10-Q 1 d945812d10q.htm FORM 10-Q Form 10-Q
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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 June 30, 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 July 17, 2015, there were 671,820,576 shares of American Airlines Group Inc. common stock outstanding.

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

 

 

 


Table of Contents

American Airlines Group Inc.

American Airlines, Inc.

Form 10-Q

Quarterly Period Ended June 30, 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.

     36   
  

Condensed Consolidated Statements of Operations

     36   
  

Condensed Consolidated Statements of Comprehensive Income

     37   
  

Condensed Consolidated Balance Sheets

     38   
  

Condensed Consolidated Statements of Cash Flows

     39   
  

Notes to the Condensed Consolidated Financial Statements

     40   

Item 2.

  

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

     51   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     78   

Item 4.

  

Controls and Procedures

     80   
   PART II: OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     81   

Item 1A.

  

Risk Factors

     82   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     99   

Item 6.

  

Exhibits

     99   

SIGNATURES

     100   

 

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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 have on takeover attempts that some of our stockholders might consider beneficial; the effect of provisions of our Restated Certificate

 

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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 June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Operating revenues:

    

Mainline passenger

   $ 7,655      $ 8,213      $ 14,644      $ 15,471   

Regional passenger

     1,759        1,707        3,211        3,114   

Cargo

     194        221        388        428   

Other

     1,219        1,214        2,411        2,338   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     10,827        11,355        20,654        21,351   

Operating expenses:

        

Aircraft fuel and related taxes

     1,774        2,830        3,318        5,541   

Salaries, wages and benefits

     2,364        2,163        4,737        4,282   

Regional expenses

     1,557        1,657        3,019        3,251   

Maintenance, materials and repairs

     502        514        995        999   

Other rent and landing fees

     451        441        859        866   

Aircraft rent

     316        312        633        631   

Selling expenses

     350        402        686        804   

Depreciation and amortization

     340        319        676        626   

Special items, net

     144        251        447        114   

Other

     1,108        1,067        2,147        2,108   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,906        9,956        17,517        19,222   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,921        1,399        3,137        2,129   

Nonoperating income (expense):

        

Interest income

     10        8        19        15   

Interest expense, net of capitalized interest

     (223     (214     (432     (457

Other, net

     11        11        (62     9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (202     (195     (475     (433
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,719        1,204        2,662        1,696   

Income tax provision

     15        340        26        353   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,704      $ 864      $ 2,636      $ 1,343   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 2.47      $ 1.20      $ 3.81      $ 1.86   

Diluted

   $ 2.41      $ 1.17      $ 3.70      $ 1.82   

Weighted average shares outstanding (in thousands):

        

Basic

     688,727        720,600        692,571        722,286   

Diluted

     707,611        734,767        712,270        738,051   

Cash dividends declared per common share

   $ 0.10      $ —        $ 0.20      $ —     

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 June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Net income

   $ 1,704      $ 864      $ 2,636      $ 1,343   

Other comprehensive income (loss), before tax:

        

Defined benefit pension plans and retiree medical

     (26     (59     (52     (104

Derivative financial instruments:

        

Change in fair value

     —          13        —          (54

Reclassification into earnings

     (3     5        (9     12   

Unrealized gain (loss) on investments:

        

Net change in value

     (1     —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

     (30     (41     (61     (144

Reversal of non-cash tax provision

     —          330        —          330   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,674      $ 1,153      $ 2,575      $ 1,529   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     June 30, 2015     December 31, 2014  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 952      $ 994   

Short-term investments

     7,967        6,309   

Restricted cash and short-term investments

     747        774   

Accounts receivable, net

     1,892        1,771   

Aircraft fuel, spare parts and supplies, net

     1,069        1,004   

Prepaid expenses and other

     1,482        1,260   
  

 

 

   

 

 

 

Total current assets

     14,109        12,112   

Operating property and equipment

    

Flight equipment

     30,829        28,213   

Ground property and equipment

     6,132        5,900   

Equipment purchase deposits

     1,124        1,230   
  

 

 

   

 

 

 

Total property and equipment, at cost

     38,085        35,343   

Less accumulated depreciation and amortization

     (12,797     (12,259
  

 

 

   

 

 

 

Total property and equipment, net

     25,288        23,084   

Other assets

    

Goodwill

     4,091        4,091   

Intangibles, net of accumulated amortization of $478 and $447, respectively

     2,274        2,240   

Other assets

     2,106        2,244   
  

 

 

   

 

 

 

Total other assets

     8,471        8,575   
  

 

 

   

 

 

 

Total assets

   $ 47,868      $ 43,771   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,642      $ 1,708   

Accounts payable

     1,683        1,377   

Accrued salaries and wages

     1,040        1,194   

Air traffic liability

     5,664        4,252   

Frequent flyer liability

     2,745        2,807   

Other accrued liabilities

     2,271        2,097   
  

 

 

   

 

 

 

Total current liabilities

     15,045        13,435   

Noncurrent liabilities

    

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

     17,152        16,196   

Pension and postretirement benefits

     7,477        7,562   

Deferred gains and credits, net

     746        829   

Bankruptcy settlement obligations

     208        325   

Other liabilities

     3,604        3,403   
  

 

 

   

 

 

 

Total noncurrent liabilities

     29,187        28,315   

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, $0.01 par value; 1,750,000,000 shares authorized, 678,288,983 shares issued and outstanding at June 30, 2015; 697,474,535 shares issued and outstanding at December 31, 2014

     7        7   

Additional paid-in capital

     14,319        15,135   

Accumulated other comprehensive loss

     (4,620     (4,559

Accumulated deficit

     (6,070     (8,562
  

 

 

   

 

 

 

Total stockholders’ equity

     3,636        2,021   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 47,868      $ 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)

 

     Six Months Ended June 30,  
     2015     2014  

Net cash provided by operating activities

   $ 4,841      $ 2,637   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (3,139     (2,678

Purchases of short-term investments

     (5,093     (1,861

Sales of short-term investments

     3,436        1,723   

Decrease in restricted cash and short-term investments

     27        153   

Net proceeds from slot transaction

     —          307   

Proceeds from sale of an investment

     52        —     

Proceeds from sale of property and equipment

     22        9   
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,695     (2,347

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (1,107     (1,145

Proceeds from issuance of long-term debt

     1,996        534   

Deferred financing costs

     (40     (7

Sale-leaseback transactions

     —          411   

Exercise of stock options

     —          9   

Treasury stock repurchases

     (931     (28

Dividend payment

     (140     —     

Other financing activities

     34        6   
  

 

 

   

 

 

 

Net cash used in financing activities

     (188     (220
  

 

 

   

 

 

 

Net increase (decrease) in cash

     (42     70   

Cash at beginning of period

     994        1,140   
  

 

 

   

 

 

 

Cash at end of period

   $ 952      $ 1,210   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 35      $ 5,362   

Capital lease obligations

     5        361   

Supplemental information:

    

Interest paid, net of amounts capitalized

     433        367   

Income taxes paid

     10        5   

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 flyer program, pensions, 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 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. On July 9, 2015, the FASB deferred the effective date of this new standard to December 15, 2017 for public entities. Early application is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. 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 to 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.

