10-Q 1 d247546d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

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

For the Quarterly Period Ended September 30, 2016

 

¨

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 October 14, 2016, there were 518,125,156 shares of American Airlines Group Inc. common stock outstanding.

As of October 14, 2016, 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 September 30, 2016

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.

     20   
  

Condensed Consolidated Statements of Operations

     20   
  

Condensed Consolidated Statements of Comprehensive Income

     21   
  

Condensed Consolidated Balance Sheets

     22   
  

Condensed Consolidated Statements of Cash Flows

     23   
  

Notes to the Condensed Consolidated Financial Statements

     24   

Item 2.

  

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

     34   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 4.

  

Controls and Procedures

     56   

PART II: OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     58   

Item 1A.

  

Risk Factors

     59   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     77   

Item 6.

  

Exhibits

     77   

SIGNATURES

     78   

 

2


Table of Contents

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” and similar terms refer to AAG and its consolidated subsidiaries. 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). On December 30, 2015, in order to simplify AAG’s internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, AAG caused US Airways Group to be merged with and into AAG, with AAG as the surviving corporation, and, immediately thereafter, US Airways, Inc. (US Airways), a subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and is reflected in this Quarterly Report on Form 10-Q as though the transaction had occurred on December 9, 2013, the effective date of the Merger, which represents the earliest date that American and US Airways were under common control. Thus, information in this Quarterly Report on Form 10-Q regarding American’s condensed consolidated results of operations is comprised of the results of US Airways and American for all periods presented. “AMR” or “AMR Corporation” refers to AAG during the period of time prior to its acquisition of US Airways Group. References to “US Airways Group” and “US Airways” represent the entities during the period of time prior to December 30, 2015. References in this Quarterly Report on Form 10-Q to “mainline” refer to the operations of American, 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; costs of ongoing data security compliance requirements and the impact of any significant data security breach; 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 postretirement 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; 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 and noise regulation; the impact associated with climate change, including increased regulation to reduce emissions of greenhouse gases; 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

 

3


Table of Contents

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, more stringent duty time regulations, increased flight hour requirements for commercial airline pilots and other factors that have caused a shortage of pilots; the impact of possible future increases in insurance costs or reductions in available insurance coverage; the effect on our financial position and liquidity of being party to or involved in litigation; an inability to use net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards); any impairment in the amount of our goodwill and an inability to realize the full value of our 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 programs 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 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; and 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.

 

4


Table of Contents

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.

 

5


Table of Contents
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 September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Operating revenues:

    

Mainline passenger

   $ 7,419      $ 7,654      $ 21,192      $ 22,298   

Regional passenger

     1,731        1,699        5,040        4,910   

Cargo

     171        180        506        568   

Other

     1,273        1,173        3,653        3,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     10,594        10,706        30,391        31,360   

Operating expenses:

        

Aircraft fuel and related taxes

     1,393        1,593        3,736        4,912   

Salaries, wages and benefits

     2,772        2,404        8,094        7,141   

Regional expenses

     1,538        1,518        4,488        4,536   

Maintenance, materials and repairs

     481        456        1,352        1,452   

Other rent and landing fees

     463        432        1,342        1,290   

Aircraft rent

     299        308        908        941   

Selling expenses

     347        366        990        1,051   

Depreciation and amortization

     399        336        1,128        1,013   

Special items, net

     289        163        450        610   

Other

     1,182        1,131        3,386        3,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,163        8,707        25,874        26,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,431        1,999        4,517        5,136   

Nonoperating income (expense):

        

Interest income

     16        10        45        29   

Interest expense, net of capitalized interest

     (250     (219     (738     (651

Other, net

     (8     (81     (25     (143
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (242     (290     (718     (765
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,189        1,709        3,799        4,371   

Income tax provision

     452        16        1,412        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 737      $ 1,693      $ 2,387      $ 4,329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic

   $ 1.40      $ 2.56      $ 4.23      $ 6.34   

Diluted

   $ 1.40      $ 2.49      $ 4.20      $ 6.17   

Weighted average shares outstanding (in thousands):

        

Basic

     525,415        661,869        564,886        682,337   

Diluted

     528,510        680,739        568,679        701,760   

Cash dividends declared per common share

   $ 0.10      $ 0.10      $ 0.30      $ 0.30   

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Net income

   $ 737      $ 1,693      $ 2,387      $ 4,329   

Other comprehensive income (loss), net of tax:

        

Pension, retiree medical and other postretirement benefits

     (17     (26     (52     (79

Derivative financial instruments:

        

Reclassification into earnings

     —          —          —          (9

Unrealized gain (loss) on investments:

        

Net change in value

     2        (4     6        (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (15     (30     (46     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 722      $ 1,663      $ 2,341      $ 4,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     September 30, 2016     December 31, 2015  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 381      $ 390   

Short-term investments

     6,374        5,864   

Restricted cash and short-term investments

     635        695   

Accounts receivable, net

     1,703        1,425   

Aircraft fuel, spare parts and supplies, net

     1,100        863   

Prepaid expenses and other

     855        748   
  

 

 

   

 

 

 

Total current assets

     11,048        9,985   

Operating property and equipment

    

Flight equipment

     36,259        33,185   

Ground property and equipment

     6,915        6,402   

Equipment purchase deposits

     1,149        1,067   
  

 

 

   

 

 

 

Total property and equipment, at cost

     44,323        40,654   

Less accumulated depreciation and amortization

     (14,019     (13,144
  

 

 

   

 

 

 

Total property and equipment, net

     30,304        27,510   

Other assets

    

Goodwill

     4,091        4,091   

Intangibles, net of accumulated amortization of $562 and $502, respectively

     2,189        2,249   

Deferred tax asset

     1,524        2,477   

Other assets

     1,952        2,103   
  

 

 

   

 

 

 

Total other assets

     9,756        10,920   
  

 

 

   

 

 

 

Total assets

   $ 51,108      $ 48,415   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,798      $ 2,231   

Accounts payable

     1,673        1,563   

Accrued salaries and wages

     1,365        1,205   

Air traffic liability

     4,513        3,747   

Loyalty program liability

     2,950        2,525   

Other accrued liabilities

     2,234        2,334   
  

 

 

   

 

 

 

Total current liabilities

     14,533        13,605   

Noncurrent liabilities

    

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

     21,545        18,330   

Pension and postretirement benefits

     7,387        7,450   

Deferred gains and credits, net

     554        667   

Other liabilities

     2,698        2,728   
  

 

 

   

 

 

 

Total noncurrent liabilities

     32,184        29,175   

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, $0.01 par value; 1,750,000,000 shares authorized, 519,161,253 shares issued and outstanding at September 30, 2016; 624,622,381 shares issued and outstanding at December 31, 2015

     5        6   

Additional paid-in capital

     7,761        11,591   

Accumulated other comprehensive loss

     (4,778     (4,732

Retained earnings (deficit)

     1,403        (1,230
  

 

 

   

 

 

 

Total stockholders’ equity

     4,391        5,635   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 51,108      $ 48,415   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Nine Months Ended September 30,  
     2016     2015  

Net cash provided by operating activities

   $ 5,897      $ 6,021   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (4,271     (4,621

Purchases of short-term investments

     (5,078     (7,717

Sales of short-term investments

     4,587        6,167   

Decrease in restricted cash and short-term investments

     60        64   

Proceeds from sale of an investment

     —          52   

Proceeds from sale of property and equipment

     58        23   

Other investing activities

     2        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,642     (6,032

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (2,534     (1,821

Proceeds from issuance of long-term debt

     5,392        4,463   

Deferred financing costs

     (39     (69

Sale-leaseback transactions

     —          43   

Treasury stock repurchases

     (3,931     (2,411

Dividend payments

     (172     (206

Other financing activities

     20        34   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (1,264     33   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     (9     22   

Cash at beginning of period

     390        994   
  

 

 

   

 

 

 

Cash at end of period

   $ 381      $ 1,016   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 3      $ 60   

Capital lease obligations

     —          5   

Supplemental information:

    

Interest paid, net of amounts capitalized

     714        648   

Income taxes paid

     10        22   

See accompanying notes to condensed consolidated financial statements.

 

9


Table of Contents

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. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.

On December 9, 2013 (the Effective Date), AMR Merger Sub, Inc. merged with and into US Airways Group, Inc. (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 or AMR) following the Merger.

On December 30, 2015, in order to simplify our internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, AAG caused US Airways Group to be merged with and into AAG, with AAG as the surviving corporation, and, immediately thereafter, US Airways, Inc. (US Airways), a Delaware corporation and wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation. As a result of the merger of US Airways and American, US Airways transferred all of its assets, liabilities and off-balance sheet commitments to American. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, as well as pensions, retiree medical and other postretirement benefits.

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). Subsequently, the FASB has issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transition. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. We are currently evaluating the requirements of these standards and have not yet determined the impact on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the requirements of ASU 2016-02 and have not yet determined its impact on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation of excess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We early adopted this standard during the second quarter of 2016. The adoption of this standard resulted in the recognition of $418 million of previously unrecognized excess tax benefits in deferred tax assets and an increase to retained earnings on the condensed consolidated balance sheet as of the beginning of the current year, and the recognition of $9 million of excess tax benefits to the income tax provision for the nine months ended September 30, 2016.

 

10


Table of Contents

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

(Unaudited)

 

2. Special Items

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
             2016                      2015                      2016                      2015          

Mainline operating special items, net (1)

   $ 289       $ 163       $ 450       $ 610   

 

(1)

The 2016 third quarter mainline operating special items totaled a net charge of $289 million, which principally included $225 million of merger integration expenses and a $39 million net charge for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 nine month period mainline operating special items totaled a net charge of $450 million, which principally included $467 million of merger integration expenses, offset in part by a $22 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 third quarter and nine month periods, merger integration expenses included costs related to re-branding of aircraft, airport facilities and uniforms, information technology, alignment of labor union contracts, fleet restructuring, professional fees, relocation and training, as well as severance.

