed claim amount based upon a fixed percentage of the distributions to be made to general unsecured claimholders. The fair value based on the expected number of shares to be distributed to satisfy this deemed claim, as adjusted, was approximately $1.5 billion. As of March 31, 2015, the remaining liability to certain AMR labor groups and employees of $65 million represents the estimated fair value of the remaining shares expected to be issued in satisfaction of such obligation, measured as if the obligation were settled using the closing price of AAG Common Stock at March 31, 2015. For accounting purposes, the value of the remaining shares expected to be issued to satisfy the labor claim is marked-to-market each period until issued. Accordingly, changes in the value of AAG Common Stock could result in future increases and decreases in this obligation.

As described above, on February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and shares were withheld or sold on account of related tax obligations.

4. Special Items

Special items, net on the condensed consolidated statements of operations are as follows (in millions):

 

     Three Months Ended March 31,  
     2015      2014  

Mainline operating special items, net (a)

   $ 198       $ (216

 

(a) 

The 2015 first quarter mainline operating special items totaled a net charge of $198 million, which principally included $148 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, fleet restructuring, re-branding of aircraft and airport facilities, relocation and training. In addition, American recorded a net $64 million charge principally related to its new pilot joint collective bargaining agreement. These charges were offset in part by a net $6 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations.

The 2014 first quarter mainline operating special items totaled a net credit of $216 million, which principally included a $305 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $56 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $134 million of merger integration expenses related to alignment of labor union contracts, information technology, professional fees, severance and retention, share-based compensation, re-branding of aircraft and airport facilities, relocation and training.

 

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

(Unaudited)

 

The following additional amounts are also included in the condensed consolidated statements of operations as follows (in millions):

 

     Three Months Ended March 31,  
     2015      2014  

Regional operating special items, net(a)

   $ 2       $ 1   

Nonoperating special items, net (b)

     (8      44   

Income tax special items, net (c)

     8         7   

 

(a) 

The 2015 and 2014 first quarter regional operating special items principally related to merger integration expenses.

(b) 

The 2015 first quarter nonoperating special items totaled a net credit of $8 million primarily due to a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank, offset in part by a $9 million charge principally related to a non-cash write off of unamortized debt discount associated with the prepayment of certain aircraft financings.

The 2014 first quarter nonoperating special items totaled a net charge of $44 million principally due to non-cash interest accretion of $27 million on the bankruptcy settlement obligations and $13 million for Venezuelan foreign currency losses.

 

(c) 

The 2015 and 2014 first quarter tax special items were the result of a non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

5. Debt

Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):

 

     March 31, 2015      December 31, 2014  

Secured

     

2013 Credit Facilities, variable interest rate of 3.75%, installments through 2019

   $ 1,867       $ 1,872   

2014 Credit Facilities, variable interest rate of 4.25%, installments through 2021

     750         750   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.38% to 7.00%, maturing from 2017 to 2027

     5,186         4,271   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.50% to 8.10%, maturing from 2015 to 2026

     1,927         1,860   

Special facility revenue bonds, fixed interest rates ranging from 5.50% to 8.50%, maturing from 2016 to 2035

     1,071         1,071   

AAdvantage Loan, effective rate of 8.30%

     —           433   

Other secured obligations, fixed interest rates ranging from 4.19% to 12.24%, maturing from 2015 to 2028

     977         992   
  

 

 

    

 

 

 
  11,778      11,249   
  

 

 

    

 

 

 

Unsecured

Affiliate unsecured obligations

  27      27   
  

 

 

    

 

 

 
  27      27   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

  11,805      11,276   

Less: Total unamortized debt discount

  31      42   

Less: Current maturities

  802      1,230   
  

 

 

    

 

 

 

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

$ 10,972    $ 10,004   
  

 

 

    

 

 

 

2015-1 EETCs

In March 2015, American created two pass-through trusts which issued approximately $1.2 billion aggregate face amount of Series 2015-1 Class A and Class B EETCs in connection with the financing of 28 aircraft currently owned or scheduled to be delivered from July 2015 to September 2015 (the 2015 EETC Aircraft). The 2015-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of American. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until American issues equipment notes to the pass-through trusts, which purchase the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on American’s condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

As of March 31, 2015, $1.0 billion of the escrowed proceeds from the 2015-1 EETCs have been used to purchase equipment notes issued by American in two series: Series A equipment notes in the amount of $796 million bearing interest at 3.375% per annum and Series B equipment notes in the amount of $223 million bearing interest at 3.70% per annum. Interest and principal payments on the

 

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

(Unaudited)

 

equipment notes are payable semiannually in May and November of each year, beginning in November 2015. The final payments on the Series A and Series B equipment notes will be due in May 2027 and May 2023, respectively. These equipment notes are secured by liens on 19 of the 2015 EETC Aircraft. The remaining $195 million of escrowed proceeds will be used to purchase equipment notes as the remaining nine new aircraft are delivered.

Other Aircraft Financing Transactions

In the first quarter of 2015, American entered into loan agreements to borrow $208 million in connection with the financing of certain aircraft deliveries. The notes mature in 2025 and 2026 and bear interest at a rate of LIBOR plus an applicable margin.

AAdvantage Loan

American had the right to repay in cash, without premium or penalty, any or all of the amounts owed to Citibank under the AAdvantage Loan. Effective January 2, 2015, American exercised its loan repayment right with respect to the full value of the outstanding balance to Citibank for $400 million. In connection with the repayment, in the first quarter of 2015, American recognized an early debt extinguishment gain of approximately $17 million.

6. Income Taxes

At December 31, 2014, American had approximately $10.3 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2015. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal and state NOL Carryforwards available in those returns is $10.1 billion and $4.6 billion, respectively, substantially all of which is expected to be available for use in 2015. The federal NOL Carryforwards will expire beginning in 2022 if unused. These NOL Carryforwards include an unrealized tax benefit of $712 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. American also had approximately $3.9 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2014, which will expire in years 2015 through 2034 if unused. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. American experienced an ownership change in connection with its emergence from the Chapter 11 Cases. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. American elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.5 billion of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL Carryforwards arising after the ownership change is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2014, American had an AMT credit carryforward of approximately $435 million available for federal income tax purposes, which is available for an indefinite period. American’s net deferred tax assets, which include the NOL Carryforwards, are subject to a full valuation allowance. At December 31, 2014, the federal and state valuation allowances were $5.1 billion and $208 million, respectively. In accordance with GAAP, utilization of the NOL Carryforwards after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset American’s tax provision dollar for dollar.

American provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions. American considers many factors in evaluating the realizability of its deferred tax assets including risks associated with merger integration as well as other factors, which continue to be affected by conditions beyond American’s control, such as the condition of the economy, the level and volatility of fuel prices and travel demand. American has concluded as of March 31, 2015 that the valuation allowance was still needed on its deferred tax asset based on the weight of the factors described above.

For the three months ended March 31, 2015, American recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

For the three months ended March 31, 2014, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $4 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used.

 

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

(Unaudited)

 

7. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

American utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. 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, 2015.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):

 

     Fair Value Measurements as of March 31, 2015  
     Total      Level 1      Level 2      Level 3  

Short-term investments (1), (2):

           

Money market funds

   $ 1,009       $ 1,009       $ —         $ —     

Repurchase agreements

     46         —           46         —     

Corporate obligations

     2,151         —           2,151         —     

Bank notes / certificates of deposit / time deposits

     1,647         —           1,647         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  4,853      1,009      3,844      —     

Restricted cash and short-term investments (1)

  646      646      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 5,499    $ 1,655    $ 3,844    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Unrealized gains or losses on short-term investments and restricted cash and short-term investments are recorded in accumulated other comprehensive loss at each measurement date.

 

(2) 

American’s short-term investments mature in one year or less except for $338 million of corporate obligations and $476 million of bank notes/certificates of deposit/time deposits.

There were no Level 1 to Level 2 transfers during the three months ended March 31, 2015.

All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are reflected as a component of accumulated other comprehensive loss.

Venezuela Cash and Short-term Investments

As of March 31, 2015, American had approximately $644 million of unrestricted cash and short-term investments held in Venezuelan bolivars. This balance includes approximately $621 million valued at 6.3 bolivars to the U.S. dollar and approximately $23 million valued at 12.0 bolivars to the U.S. dollar, with the rate depending on the date American submitted its repatriation request to the Venezuelan government. These rates are materially more favorable than the exchange rates currently prevailing for other transactions conducted outside of the Venezuelan government’s currency exchange system. American’s cash balance held in Venezuelan bolivars decreased $12 million from the December 31, 2014 balance of $656 million, due to payments made in bolivars for local operating expenditures.

During 2014, American significantly reduced capacity in the Venezuelan market and is no longer accepting bolivars as payment for airline tickets. American is monitoring this situation closely and continues to evaluate its holdings of Venezuelan bolivars for additional foreign currency losses or other accounting adjustments, which could be material, particularly in light of the additional uncertainty posed by the February 2015 changes to the foreign exchange regulations and the continued deterioration of economic conditions in Venezuela. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by American and can significantly affect the value of American’s assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect American’s business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.

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.

 

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

(Unaudited)

 

The carrying value and estimated fair value of American’s long-term debt, including current maturities, were as follows (in millions):

 

     March 31, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 11,774       $ 12,174       $ 11,234       $ 11,618   
  

 

 

    

 

 

    

 

 

    

 

 

 

8. Retirement Benefits

The following tables provide the components of net periodic benefit cost (in millions):

 

     Pension Benefits      Retiree Medical and Other Benefits  

Three Months Ended March 31,

   2015      2014      2015      2014  

Interest cost

   $ 184       $ 185       $ 11       $ 14   

Expected return on assets

     (212      (195      (5      (5

Settlements

     —           2         —           —     

Amortization of:

           

Prior service cost (benefit) (1)

     7         7         (59      (60

Unrecognized net loss (gain)

     28         11         (2      (2
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

$ 7    $ 10    $ (55 $ (53
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The 2015 first quarter prior service cost does not include amortization of less than $1 million related to other post-employment benefits.

Effective November 1, 2012, American’s defined benefit pension plans were frozen.

American is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, the Pension Relief Act of 2010 and the Moving Ahead for Progress in the 21st Century Act of 2012. Based on current funding assumptions, American has no minimum required contributions until 2019. Currently, American’s minimum funding obligation for its pension plans is subject to temporary favorable rules that are scheduled to expire at the end of 2017. Upon expiration of these rules, American’s funding obligations are likely to increase materially. The amount of these obligations will depend on the performance of American’s investments held in trust by the pension plans, interest rates for determining liabilities and American’s actuarial experience.

9. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows (in millions):

 

     Pension and
Retiree
Medical
Liability
    Unrealized
Gain/(Loss)
on
Investments
    Derivative
Financial
Instruments
    Income Tax
Benefit
(Expense)
    Total  

Balance at December 31, 2014

   $ (3,660   $ (3   $ 9      $ (991   $ (4,645

Other comprehensive income (loss) before reclassifications

     —          —          —          —          —     

Amounts reclassified from accumulated other comprehensive income (loss)

     (26     1        (6     —          (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

  (26   1      (6   —        (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

$ (3,686 $ (2 $ 3    $ (991 $ (4,676
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Unaudited)

 

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2015 and 2014 are as follows (in millions):

 

     Amount reclassified from accumulated
other comprehensive income (loss)
    

Affected line item in the statement
where net income (loss) is presented

     Three Months Ended March 31,     

Details about accumulated other comprehensive
income (loss) components

   2015      2014     

Amortization of pension and retiree medical liability:

        

Prior service cost

   $ (52    $ (53    Wages, salaries and benefits

Actuarial loss

     26         9       Wages, salaries and benefits

Derivative financial instruments:

        

Cash flow hedges

     (6      7       Aircraft fuel and related taxes

Net unrealized change on investments:

        

Net change in value

     1         2       Other, net
  

 

 

    

 

 

    

Total reclassifications for the period

$ (31 $ (35
  

 

 

    

 

 

    

10. Regional Expenses

Expenses associated with American’s third-party regional carriers operating under the brand name American Eagle 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,  
     2015      2014  

Aircraft fuel and related taxes

   $ 160       $ 252   

Salaries, wages and benefits

     31         5   

Capacity purchases from third-party regional carriers

     293         302   

Other rent and landing fees

     63         55   

Selling expenses

     37         36   

Depreciation and amortization

     42         37   

Special items, net

     2         1   

Other

     100         70   
  

 

 

    

 

 

 

Total regional expenses

$ 728    $ 758   
  

 

 

    

 

 

 

11. Transactions with Related Parties

The following represents the net payables to (receivables from) related parties (in millions):

 

     March 31, 2015      December 31, 2014  

American Airlines Group Parent

   $ 284       $ 40   

US Airways Group, Inc.