 

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

(Unaudited)

 

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.

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 $2.5 billion and the Allowed Single-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.5 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 June 30, 2015, there were approximately 26.0 million shares of AAG Common Stock remaining in the Disputed Claims Reserve. On July 14, 2015, approximately 0.6 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 0.1 million shares of AAG Common Stock for an aggregate of $2 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. 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 is expected to take considerable time. 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 June 30, 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.

 

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(Unaudited)

 

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 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):

 

     June 30, 2015      December 31, 2014  

Single-Dip Equity Obligations

   $ 159       $ 248   

Labor-related deemed claim

     49         77   
  

 

 

    

 

 

 

Total

$ 208    $ 325   
  

 

 

    

 

 

 

The amount of the remaining Single-Dip Equity Obligations at June 30, 2015 is the Company’s estimate of its obligation for disputed claims of $159 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 June 30, 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 June 30, 2015, the remaining liability to certain AMR labor groups and employees of $49 million represents the estimated fair value of the remaining shares expected to be issued in satisfaction of such obligation, measured as if the obligation was settled using the closing price of AAG Common Stock at June 30, 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.

On February 10, 2015 and July 14, 2015, approximately 0.8 million and 0.6 million shares, respectively, 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 0.1 million shares were withheld or sold on account of related tax obligations.

 

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4. Special Items

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Mainline operating special items, net (a)

   $ 144       $ 251       $ 447       $ 114   

 

(a) 

The 2015 second quarter mainline operating special items totaled a net charge of $144 million, which principally included $221 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. These charges were offset in part by a net $68 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. The 2015 six month period mainline operating special items totaled a net charge of $447 million, which principally included $437 million of merger integration expenses as described above and a net $99 million charge related to the Company’s new pilot joint collective bargaining agreement. These charges were offset in part by a net $73 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations.

The 2014 second quarter mainline operating special items totaled a net charge of $251 million, which principally included $163 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation, re-branding of aircraft and airport facilities, relocation and training as well as a net $38 million charge for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations and $37 million in charges related to the buyout of leases associated with certain aircraft. The 2014 six month period mainline operating special items totaled a net charge of $114 million, which principally included $365 million of merger integration expenses, $40 million in charges primarily related to the buyout of leases associated with certain aircraft and a net $5 million charge for bankruptcy related items, all as described above. These charges were offset in part by a $309 million gain on the sale of Slots at Ronald Reagan Washington National Airport.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Regional operating special items, net (a)

   $ 10       $ 2       $ 18       $ 6   

Nonoperating special items, net (b)

     (11      2         (19      50   

Income tax special items, net (c)

     7         337         16         345   

 

(a) 

The 2015 and 2014 second quarter and six month period regional operating special items principally related to merger integration expenses.

 

(b) 

The 2015 second quarter nonoperating special items totaled a net credit of $11 million and primarily included a $22 million gain associated with the sale of an investment, offset in part by $11 million in charges principally related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing the Company’s secured term loan facilities. The 2015 six month period nonoperating special items totaled a net credit of $19 million and principally included the $22 million gain associated with the sale of an investment as described above and a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank. These special credits were offset in part by $20 million in charges principally related to non-cash write offs of unamortized debt discount and debt issuance costs associated with the debt refinancing as described above and the prepayment of certain aircraft financings.

The 2014 second quarter and six month period nonoperating special items were primarily due to non-cash interest accretion of $2 million and $33 million, respectively, on bankruptcy settlement obligations.

 

(c) 

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

During the 2014 second quarter, the Company sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, the Company recorded a special non-cash tax provision of $330 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in other comprehensive income (OCI), a subset of stockholders’ equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of the Company’s fuel hedging contracts. In accordance with GAAP, the Company retained the $330 million tax provision in OCI until the last contract was settled or terminated. In addition, the Company recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets

 

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in the 2014 second quarter. The 2014 six month period included the $330 million non-cash tax provision related to the settlement of fuel hedges discussed above as well as a special $15 million 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 June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Basic EPS:

           

Net income

   $ 1,704       $ 864       $ 2,636       $ 1,343   

Weighted-average common shares outstanding (in thousands)

     688,727         720,600         692,571         722,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

$ 2.47    $ 1.20    $ 3.81    $ 1.86   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS:

Net income

$ 1,704    $ 864    $ 2,636    $ 1,343   

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

  —        (2   —        3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income for purposes of computing diluted EPS

$ 1,704    $ 862    $ 2,636    $ 1,346   

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

Weighted-average shares outstanding

  688,727      720,600      692,571      722,286   

Dilutive effect of stock awards

  18,884      14,167      19,699      13,850   

Assumed conversion of convertible senior notes

  —        —        —        1,915   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

  707,611      734,767      712,270      738,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

$ 2.41    $ 1.17    $ 3.70    $ 1.82   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Stock options, SARs and RSUs because inclusion would be antidilutive

  905      582      453      307   

 

(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. For purposes of computing diluted earnings per share under GAAP, the Company was required to adjust the numerator by the change in fair value of the conversion feature from March 12, 2014 to May 15, 2014, which decreased GAAP net income by $2 million for the three months ended June 30, 2014 and increased GAAP net income by $3 million for the six months ended June 30, 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 June 30, 2015, the Company repurchased 17.3 million shares of AAG Common Stock for $753 million at a weighted average cost per share of $43.53. During the six months ended June 30, 2015, the Company repurchased 21.1 million shares of AAG Common Stock for $943 million at a weighted average cost per share of $44.60.

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.

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.

The total cash payment for dividends during the three and six months ended June 30, 2015 was $70 million and $140 million, respectively. 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.