The 2015 third quarter mainline operating special items totaled a net charge of $163 million, which principally included $198 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $66 million credit related to proceeds received from a legal settlement. The 2015 nine month period mainline operating special items totaled a net charge of $610 million, which principally included $741 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $75 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations and a $66 million credit related to proceeds received from a legal settlement. For the 2015 third quarter and nine month periods, merger integration expenses included costs related to information technology, fleet restructuring, alignment of labor union contracts, professional fees, severance, relocation and training, re-branding of aircraft, airport facilities and uniforms, as well as share-based compensation.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Regional operating special items, net

   $ 5       $ 2       $ 13       $ 20   

Nonoperating special items, net (1)

     —           21         36         2   

Income tax special items, net

     —           6         —           22   

 

(1)

In connection with a bond refinancing, we recorded a $36 million nonoperating special charge in the 2016 nine month period related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

The 2015 third quarter nonoperating special items totaled a net charge of $21 million, which was primarily due to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The 2015 nine month period nonoperating special items totaled a net charge of $2 million, which principally included $40 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $22 million gain associated with the sale of an investment and a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

 

11


Table of Contents

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

(Unaudited)

 

3. Earnings Per Common Share

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Basic EPS:

           

Net income

   $ 737       $ 1,693       $ 2,387       $ 4,329   

Weighted-average common shares outstanding (in thousands)

     525,415         661,869         564,886         682,337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 1.40       $ 2.56       $ 4.23       $ 6.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS:

           

Net income for purposes of computing diluted EPS

   $ 737       $ 1,693       $ 2,387       $ 4,329   

Share computation for diluted EPS (in thousands):

           

Basic weighted average common shares outstanding

     525,415         661,869         564,886         682,337   

Dilutive effect of stock awards

     3,095         18,870         3,793         19,423   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     528,510         680,739         568,679         701,760   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 1.40       $ 2.49       $ 4.20       $ 6.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Stock options, stock appreciation rights and restricted stock unit awards because inclusion would be antidilutive

     1,623         1,094         1,771         667   

4. Share Repurchase Programs and Dividends

Since July 2014, our Board of Directors has approved several share repurchase programs aggregating $9.0 billion of authority of which, as of September 30, 2016, $555 million remained unused under repurchase programs that expire on December 31, 2017. Share repurchases under our share repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.

During the three months ended September 30, 2016, we repurchased 18.2 million shares of AAG common stock for $616 million at a weighted average cost per share of $33.87. During the nine months ended September 30, 2016, we repurchased 107.7 million shares of AAG common stock for $3.9 billion at a weighted average cost per share of $35.87. Since the inception of the share repurchase programs in July 2014, we have repurchased 216.2 million shares of AAG common stock for $8.4 billion at a weighted average cost per share of $39.06.

Our Board of Directors declared the following cash dividends during the first nine months of 2016:

 

Period

   Per share      For stockholders
of record as of
     Payable on      Cash paid
(millions)
 

First Quarter

   $ 0.10         February 10, 2016         February 24, 2016       $ 61   

Second Quarter

   $ 0.10         May 4, 2016         May 18, 2016         58   

Third Quarter

   $ 0.10         August 5, 2016         August 19, 2016         53   
           

 

 

 

Total

            $ 172   
           

 

 

 

Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

 

12


Table of Contents

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

(Unaudited)

 

5. Debt

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

 

     September 30, 2016      December 31, 2015  

Secured

     

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

   $ 1,843       $ 1,867   

2014 Credit Facilities, variable interest rate of 3.25%, installments through 2021

     743         743   

2016 Credit Facilities, variable interest rate of 3.50%, installments through 2023

     1,000         —     

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

     970         980   

2013 Citicorp Credit Facility tranche B-2

     —           588   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.20% to 9.75%, maturing from 2017 to 2028

     10,358         8,693   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.92% to 8.48%, maturing from 2016 to 2028

     5,136         4,183   

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2017 to 2035

     891         1,080   

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2016 to 2028

     865         923   
  

 

 

    

 

 

 
     21,806         19,057   
  

 

 

    

 

 

 

Unsecured

     

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

     750         750   

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

     500         500   

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

     500         500   
  

 

 

    

 

 

 
     1,750         1,750   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     23,556         20,807   

Less: Total unamortized debt discount and debt issuance costs

     213         246   

Less: Current maturities

     1,798         2,231   
  

 

 

    

 

 

 

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

   $ 21,545       $ 18,330   
  

 

 

    

 

 

 

The table below shows availability under revolving credit facilities, all of which were undrawn, as of September 30, 2016 (in millions):

 

2013 Revolving Facility

   $ 1,400   

2014 Revolving Facility

     1,025   
  

 

 

 

Total

   $ 2,425   
  

 

 

 

2016 Aircraft Financing Activities

2016-1 EETCs

In January 2016, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2016-1 Class AA, Class A and Class B EETCs (the 2016-1 EETCs) in connection with the financing of 22 aircraft owned by American (the 2016-1 EETC Aircraft).

All of the proceeds received from the sale of the 2016-1 EETCs have been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the principal amount of $584 million bearing interest at 3.575% per annum, Series A equipment notes in the principal amount of $262 million bearing interest at 4.10% per annum and Series B equipment notes in the principal amount of $228 million bearing interest at 5.25% per annum. Interest and principal payments on the equipment notes are payable semi-annually in January and July of each year, beginning in July 2016. The final payments on the Series AA and Series A equipment notes are due in January 2028 and the final payment on the Series B equipment notes is due in January 2024. These equipment notes are secured by liens on the 2016-1 EETC Aircraft.

2016-2 EETCs

In May and July 2016, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2016-2 Class AA, Class A and Class B EETCs (the 2016-2 EETCs) in connection with the financing of 22 aircraft owned by American (the 2016-2 EETC Aircraft).

All of the proceeds received from the sale of the 2016-2 EETCs have been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the principal amount of $567 million bearing interest at 3.20% per annum, Series A

 

13


Table of Contents

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

(Unaudited)

 

equipment notes in the principal amount of $261 million bearing interest at 3.65% per annum and Series B equipment notes in the principal amount of $227 million bearing interest at 4.375% per annum. Interest and principal payments on the equipment notes are payable semi-annually in June and December of each year, with interest payments beginning in December 2016 and principal payments beginning in June 2017. The final payments on the Series AA and Series A equipment notes are due in June 2028 and the final payments on the Series B equipment notes are due in June 2024. These equipment notes are secured by liens on the 2016-2 EETC Aircraft.

Other Aircraft Financing Transactions

In the first nine months of 2016, American entered into loan agreements to borrow $1.4 billion in connection with the financing of certain aircraft. Debt incurred under these loan agreements matures in 2026 through 2028 and bears interest at a rate of LIBOR plus an applicable margin.

2016 Other Financing Activities

2016 Credit Facilities

On April 29, 2016, American and AAG entered into a Credit and Guaranty Agreement (the 2016 Credit Agreement), among American, as the borrower, AAG as parent and guarantor, Barclays Bank PLC, as administrative agent and collateral agent and certain lenders. The 2016 Credit Agreement provides for a $1.0 billion term loan facility (the 2016 Term Loan Facility) with a maturity date of April 28, 2023 and a revolving credit facility that may be established in the future (the 2016 Revolving Credit Facility, and together with the 2016 Term Loan Facility, the 2016 Credit Facilities). As of September 30, 2016, the aggregate outstanding principal amount under the 2016 Term Loan Facility was $1.0 billion.

The proceeds from the 2016 Term Loan Facility were used to repay approximately $588 million in remaining principal plus accrued and unpaid interest of the 2013 Citicorp Credit Facility Tranche B-2 with the remainder of the proceeds to be used for general corporate purposes.

The 2016 Term Loan Facility is repayable in annual installments in an amount equal to 1.00% of the original principal balance with any unpaid balance due on the maturity date of the 2016 Term Loan Facility. Voluntary prepayments may be made by American at any time, with a premium of 1.0% applicable to certain prepayments made prior to the date that is six months following April 29, 2016.

Loans under the 2016 Term Loan Facility bear interest at a base rate plus an applicable base rate margin or, at American’s option, LIBOR (subject to a floor of 0.75%) plus an applicable LIBOR margin. The applicable base rate margin is 1.75% and the applicable LIBOR margin is 2.75% for loans under the 2016 Term Loan Facility.

The obligations of American under the 2016 Credit Agreement are secured by liens on substantially all aircraft spare parts owned by American. American has the ability to add or release certain types of collateral, subject to certain conditions, at its discretion. The obligations of American under the 2016 Credit Facilities are guaranteed by AAG. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2016 Credit Facilities.

The 2016 Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the 2016 Credit Facilities may be accelerated and become due and payable immediately. In addition, if a “change of control” (as defined in the 2016 Credit Agreement) occurs with respect to AAG, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the 2016 Credit Facilities and terminate the 2016 Revolving Facility. The 2016 Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the 2016 Credit Facilities) of not less than $2.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

Obligations Associated with Special Facility Revenue Bonds

In June 2016, the New York Transportation Development Corporation (NYTDC) issued approximately $844 million of special facility revenue refunding bonds (the 2016 JFK Bonds) on behalf of American. The net proceeds from the 2016 JFK Bonds generally were used to provide a portion of the funds to refinance $1.0 billion of special facility revenue bonds (Prior JFK Bonds), the net proceeds of which partially financed the construction of a terminal used by American at John F. Kennedy International Airport (JFK) (the Terminal).

 

14


Table of Contents

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

(Unaudited)

 

American is required to pay debt service on the 2016 JFK Bonds through payments under a loan agreement with NYTDC, and American and AAG guarantee the 2016 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.

The 2016 JFK Bonds, in aggregate, were priced at approximately 107% of par value. The gross proceeds from the issuance of the 2016 JFK Bonds were approximately $907 million. Of this amount, approximately $895 million was used to partially fund the redemption of the Prior JFK Bonds. The 2016 JFK Bonds bear interest at 5.0% per annum and are comprised of $212 million of serial bonds, portions of which mature annually from August 1, 2017 to August 1, 2021, and $632 million of term bonds, $278 million of which matures on August 1, 2026 and $354 million of which matures on August 1, 2031. In connection with the refinancing of the Prior JFK Bonds, American recorded a special nonoperating charge of $36 million consisting of non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

2014 Credit Facilities

On September 22, 2016, American and AAG amended the Amended and Restated Credit and Guaranty Agreement dated April 20, 2015 (which amended and restated the Credit and Guaranty Agreement dated October 10, 2014), pursuant to which it refinanced the $750 million term loan facility due October 2021 established thereunder (the 2014 Term Loan Facility and, together with the $1.025 billion revolving credit facility established under such agreement, the 2014 Credit Facilities) to reduce the LIBOR margin from 2.75% to 2.50% and the base rate margin from 1.75% to 1.50%. The $1.025 billion revolving credit facility under the 2014 Credit Facilities (the 2014 Revolving Facility) remains unchanged. As of September 30, 2016, $743 million of principal was outstanding under the 2014 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.