     (281      320   

Envoy Aviation Group (1) and other subsidiaries

     2,165         2,203   
  

 

 

    

 

 

 

Total

$ 2,168    $ 2,563   
  

 

 

    

 

 

 

 

(1) 

The net payable to AAG’s wholly-owned regional airline operating under the brand name of American Eagle consists principally of amounts due under regional capacity purchase agreements.

Frequent Flyer Program

In the first quarter of 2015, the US Airways Dividend Miles frequent flyer program was merged into American’s AAdvantage program. Accordingly, as of March 31, 2015, the related frequent flyer deferred revenue and incremental cost liability for the Dividend Miles program has been transferred to American with a corresponding intercompany receivable from US Airways recorded by American. No gain or loss was incurred from the transaction as the liabilities were transferred at their respective net book values. American’s intercompany receivable associated with the transfer of this obligation will be settled by US Airways through future redemptions by AAdvantage members on US Airways operated flights.

Allocated Expenses

Until American and US Airways are merged into one legal entity, revenue and expenses will continue to be recorded by each entity based on either specific identification of the related transaction where applicable or appropriate allocations based on metrics that are systematic and rational. The operating expenses of American reflect allocated expenses for certain services shared with US Airways. These allocated expenses include certain selling expenses, certain airport operating expenses at co-located airports, information technology expenses and corporate management and support functions. Shared selling expenses have been allocated primarily based on the passenger revenue of each respective carrier. Shared airport operating expenses have been allocated based on American’s and

 

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

(Unaudited)

 

US Airways’ respective departures at those airports. Shared other expenses have been allocated primarily based on American’s and US Airways’ respective available seat miles (ASMs). Total net expense allocated from American to US Airways was $172 million for the quarter ended March 31, 2015. There were no material allocations recorded during the first quarter of 2014.

12. Legal Proceedings

Chapter 11 Cases. As previously disclosed, on the Petition Date, November 29, 2011, the Debtors filed the Chapter 11 Cases. On October 21, 2013, the Bankruptcy Court entered the Confirmation Order confirming the Plan. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by the Merger Agreement pursuant to which Merger Sub merged with and into US Airways Group, with US Airways Group surviving as a wholly-owned subsidiary of AAG. From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date, generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the Bankruptcy Court to determine the amount, if any, of such litigation claims for purposes of treatment under the Plan.

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 Single-Dip Unsecured Claims. The shares provided for under the Plan were determined based upon a Disputed Claims Reserve amount of claims of approximately $755 million, representing the maximum amount of additional distributions to subsequently allowed Single-Dip Unsecured Claims under the Plan. As of December 31, 2014, the Disputed Claims Reserve held 26.8 million shares of AAG Common Stock pending distribution of those shares in accordance with the Plan. On February 10, 2015, approximately 0.8 million shares of AAG Common Stock held in the Disputed Claims Reserve were distributed to holders of allowed Single-Dip Unsecured Claims, to holders of certain labor-related deemed claims, and to holders of certain non-management, non-union employee deemed claims as specified in the Plan, and American repurchased less than 0.1 million shares of AAG Common Stock for an aggregate of $4 million from the Disputed Claims Reserve at the then prevailing market price in order to fund cash tax obligations resulting from this distribution. As of March 31, 2015, there were approximately 26 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 on the same basis as if such distributions had been made on or about the Effective Date. However, American is 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 AAG but rather will be distributed to former AMR shareholders as of the Effective Date. However, resolution of disputed claims could have a material effect on recoveries by holders of additional allowed Single-Dip Unsecured Claims under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.

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, post-employee benefits (OPEB) 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. American’s 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. Separately, both the Association of Professional Flight Attendants and Transport Workers Union have filed grievances asserting that American was “successful” in its Chapter 11 with respect to matters related to OPEB and, accordingly, by operation of the underlying collective bargaining agreements, American’s prior contributions to certain OPEB prefunding trusts attributable to active employees should be returned to those active employees. These amounts aggregate approximately $212 million. American has denied both grievances and intends to defend these matters vigorously.

Private Party Antitrust Action. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint named as defendants US Airways Group and US Airways, and alleged that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint included an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants, and on October 2, 2013, dismissed the initial California action. The Bankruptcy Court denied plaintiffs’ motion to

 

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

(Unaudited)

 

preliminarily enjoin the Merger. On January 10, 2014, the plaintiffs moved to amend their complaint to add additional factual allegations, a claim for money damages and a request for preliminary injunctive relief requiring the carriers to hold separate their assets. On March 14, 2014, the Court allowed plaintiffs to add certain allegations but denied plaintiffs’ requests to add a damages claim or seek preliminary injunctive relief requiring the carriers to hold separate their assets. On June 2, 2014, plaintiffs filed an amended motion for leave to file a second amended and supplemental complaint. On March 31, 2015, the Court denied plaintiffs’ motion. There is currently no trial date set. American believes this lawsuit is without merit and intends to vigorously defend against the allegations.

General. American is 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 the control of American. Therefore, although American will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on American are uncertain.

13. Subsequent Events

Refinancing of 2014 Credit Facilities

On April 20, 2015, American refinanced its $750 million term loan facility (the new 2015 Term Loan Facility and together with a $400 million revolving credit facility, the 2014 Credit Facilities) to reduce the LIBOR margin from 3.50% to 3.00% and entered into certain amendments to reflect the release of certain existing collateral and the addition of certain new collateral and to allow American to make future modifications to the collateral pledged. For more information on these amendments, see Part II, Item 5. Other Information.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of AAG’s and American’s Annual Report on Form 10-K for the year ended December 31, 2014 (the 2014 Form 10-K). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the 2014 Form 10-K.