 

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7. Debt

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

 

     June 30, 2015      December 31, 2014  

Secured

     

2013 Credit Facilities, variable interest rate of 3.25%, installments through 2020

   $ 1,867       $ 1,872   

2014 Credit Facilities, variable interest rate of 3.50%, installments through 2021

     750         750   

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

     980         990   

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

     588         594   

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

     7,777         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

     3,059         2,952   

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.50%, maturing from 2016 to 2035

     1,111         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

     957         994   
  

 

 

    

 

 

 
     17,089         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

     18,839         17,963   

Less: Total unamortized debt discount

     45         59   

Less: Current maturities

     1,642         1,708   
  

 

 

    

 

 

 

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

   $ 17,152       $ 16,196   
  

 

 

    

 

 

 

2013 Credit Facilities

On May 21, 2015, American refinanced its $1.9 billion term loan facility (the $1.9 billion 2015 Term Loan Facility and, together with a $1.4 billion revolving credit facility, the 2013 Credit Facilities) to extend the maturity date to June 29, 2020 and reduce the LIBOR margin from 3.00% to 2.75%. In addition, American entered into certain amendments to reflect the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $1.9 billion 2015 Term Loan Facility may vary based on American’s credit ratings, and on June 30, 2015 the LIBOR margin was further reduced to 2.50% due to an improvement in American’s credit ratings.

2014 Credit Facilities

On April 20, 2015, American refinanced its $750 million term loan facility (the $750 million 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, as well as the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $750 million 2015 Term Loan Facility may vary based on American’s credit ratings, and on June 30, 2015 the LIBOR margin was further reduced to 2.75% due to an improvement in American’s credit ratings.

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.

 

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As of June 30, 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 semi-annually 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, Inc. (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.

AAdvantage Loan

Effective January 2, 2015, American exercised its loan repayment right with respect to the full value of the outstanding balance of the AAdvantage Loan with 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.

Obligations Associated with Special Facility Revenue Bonds

In December 2014, American acquired approximately $112 million aggregate principal amount of special facility revenue bonds related to the Tulsa International Airport, when such bonds were mandatorily tendered to American. The acquisition of these bonds resulted in an $11 million reduction of debt on the Company’s consolidated balance sheet and a $50 million reduction of a long-term operating lease obligation included in other long-term liabilities on the Company’s consolidated balance sheet as of December 31, 2014. American exercised its option to remarket approximately $104 million of these bonds in May 2015. The remarketed bonds will initially bear a coupon interest rate of 5% from the date of initial issuance and delivery of the bonds on May 27, 2015, until the day preceding June 1, 2025, on which date the bonds will be subject to mandatory tender. In connection with the remarketing of these special facility revenue bonds, American received cash proceeds of $112 million and recognized a total obligation of $62 million. Of that total obligation, $11 million is reflected as a capital lease and $51 million is reflected in other long-term liabilities on the Company’s condensed consolidated balance sheet as of June 30, 2015.

In June 2015, American exercised its right to adjust the interest rate on approximately $365 million aggregate principal amount of special facility revenue bonds, reflected as debt on the Company’s condensed consolidated balance sheet related to the John F. Kennedy International Airport. In connection with the adjustment to a new interest rate, the bonds are required to be purchased by American on August 3, 2015. American is in the process of remarketing the bonds at the new interest rate. The remarketed bonds are expected to be subject to mandatory tender for purchase by American on August 1, 2016. As a result, American reclassified $365 million to current maturities of long-term debt on its condensed consolidated balance sheet as of June 30, 2015.

Other Aircraft Financing Transactions

In the first six months of 2015, American prepaid $72 million principal amount of outstanding debt secured by certain aircraft.

In the first six months of 2015, the Company entered into loan agreements to borrow $465 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.

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

 

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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.

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 June 30, 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 and six months ended June 30, 2015, the Company recorded a special $7 million and $16 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the three and six months ended June 30, 2015, the Company recorded $8 million and $10 million, respectively, of state and international income tax expense related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

During the second quarter of 2014, the Company sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, the Company recorded a special non-cash tax provision of $330 million in the statement of operations for the second quarter of 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholders’ equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of the Company’s fuel hedging contracts. In accordance with GAAP, the Company retained the $330 million tax provision in OCI until the last contract was settled or terminated. In addition, the Company recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter. The 2014 six month period included the $330 million non-cash tax provision related to the settlement of fuel hedges discussed above as well as a special $15 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

For the three and six months ended June 30, 2014, the Company recorded $3 million and $8 million, respectively, of state and international income tax expense related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

 

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

(Unaudited)

 

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 six months ended June 30, 2015.

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

 

     Fair Value Measurements as of June 30, 2015  
     Total      Level 1      Level 2      Level 3  

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

           

Money market funds

   $ 376       $ 376       $ —         $ —     

Repurchase agreements

     43         —           43         —     

Corporate obligations

     4,512         —           4,512         —     

Bank notes / certificates of deposit / time deposits

     3,036         —           3,036         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  7,967      376      7,591      —     

Restricted cash and short-term investments (1)

  747      747      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 8,714    $ 1,123    $ 7,591    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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) 

All short-term investments are classified as available-for-sale and stated at fair value. In addition, all short-term investments mature in one year or less except for $1.0 billion of corporate obligations and $1.6 billion of bank notes/certificates of deposit/time deposits.

There were no Level 1 to Level 2 transfers during the six months ended June 30, 2015.

Venezuela Cash and Short-term Investments

As of June 30, 2015, the Company had approximately $629 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 $8 million valued at 12.8 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.

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 recent 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.

 

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

(Unaudited)

 

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):

 

     June 30, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 18,794       $ 19,271       $ 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 June 30,

   2015      2014      2015      2014  

Service cost

   $ 1       $ 2       $ 1       $ 1   

Interest cost

     184         185         13         16   

Expected return on assets

     (213      (197      (5      (5

Settlements

     1         1         —           —     

Amortization of:

           

Prior service cost (benefit) (1)

     7         7         (61      (59

Unrecognized net loss (gain)

     28         12         (2      (2
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost (income)

   $ 8       $ 10       $ (54    $ (49
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

     Pension Benefits      Retiree Medical and Other Benefits  

Six Months Ended June 30,

   2015      2014      2015      2014  

Service cost

   $ 1       $ 2       $ 2       $ 1   

Interest cost

     369         371         26         31   

Expected return on assets

     (426      (393      (10      (10

Settlements

     1         3         —           —     

Amortization of:

           

Prior service cost (benefit) (1)

     14         14         (121      (120

Unrecognized net loss (gain)

     56         23         (3      (4
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost (income)

   $ 15       $ 20       $ (106    $ (102
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The 2015 six month period prior service cost does not include amortization of $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, the Company’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, the Company’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.