6. Income Taxes

At December 31, 2015, we had approximately $8.0 billion of gross net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $4.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused.

At December 31, 2015, we had an Alternative Minimum Tax credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of our financial statements for the fourth quarter of 2015, we determined that it was more likely than not that substantially all of our deferred tax assets, which include our NOLs, would be realized. Accordingly, we reversed $3.0 billion of the valuation allowance as of December 31, 2015.

In the first nine months of 2016, we recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as we utilized the NOLs described above. For purposes of taxation, substantially all of our income before income taxes is attributable to the United States.

Following the filing of our 2015 annual tax return in the third quarter of 2016, federal NOLs, substantially all of which are expected to be available to reduce future federal taxable income in 2016 and future years, increased by $2.5 billion. The increase in the federal NOLs is attributable to the election to take bonus depreciation on eligible assets (primarily aircraft) in the 2015 federal income tax return.

7. Fair Value Measurements

Assets Measured at Fair Value on a Recurring Basis

We utilize the market approach to measure fair value for our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2016.

 

15


Table of Contents

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

(Unaudited)

 

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

 

     Fair Value Measurements as of September 30, 2016  
     Total      Level 1      Level 2      Level 3  

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

           

Money market funds

   $ 378       $ 378       $ —         $ —     

Corporate obligations

     2,694         —           2,694         —     

Bank notes/certificates of deposit/time deposits

     3,052         —           3,052         —     

Repurchase agreements

     250         —           250         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,374         378         5,996         —     

Restricted cash and short-term investments (1)

     635         635         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,009       $ 1,013       $ 5,996       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. Our short-term investments mature in one year or less except for $100 million of bank notes/certificates of deposit/time deposits and $230 million of corporate obligations.

There were no Level 1 to Level 2 transfers during the nine months ended September 30, 2016.

Fair Value of Debt

The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.

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

 

     September 30, 2016      December 31, 2015  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 23,343       $ 24,486       $ 20,561       $ 21,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and Short-term Investments

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our cash and short-term investments located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.

8. Retirement Benefits

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

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Three Months Ended September 30,

   2016     2015     2016     2015  

Service cost

   $ 1      $ 1      $ 1      $ 1   

Interest cost

     187        184        12        13   

Expected return on assets

     (188     (213     (5     (5

Settlements

     —          —          —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     7        7        (60     (60

Unrecognized net loss (gain)

     32        28        (4     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 39      $ 7      $ (56   $ (53
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each of the 2016 and 2015 third quarters’ prior service cost does not include amortization of $1 million related to other postretirement benefits.

 

16


Table of Contents

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

(Unaudited)

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Nine Months Ended September 30,

   2016     2015     2016     2015  

Service cost

   $ 2      $ 2      $ 2      $ 3   

Interest cost

     562        552        36        38   

Expected return on assets

     (562     (639     (15     (15

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     21        21        (180     (182

Unrecognized net loss (gain)

     95        84        (12     (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 118      $ 21      $ (169   $ (161
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The 2016 and 2015 nine months’ prior service cost does not include amortization of $1 million and $2 million, respectively, related to other postretirement benefits.

Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen.

9. Accumulated Other Comprehensive Income (Loss)

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

 

     Pension, Retiree
Medical and
Other
Postretirement

Benefits
    Unrealized
Gain (Loss) on

Investments
    Income Tax
Benefit

(Provision)
    Total  

Balance at December 31, 2015

   $ (3,842   $ (10   $ (880 )(1)    $ (4,732

Other comprehensive income (loss) before reclassifications

     (7     9        —          2   

Amounts reclassified from accumulated other comprehensive income (loss)

     (75     —          27 (2)       (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (82     9        27        (46
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ (3,924   $ (1   $ (853   $ (4,778
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Relates to pension, retiree medical and other postretirement obligations that will not be recognized in net income until the obligations are fully extinguished.

(2)

Relates to pension, retiree medical and other postretirement obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.

Reclassifications out of AOCI for the three and nine months ended September 30, 2016 and 2015 are as follows (in millions):

 

    Amounts reclassified from AOCI      

AOCI Components

  Three Months Ended September 30,     Nine Months Ended September 30,     Affected line items on condensed
consolidated statement of operations
  2016     2015     2016     2015    

Amortization of pension, retiree medical and other postretirement benefits:

         

Prior service cost (benefit)

  $ (33   $ (52   $ (100   $ (159   Salaries, wages and benefits

Actuarial loss

    17        26        52        80      Salaries, wages and benefits

Derivative financial instruments:

         

Cash flow hedges

    —          —          —          (9   Aircraft fuel and related taxes

Net unrealized change on investments:

         

Net change in value

    —          —          —          1      Other nonoperating, net
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period, net of tax

  $ (16   $ (26   $ (48   $ (87  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

17


Table of Contents

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

(Unaudited)

 

10. Regional Expenses

Expenses associated with our wholly-owned regional airlines and third-party regional carriers operating under the brand name American Eagle are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Aircraft fuel and related taxes

   $ 303       $ 310       $ 801       $ 970   

Salaries, wages and benefits

     337         296         990         881   

Capacity purchases from third-party regional carriers

     378         419         1,164         1,237   

Maintenance, materials and repairs

     82         84         264         254   

Other rent and landing fees

     143         133         413         376   

Aircraft rent

     9         8         26         25   

Selling expenses

     90         87         256         252   

Depreciation and amortization

     78         64         218         187   

Special items, net

     5         2         13         20   

Other

     113         115         343         334   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regional expenses

   $ 1,538       $ 1,518       $ 4,488       $ 4,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

11. Legal Proceedings

Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed “Single-Dip” unsecured claims. As of September 30, 2016, there were approximately 25.2 million shares of AAG common stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders as of the Effective Date.

There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non-union employees, concluding that their benefits were not vested and could be terminated. The summary judgment motion was denied with respect to all other retirees. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees. Our financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding.

DOJ Antitrust Civil Investigative Demand. In June 2015, we received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from us, and other airlines have announced that they have received similar requests. We are cooperating fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, we, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were the subject of multiple motions to consolidate them in a single forum, and they have now been consolidated in the Federal District Court for the District of Columbia. The airline defendants have moved to dismiss all claims in the class actions. Both the DOJ investigation and these lawsuits are in their very early stages and we intend 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

 

18


Table of Contents

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

(Unaudited)

 

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. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 19, 2015, after three previous largely unsuccessful attempts to amend their complaint, plaintiffs filed a fourth motion for leave to file an amended and supplemental complaint to add a claim for damages and demand for jury trial, as well as claims similar to those in the putative class action lawsuits regarding air passenger capacity. Thereafter, plaintiffs filed a request with the Judicial Panel on Multidistrict Litigation (JPML) to consolidate the Fjord matter with the putative class action lawsuits. The JPML denied that request on October 15, 2015 and plaintiffs’ request for further relief from the JPML was denied on February 4, 2016. Accordingly, the parties will continue to litigate the matter in Bankruptcy Court; a jointly proposed schedule for the remainder of the case was submitted on September 7, 2016, which has not yet been accepted by the court. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, we received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating fully with the DOJ investigation.

General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.

12. Subsequent Events

2016-3 EETCs

In October 2016, American created two pass-through trusts which issued approximately $814 million aggregate face amount of 2016-3 Class AA and Class A EETCs (the 2016-3 EETCs) in connection with the financing of 25 aircraft owned by American or scheduled to be delivered to American between October 2016 and January 2017. A portion of the proceeds received from the sale of the 2016-3 EETCs has been used to acquire Series AA and A equipment notes issued by American to the pass-through trusts and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2016-3 EETCs until such time as American issues additional Series AA and A equipment notes to the pass-through trusts, which will purchase the notes with escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on our condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

Series AA equipment notes bear interest at 3.00% per annum and Series A equipment notes bear interest at 3.25% per annum. Interest and principal payments on the equipment notes will be payable semi-annually in April and October of each year, with interest payments beginning in April 2017 and principal payments beginning in October 2017. The final payments on the Series AA and Series A equipment notes are due in October 2028.

Dividend Declaration

In October 2016, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on November 7, 2016, and payable on November 21, 2016. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

 

19


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 September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Operating revenues:

    

Mainline passenger

   $ 7,419      $ 7,654      $ 21,192      $ 22,298   

Regional passenger

     1,731        1,699        5,040        4,910   

Cargo

     171        180        506        568   

Other

     1,368        1,200        3,897        3,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     10,689        10,733        30,635        31,423   

Operating expenses:

        

Aircraft fuel and related taxes

     1,393        1,593        3,736        4,912   

Salaries, wages and benefits

     2,770        2,402        8,087        7,134   

Regional expenses

     1,632        1,541        4,738        4,614   

Maintenance, materials and repairs

     481        456        1,352        1,452   

Other rent and landing fees

     463        432        1,342        1,290   

Aircraft rent

     299        308        908        941   

Selling expenses

     347        366        990        1,051   

Depreciation and amortization

     399        336        1,128        1,013   

Special items, net

     289        163        450        610   

Other

     1,184        1,133        3,391        3,281   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,257        8,730        26,122        26,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,432        2,003        4,513        5,125   

Nonoperating income (expense):

        

Interest income

     28        13        74        36   

Interest expense, net of capitalized interest

     (229     (197     (674     (587

Other, net

     (8     (81     (27     (166
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (209     (265     (627     (717
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,223        1,738        3,886        4,408   

Income tax provision

     465        15        1,445        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 758      $ 1,723      $ 2,441      $ 4,369   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

20


Table of Contents

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Net income

   $ 758      $ 1,723      $ 2,441      $ 4,369   

Other comprehensive income (loss), net of tax:

        

Pension, retiree medical and other postretirement benefits

     (17     (26     (53     (79

Derivative financial instruments:

        

Reclassification into earnings

     —          —          —          (9

Unrealized gain (loss) on investments:

        

Net change in value

     2        (4     6        (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (15     (30     (47     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 743      $ 1,693      $ 2,394      $ 4,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

21


Table of Contents

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and per share amounts)

 

     September 30, 2016     December 31, 2015  
     (Unaudited)        

ASSETS

  

Current assets

    