American Airlines Group

Background

We continue to move toward operating under the single brand name of “American Airlines” through our mainline operating subsidiaries, American and US Airways. Together with our wholly-owned regional airline subsidiaries and third-party regional carriers operating as American Eagle and US Airways Express, our airlines operate an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries from our hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. In the first quarter of 2015, approximately 46 million passengers boarded our mainline and regional flights. As of March 31, 2015, we operated 973 mainline aircraft and were supported by our regional airline subsidiaries and third-party regional carriers, which operated 577 regional aircraft.

Since American and US Airways merged in December 2013, the airline has been making steady integration progress. In the first quarter of 2015, we merged each airline’s separate frequent flyer program into the single AAdvantage program and reached a new five-year labor contract with our pilots. Additionally, on April 8, 2015, we received a single operating certificate from the Federal Aviation Administration (FAA) for American and US Airways, marking a major milestone in the integration of the two airlines.

The U.S. Airline Industry

During the first quarter of 2015, U.S. airline industry revenues were up nominally as higher traffic more than offset lower yields. Yields were lower as compared to the first quarter of 2014 due in part to competitive capacity growth in certain markets. Additionally U.S. carriers with international operations experienced weaker yields due to the devaluation of certain foreign currencies as well as the removal of certain fuel surcharges. In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported the following changes in U.S. industry passenger revenues and yields:

 

     January     February     March  

2015 vs. 2014

      

Passenger Revenues

     1.8     1.5     1.5%   

Yields

     (0.6 )%      (1.1 )%      (0.5)%   
     January     February     March  

2014 vs. 2013

      

Passenger Revenues

     3.5     2.6     1.4

Yields

     1.4     1.4     (0.5 )% 

Jet fuel prices continue to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On average, Brent crude oil per barrel was approximately 50% lower in the first quarter of 2015 as compared to the first quarter of 2014. The average daily spot price for Brent crude oil during the first quarter of 2015 was $54 per barrel as compared to an average daily spot price of $108 per barrel during the first quarter of 2014. On a daily basis, Brent crude oil prices fluctuated during the quarter between a high of $62 per barrel to a low of $45 per barrel, and closed the quarter on March 31, 2015, at $54 per barrel.

While the U.S. airline industry is currently benefiting from significantly reduced fuel prices as described above, uncertainty exists regarding the economic conditions driving these factors. See Part II, Item 1A. Risk Factors – “Downturns in economic conditions adversely affect our business” and “Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”

 

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American Airlines Group

First Quarter 2015 Results

Driven by a substantial reduction in fuel costs, we realized operating income of $1.2 billion and net income of $932 million in the first quarter of 2015. This compares to operating income of $730 million and net income of $480 million in the first quarter of 2014.

Excluding the effects of net special charges, we recognized operating income of $1.5 billion and net income of $1.2 billion in the first quarter of 2015. This compares to operating income of $597 million and net income of $402 million, excluding net special credits in the first quarter of 2014, representing a 156% and 209% improvement in the first quarter of 2015 in operating income and net income, respectively.

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015      2014     
     (In millions, except percentage changes)  

Mainline and regional passenger revenues

   $ 8,441       $ 8,665         (2.6

Total operating revenues

     9,827         9,995         (1.7

Mainline and regional aircraft fuel and related taxes

     1,855         3,211         (42.2

Total operating expenses

     8,611         9,265         (7.1

Operating income

     1,216         730         66.6   

Net income

     932         480         94.2   

Special items: (1)

        

Operating special charges (credits), net

     310         (133   

Nonoperating special charges (credits), net

     (8      47      

Income tax special charges, net

     9         8      
  

 

 

    

 

 

    

Total net special charges (credits)

  311      (78

 

(1) 

AAG’s first quarter 2015 results were significantly impacted by net special charges of $311 million, consisting principally of $223 million of mainline and regional merger integration expenses and $99 million in charges related to our new pilot contract. The first quarter of 2014 included a similar amount of merger integration expenses; however, these expenses were more than offset by a gain on sale of slots at Ronald Reagan Washington National Airport. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “AAG’s Results of Operations” of this report for more information on net special items.

Revenue

In the first quarter of 2015, we reported operating revenues of $9.8 billion. Mainline and regional passenger revenues were $8.4 billion, a decrease of $224 million, or 2.6%, as compared to the first quarter of 2014. The decline in revenues was driven by a 1.4% decrease in revenue passenger miles as compared to the first quarter of 2014 due primarily to winter storm related flight cancellations. A 1.2% decline in yield also contributed to the decrease and was driven by competitive capacity growth in certain of our key markets, as well as weaker international yields due to foreign currency devaluation. Our mainline and regional passenger revenue per available seat mile (PRASM) was 13.44 cents in the first quarter of 2015, a 1.7% decrease as compared to 13.67 cents in the first quarter of 2014.

Fuel

Mainline and regional fuel expense was $1.9 billion in the first quarter of 2015, which was $1.4 billion, or 42.2%, lower as compared to mainline and regional fuel expense in the first quarter of 2014. This decrease was driven by a 41.0% decrease in the average price per gallon to $1.83 in the first quarter of 2015 from an average price per gallon of $3.10 in the 2014 period.

During the second quarter of 2014, we sold our portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. We have not entered into any transactions to hedge our fuel consumption since December 9, 2013 and, accordingly, as of March 31, 2015, we did not have any fuel hedging contracts outstanding. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors.

 

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Cost Control

We remain committed to actively managing and maintaining a low cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our 2015 first quarter mainline cost per available seat mile (CASM) excluding special items and fuel was 9.49 cents, an increase of 5.8% as compared to the first quarter of 2014. The increase was primarily due to higher salaries, wages and benefits driven by new merger-related labor contracts.