 

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

(Unaudited)

 

11. Accumulated Other Comprehensive Income (Loss)

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

 

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

Balance at December 31, 2014

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

Other comprehensive income (loss) before reclassifications

     —          —          —          —          —     

Amounts reclassified from accumulated other comprehensive income (loss)

     (52     (9     —          —          (61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

  (52   (9   —        —        (61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

$ (3,735 $ —      $ (5 $ (880 $ (4,620
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications out of AOCI for the three and six months ended June 30, 2015 and 2014 are as follows (in millions):

 

     Amounts reclassified from AOCI      

AOCI Components

   Three Months Ended June 30,     Six Months Ended June 30,    

Affected line items on condensed

consolidated statement of operations

   2015     2014     2015     2014    

Amortization of pension and retiree medical liability:

          

Prior service cost

   $ (53   $ (52   $ (106   $ (106   Salaries, wages and benefits

Actuarial loss

     27        10        54        19      Salaries, wages and benefits

Derivative financial instruments:

          

Cash flow hedges

     (3     5        (9     12      Aircraft fuel and related taxes

Net unrealized change on investments:

          

Net change in value

     (1     —          —          2      Other nonoperating, net

Income tax benefit:

          

Reversal of non-cash tax provision

     —          330        —          330      Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period

$ (30 $ 293    $ (61 $ 257   
  

 

 

   

 

 

   

 

 

   

 

 

   

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 June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Aircraft fuel and related taxes

   $ 349       $ 535       $ 660       $ 1,035   

Salaries, wages and benefits

     293         288         585         567   

Capacity purchases from third-party regional carriers

     409         371         787         722   

Maintenance, materials and repairs

     88         82         162         169   

Other rent and landing fees

     122         105         230         202   

Aircraft rent

     8         9         17         18   

Selling expenses

     89         87         165         159   

Depreciation and amortization

     61         50         118         103   

Special items, net

     10         2         18         6   

Other

     128         128         277         270   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regional expenses

$ 1,557    $ 1,657    $ 3,019    $ 3,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 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.

 

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

(Unaudited)

 

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 June 30, 2015, there were approximately 26.0 million shares of AAG Common Stock remaining in the Disputed Claims Reserve. On July 14, 2015, approximately 0.6 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 $2 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. 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.

DOJ Civil Investigative Demand. In June 2015, the Company received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from the Company, and other airlines have announced that they have received similar requests. The Company intends to cooperate fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, the Company, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in a number of putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits are the subject of multiple motions to consolidate them in a single forum. Both the DOJ process and these lawsuits are in their very early stages and the Company intends to defend the lawsuits 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 GROUP 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. 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 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 June 30, 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

  $ —        $ 4,947      $ —        $ 2,708      $ —        $ —        $ 7,655   

Regional passenger

    —          843        —          916        —          —          1,759   

Cargo

    —          161        —          33        —          —          194   

Other

    —          868        —          373        761        (783     1,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          6,819        —          4,030        761        (783     10,827   

Operating expenses:

             

Aircraft fuel and related taxes

    —          1,197        —          577        —          —          1,774   

Salaries, wages and benefits

    —          1,536        —          825        198        (195     2,364   

Regional expenses

    —          788        —          792        —          (23     1,557   

Maintenance, materials and repairs

    —          302        —          200        87        (87     502   

Other rent and landing fees

    —          269        —          182        11        (11     451   

Aircraft rent

    —          226        —          90        37        (37     316   

Selling expenses

    —          198        —          152        —          —          350   

Depreciation and amortization

    —          247        —          93        11        (11     340   

Special items, net

    —          74        —          70        —          —          144   

Other

    —          776        —          334        418        (420     1,108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    —          5,613        —          3,315        762        (784     8,906   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          1,206        —          715        (1     1        1,921   

Nonoperating income (expense):

             

Interest income

    —          10        —          3        3        (6     10   

Interest expense, net

    (17     (137     (9     (63     (3     6        (223

Equity in earnings of subsidiaries

    1,705        —          413        —          —          (2,118     —     

Other, net

    22        (16     —          5        —          —          11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    1,710        (143     404        (55     —          (2,118     (202
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,710        1,063        404        660        (1     (2,117     1,719   

Income tax provision

    —          11        —          247        5        (248     15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,710      $ 1,052      $ 404      $ 413      $ (6   $ (1,869   $ 1,704   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 June 30, 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 (loss)

  $ 1,710      $ 1,052      $ 404      $ 413      $ (6   $ (1,869   $ 1,704   

Other comprehensive income (loss) before tax:

             

Defined benefit pension plans and retiree medical

    —          (25     —          (1     —          —          (26

Derivative financial instruments:

             

Change in fair value

    —          —          —          —          —          —          —     

Reclassification into earnings

    —          (3     —          —          —          —          (3

Unrealized loss on investments:

             

Net change in value

    —          (1     —          —          —          —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

  —        (29   —        (1   —        —        (30

Non-cash tax provision

  —        —        —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

$ 1,710    $ 1,023    $ 404    $ 412    $ (6 $ (1,869 $ 1,674   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Six Months Ended June 30, 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

  $ —        $ 9,638      $ —        $ 5,006      $ —        $ —        $ 14,644   

Regional passenger

    —          1,542        —          1,669        —          —          3,211   

Cargo

    —          322        —          66        —          —          388   

Other

    —          1,686        —          762        1,486        (1,523     2,411   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          13,188        —          7,503        1,486        (1,523     20,654   

Operating expenses:

             

Aircraft fuel and related taxes

    —          2,267        —          1,051        —          —          3,318   

Salaries, wages and benefits

    —          3,121        —          1,611        391        (386     4,737   

Regional expenses

    —          1,516        —          1,558        —          (55     3,019   

Maintenance, materials and repairs

    —          606        —          389        161        (161     995   

Other rent and landing fees

    —          539        —          320        20        (20     859   

Aircraft rent

    —          451        —          182        68        (68     633   

Selling expenses

    —          433        —          253        —          —          686   

Depreciation and amortization

    —          483        —          193        22        (22     676   

Special items, net

    —          272        —          175        4        (4     447   

Other

    2        1,534        —          614        804        (807     2,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2        11,222        —          6,346        1,470        (1,523     17,517   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (2     1,966        —          1,157        16        —          3,137   

Nonoperating income (expense):

             

Interest income

    2        16        —          7        3        (9     19   

Interest expense, net

    (30     (263     (18     (127     (3     9        (432

Equity in earnings of subsidiaries

    2,649        —          663        —          —          (3,312     —     

Other, net

    22        (80     —          (5     1        —          (62
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    2,643        (327     645        (125     1        (3,312     (475
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    2,641        1,639        645        1,032        17        (3,312     2,662   

Income tax provision

    —          19        —          378        8        (379     26   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 2,641      $ 1,620      $ 645      $ 654      $ 9      $ (2,933   $ 2,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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

(In millions)(Unaudited)

 