Cash

   $ 372      $ 364   

Short-term investments

     6,371        5,862   

Restricted cash and short-term investments

     635        695   

Accounts receivable, net

     1,705        1,420   

Receivables from related parties, net

     6,131        1,981   

Aircraft fuel, spare parts and supplies, net

     1,035        796   

Prepaid expenses and other

     847        740   
  

 

 

   

 

 

 

Total current assets

     17,096        11,858   

Operating property and equipment

    

Flight equipment

     35,898        32,838   

Ground property and equipment

     6,722        6,224   

Equipment purchase deposits

     1,149        1,067   
  

 

 

   

 

 

 

Total property and equipment, at cost

     43,769        40,129   

Less accumulated depreciation and amortization

     (13,744     (12,893
  

 

 

   

 

 

 

Total property and equipment, net

     30,025        27,236   

Other assets

    

Goodwill

     4,091        4,091   

Intangibles, net of accumulated amortization of $562 and $502, respectively

     2,189        2,249   

Deferred tax asset

     1,944        2,932   

Other assets

     1,905        2,073   
  

 

 

   

 

 

 

Total other assets

     10,129        11,345   
  

 

 

   

 

 

 

Total assets

   $ 57,250      $ 50,439   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities

    

Current maturities of long-term debt and capital leases

   $ 1,801      $ 2,234   

Accounts payable

     1,622        1,517   

Accrued salaries and wages

     1,321        1,156   

Air traffic liability

     4,513        3,747   

Loyalty program liability

     2,950        2,525   

Other accrued liabilities

     2,114        2,198   
  

 

 

   

 

 

 

Total current liabilities

     14,321        13,377   

Noncurrent liabilities

    

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

     19,775        16,592   

Pension and postretirement benefits

     7,346        7,410   

Deferred gains and credits, net

     554        667   

Other liabilities

     2,665        2,695   
  

 

 

   

 

 

 

Total noncurrent liabilities

     30,340        27,364   

Commitments and contingencies

    

Stockholder’s equity

    

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

     —          —     

Additional paid-in capital

     16,600        16,521   

Accumulated other comprehensive loss

     (4,878     (4,831

Retained earnings (deficit)

     867        (1,992
  

 

 

   

 

 

 

Total stockholder’s equity

     12,589        9,698   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 57,250      $ 50,439   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

22


Table of Contents

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)

 

     Nine Months Ended September 30,  
     2016     2015  

Net cash provided by operating activities

   $ 1,769      $ 3,877   

Cash flows from investing activities:

    

Capital expenditures and aircraft purchase deposits

     (4,219     (4,564

Purchases of short-term investments

     (5,078     (7,717

Sales of short-term investments

     4,587        6,167   

Decrease in restricted cash and short-term investments

     60        64   

Proceeds from sale of property and equipment

     48        18   

Other investing activities

     2        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,600     (6,032

Cash flows from financing activities:

    

Payments on long-term debt and capital leases

     (2,534     (1,821

Proceeds from issuance of long-term debt

     5,392        3,963   

Deferred financing costs

     (39     (62

Sale-leaseback transactions

     —          43   

Other financing activities

     20        34   
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,839        2,157   
  

 

 

   

 

 

 

Net increase in cash

     8        2   

Cash at beginning of period

     364        984   
  

 

 

   

 

 

 

Cash at end of period

   $ 372      $ 986   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Settlement of bankruptcy obligations

   $ 3      $ 60   

Capital lease obligations

     —          5   

Supplemental information:

    

Interest paid, net of amounts capitalized

     653        632   

Income taxes paid

     9        8   

See accompanying notes to condensed consolidated financial statements.

 

23


Table of Contents

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, 2015. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

On December 9, 2013 (the Effective Date), AMR Merger Sub, Inc. merged with and into US Airways Group, Inc. (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 or AMR) following the Merger.

On December 30, 2015, in order to simplify AAG’s internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, AAG caused US Airways Group to be merged with and into AAG, with AAG as the surviving corporation, and, immediately thereafter, US Airways, Inc. (US Airways), a Delaware corporation and wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation. As a result of the merger of US Airways and American, US Airways transferred all of its assets, liabilities and off-balance sheet commitments to American. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and is reflected in American’s condensed consolidated financial statements as though the transaction had occurred on December 9, 2013, when a subsidiary of AMR merged with and into US Airways Group, which represents the earliest date that American and US Airways were under common control. Thus, all periods presented in Part I, Item 1B of this Quarterly Report on Form 10-Q are comprised of the condensed consolidated financial data of American and US Airways. This transaction was accounted for in a manner similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity and no other assets or liabilities are recognized.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, as well as pensions, retiree medical and other postretirement benefits.

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). Subsequently, the FASB has issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transition. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. American is currently evaluating the requirements of these standards and has not yet determined the impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. American is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation of excess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. American early adopted this

 

24


Table of Contents

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

(Unaudited)

 

standard during the second quarter of 2016. The adoption of this standard resulted in the recognition of $418 million of previously unrecognized excess tax benefits in deferred tax assets and an increase to retained earnings on the condensed consolidated balance sheet as of the beginning of the current year, and the recognition of $9 million of excess tax benefits to the income tax provision for the nine months ended September 30, 2016.

2. Special Items

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Mainline operating special items, net (1)

   $ 289       $ 163       $ 450       $ 610   

 

(1)

The 2016 third quarter mainline operating special items totaled a net charge of $289 million, which principally included $225 million of merger integration expenses and a $39 million net charge for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 nine month period mainline operating special items totaled a net charge of $450 million, which principally included $467 million of merger integration expenses, offset in part by a $22 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 third quarter and nine month periods, merger integration expenses included costs related to re-branding of aircraft, airport facilities and uniforms, information technology, alignment of labor union contracts, fleet restructuring, professional fees, relocation and training, as well as severance.

The 2015 third quarter mainline operating special items totaled a net charge of $163 million, which principally included $198 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $66 million credit related to proceeds received from a legal settlement. The 2015 nine month period mainline operating special items totaled a net charge of $610 million, which principally included $741 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $75 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations and a $66 million credit related to proceeds received from a legal settlement. For the 2015 third quarter and nine month periods, merger integration expenses included costs related to information technology, fleet restructuring, alignment of labor union contracts, professional fees, severance, relocation and training, re-branding of aircraft, airport facilities and uniforms, as well as share-based compensation.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Regional operating special items, net

   $ 3       $ 2       $ 11       $ 11   

Nonoperating special items, net (1)

     —           21         36         24   

Income tax special items, net

     —           6         —           22   

 

(1)

In connection with a bond refinancing, American recorded a $36 million nonoperating special charge in the 2016 nine month period related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

The 2015 third quarter nonoperating special items totaled a net charge of $21 million, which was primarily due to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The 2015 nine month period nonoperating special items totaled a net charge of $24 million, which principally included $41 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

 

25


Table of Contents

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

(Unaudited)

 

3. Debt

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

 

     September 30, 2016      December 31, 2015  

Secured

     

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

   $ 1,843       $ 1,867   

2014 Credit Facilities, variable interest rate of 3.25%, installments through 2021

     743         743   

2016 Credit Facilities, variable interest rate of 3.50%, installments through 2023

     1,000         —     

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

     970         980   

2013 Citicorp Credit Facility tranche B-2

     —           588   

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.20% to 9.75%, maturing from 2017 to 2028

     10,358         8,693   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.92% to 8.48%, maturing from 2016 to 2028

     5,136         4,183   

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 5.50%, maturing from 2017 to 2035

     862         1,051   

Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2016 to 2028

     864         922   
  

 

 

    

 

 

 
     21,776         19,027   
  

 

 

    

 

 

 

Unsecured

     

Affiliate unsecured obligations

     —           27   
  

 

 

    

 

 

 
     —           27   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     21,776         19,054   

Less: Total unamortized debt discount and debt issuance costs

     200         228   

Less: Current maturities

     1,801         2,234   
  

 

 

    

 

 

 

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

   $ 19,775       $ 16,592   
  

 

 

    

 

 

 

The table below shows availability under revolving credit facilities, all of which were undrawn, as of September 30, 2016 (in millions):

 

2013 Revolving Facility

   $ 1,400   

2014 Revolving Facility

     1,025   
  

 

 

 

Total

   $ 2,425   
  

 

 

 

2016 Aircraft Financing Activities

2016-1 EETCs

In January 2016, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2016-1 Class AA, Class A and Class B EETCs (the 2016-1 EETCs) in connection with the financing of 22 aircraft owned by American (the 2016-1 EETC Aircraft).

All of the proceeds received from the sale of the 2016-1 EETCs have been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the principal amount of $584 million bearing interest at 3.575% per annum, Series A equipment notes in the principal amount of $262 million bearing interest at 4.10% per annum and Series B equipment notes in the principal amount of $228 million bearing interest at 5.25% per annum. Interest and principal payments on the equipment notes are payable semi-annually in January and July of each year, beginning in July 2016. The final payments on the Series AA and Series A equipment notes are due in January 2028 and the final payment on the Series B equipment notes is due in January 2024. These equipment notes are secured by liens on the 2016-1 EETC Aircraft.

2016-2 EETCs

In May and July 2016, American created three pass-through trusts which issued approximately $1.1 billion aggregate face amount of Series 2016-2 Class AA, Class A and Class B EETCs (the 2016-2 EETCs) in connection with the financing of 22 aircraft owned by American (the 2016-2 EETC Aircraft).

All of the proceeds received from the sale of the 2016-2 EETCs have been used to purchase equipment notes issued by American in three series: Series AA equipment notes in the principal amount of $567 million bearing interest at 3.20% per annum, Series A equipment notes in the principal amount of $261 million bearing interest at 3.65% per annum and Series B equipment notes in the

 

26


Table of Contents

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

(Unaudited)

 

principal amount of $227 million bearing interest at 4.375% per annum. Interest and principal payments on the equipment notes are payable semi-annually in June and December of each year, with interest payments beginning in December 2016 and principal payments beginning in June 2017. The final payments on the Series AA and Series A equipment notes are due in June 2028 and the final payments on the Series B equipment notes are due in June 2024. These equipment notes are secured by liens on the 2016-2 EETC Aircraft.

Other Aircraft Financing Transactions

In the first nine months of 2016, American entered into loan agreements to borrow $1.4 billion in connection with the financing of certain aircraft. Debt incurred under these loan agreements matures in 2026 through 2028 and bears interest at a rate of LIBOR plus an applicable margin.