The following table details our mainline CASM for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015      2014     
     (In cents, except percentage changes)  

Mainline CASM excluding special items and aircraft fuel and related taxes:

        

Total mainline CASM

     12.80         13.50         (5.2

Special items, net

     (0.54      0.24         nm   

Aircraft fuel and related taxes

     (2.76      (4.77      (42.0
  

 

 

    

 

 

    

Mainline operating expenses per ASM, excluding special items and aircraft fuel and related taxes (1)

  9.49      8.97      5.8   
  

 

 

    

 

 

    

 

(1) 

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

Customer Service

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation. Our first quarter 2015 operating performance was negatively impacted by severe winter storm conditions at our hubs in Charlotte, Dallas/Fort Worth, New York, Philadelphia and Washington D.C. as well as our operations in the city of Boston.

We reported the following combined operating statistics to the U.S. Department of Transportation (DOT) for mainline operations for the first quarter of 2015 and 2014:

 

     2015      2014      Better (Worse)  
     January      February      March(e)      January      February      March      January     February     March  

On-time performance (a)

     77.4         73.1         77.0         76.5         73.9         80.5         0.9  pts      (0.8 ) pts      (3.5 ) pts 

Completion factor (b)

     97.6         94.1         97.3         96.7         94.4         98.1         0.9  pts      (0.3 ) pts      (0.8 ) pts 

Mishandled baggage (c)

     4.81         4.98         4.20         4.37         3.86         3.67         (10.1 )%      (29.0 )%      (14.4 )% 

Customer complaints (d)

     2.81         3.02         3.99         2.60         2.28         1.76         (8.1 )%      (32.5 )%      (126.7 )% 

 

(a) 

Percentage of reported flight operations arriving on time as defined by the DOT.

 

(b) 

Percentage of scheduled flight operations completed

 

(c) 

Rate of mishandled baggage reports per 1,000 passengers.

 

(d) 

Rate of customer complaints filed with the DOT per 100,000 enplanements.

 

(e) 

March 2015 operating statistics are preliminary as the DOT has not issued its March 2015 Air Travel Consumer report as of the date of this filing.

Liquidity Position

As of March 31, 2015, AAG’s total cash, short-term investments and restricted cash was $9.9 billion, of which $757 million was restricted. We also had available $1.8 billion under undrawn revolving line of credit facilities.

In the first quarter of 2015, we utilized cash from operations to pay down certain higher rate debt including our $400 million Citibank AAdvantage loan. Additionally, we repurchased 3.8 million shares of AAG Common Stock for $190 million pursuant to our $2.0 billion share repurchase program to be completed by the end of 2016.

 

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These cash outflows were offset in part by certain new debt issuances to further strengthen our liquidity position. In March 2015, we issued $500 million aggregate principal amount of 4.625% senior notes due 2020. Also in March 2015, American issued $1.0 billion in equipment notes related to the 2015-1 Enhanced Equipment Trust Certificates to finance certain unencumbered aircraft.

The following table presents a summary of our cash balances:

 

     March 31, 2015      December 31, 2014  
     (In millions)  

Cash and short-term investments (1)

   $ 9,173       $ 7,303   

Restricted cash and short-term investments (2)

     757         774   
  

 

 

    

 

 

 

Total cash and short-term investments

$ 9,930    $ 8,077   
  

 

 

    

 

 

 

 

(1) 

As of March 31, 2015, we had approximately $644 million of unrestricted cash and short-term investments held in Venezuelan bolivars. This balance includes approximately $621 million valued at 6.3 bolivars to the U.S. dollar and approximately $23 million valued at 12.0 bolivars to the U.S. dollar, with the rate depending on the date we submitted our repatriation request to the Venezuelan government. These rates are materially more favorable than the exchange rates currently prevailing for other transactions conducted outside of the Venezuelan government’s currency exchange system. Our cash balance held in Venezuelan bolivars decreased $12 million from the December 31, 2014 balance of $656 million, due to payments made in bolivars for local operating expenditures.

During 2014, we significantly reduced capacity in the Venezuelan market and we are no longer accepting bolivars as payment for airline tickets. We are monitoring this situation closely and continue to evaluate our holdings of Venezuelan bolivars for additional foreign currency losses or other accounting adjustments, which could be material, particularly in light of the additional uncertainty posed by the February 2015 changes to the foreign exchange regulations and the continued deterioration of economic conditions in Venezuela. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.

 

(2) 

Restricted cash and investments primarily include cash collateral to secure workers’ compensation claims.

AAG’s Results of Operations

In the first quarter of 2015, we realized operating income of $1.2 billion and net income of $932 million. Our first quarter 2015 net income included net special operating charges of $310 million and total net special charges of $311 million. Excluding the effects of these special charges, we realized operating income of $1.5 billion and net income of $1.2 billion.

In the first quarter of 2014, we realized operating income of $730 million and net income of $480 million. Our first quarter 2014 net income included net special operating credits of $133 million and total net special credits of $78 million. Excluding the effects of these special credits, we realized operating income of $597 million and net income of $402 million.

The following table details our net income excluding special items (in millions):

 

     Three Months Ended March 31,  
     2015      2014  

Net income

   $ 932       $ 480   

Special items:

     

Mainline operating special items, net (1)

     303         (137

Regional operating special items, net(2)

     7         4   

Nonoperating special items, net (3)

     (8      47   

Income tax special items, net (4)

     9         8   
  

 

 

    

 

 

 

Total special items

  311      (78
  

 

 

    

 

 

 

Net income excluding special items

$ 1,243    $ 402   
  

 

 

    

 

 

 

 

(1) 

The 2015 first quarter mainline operating special items totaled a net charge of $303 million, which principally included $216 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, fleet restructuring, re-branding of aircraft and airport facilities, relocation and training. In addition, we recorded a net $99 million charge principally related to our new pilot joint collective bargaining agreement. These charges were offset in part by a net $6 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations.

 

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The 2014 first quarter mainline operating special items totaled a net credit of $137 million, which principally included a $309 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $32 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $202 million of merger integration expenses related to alignment of labor union contracts, information technology, professional fees, severance and retention, share-based compensation, re-branding of aircraft and airport facilities, relocation and training.

 

(2) 

The 2015 and 2014 first quarter regional operating special items principally related to merger integration expenses.