    Six Months Ended June 30, 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

  $ 2,641      $ 1,620      $ 645      $ 654      $ 9      $ (2,933   $ 2,636   

Other comprehensive income (loss) before tax:

             

Defined benefit pension plans and retiree medical

    —          (51     —          (1     —          —          (52

Derivative financial instruments:

             

Change in fair value

    —          —          —          —          —          —          —     

Reclassification into earnings

    —          (9     —          —          —          —          (9

Unrealized gain on investments:

             

Net change in value

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

  —        (60   —        (1   —        —        (61

Non-cash tax provision

  —        —        —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

$ 2,641    $ 1,560    $ 645    $ 653    $ 9    $ (2,933 $ 2,575   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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 June 30, 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

  $ —        $ 5,352      $ —        $ 2,861      $ —        $ —        $ 8,213   

Regional passenger

    —          786        —          921        —          —          1,707   

Cargo

    —          178        —          43        —          —          221   

Other

    —          837        —          408        744        (775     1,214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          7,153        —          4,233        744        (775     11,355   

Operating expenses:

             

Aircraft fuel and related taxes

    —          1,897        —          933        —          —          2,830   

Salaries, wages and benefits

    —          1,441        —          720        195        (193     2,163   

Regional expenses

    —          804        —          867        —          (14     1,657   

Maintenance, materials and repairs

    —          346        —          168        80        (80     514   

Other rent and landing fees

    —          289        —          152        7        (7     441   

Aircraft rent

    —          214        —          102        22        (26     312   

Selling expenses

    —          282        —          120        —          —          402   

Depreciation and amortization

    —          220        —          100        10        (11     319   

Special items, net

    (2     179        —          74        —          —          251   

Other

    2        763        —          319        427        (444     1,067   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    —          6,435        —          3,555        741        (775     9,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    —          718        —          678        3        —          1,399   

Nonoperating income (expense):

             

Interest income

    2        6        1        3        —          (4     8   

Interest expense, net

    —          (139     (10     (69     —          4        (214

Equity in earnings of subsidiaries

    863        —          595        —          —          (1,458     —     

Other, net

    —          16        3        (6     1        (3     11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    865        (117     589        (72     1        (1,461     (195
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    865        601        589        606        4        (1,461     1,204   

Income tax provision (benefit)

    (3     336        —          1        6        —          340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 868      $ 265      $ 589      $ 605      $ (2   $ (1,461   $ 864   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


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 June 30, 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)

  $ 868      $ 265      $ 589      $ 605      $ (2   $ (1,461   $ 864   

Other comprehensive income (loss) before tax:

             

Defined benefit pension plans and retiree medical

    —          (58     —          (1     —          —          (59

Derivative financial instruments:

             

Change in fair value

    (2     15        —          —          —          —          13   

Reclassification into earnings

    —          5        —          —          —          —          5   

Unrealized gain (loss) on investments:

             

Net change in value

    2        (2     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

    —          (40     —          (1     —          —          (41

Reversal of non-cash tax provision

    2        328        —          —          —          —          330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 870      $ 553      $ 589      $ 604      $ (2   $ (1,461   $ 1,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

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

(Unaudited)

 

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)(Unaudited)

 

    Six Months Ended June 30, 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

  $ —        $ 10,258      $ —        $ 5,213      $ —        $ —        $ 15,471   

Regional passenger

    —          1,455        —          1,659        —          —          3,114   

Cargo

    —          346        —          82        —          —          428   

Other

    —          1,563        —          826        1,488        (1,539     2,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    —          13,622        —          7,780        1,488        (1,539     21,351   

Operating expenses:

             

Aircraft fuel and related taxes

    —          3,768        —          1,773        —          —          5,541   

Salaries, wages and benefits

    —          2,839        —          1,439        392        (388     4,282   

Regional expenses

    —          1,562        —          1,696        —          (7     3,251   

Maintenance, materials and repairs

    —          678        —          321        165        (165     999   

Other rent and landing fees

    —          574        —          292        15        (15     866   

Aircraft rent

    —          430        —          205        43        (47     631   

Selling expenses

    —          566        —          238        —          —          804   

Depreciation and amortization

    —          434        —          195        20        (23     626   

Special items, net

    22        (37     —          129        3        (3     114   

Other

    4        1,512        —          626        857        (891     2,108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26        12,326        —          6,914        1,495        (1,539     19,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (26     1,296        —          866        (7     —          2,129   

Nonoperating income (expense):

             

Interest income

    4        13        1        4        1        (8     15   

Interest expense, net

    (4     (307     (20     (134     —          8        (457

Equity in earnings of subsidiaries

    1,314        —          712        —          —          (2,026     —     

Other, net

    —          11        (53     (3     1        53        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

    1,314        (283     640        (133     2        (1,973     (433
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,288        1,013        640        733        (5     (1,973     1,696   

Income tax provision (benefit)

    (2     347        —          2        6        —          353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,290      $ 666      $ 640      $ 731      $ (11   $ (1,973   $ 1,343   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


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)

 

    Six Months Ended June 30, 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)

  $ 1,290      $ 666      $ 640      $ 731      $ (11   $ (1,973   $ 1,343   

Other comprehensive income (loss) before tax:

             

Defined benefit pension plans and retiree medical

    —          (102     —          (2     —          —          (104

Derivative financial instruments:

             

Change in fair value

    (2     (52     —          —          —          —          (54

Reclassification into earnings

    —          12        —          —          —          —          12   

Unrealized gain on investments:

             

Net change in value

    2        —          —          —          —          —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

    —          (142     —          (2     —          —          (144

Reversal of non-cash tax provision

    2        328        —          —          —          —          330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 1,292      $ 852      $ 640      $ 729      $ (11   $ (1,973   $ 1,529   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


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)

 

    June 30, 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      $ 789      $ 12      $ 144      $ 6      $ —        $ 952   

Short-term investments

    —          5,192        —          2,772        3        —          7,967   

Restricted cash and short-term investments

    —          641        —          106        —          —          747   

Accounts receivable, net

    —          1,535        —          352        18        (13     1,892   

Receivables from related parties, net

    1,623        —          —          742        138        (2,503     —     

Aircraft fuel, spare parts and supplies, net

    —          665        —          330        74        —          1,069   

Prepaid expenses and other

    100        717        —          621        44        —          1,482   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  1,724      9,539      12      5,067      283      (2,516   14,109   

Operating property and equipment

  —        18,165      —        6,848      275      —        25,288   

Other assets

Investments in subsidiaries

  3,363      —        7,590      —        —        (10,953   —     

Goodwill

  —        —        —        4,091      —        —        4,091   

Intangibles, net of accumulated amortization

  —        874      —        1,400      —        —        2,274   

Other assets

  28      1,822      —        251      40      (35   2,106   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