2016 Other Financing Activities

2016 Credit Facilities

On April 29, 2016, American and AAG entered into a Credit and Guaranty Agreement (the 2016 Credit Agreement), among American, as the borrower, AAG as parent and guarantor, Barclays Bank PLC, as administrative agent and collateral agent and certain lenders. The 2016 Credit Agreement provides for a $1.0 billion term loan facility (the 2016 Term Loan Facility) with a maturity date of April 28, 2023 and a revolving credit facility that may be established in the future (the 2016 Revolving Credit Facility, and together with the 2016 Term Loan Facility, the 2016 Credit Facilities). As of September 30, 2016, the aggregate outstanding principal amount under the 2016 Term Loan Facility was $1.0 billion.

The proceeds from the 2016 Term Loan Facility were used to repay approximately $588 million in remaining principal plus accrued and unpaid interest of the 2013 Citicorp Credit Facility Tranche B-2 with the remainder of the proceeds to be used for general corporate purposes.

The 2016 Term Loan Facility is repayable in annual installments in an amount equal to 1.00% of the original principal balance with any unpaid balance due on the maturity date of the 2016 Term Loan Facility. Voluntary prepayments may be made by American at any time, with a premium of 1.0% applicable to certain prepayments made prior to the date that is six months following April 29, 2016.

Loans under the 2016 Term Loan Facility bear interest at a base rate plus an applicable base rate margin or, at American’s option, LIBOR (subject to a floor of 0.75%) plus an applicable LIBOR margin. The applicable base rate margin is 1.75% and the applicable LIBOR margin is 2.75% for loans under the 2016 Term Loan Facility.

The obligations of American under the 2016 Credit Agreement are secured by liens on substantially all aircraft spare parts owned by American. American has the ability to add or release certain types of collateral, subject to certain conditions, at its discretion. The obligations of American under the 2016 Credit Facilities are guaranteed by AAG. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2016 Credit Facilities.

The 2016 Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the 2016 Credit Facilities may be accelerated and become due and payable immediately. In addition, if a “change of control” (as defined in the 2016 Credit Agreement) occurs with respect to AAG, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the 2016 Credit Facilities and terminate the 2016 Revolving Facility. The 2016 Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the 2016 Credit Facilities) of not less than $2.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

Obligations Associated with Special Facility Revenue Bonds

In June 2016, the New York Transportation Development Corporation (NYTDC) issued approximately $844 million of special facility revenue refunding bonds (the 2016 JFK Bonds) on behalf of American. The net proceeds from the 2016 JFK Bonds generally were used to provide a portion of the funds to refinance $1.0 billion of special facility revenue bonds (Prior JFK Bonds), the net proceeds of which partially financed the construction of a terminal used by American at John F. Kennedy International Airport (JFK) (the Terminal).

 

27


Table of Contents

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

(Unaudited)

 

American is required to pay debt service on the 2016 JFK Bonds through payments under a loan agreement with NYTDC, and American and AAG guarantee the 2016 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.

The 2016 JFK Bonds, in aggregate, were priced at approximately 107% of par value. The gross proceeds from the issuance of the 2016 JFK Bonds were approximately $907 million. Of this amount, approximately $895 million was used to partially fund the redemption of the Prior JFK Bonds. The 2016 JFK Bonds bear interest at 5.0% per annum and are comprised of $212 million of serial bonds, portions of which mature annually from August 1, 2017 to August 1, 2021, and $632 million of term bonds, $278 million of which matures on August 1, 2026 and $354 million of which matures on August 1, 2031. In connection with the refinancing of the Prior JFK Bonds, American recorded a special nonoperating charge of $36 million consisting of non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

2014 Credit Facilities

On September 22, 2016, American and AAG amended the Amended and Restated Credit and Guaranty Agreement dated April 20, 2015 (which amended and restated the Credit and Guaranty Agreement dated October 10, 2014), pursuant to which it refinanced the $750 million term loan facility due October 2021 established thereunder (the 2014 Term Loan Facility and, together with the $1.025 billion revolving credit facility established under such agreement, the 2014 Credit Facilities) to reduce the LIBOR margin from 2.75% to 2.50% and the base rate margin from 1.75% to 1.50%. The $1.025 billion revolving credit facility under the 2014 Credit Facilities (the 2014 Revolving Facility) remains unchanged. As of September 30, 2016, $743 million of principal was outstanding under the 2014 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.

4. Income Taxes

At December 31, 2015, American had approximately $8.8 billion of gross net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $8.0 billion, substantially all of which is expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2022 if unused. American also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused.

At December 31, 2015, American had an Alternative Minimum Tax credit carryforward of approximately $458 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of American’s financial statements for the fourth quarter of 2015, management determined that it was more likely than not that substantially all of its deferred tax assets, which include its NOLs, would be realized. Accordingly, American reversed $3.5 billion of the valuation allowance as of December 31, 2015.

In the first nine months of 2016, American recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as American utilized the NOLs described above. For purposes of taxation, substantially all of American’s income before income taxes is attributable to the United States.

Following the filing of AAG’s 2015 annual tax return in the third quarter of 2016, federal NOLs, substantially all of which are expected to be available to reduce future federal taxable income in 2016 and future years, increased by $2.4 billion. The increase in the federal NOLs is attributable to the election to take bonus depreciation on eligible assets (primarily aircraft) in the 2015 federal income tax return.

5. Fair Value Measurements

Assets Measured at Fair Value on a Recurring Basis

American utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. American’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2016.

 

28


Table of Contents

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

(Unaudited)

 

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

 

     Fair Value Measurements as of September 30, 2016  
     Total      Level 1      Level 2      Level 3  

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

           

Money market funds

   $ 376       $ 376       $ —         $ —     

Corporate obligations

     2,694         —           2,694         —     

Bank notes/certificates of deposit/time deposits

     3,051         —           3,051         —     

Repurchase agreements

     250         —           250         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,371         376         5,995         —     

Restricted cash and short-term investments (1)

     635         635         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,006       $ 1,011       $ 5,995       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

(2)

All short-term investments are classified as available-for-sale and stated at fair value. American’s short-term investments mature in one year or less except for $100 million of bank notes/certificates of deposit/time deposits and $230 million of corporate obligations.

There were no Level 1 to Level 2 transfers during the nine months ended September 30, 2016.

Fair Value of Debt

The fair value of American’s long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If American’s long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.

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

 

     September 30, 2016      December 31, 2015  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 21,576       $ 22,650       $ 18,826       $ 19,378   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and Short-term Investments

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by American and can significantly affect the value of American’s cash and short-term investments 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.

 

29


Table of Contents

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

(Unaudited)

 

6. Retirement Benefits

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

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Three Months Ended September 30,

   2016     2015     2016     2015  

Service cost

   $ —        $ —        $ 1      $ 1   

Interest cost

     186        183        12        13   

Expected return on assets

     (187     (212     (5     (5

Settlements

     —          —          —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     7        7        (60     (60

Unrecognized net loss (gain)

     32        28        (4     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 38      $ 6      $ (56   $ (53
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Each of the 2016 and 2015 third quarters’ prior service cost does not include amortization of $1 million related to other postretirement benefits.

 

     Pension Benefits     Retiree Medical and Other
Postretirement Benefits
 

Nine Months Ended September 30,

   2016     2015     2016     2015  

Service cost

   $ 1      $ 1      $ 2      $ 3   

Interest cost

     559        550        36        38   

Expected return on assets

     (560     (636     (15     (15

Settlements

     —          1        —          —     

Amortization of:

        

Prior service cost (benefit) (1)

     21        21        (180     (182

Unrecognized net loss (gain)

     94        84        (12     (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 115      $ 21      $ (169   $ (161
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The 2016 and 2015 nine months’ prior service cost does not include amortization of $1 million and $2 million, respectively, related to other postretirement benefits.

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

7. Accumulated Other Comprehensive Income (Loss)

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

 

     Pension, Retiree
Medical and
Other
Postretirement

Benefits
    Unrealized
Gain (Loss) on

Investments
    Income Tax
Benefit

(Provision)
    Total  

Balance at December 31, 2015

   $ (3,831   $ (9   $ (991 )(1)    $ (4,831

Other comprehensive income (loss) before reclassifications

     (7     9        —          2   

Amounts reclassified from accumulated other comprehensive income (loss)

     (76     —          27 (2)       (49
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (83     9        27        (47
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ (3,914   $ —        $ (964   $ (4,878
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Relates to pension, retiree medical and other postretirement obligations that will not be recognized in net income until the obligations are fully extinguished.

(2)

Relates to pension, retiree medical and other postretirement obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.

 

30


Table of Contents

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

(Unaudited)

 

Reclassifications out of AOCI for the three and nine months ended September 30, 2016 and 2015 are as follows (in millions):

 

     Amounts reclassified from AOCI      

AOCI Components

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
   

Affected line items on condensed
consolidated statement of operations

   2016     2015     2016     2015    

Amortization of pension, retiree medical and other postretirement benefits:

          

Prior service cost (benefit)

   $ (33   $ (52   $ (101   $ (159   Salaries, wages and benefits

Actuarial loss

     17        26        52        80      Salaries, wages and benefits

Derivative financial instruments:

          

Cash flow hedges

     —          —          —          (9   Aircraft fuel and related taxes

Net unrealized change on investments:

          

Net change in value

     —          —          —          1      Other nonoperating, net
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period, net of tax

   $ (16   $ (26   $ (49   $ (87  
  

 

 

   

 

 

   

 

 

   

 

 

   

8. Regional Expenses

Expenses associated with regional carriers operating under the brand name American Eagle are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Aircraft fuel and related taxes

   $ 303       $ 310       $ 801       $ 970   

Salaries, wages and benefits

     82         71         249         207   

Capacity purchases from third-party regional carriers

     891         823         2,665         2,454   

Maintenance, materials and repairs

     1         2         4         3   

Other rent and landing fees

     124         114         356         324   

Aircraft rent

     7         7         20         21   

Selling expenses

     90         87         256         253   

Depreciation and amortization

     62         50         174         145   

Special items, net

     3         2         11         11   

Other

     69         75         202         226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regional expenses

   $ 1,632       $ 1,541       $ 4,738       $ 4,614   
  

 

 

    

 

 

    

 

 

    

 

 

 

9. Transactions with Related Parties

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

 

     September 30, 2016     December 31, 2015  

AAG (1)

   $ 8,195      $ 4,489   

AAG’s wholly-owned subsidiaries (2)

     (2,064     (2,508
  

 

 

   

 

 

 

Total

   $ 6,131      $ 1,981   
  

 

 

   

 

 

 

 

(1)

The increase in American’s net related party receivable from AAG is primarily due to American providing the cash funding for AAG’s share repurchase and dividend programs.