 

(3) 

The 2015 first quarter nonoperating special items totaled a net credit of $8 million primarily due to a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank, offset in part by a $9 million charge principally related to a non-cash write off of unamortized debt discount associated with the prepayment of certain aircraft financings.

The 2014 first quarter nonoperating special items totaled a net charge of $47 million principally due to non-cash interest accretion of $31 million on the bankruptcy settlement obligations and $13 million for Venezuelan foreign currency losses.

 

(4) 

The 2015 and 2014 first quarter tax special items were the result of a non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

Income Taxes

At December 31, 2014, we had approximately $10.1 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2015. The federal NOL Carryforwards will expire beginning in 2022 if unused. These NOL Carryforwards include an unrealized tax benefit of $867 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. We also had approximately $4.6 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2014, which will expire in years 2015 through 2034 if unused. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. We experienced an ownership change in connection with our emergence from the Chapter 11 Cases, and US Airways Group experienced an ownership change in connection with the Merger. As a result of the Merger, US Airways Group is now included in the AAG consolidated federal and state income tax return. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. We elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.0 billion of our federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of our remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2014, we had an Alternative Minimum Tax (AMT) credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period. Our net deferred tax assets, which include the NOL Carryforwards, are subject to a full valuation allowance. At December 31, 2014, the federal and state valuation allowances were $4.5 billion and $264 million, respectively. In accordance with GAAP, utilization of the NOL Carryforwards after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset our tax provision dollar for dollar.

We provide a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We consider all available positive and negative evidence and make certain assumptions. We consider many factors in evaluating the realizability of our deferred tax assets including risks associated with merger integration as well as other factors, which continue to be affected by conditions beyond our control, such as the condition of the economy, the level and volatility of fuel prices and travel demand. We have concluded as of March 31, 2015 that the valuation allowance was still needed on our deferred tax asset based on the weight of the factors described above.

For the three months ended March 31, 2015, we recorded a special $9 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $2 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used.

For the three months ended March 31, 2014, we recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $5 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used.

 

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Operating Statistics

The table below sets forth selected mainline and regional operating data for the three months ended March 31, 2015 and 2014.

 

     Three Months Ended March 31,         
     2015      2014      Increase (Decrease)  

Mainline

        

Revenue passenger miles (millions) (a)

     44,849         45,828         (2.1 )% 

Available seat miles (millions) (b)

     55,854         56,831         (1.7 )% 

Passenger load factor (percent) (c)

     80.3         80.6         (0.3 )pts 

Yield (cents) (d)

     15.58         15.84         (1.6 )% 

Passenger revenue per available seat mile (cents) (e)

     12.51         12.77         (2.0 )% 

Operating cost per available seat mile (cents) (f)

     12.80         13.50         (5.2 )% 

Passenger enplanements (thousands) (g)

     33,951         34,843         (2.6 )% 

Departures (thousands)

     269         279         (3.5 )% 

Aircraft at end of period

     973         977         (0.4 )% 

Block hours (thousands) (h)

     833         853         (2.4 )% 

Average stage length (miles) (i)

     1,195         1,189         0.5

Fuel consumption (gallons in millions)

     846         874         (3.2 )% 

Average aircraft fuel price including related taxes (dollars per gallon)

     1.83         3.10         (41.1 )% 

Full-time equivalent employees at end of period

     97,500         93,400         4.4

Regional (j)

        

Revenue passenger miles (millions) (a)

     5,341         5,058         5.6

Available seat miles (millions) (b)

     6,937         6,561         5.7

Passenger load factor (percent) (c)

     77.0         77.1         (0.1 )pts 

Yield (cents) (d)

     27.19         27.82         (2.2 )% 

Passenger revenue per available seat mile (cents) (e)

     20.94         21.45         (2.4 )% 

Operating cost per available seat mile (cents) (f)

     21.07         24.30         (13.3 )% 

Passenger enplanements (thousands) (g)

     12,243         11,709         4.6

Aircraft at end of period

     577         560         3.0

Fuel consumption (gallons in millions)

     167         161         3.7

Average aircraft fuel price including related taxes (dollars per gallon)

     1.86         3.10         (40.0 )% 

Full-time equivalent employees at end of period (k)

     19,300         18,000         7.2

Total Mainline and Regional

        

Revenue passenger miles (millions) (a)

     50,190         50,886         (1.4 )% 

Available seat miles (millions) (b)

     62,791         63,392         (0.9 )% 

Cargo ton miles (millions) (l)

     553         560         (1.2 )% 

Passenger load factor (percent) (c)

     79.9         80.3         (0.4 )pts 

Yield (cents) (d)

     16.82         17.03         (1.2 )% 

Passenger revenue per available seat mile (cents) (e)

     13.44         13.67         (1.7 )% 

Total revenue per available seat mile (cents) (m)

     15.65         15.77         (0.7 )% 

Cargo yield per ton mile (cents) (n)

     35.14         36.88         (4.7 )% 

Passenger enplanements (thousands) (g)

     46,194         46,552         (0.8 )% 

Aircraft at end of period

     1,550         1,537         0.8

Fuel consumption (gallons in millions)

     1,013         1,035         (2.1 )% 

Average aircraft fuel price including related taxes (dollars per gallon)

     1.83         3.10         (41.0 )% 

Full-time equivalent employees at end of period

     116,800         111,400         4.8

 

(a)

Revenue passenger mile (RPM) – A basic measure of sales volume. One RPM represents one passenger flown one mile.

 

(b)

Available seat mile (ASM) – A basic measure of production. One ASM represents one seat flown one mile.

 

(c)

Passenger load factor – The percentage of available seats that are filled with revenue passengers.

 

(d)

Yield – A measure of airline revenue derived by dividing passenger revenue by RPMs.

 

(e)

Passenger revenue per available seat mile (PRASM) – Passenger revenues divided by ASMs.

 

(f)

Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs.

 

(g)

Passenger enplanements – The number of passengers on board an aircraft, including local, connecting and through passengers.

 

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(h)

Block hours – The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.

 

(i)

Average stage length – The average of the distances flown on each segment of every route.