  3,391      2,696      7,590      5,742      40      (10,988   8,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 5,115    $ 30,400    $ 7,602    $ 17,657    $ 598    $ (13,504 $ 47,868   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities

Current maturities of long-term debt and capital leases

$ —      $ 1,172    $ —      $ 470    $ —      $ —      $ 1,642   

Accounts payable

  —        1,292      —        325      74      (8   1,683   

Payables to related parties, net

  —        1,868      504      —        131      (2,503   —     

Air traffic liability

  —        4,160      —        1,504      —        —        5,664   

Frequent flyer liability

  —        2,745      —        —        —        —        2,745   

Other accrued liabilities

  92      2,018      3      1,096      97      5      3,311   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

  92      13,255      507      3,395      302      (2,506   15,045   

Noncurrent liabilities

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

  1,257      10,595      525      4,810      —        (35   17,152   

Pension and postretirement benefits

  —        7,313      —        124      40      —        7,477   

Bankruptcy settlement obligations

  —        208      —        —        —        —        208   

Other liabilities

  130      2,912      —        1,802      49      (543   4,350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

  1,387      21,028      525      6,736      89      (578   29,187   

Stockholders’ equity (deficit)

Common stock

  7      —        —        —        —        —        7   

Additional paid-in capital

  14,319      10,761      4,752      5,591      199      (21,303   14,319   

Accumulated other comprehensive loss

  (4,620   (4,705   (17   (9   (12   4,743      (4,620

Retained earnings (deficit)

  (6,070   (9,939   1,835      1,944      20      6,140      (6,070
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

  3,636      (3,883   6,570      7,526      207      (10,420   3,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

$ 5,115    $ 30,400    $ 7,602    $ 17,657    $ 598    $ (13,504 $ 47,868   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


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)

 

    Six Months Ended June 30, 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 operating activities

  $ 526      $ 3,935      $ 10      $ 340      $ 30      $ —        $ 4,841   

Cash flows from investing activities:

             

Capital expenditures and aircraft purchase deposits

    —          (2,563     —          (541     (35     —          (3,139

Purchases of short-term investments

    —          (3,080     —          (2,013     —          —          (5,093

Sales of short-term investments

    —          1,178        —          2,258        —          —          3,436   

Decrease in restricted cash and short-term investments

    —          9        —          18        —          —          27   

Proceeds from sale of an investment

    52        —          —          —          —          —          52   

Proceeds from sale of property and equipment

    —          18        —          —          4        —          22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    52        (4,438     —          (278     (31     —          (4,695

Cash flows from financing activities:

             

Payments on long-term debt and capital leases

    —          (881     —          (226     —          —          (1,107

Proceeds from issuance of long-term debt

    500        1,420        —          76        —          —          1,996   

Deferred financing costs

    (7     (32     —          (1     —          —          (40

Treasury stock repurchases

    (931     —          —          —          —          —          (931

Dividend payment

    (140     —          —          —          —          —          (140

Other financing activities

    —          —          —          34        —          —          34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (578     507        —          (117     —          —          (188
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    —          4        10        (55     (1     —          (42

Cash at beginning of period

    1        785        2        199        7        —          994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

  $ 1      $ 789      $ 12      $ 144      $ 6      $ —        $ 952   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


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)

 

    Six Months Ended June 30, 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 operating activities

  $ —        $ 1,683      $ —        $ 931      $ 23      $ —        $ 2,637   

Cash flows from investing activities:

             

Capital expenditures and aircraft purchase deposits

    —          (1,828     —          (626     (26     (198     (2,678

Purchases of short-term investments

    —          (1,183     —          (678     —          —          (1,861

Sales of short-term investments

    —          1,523        —          200        —          —          1,723   

Decrease in restricted cash and short-term investments

    —          52        —          101        —          —          153   

Net proceeds from slot transaction

    —          299        —          8        —          —          307   

Funds transferred to affiliates

    —          (198     —          —          —          198        —     

Proceeds from sale of property and equipment

    —          7        —          —          2        —          9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          (1,328     —          (995     (24     —          (2,347

Cash flows from financing activities:

             

Payments on long-term debt and capital leases

    —          (655     —          (314     —          (176     (1,145

Proceeds from issuance of long-term debt

    —          53        —          481        —          —          534   

Deferred financing costs

    —          (5     —          (2     —          —          (7

Sale-leaseback transactions

    —          411        —          —          —          —          411   

Exercise of stock options

    —          —          —          9        —          —          9   

Treasury stock repurchases

    —          (7     —          (21     —          —          (28

Funds transferred to affiliates, net

    —          —          —          (176     —          176        —     

Other financing activities

    —          —          —          6        —          —          6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

    —          (203     —          (17     —          —          (220
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    —          152        —          (81     (1     —          70   

Cash at beginning of period

    1        829        1        303        6        —          1,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

  $ 1      $ 981      $ 1      $ 222      $ 5      $ —        $ 1,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

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

(Unaudited)

 

15. Subsequent Events

Share Repurchase Program and Dividend Declaration

In July 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.

Also in July 2015, the Company announced that its Board of Directors had declared a $0.10 per share dividend for shareholders of record on August 10, 2015, and payable on August 24, 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.

Distribution of AAG Common Stock

On July 14, 2015, approximately 0.6 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 0.1 million shares were withheld or sold on account of related tax obligations.

 

35


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 June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Operating revenues:

    

Mainline passenger

   $ 4,947      $ 5,352      $ 9,638      $ 10,258   

Regional passenger

     843        786        1,542        1,455   

Cargo

     161        178        322        346   

Other

     868        837        1,686        1,563   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     6,819        7,153        13,188        13,622   

Operating expenses:

        

Aircraft fuel and related taxes

     1,197        1,897        2,267        3,768   

Salaries, wages and benefits

     1,536        1,441        3,121        2,839   

Regional expenses

     788        804        1,516        1,562   

Maintenance, materials and repairs

     302        346        606        678   

Other rent and landing fees

     269        289        539        574   

Aircraft rent

     226        214        451        430   

Selling expenses

     198        282        433        566   

Depreciation and amortization

     247        220        483        434   

Special items, net

     74        179        272        (37

Other

     776        763        1,534        1,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,613        6,435        11,222        12,326   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,206        718        1,966        1,296   

Nonoperating income (expense):

        

Interest income

     10        6        16        13   

Interest expense, net of capitalized interest

     (137     (139     (263     (307

Other, net

     (16     16        (80     11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (143     (117     (327     (283
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,063        601        1,639        1,013   