(2)

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

10. Legal Proceedings

Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed “Single-Dip” unsecured claims. As of September 30, 2016, there were approximately 25.2 million shares of AAG common stock remaining in the

 

31


Table of Contents

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

(Unaudited)

 

Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. However, American is not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to AAG but rather will be distributed to former AMR stockholders as of the Effective Date.

There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non-union employees, concluding that their benefits were not vested and could be terminated. The summary judgment motion was denied with respect to all other retirees. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees. American’s financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding.

DOJ Antitrust Civil Investigative Demand. In June 2015, American 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 American, and other airlines have announced that they have received similar requests. American is cooperating fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, American, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were the subject of multiple motions to consolidate them in a single forum, and they have now been consolidated in the Federal District Court for the District of Columbia. The airline defendants have moved to dismiss all claims in the class actions. Both the DOJ investigation and these lawsuits are in their very early stages and American 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. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 19, 2015, after three previous largely unsuccessful attempts to amend their complaint, plaintiffs filed a fourth motion for leave to file an amended and supplemental complaint to add a claim for damages and demand for jury trial, as well as claims similar to those in the putative class action lawsuits regarding air passenger capacity. Thereafter, plaintiffs filed a request with the Judicial Panel on Multidistrict Litigation (JPML) to consolidate the Fjord matter with the putative class action lawsuits. The JPML denied that request on October 15, 2015 and plaintiffs’ request for further relief from the JPML was denied on February 4, 2016. Accordingly, the parties will continue to litigate the matter in Bankruptcy Court; a jointly proposed schedule for the remainder of the case was submitted on September 7, 2016, which has not yet been accepted by the court. American believes this lawsuit is without merit and intends to vigorously defend against the allegations.

DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed American of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, American received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. American is cooperating fully with the DOJ investigation.

General. In addition to the specifically identified legal proceedings, American 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 American’s control. Therefore, although American will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on American are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.

 

32


Table of Contents

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

(Unaudited)

 

11. Subsequent Event

2016-3 EETCs

In October 2016, American created two pass-through trusts which issued approximately $814 million aggregate face amount of 2016-3 Class AA and Class A EETCs (the 2016-3 EETCs) in connection with the financing of 25 aircraft owned by American or scheduled to be delivered to American between October 2016 and January 2017. A portion of the proceeds received from the sale of the 2016-3 EETCs has been used to acquire Series AA and A equipment notes issued by American to the pass-through trusts and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2016-3 EETCs until such time as American issues additional Series AA and A equipment notes to the pass-through trusts, which will purchase the notes with escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depository are not American’s assets.

Series AA equipment notes bear interest at 3.00% per annum and Series A equipment notes bear interest at 3.25% per annum. Interest and principal payments on the equipment notes will be payable semi-annually in April and October of each year, with interest payments beginning in April 2017 and principal payments beginning in October 2017. The final payments on the Series AA and Series A equipment notes are due in October 2028.

 

33


Table of Contents

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

Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of AAG’s and American’s Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of AAG and American, but rather updates disclosures made in the 2015 Form 10-K.

Background

American Airlines and American Eagle offer an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries. American has hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. American is a founding member of the oneworld alliance, whose members serve more than 1,000 destinations with about 14,250 daily flights to over 150 countries. In the third quarter of 2016, approximately 52 million passengers boarded our mainline and regional flights. As of September 30, 2016, we operated 922 mainline aircraft and were supported by our regional airline subsidiaries and third-party regional carriers, which operated an additional 599 regional aircraft.

The U.S. Airline Industry

In the third quarter of 2016, the U.S. airline industry continued to benefit from lower fuel prices. However, the reductions in fuel costs in the quarter were offset by year-over-year declines in revenue. Domestic markets continued to be impacted by competitive capacity growth. Domestic markets did, however, perform better than international markets, which also have been impacted by competitive capacity growth, continued macroeconomic softness and foreign currency weakness.

Jet fuel prices closely follow the price of Brent crude oil. On average, the price of Brent crude oil per barrel was approximately 8% lower in the third quarter of 2016 as compared to the 2015 period. The average daily spot price for Brent crude oil during the third quarter of 2016 was $46 per barrel as compared to an average daily spot price of $50 per barrel during the third quarter of 2015. From a trend perspective, fuel prices were flat when compared to the second quarter of 2016 when the average daily spot price was also $46 per barrel. On a daily basis, Brent crude oil prices fluctuated during the third quarter of 2016 between a high of $50 per barrel to a low of $40 per barrel, and closed the quarter on September 30, 2016 at $48 per barrel.

While jet fuel prices have declined period-over-period as described above, uncertainty exists regarding the economic conditions driving these declines. See Part II, Item 1A. Risk Factors – “Downturns in economic conditions adversely affect our business” and “Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”

 

34


Table of Contents

American Airlines Group

Third Quarter 2016 Results

The selected financial data presented below is derived from AAG’s unaudited condensed consolidated financial statements included in Part I, Item 1A of this report and should be read in conjunction with those financial statements and the related notes thereto.

 

     Three Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline and regional passenger revenues

   $ 9,150       $ 9,353         (2.2

Cargo and other operating revenues

     1,444         1,353         6.7   

Total operating revenues

     10,594         10,706         (1.1

Mainline and regional aircraft fuel and related taxes

     1,696         1,903         (10.9

Total operating expenses

     9,163         8,707         5.2   

Operating income

     1,431         1,999         (28.4

Pre-tax income

     1,189         1,709         (30.4

Income tax provision

     452         16         nm   

Net income

     737         1,693         (56.4

Pre-tax income

   $ 1,189       $ 1,709         (30.4

Pre-tax special items:

        

Operating special charges, net (1)

     294         165         77.5   

Nonoperating special items, net

     —           21         nm   
  

 

 

    

 

 

    

Total pre-tax special items

     294         186         57.7   
  

 

 

    

 

 

    

Pre-tax income excluding special items

   $ 1,483       $ 1,895         (21.7
  

 

 

    

 

 

    

 

(1)

Our 2016 and 2015 third quarter results were impacted by net operating special charges of $294 million and $165 million, respectively, consisting principally of mainline and regional merger integration expenses. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “AAG’s Results of Operations” of this report for more information on net special items.

Pre-Tax Income and Net Income

We realized pre-tax income of $1.2 billion and $1.7 billion in the third quarters of 2016 and 2015, respectively. Excluding the effects of net special charges, we recognized pre-tax income of $1.5 billion and $1.9 billion in the third quarters of 2016 and 2015, respectively. Our 2016 third quarter results on both a GAAP basis and excluding net special charges were impacted by a decline in revenues driven by lower yields and travel demand. Operating costs also increased during the third quarter due primarily to higher salaries, wages and benefits associated with new labor contracts and the addition of an employee profit sharing program. These impacts were offset in part by a year-over-year decline in fuel prices.

As of December 31, 2015, we reversed the valuation allowance on our deferred tax assets, which include our federal and state net operating losses (NOLs). As a result of the reversal of the valuation allowance, we began to record a provision for income taxes in 2016. The provision is substantially non-cash due to the utilization of NOLs. We currently have $10.5 billion of federal NOLs and $4.0 billion of state NOLs available to reduce federal taxable income in 2016 and future years. Accordingly, as illustrated above, amounts reported in the third quarter of 2016 for income tax provision and net income are not comparable to the third quarter of 2015. Therefore, we are discussing pre-tax income and pre-tax income excluding special items in order to provide a more meaningful period-over-period comparison. The exclusion of special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to financial measures presented by other major airlines. Management uses pre-tax income excluding special items to evaluate our financial performance.

Revenue

In the third quarter of 2016, we reported operating revenues of $10.6 billion, a decrease of $112 million, or 1.1%, as compared to the 2015 period. Mainline and regional passenger revenues were $9.2 billion, a decrease of $203 million, or 2.2%, as compared to the 2015 period. The decline in mainline and regional passenger revenues was driven by competitive capacity growth, continued macroeconomic softness outside of the United States and foreign currency weakness. The decline in mainline and regional passenger revenues was offset in part by an increase in other operating revenues primarily due to revenue generated from our new co-branded credit card agreements effective in the third quarter of 2016. Our mainline and regional total revenue per available seat mile (TRASM) was 14.73 cents in the third quarter of 2016, a 2.2% decrease as compared to 15.06 cents in the 2015 period.

 

35


Table of Contents

Fuel

Mainline and regional fuel expense totaled $1.7 billion in the third quarter of 2016, which was $207 million, or 10.9%, lower as compared to the third quarter of 2015. This decrease was driven by an 11.6% decrease in the average price per gallon of fuel to $1.48 in the third quarter of 2016 from $1.67 in the 2015 period.

As of September 30, 2016, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors.

Cost per Available Seat Mile (CASM)

We remain committed to actively managing our cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our 2016 third quarter mainline CASM was 11.96 cents, an increase of 5.6% as compared to the 2015 period. The increase was primarily driven by higher salaries, wages and benefits associated with new labor contracts and the addition of an employee profit sharing program, offset in part by lower fuel costs.

Our third quarter mainline CASM excluding special items and fuel was 9.32 cents, an increase of 8.9% as compared to the 2015 period. The increase was primarily due to higher salaries, wages and benefits as described above.

The following table details our mainline CASM for the three months ended September 30, 2016 and 2015:

 

     Three Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In cents, except percentage changes)  

Mainline CASM excluding special items and fuel:

      

Total mainline CASM

     11.96        11.33        5.6   

Special items, net

     (0.45     (0.26     77.0   

Aircraft fuel and related taxes

     (2.18     (2.51     (13.0
  

 

 

   

 

 

   

Mainline CASM, excluding special items and fuel (1)

     9.32        8.56        8.9   
  

 

 

   

 

 

   

 

(1)

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

Customer Service

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation. We are working to continue to improve our customer experience by making investments in our operations in the form of hiring additional personnel and expenditures for new equipment and technology. Additionally, on October 1, 2016, we combined our pilots and entire fleet into a single scheduling system, which was a critical integration milestone that enables us to operate as one airline and better meet the needs of our passengers. The table below summarizes the operating statistics we reported to the U.S. Department of Transportation (DOT) for our mainline operations for the third quarter of 2016 and 2015. Our 2016 third quarter results were affected by severe weather, particularly in Dallas/Fort Worth, our largest hub, which has downstream impacts to our entire system.