 

(j)

Regional statistics include our subsidiaries, Envoy Aviation Group Inc. (Envoy, formerly known as AMR Eagle Holding Corporation), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), and operating and financial results from our capacity purchase agreements with Air Wisconsin Airlines Corporation, Chautauqua Airlines, Inc., ExpressJet Airlines, Inc., Mesa Airlines, Inc., Republic Airline Inc., SkyWest Airlines, Inc. and Compass Airlines, LLC.

 

(k) 

Regional full-time equivalent employees only include our wholly owned regional airline subsidiaries, Envoy, Piedmont and PSA.

 

(l) 

Cargo ton miles – A basic measure of cargo transportation. One cargo ton mile represents one ton of cargo transported one mile.

 

(m)

Total revenue per available seat mile (RASM) – Total revenues divided by total mainline and regional ASMs.

 

(n) 

Cargo yield per ton mile – Cargo revenues divided by total mainline and regional cargo ton miles.

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Operating Revenues

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015      2014     
     (In millions, except percentage changes)  

Mainline passenger

   $ 6,989       $ 7,258         (3.7

Regional passenger

     1,452         1,407         3.2   

Cargo

     194         206         (5.9

Other

     1,192         1,124         6.0   
  

 

 

    

 

 

    

Total operating revenues

$ 9,827    $ 9,995      (1.7
  

 

 

    

 

 

    

Total operating revenues in the first quarter of 2015 decreased $168 million, or 1.7%, from the 2014 period principally due to winter storm flight cancellations, competitive capacity growth in our key markets and foreign currency devaluation. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $7.0 billion in the first quarter of 2015 as compared to $7.3 billion in the 2014 period. Mainline RPM’s decreased 2.1% as mainline capacity, as measured by ASMs, decreased 1.7%, resulting in a 0.3 point decrease in load factor to 80.3%. Mainline passenger yield decreased 1.6% to 15.58 cents in the first quarter of 2015 from 15.84 cents in the 2014 period. Mainline PRASM decreased 2.0% to 12.51 cents in the first quarter of 2015 from 12.77 cents in the 2014 period.

 

   

Regional passenger revenues were $1.5 billion in the first quarter of 2015 as compared to $1.4 billion in the 2014 period. Regional RPM’s increased 5.6% as regional capacity, as measured by ASMs, increased 5.7%, resulting in a 0.1 point decrease in load factor to 77.0%. Regional passenger yield decreased 2.2% to 27.19 cents in the first quarter of 2015 from 27.82 cents in the 2014 period. Regional PRASM decreased 2.4% to 20.94 cents in the first quarter of 2015 from 21.45 cents in the 2014 period.

 

   

Other revenues increased $68 million, or 6.0%, in the first quarter of 2015 from the 2014 period driven primarily by higher revenues associated with our frequent flyer programs.

 

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Operating Expenses

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015      2014     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 1,544       $ 2,711         (43.0

Salaries, wages and benefits

     2,373         2,119         12.0   

Maintenance, materials and repairs

     494         485         1.8   

Other rent and landing fees

     408         424         (3.9

Aircraft rent

     317         320         (0.9

Selling expenses

     336         401         (16.3

Depreciation and amortization

     336         307         9.6   

Special items, net

     303         (137      nm   

Other

     1,038         1,041         (0.3
  

 

 

    

 

 

    

Total mainline operating expenses

  7,149      7,671      (6.8

Regional expenses:

Fuel

  311      500      (37.8

Other

  1,151      1,094      5.1   
  

 

 

    

 

 

    

Total regional operating expenses

  1,462      1,594      (8.3
  

 

 

    

 

 

    

Total operating expenses

$ 8,611    $ 9,265      (7.1
  

 

 

    

 

 

    

Total operating expenses were $8.6 billion in the first quarter of 2015, a decrease of $654 million, or 7.1%, from the 2014 period. The decrease in operating expenses was primarily due to substantially lower aircraft fuel costs, offset in part by higher salaries due to our new pilot and flight attendant collective bargaining agreements. See detailed explanations below relating to the other changes in operating costs.

Mainline Operating Expenses per ASM

Our mainline CASM decreased 0.70 cents, or 5.2%, from 13.50 cents in the first quarter of 2014 to 12.80 cents in the first quarter of 2015. Excluding special items and aircraft fuel and related taxes, our mainline CASM increased 0.52 cents, or 5.8%, from 8.97 cents in the first quarter of 2014 to 9.49 cents in the first quarter of 2015, while mainline capacity decreased 1.7%.

The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and aircraft fuel and related taxes for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015      2014     
     (In cents, except percentage changes)  

Mainline CASM:

        

Aircraft fuel and related taxes

     2.76         4.77         (42.0

Salaries, wages and benefits

     4.25         3.73         14.0   

Maintenance, materials and repairs

     0.88         0.85         3.6   

Other rent and landing fees

     0.73         0.75         (2.2

Aircraft rent

     0.57         0.56         0.9   

Selling expenses

     0.60         0.71         (14.8

Depreciation and amortization

     0.60         0.54         11.5   

Special items, net

     0.54         (0.24      nm   

Other

     1.86         1.83         1.5   
  

 

 

    

 

 

    

Total mainline CASM

  12.80      13.50      (5.2

Special items, net

  (0.54   0.24      nm   

Aircraft fuel and related taxes

  (2.76   (4.77   (42.0
  

 

 

    

 

 

    

Mainline operating expenses per ASM, excluding special items and aircraft fuel and related taxes (1)

  9.49      8.97      5.8   
  

 

 

    

 

 

    

 

(1) 

We believe that the presentation of mainline CASM excluding fuel and related taxes is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, and fuel and related taxes to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Significant changes in the components of mainline operating expense per ASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 42.0% primarily due to a 41.1% decrease in the average price per gallon to $1.83 in the first quarter of 2015 from an average price per gallon of $3.10 in the 2014 period on a 3.2% decrease in consumption.

 

   

Salaries, wages and benefits per ASM increased 14.0% primarily due to increased costs associated with the new pilot and flight attendant joint collective bargaining agreements.

 

   

Selling expenses per ASM decreased 14.8% primarily due to lower contractually negotiated rates for certain commissions and booking fees.