Income tax provision

     11        336        19        347   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,052      $ 265      $ 1,620      $ 666   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Net income

   $ 1,052      $ 265      $ 1,620      $ 666   

Other comprehensive income (loss), before tax:

        

Defined benefit pension plans and retiree medical

     (25     (58     (51     (102

Derivative financial instruments:

        

Change in fair value

     —          15        —          (52

Reclassification into earnings

     (3     5        (9     12   

Unrealized gain (loss) on investments:

        

Net change in value

     (1     (2     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before tax

     (29     (40     (60     (142

Reversal of non-cash tax provision

     —          328        —          328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,023      $ 553      $ 1,560      $ 852   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     June 30, 2015     December 31, 2014  
     (Unaudited)        

ASSETS

    

Current assets

    

Cash

   $ 789      $ 785   

Short-term investments

     5,192        3,290   

Restricted cash and short-term investments

     641        650   

Accounts receivable, net

     1,535        1,445   

Aircraft fuel, spare parts and supplies, net

     665        625   

Prepaid expenses and other

     717        462   
  

 

 

   

 

 

 

Total current assets

     9,539        7,257   

Operating property and equipment

    

Flight equipment

     23,688        21,646   

Ground property and equipment

     5,426        5,217   

Equipment purchase deposits

     1,102        1,128   
  

 

 

   

 

 

 

Total property and equipment, at cost

     30,216        27,991   

Less accumulated depreciation and amortization

     (12,051     (11,692
  

 

 

   

 

 

 

Total property and equipment, net

     18,165        16,299   

Other assets

    

Intangibles, net of accumulated amortization of $382 and $376, respectively

     874        815   

Other assets

     1,822        1,921   
  

 

 

   

 

 

 

Total other assets

     2,696        2,736   
  

 

 

   

 

 

 

Total assets

   $ 30,400      $ 26,292   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,172      $ 1,230   

Accounts payable

     1,292        1,029   

Accrued salaries and wages

     639        650   

Air traffic liability

     4,160        2,989   

Frequent flyer liability

     2,745        1,823   

Payable to affiliates

     1,868        2,563   

Other accrued liabilities

     1,379        1,236   
  

 

 

   

 

 

 

Total current liabilities

     13,255        11,520   

Noncurrent liabilities

    

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

     10,595        10,004   

Pension and postretirement benefits

     7,313        7,400   

Deferred gains and credits, net

     270        271   

Bankruptcy settlement obligations

     208        325   

Other liabilities

     2,642        2,344   
  

 

 

   

 

 

 

Total noncurrent liabilities

     21,028        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

     10,761        10,632   

Accumulated other comprehensive loss

     (4,705     (4,645

Accumulated deficit

     (9,939     (11,559
  

 

 

   

 

 

 

Total stockholder’s deficit

     (3,883     (5,572
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 30,400      $ 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)

 

     Six Months Ended June 30,  
     2015     2014  

Net cash provided by operating activities

   $ 3,935      $ 1,683   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (2,563     (1,828

Purchases of short-term investments

     (3,080     (1,183

Sales of short-term investments

     1,178        1,523   

Decrease in restricted cash and short-term investments

     9        52   

Net proceeds from slot transaction

     —          299   

Funds transferred to affiliates, net

     —          (198

Proceeds from sale of property and equipment

     18        7   
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,438     (1,328

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (881     (655

Proceeds from issuance of long-term debt

     1,420        53   

Deferred financing costs

     (32     (5

Sale-leaseback transactions

     —          411   

Treasury stock repurchases

     —          (7
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     507        (203
  

 

 

   

 

 

 

Net increase in cash

     4        152   

Cash at beginning of period

     785        829   
  

 

 

   

 

 

 

Cash at end of period

   $ 789      $ 981   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 35      $ 4,998   

Capital lease obligations

     —          361   

Supplemental information:

    

Interest paid, net of amounts capitalized

     294        226   

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, 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 flyer program, pensions, 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 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. On July 9, 2015, the FASB deferred the effective date of this new standard to December 15, 2017 for public entities. Early application is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. 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 to 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 $2.5 billion and the Allowed Single-Dip General Unsecured Claims (as defined in the Plan) were approximately $2.5 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 June 30, 2015, there were approximately 26.0 million shares of AAG Common Stock remaining in the Disputed Claims Reserve. On July 14, 2015, approximately 0.6 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 0.1 million shares of AAG Common Stock for an aggregate of $2 million from the Disputed Claims Reserve at the then-prevailing market price in order to fund cash tax obligations resulting from this distribution. 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 is expected to take considerable time. 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 June 30, 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):

 

     June 30, 2015      December 31, 2014  

Single-Dip and Double-Dip Equity Obligations

   $ 159       $ 248   

Labor-related deemed claim

     49         77   
  

 

 

    

 

 

 

Total

   $ 208       $ 325   
  

 

 

    

 

 

 

The amount of the remaining Single-Dip Equity Obligations at June 30, 2015 is American’s estimate of its obligation for disputed claims of $159 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 June 30, 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 June 30, 2015, the remaining liability to certain AMR labor groups and employees of $49 million represents the estimated fair value of the remaining shares expected to be issued in satisfaction of such obligation, measured as if the obligation was settled using the closing price of AAG Common Stock at June 30, 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.

On February 10, 2015 and July 14, 2015, approximately 0.8 million and 0.6 million shares, respectively, 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 0.1 million 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 June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Mainline operating special items, net (a)

   $ 74       $ 179       $ 272       $ (37

 

(a) 

The 2015 second quarter mainline operating special items totaled a net charge of $74 million, which principally included $137 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. These charges were offset in part by a net $68 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. The 2015 six month period mainline operating special items totaled a net charge of $272 million, which principally included $285 million of merger integration expenses as described above and a net $64 million charge related to American’s new pilot joint collective bargaining agreement. These charges were offset in part by a net $73 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations.

The 2014 second quarter mainline operating special items totaled a net charge of $179 million, which principally included $99 million of merger integration expenses related to information technology, professional fees, severance, share-based compensation,

 

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

(Unaudited)

 

re-branding of aircraft and airport facilities, relocation and training as well as a net $40 million charge for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations and $26 million in charges related to the buyout of leases associated with certain aircraft. The 2014 six month period mainline operating special items totaled a net credit of $37 million, which principally included a $305 million gain on the sale of Slots at Ronald Reagan Washington National Airport and a net $16 million credit for bankruptcy related items as described above. These special credits were offset in part by $234 million of merger integration expenses as described above as well as $29 million in charges primarily related to the buyout of leases associated with certain aircraft.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Regional operating special items, net (a)

   $ 1       $ 1       $ 4       $ 2   

Nonoperating special items, net (b)

     11         (4      3         40   

Income tax special items, net (c)

     7         335         15         342   

 

(a) 

The 2015 and 2014 second quarter and six month period regional operating special items principally related to merger integration expenses.