 

     2016      2015      Better (Worse)  
     July      August      September(e)      July      August      September      July     August     September  

On-time performance (a)

     70.7         71.9         83.0         80.0         80.6         85.6         (9.3 )pts      (8.7 )pts      (2.6 )pts 

Completion factor (b)

     98.2         98.1         99.7         99.3         99.0         99.5         (1.1 )pts      (0.9 )pts      0.2  pts 

Mishandled baggage (c)

     4.12         4.12         2.70         3.73         3.88         2.95         (10.5 )%      (6.2 )%      8.5  % 

Customer complaints (d)

     2.57         3.23         2.60         3.45         4.01         4.15         25.5  %      19.5  %      37.3  % 

 

(a)

Percentage of reported flight operations arriving less than 15 minutes after the scheduled arrival time.

(b)

Percentage of scheduled flight operations completed.

(c)

Rate of mishandled baggage reports per 1,000 passengers.

(d) 

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

 

36


Table of Contents
(e) 

September 2016 operating statistics are preliminary as the DOT has not issued its September 2016 Air Travel Consumer report as of the date of this filing.

Liquidity Position

As of September 30, 2016, we had approximately $9.2 billion in total available liquidity, consisting of unrestricted cash and short-term investments of $6.8 billion and $2.4 billion in undrawn revolver capacity.

This remains well in excess of the $6.5 billion minimum liquidity we seek to maintain for the foreseeable future. We believe it is important to retain liquidity levels higher than our network peers given our overall leverage and the fact that we have not yet completed our fleet renewal program.

See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Commitments” for further discussion of our contractual commitments.

AAG’s Results of Operations

We realized pre-tax income of $1.2 billion and $1.7 billion in the third quarters of 2016 and 2015, respectively. Excluding the effects of net special charges, we recognized pre-tax income of $1.5 billion and $1.9 billion in the third quarters of 2016 and 2015, respectively.

We realized pre-tax income of $3.8 billion and $4.4 billion in the first nine months of 2016 and 2015, respectively. Excluding the effects of net special charges, we recognized pre-tax income of $4.3 billion and $5.0 billion in the first nine months of 2016 and 2015, respectively.

Our 2016 third quarter and first nine months results on both a GAAP basis and excluding net special charges were impacted by a decline in revenues driven by lower yields and travel demand. In addition, our results were impacted by higher salaries, wages and benefits associated with new labor contracts and the addition of an employee profit sharing program. These impacts were offset in part by a year-over-year decline in fuel prices.

The table below details our pre-tax and net income excluding special items (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016     2015      2016     2015  

Pre-tax income

   $ 1,189      $ 1,709       $ 3,799      $ 4,371   

Pre-tax special items:

         

Mainline operating special charges, net (1)

     289        163         450        610   

Regional operating special charges, net

     5        2         13        20   

Nonoperating special charges, net (2)

     —          21         36        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total pre-tax special items

     294        186         499        632   
  

 

 

   

 

 

    

 

 

   

 

 

 

Pre-tax income excluding special items

   $ 1,483      $ 1,895       $ 4,298      $ 5,003   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 737      $ 1,693       $ 2,387      $ 4,329   

Total special items:

         

Total pre-tax special items

     294        186         499        632   

Income tax special charges, net

     —          6         —          22   

Net tax effect of special items (3)

     (98     —           (188     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total special items

     196        192         311        654   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income excluding special items

   $ 933      $ 1,885       $ 2,698      $ 4,983   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

The 2016 third quarter mainline operating special items totaled a net charge of $289 million, which principally included $225 million of merger integration expenses and a $39 million net charge for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 nine month period mainline operating special items totaled a net charge of $450 million, which principally included $467 million of merger integration expenses, offset in part by a $22 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 third quarter and nine month periods, merger integration expenses included costs related to re-branding of aircraft, airport facilities and uniforms, information technology, alignment of labor union contracts, fleet restructuring, professional fees, relocation and training, as well as severance.

The 2015 third quarter mainline operating special items totaled a net charge of $163 million, which principally included $198 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $66 million credit related to proceeds received from a legal settlement. The 2015 nine month

 

37


Table of Contents
 

period mainline operating special items totaled a net charge of $610 million, which principally included $741 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $75 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations and a $66 million credit related to proceeds received from a legal settlement. For the 2015 third quarter and nine month periods, merger integration expenses included costs related to information technology, fleet restructuring, alignment of labor union contracts, professional fees, severance, relocation and training, re-branding of aircraft, airport facilities and uniforms, as well as share-based compensation.

 

(2)

In connection with a bond refinancing, we recorded a $36 million nonoperating special charge in the 2016 nine month period related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

The 2015 third quarter nonoperating special items totaled a net charge of $21 million, which was primarily due to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The 2015 nine month period nonoperating special items totaled a net charge of $2 million, which principally included $40 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $22 million gain associated with the sale of an investment and a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

 

(3)

In the 2015 periods, there was no net tax effect associated with special items. During the 2015 periods, our net deferred tax asset, which includes our NOLs, was subject to a full valuation allowance. Accordingly, our NOLs offset our taxable income and resulted in the release of a corresponding portion of valuation allowance, which offset the tax provision dollar for dollar.

Income Taxes

At December 31, 2015, we had approximately $8.0 billion of gross NOLs carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $4.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 through 2034 if unused. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Internal Revenue Code of 1986 (Section 382) where an “ownership change” has occurred. We experienced an ownership change in connection with our emergence from bankruptcy in 2013. The general limitation rules of Section 382 for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $6.6 billion of unlimited NOL remaining at December 31, 2015) of our federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of our remaining federal NOL Carryforwards are subject to limitation under Section 382; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL Carryforwards arising after the 2013 ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2015, we had an Alternative Minimum Tax credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of our financial statements for the fourth quarter of 2015, we determined that it was more likely than not that substantially all of our deferred tax assets, which include our NOLs, would be realized. Accordingly, we reversed $3.0 billion of the valuation allowance as of December 31, 2015.

In the first nine months of 2016, we recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as we utilized the NOLs described above. For purposes of taxation, substantially all of our income before income taxes is attributable to the United States.

Following the filing of our 2015 annual tax return in the third quarter of 2016, federal NOLs, substantially all of which are expected to be available to reduce future federal taxable income in 2016 and future years, increased by $2.5 billion. The increase in the federal NOLs is attributable to the election to take bonus depreciation on eligible assets (primarily aircraft) in the 2015 federal income tax return.

 

38


Table of Contents

Operating Statistics

The table below sets forth selected mainline and regional operating data for the three and nine months ended September 30, 2016 and 2015.

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
        
     2016      2015      Increase
(Decrease)
    2016      2015      Increase
(Decrease)
 

Mainline

                

Revenue passenger miles (millions) (a)

     53,472         54,667         (2.2 )%      151,619         151,148         0.3

Available seat miles (millions) (b)

     63,751         63,459         0.5     183,985         181,232         1.5

Passenger load factor (percent) (c)

     83.9         86.1         (2.2 )pts      82.4         83.4         (1.0 )pts 

Yield (cents) (d)

     13.87         14.00         (0.9 )%      13.98         14.75         (5.3 )% 

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

     11.64         12.06         (3.5 )%      11.52         12.30         (6.4 )% 

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

     11.96         11.33         5.6     11.62         11.97         (2.9 )% 

Passenger enplanements (thousands) (g)

     37,584         38,909         (3.4 )%      109,830         110,683         (0.8 )% 

Departures (thousands)

     282         286         (1.3 )%      837         841         (0.5 )% 

Aircraft at end of period

     922         943         (2.2 )%      922         943         (2.2 )% 

Block hours (thousands) (h)

     905         908         (0.3 )%      2,650         2,643         0.3

Average stage length (miles) (i)

     1,258         1,259         (0.1 )%      1,235         1,231         0.3

Fuel consumption (gallons in millions)

     953         954         (0.2 )%      2,739         2,736         0.1

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

     1.46         1.67         (12.4 )%      1.36         1.80         (24.0 )% 

Full-time equivalent employees at end of period

     101,200         99,700         1.5     101,200         99,700         1.5

Regional (j)

                

Revenue passenger miles (millions) (a)

     6,447         6,199         4.0     18,406         17,729         3.8

Available seat miles (millions) (b)

     8,160         7,633         6.9     23,741         22,050         7.7

Passenger load factor (percent) (c)

     79.0         81.2         (2.2 )pts      77.5         80.4         (2.9 )pts 

Yield (cents) (d)

     26.85         27.40         (2.0 )%      27.38         27.69         (1.1 )% 

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

     21.21         22.25         (4.7 )%      21.23         22.27         (4.7 )% 

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

     18.85         19.89         (5.2 )%      18.91         20.57         (8.1 )% 

Passenger enplanements (thousands) (g)

     14,288         14,413         (0.9 )%      40,908         41,032         (0.3 )% 

Aircraft at end of period

     599         584         2.6     599         584         2.6

Fuel consumption (gallons in millions)

     196         186         5.3     565         536         5.4

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

     1.55         1.67         (7.3 )%      1.42         1.81         (21.6 )% 

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

     20,600         19,300         6.7     20,600         19,300         6.7

Total Mainline and Regional

                

Revenue passenger miles (millions) (a)

     59,919         60,866         (1.6 )%      170,025         168,877         0.7

Available seat miles (millions) (b)

     71,911         71,092         1.2     207,726         203,282         2.2

Cargo ton miles (millions) (l)

     601         569         5.6     1,754         1,716         2.2

Passenger load factor (percent) (c)

     83.3         85.6         (2.3 )pts      81.9         83.1         (1.2 )pts 

Yield (cents) (d)

     15.27         15.37         (0.6 )%      15.43         16.11         (4.2 )% 

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

     12.72         13.16         (3.3 )%      12.63         13.38         (5.6 )% 

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

     14.73         15.06         (2.2 )%      14.63         15.43         (5.2 )% 

Cargo yield per ton mile (cents) (n)

     28.42         31.63         (10.2 )%      28.86         33.11         (12.8 )% 

Passenger enplanements (thousands) (g)

     51,872         53,322         (2.7 )%      150,738         151,715         (0.6 )% 

Aircraft at end of period

     1,521         1,527         (0.4 )%      1,521         1,527         (0.4 )% 

Fuel consumption (gallons in millions)

     1,149         1,140         0.7     3,304         3,272         1.0

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

     1.48         1.67         (11.6 )%      1.37         1.80         (23.6 )% 

Full-time equivalent employees at end of period

     121,800         119,000         2.4     121,800         119,000         2.4

 

(a)

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

(b)

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

(c)

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

(d)

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

 

39


Table of Contents
(e)

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

(f)

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

(g)

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

(h)

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

(i)

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

(j)

Regional statistics include our subsidiaries, Envoy Aviation Group Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), and operating statistics from our capacity purchase agreements with Air Wisconsin Airlines Corporation, ExpressJet Airlines, Inc., Mesa Airlines, Inc., Republic Airline Inc., SkyWest Airlines, Inc., Compass Airlines, LLC and Trans States Airlines, Inc.