 

   

Depreciation and amortization per ASM increased 11.5% primarily due to new purchased aircraft deliveries since the end of the 2014 first quarter as we continued our fleet renewal program.

Regional Operating Expenses

Total regional expenses decreased $132 million, or 8.3%, in the first quarter of 2015 to $1.5 billion from $1.6 billion in the 2014 period. The period over period decrease was primarily due to a $189 million decrease in fuel costs. The average price per gallon of fuel decreased 40.0% to $1.86 in the first quarter of 2015 from $3.10 in the 2014 period, on a 3.7% increase in consumption. Other regional operating expenses increased $57 million, or 5.1%, from the 2014 period principally due to a 5.7% increase in regional capacity.

Nonoperating Income (Expense)

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015      2014     
     (In millions, except percentage changes)  

Interest income

   $ 10       $ 7         39.5   

Interest expense, net of capitalized interest

     (210      (243      (13.7

Other, net

     (73      (1      nm   
  

 

 

    

 

 

    

Total nonoperating expense, net

$ (273 $ (237   15.2   
  

 

 

    

 

 

    

Interest income was $10 million and $7 million in the first quarter of 2015 and 2014, respectively. Our short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest decreased $33 million, or 13.7%, in the first quarter of 2015 from the 2014 period. The 2014 period included $31 million of special charges related to non-cash interest accretion on the bankruptcy settlement obligations.

Other nonoperating expense, net increased $72 million in the first quarter of 2015 from the 2014 period. The first quarter of 2015 included $80 million of foreign currency losses as compared to $2 million of net foreign currency gains in the 2014 period. The increase in foreign currency losses during the first quarter of 2015 was driven primarily by the strengthening of the U.S. dollar in foreign currency transactions relative to other currencies, principally in Latin American and European markets including a 17% decrease in the value of the Brazilian real, a 10% decrease in the value of the Euro and a 4% decrease in the value of the British pound in the first quarter of 2015. These foreign currency losses were offset in part by a net special credit of $8 million primarily due to a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank and a $9 million charge principally related to a non-cash write off of unamortized debt discount associated with the prepayment of certain aircraft financings.

American’s Results of Operations

In the first quarter of 2015, American realized operating income of $760 million and net income of $569 million. American’s first quarter 2015 net income included net special operating charges of $200 million and total net special charges of $200 million. Excluding the effects of these special charges, American realized operating income of $960 million and net income of $769 million.

In the first quarter of 2014, American realized operating income of $578 million and net income of $401 million. American’s first quarter 2014 net income included net special operating credits of $215 million and total net special credits of $164 million. Excluding the effects of these special credits, American realized operating income of $363 million and net income of $237 million.

 

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The following table details American’s net income excluding special items (in millions):

 

     Three Months Ended March 31,  
     2015      2014  

Net income

   $ 569       $ 401   

Special items:

     

Mainline operating special items, net (1)

     198         (216

Regional operating special items, net (2)

     2         1   

Nonoperating special items, net (3)

     (8      44   

Income tax special items, net (4)

     8         7   
  

 

 

    

 

 

 

Total special items

  200      (164
  

 

 

    

 

 

 

Net income excluding special items

$ 769    $ 237   
  

 

 

    

 

 

 

 

(1) 

The 2015 first quarter mainline operating special items totaled a net charge of $198 million, which principally included $148 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, fleet restructuring, re-branding of aircraft and airport facilities, relocation and training. In addition, American recorded a net $64 million charge principally related to its new pilot joint collective bargaining agreement. These charges were offset in part by a net $6 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations.

The 2014 first quarter mainline operating special items totaled a net credit of $216 million, which principally included a $305 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $56 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $134 million of merger integration expenses related to alignment of labor union contracts, information technology, professional fees, severance and retention, share-based compensation, re-branding of aircraft and airport facilities, relocation and training.

 

(2) 

The 2015 and 2014 first quarter regional operating special items principally related to merger integration expenses.

 

(3) 

The 2015 first quarter nonoperating special items totaled a net credit of $8 million primarily due to a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank, offset in part by a $9 million charge principally related to a non-cash write off of unamortized debt discount associated with the prepayment of certain aircraft financings.

The 2014 first quarter nonoperating special items totaled a net charge of $44 million principally due to non-cash interest accretion of $27 million on the bankruptcy settlement obligations and $13 million for Venezuelan foreign currency losses.

 

(4) 

The 2015 and 2014 first quarter tax special items were the result of a non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

Income Taxes

At December 31, 2014, American had approximately $10.3 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2015. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal and state NOL Carryforwards available in those returns is $10.1 billion and $4.6 billion, respectively, substantially all of which is expected to be available for use in 2015. The federal NOL Carryforwards will expire beginning in 2022 if unused. These NOL Carryforwards include an unrealized tax benefit of $712 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. American also had approximately $3.9 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2014, which will expire in years 2015 through 2034 if unused. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. American experienced an ownership change in connection with its emergence from the Chapter 11 Cases. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. American elected to be covered by certain special rules for federal income tax purposes that permit approximately $9.5 billion of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL Carryforwards arising after the ownership change is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2014, American had an AMT credit carryforward of approximately $435 million available for federal income tax purposes, which is available for an indefinite period. American’s net deferred tax assets, which include the NOL Carryforwards, are subject to a full valuation allowance. At December 31, 2014, the federal and state valuation allowances were $5.1 billion and $208 million, respectively. In accordance with GAAP, utilization of the NOL Carryforwards after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset American’s tax provision dollar for dollar.

 

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American provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions. American considers many factors in evaluating the realizability of its deferred tax assets including risks associated with merger integration as well as other factors, which continue to be affected by conditions beyond American’s control, such as the condition of the economy, the level and volatility of fuel prices and travel demand. American has concluded as of March 31, 2015 that the valuation allowance was still needed on its deferred tax asset based on the weight of the factors described above.

For the three months ended March 31, 2015, American recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

For the three months ended March 31, 2014, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $4 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used.

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Operating Revenues

 

     Three Months Ended
March 31,
     Percent
Increase
(Decrease)
 
     2015