(b) 

The 2015 second quarter nonoperating special items totaled a net charge of $11 million and primarily included non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities. The 2015 six month period nonoperating special items totaled a net charge of $3 million and principally included $20 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with the debt refinancing as described above and the prepayment of certain aircraft financings, offset in part by a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

The 2014 six month period nonoperating special charges of $40 million were primarily due to non-cash interest accretion on bankruptcy settlement obligations.

 

(c) 

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

During the 2014 second quarter, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in other comprehensive income (OCI), a subset of stockholder’s equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American’s fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated. In addition, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter. The 2014 six month period included the $328 million non-cash tax provision related to the settlement of fuel hedges discussed above as well as a special $14 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

 

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

(Unaudited)

 

5. Debt

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

 

     June 30, 2015      December 31, 2014  

Secured

     

2013 Credit Facilities, variable interest rate of 3.25%, installments through 2020

   $ 1,867       $ 1,872   

2014 Credit Facilities, variable interest rate of 3.50%, 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

     5,155         4,271   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.50% to 8.10%, maturing from 2015 to 2027

     1,964         1,860   

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.50%, maturing from 2016 to 2035

     1,082         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

     951         992   
  

 

 

    

 

 

 
  11,769      11,249   
  

 

 

    

 

 

 

Unsecured

Affiliate unsecured obligations

  27      27   
  

 

 

    

 

 

 
  27      27   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

  11,796      11,276   

Less: Total unamortized debt discount

  29      42   

Less: Current maturities

  1,172      1,230   
  

 

 

    

 

 

 

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

$ 10,595    $ 10,004   
  

 

 

    

 

 

 

2013 Credit Facilities

On May 21, 2015, American refinanced its $1.9 billion term loan facility (the $1.9 billion 2015 Term Loan Facility and, together with a $1.4 billion revolving credit facility, the 2013 Credit Facilities) to extend the maturity date to June 29, 2020 and reduce the LIBOR margin from 3.00% to 2.75%. In addition, American entered into certain amendments to reflect the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $1.9 billion 2015 Term Loan Facility may vary based on American’s credit ratings, and on June 30, 2015 the LIBOR margin was further reduced to 2.50% due to an improvement in American’s credit ratings.

2014 Credit Facilities

On April 20, 2015, American refinanced its $750 million term loan facility (the $750 million 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, as well as the ability for American to make future modifications to the collateral pledged, subject to certain restrictions. The LIBOR margin under the $750 million 2015 Term Loan Facility may vary based on American’s credit ratings, and on June 30, 2015 the LIBOR margin was further reduced to 2.75% due to an improvement in American’s credit ratings.

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 June 30, 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 semi-annually 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.

 

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AAdvantage Loan

Effective January 2, 2015, American exercised its loan repayment right with respect to the full value of the outstanding balance of the AAdvantage Loan with 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.

Obligations Associated with Special Facility Revenue Bonds

In December 2014, American acquired approximately $112 million aggregate principal amount of special facility revenue bonds related to the Tulsa International Airport, when such bonds were mandatorily tendered to American. The acquisition of these bonds resulted in an $11 million reduction of debt on American’s consolidated balance sheet and a $50 million reduction of a long-term operating lease obligation included in other long-term liabilities on American’s consolidated balance sheet as of December 31, 2014. American exercised its option to remarket approximately $104 million of these bonds in May 2015. The remarketed bonds will initially bear a coupon interest rate of 5% from the date of initial issuance and delivery of the bonds on May 27, 2015, until the day preceding June 1, 2025, on which date the bonds will be subject to mandatory tender. In connection with the remarketing of these special facility revenue bonds, American received cash proceeds of $112 million and recognized a total obligation of $62 million. Of that total obligation, $11 million is reflected as a capital lease and $51 million is reflected in other long-term liabilities on American’s condensed consolidated balance sheet as of June 30, 2015.

In June 2015, American exercised its right to adjust the interest rate on approximately $365 million aggregate principal amount of special facility revenue bonds, reflected as debt on its condensed consolidated balance sheet related to the John F. Kennedy International Airport. In connection with the adjustment to a new interest rate, the bonds are required to be purchased by American on August 3, 2015. American is in the process of remarketing the bonds at the new interest rate. The remarketed bonds are expected to be subject to mandatory tender for purchase by American on August 1, 2016. As a result, American reclassified $365 million to current maturities of long-term debt on its condensed consolidated balance sheet as of June 30, 2015.

Other Aircraft Financing Transactions

In the first six months of 2015, American prepaid $72 million principal amount of outstanding debt secured by certain aircraft.

In the first six months of 2015, American entered into loan agreements to borrow $389 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.

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 Alternative Minimum Tax (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

 

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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 June 30, 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 and six months ended June 30, 2015, American recorded a special $7 million and $15 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the three and six months ended June 30, 2015, American recorded $4 million and $4 million, respectively, of state and international income tax expense related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

During the second quarter of 2014, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the statement of operations for the second quarter of 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholder’s equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American’s fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated. In addition, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter. The 2014 six month period included the $328 million non-cash tax provision related to the settlement of fuel hedges discussed above as well as a special $14 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets.

For the three and six months ended June 30, 2014, American recorded $1 million and $5 million, respectively, of state and international income tax expense related to certain states and other jurisdictions where NOLs were limited or unavailable to be used.

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 six months ended June 30, 2015.

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

 

     Fair Value Measurements as of June 30, 2015  
     Total      Level 1      Level 2      Level 3  

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

           

Money market funds

   $ 207       $ 207       $ —         $ —     

Repurchase agreements

     43         —           43         —     

Corporate obligations

     2,778         —           2,778         —     

Bank notes / certificates of deposit / time deposits

     2,164         —           2,164         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  5,192      207      4,985      —     

Restricted cash and short-term investments (1)

  641      641      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 5,833    $ 848    $ 4,985    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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) 

All short-term investments are classified as available-for-sale and stated at fair value. In addition, all short-term investments mature in one year or less except for $424 million of corporate obligations and $1.3 billion of bank notes/certificates of deposit/time deposits.

There were no Level 1 to Level 2 transfers during the six months ended June 30, 2015.

Venezuela Cash and Short-term Investments

As of June 30, 2015, American had approximately $629 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 $8 million valued at 12.8 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.

 

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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 recent 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.

The carrying value and estimated fair value of American’s long-t