(k)

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

(l)

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

(m)

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

(n)

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

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Operating Revenues

 

     Three Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 7,419       $ 7,654         (3.1

Regional passenger

     1,731         1,699         1.9   

Cargo

     171         180         (5.1

Other

     1,273         1,173         8.5   
  

 

 

    

 

 

    

Total operating revenues

   $ 10,594       $ 10,706         (1.1
  

 

 

    

 

 

    

Total operating revenues in the third quarter of 2016 decreased $112 million, or 1.1%, from the 2015 period. Our mainline and regional TRASM was 14.73 cents in the third quarter of 2016, a 2.2% decrease as compared to 15.06 cents in the 2015 period. Mainline and regional passenger revenues declined $203 million, or 2.2%, as compared to the 2015 period driven by competitive capacity growth, continued macroeconomic softness outside of the United States and foreign currency weakness. The decline in mainline and regional passenger revenues was offset in part by an increase in other revenue primarily due to revenue generated from our new co-branded credit card agreements effective in the third quarter of 2016. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $7.4 billion in the third quarter of 2016 as compared to $7.7 billion in the 2015 period. Mainline RPM’s decreased 2.2% as mainline capacity, as measured by ASMs, increased 0.5%, resulting in a 2.2 point decrease in load factor to 83.9%. Mainline passenger yield decreased 0.9% to 13.87 cents in the third quarter of 2016 from 14.00 cents in the 2015 period. Mainline PRASM decreased 3.5% to 11.64 cents in the third quarter of 2016 from 12.06 cents in the 2015 period.

 

   

Regional passenger revenues were $1.7 billion in each of the third quarters of 2016 and 2015. Regional RPM’s increased 4.0% as regional capacity, as measured by ASMs, increased 6.9%, resulting in a 2.2 point decrease in load factor to 79.0%. Regional passenger yield decreased 2.0% to 26.85 cents in the third quarter of 2016 from 27.40 cents in the 2015 period. Regional PRASM decreased 4.7% to 21.21 cents in the third quarter of 2016 from 22.25 cents in the 2015 period.

 

   

Cargo revenue decreased $9 million, or 5.1%, in the third quarter of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

 

   

Other revenue increased $100 million, or 8.5%, in the third quarter of 2016 from the 2015 period primarily due to new co-branded credit card agreements effective in the third quarter of 2016.

 

40


Table of Contents

Operating Expenses

 

     Three Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 1,393       $ 1,593         (12.6

Salaries, wages and benefits

     2,772         2,404         15.3   

Maintenance, materials and repairs

     481         456         5.3   

Other rent and landing fees

     463         432         7.2   

Aircraft rent

     299         308         (3.0

Selling expenses

     347         366         (5.0

Depreciation and amortization

     399         336         18.6   

Special items, net

     289         163         77.8   

Other

     1,182         1,131         4.5   
  

 

 

    

 

 

    

Total mainline operating expenses

     7,625         7,189         6.1   

Regional expenses:

        

Fuel

     303         310         (2.4

Other

     1,235         1,208         2.3   
  

 

 

    

 

 

    

Total regional operating expenses

     1,538         1,518         1.3   
  

 

 

    

 

 

    

Total operating expenses

   $ 9,163       $ 8,707         5.2   
  

 

 

    

 

 

    

Total operating expenses were $9.2 billion in the third quarter of 2016, an increase of $456 million, or 5.2%, from the 2015 period. The increase in operating expenses was primarily driven by higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. See detailed explanations below relating to the other changes in operating costs.

Mainline CASM

Our mainline CASM increased 0.63 cents, or 5.6%, from 11.33 cents in the third quarter of 2015 to 11.96 cents in the third quarter of 2016. Excluding special items and fuel, our mainline CASM increased 0.76 cents, or 8.9%, from 8.56 cents in the third quarter of 2015 to 9.32 cents in the third quarter of 2016, while mainline capacity increased 0.5%.

The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the three months ended September 30, 2016 and 2015:

 

     Three Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In cents, except percentage changes)  

Mainline CASM:

      

Aircraft fuel and related taxes

     2.18        2.51        (13.0

Salaries, wages and benefits

     4.35        3.79        14.8   

Maintenance, materials and repairs

     0.75        0.72        4.8   

Other rent and landing fees

     0.73        0.68        6.7   

Aircraft rent

     0.47        0.49        (3.4

Selling expenses

     0.54        0.58        (5.5

Depreciation and amortization

     0.63        0.53        18.1   

Special items, net

     0.45        0.26        77.0   

Other

     1.85        1.78        4.0   
  

 

 

   

 

 

   

Total mainline CASM

     11.96        11.33        5.6   

Special items, net

     (0.45     (0.26     77.0   

Aircraft fuel and related taxes

     (2.18     (2.51     (13.0
  

 

 

   

 

 

   

Mainline CASM, excluding special items and fuel (1)

     9.32        8.56        8.9   
  

 

 

   

 

 

   

 

(1)

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

 

41


Table of Contents

Significant changes in the components of mainline CASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 13.0% primarily due to a 12.4% decrease in the average price per gallon of fuel to $1.46 in the third quarter of 2016 from $1.67 in the 2015 period.

 

   

Salaries, wages and benefits per ASM increased 14.8% primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the third quarter of 2016, we accrued $86 million for this profit sharing program.

 

   

Other rent and landing fees per ASM increased 6.7% and was primarily driven by rate increases at certain airports in the third quarter of 2016 as compared to the 2015 period.

 

   

Selling expenses per ASM decreased 5.5% primarily due to lower revenues in the third quarter of 2016, resulting in lower commissions and credit card fees.

 

   

Depreciation and amortization per ASM increased 18.1% primarily due to new purchased aircraft deliveries since the end of the third quarter of 2015 in connection with our fleet renewal program.

Regional Operating Expenses

Total regional expenses increased $20 million, or 1.3%, in the third quarter of 2016 from the 2015 period. The period-over-period increase was primarily due to a $27 million increase in other regional operating expenses, offset in part by a $7 million decrease in fuel costs. The average price per gallon of fuel decreased 7.3% to $1.55 in the third quarter of 2016 from $1.67 in the 2015 period, on a 5.3% increase in consumption. The increase in other regional operating expenses was principally due to increased regional capacity. See Note 10 to AAG’s condensed consolidated financial statements in Part I, Item 1A for more detail on regional operating expenses.

Nonoperating Income (Expense)

 

     Three Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 16      $ 10        70.6   

Interest expense, net of capitalized interest

     (250     (219     14.3   

Other, net

     (8     (81     (90.3
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (242   $ (290     (16.8
  

 

 

   

 

 

   

Our short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $31 million in the third quarter of 2016 as compared to the 2015 period primarily due to issuances of $4.1 billion in aircraft related financings since the end of the third quarter of 2015.

Other nonoperating expense, net in the third quarter of 2016 included $7 million of foreign currency losses.

Other nonoperating expense, net in the third quarter of 2015 included $62 million of foreign currency losses and $21 million in special charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The foreign currency losses in the 2015 period were driven primarily by the strengthening of the U.S. dollar in foreign currency transactions relative to other currencies, principally in Latin American and European markets, including a 30% decrease in the value of the Brazilian real and a 4% decrease in the value of the British pound.

 

42


Table of Contents

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Operating Revenues

 

     Nine Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 21,192       $ 22,298         (5.0

Regional passenger

     5,040         4,910         2.7   

Cargo

     506         568         (10.9

Other

     3,653         3,584         1.9   
  

 

 

    

 

 

    

Total operating revenues

   $ 30,391       $ 31,360         (3.1
  

 

 

    

 

 

    

Total operating revenues in the first nine months of 2016 decreased $969 million, or 3.1%, from the 2015 period primarily due to a decline in mainline and regional passenger revenues driven by competitive capacity growth, continued macroeconomic softness outside of the United States and foreign currency weakness. Our mainline and regional TRASM was 14.63 cents in the first nine months of 2016, a 5.2% decrease as compared to 15.43 cents in the 2015 period. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $21.2 billion in the first nine months of 2016 as compared to $22.3 billion in the 2015 period. Mainline RPM’s increased 0.3% as mainline capacity, as measured by ASMs, increased 1.5%, resulting in a 1.0 point decrease in load factor to 82.4%. Mainline passenger yield decreased 5.3% to 13.98 cents in the first nine months of 2016 from 14.75 cents in the 2015 period. Mainline PRASM decreased 6.4% to 11.52 cents in the first nine months of 2016 from 12.30 cents in the 2015 period.

 

   

Regional passenger revenues were $5.0 billion in the first nine months of 2016 as compared to $4.9 billion in the 2015 period. Regional RPM’s increased 3.8% as regional capacity, as measured by ASMs, increased 7.7%, resulting in a 2.9 point decrease in load factor to 77.5%. Regional passenger yield decreased 1.1% to 27.38 cents in the first nine months of 2016 from 27.69 cents in the 2015 period. Regional PRASM decreased 4.7% to 21.23 cents in the first nine months of 2016 from 22.27 cents in the 2015 period.

 

   

Cargo revenue decreased $62 million, or 10.9%, in the first nine months of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

Operating Expenses

 

     Nine Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 3,736       $ 4,912         (23.9

Salaries, wages and benefits

     8,094         7,141         13.4   

Maintenance, materials and repairs

     1,352         1,452         (6.9

Other rent and landing fees

     1,342         1,290         4.0   

Aircraft rent

     908         941         (3.6

Selling expenses

     990         1,051         (5.9

Depreciation and amortization

     1,128         1,013         11.4   

Special items, net

     450         610         (26.3

Other

     3,386         3,278         3.3   
  

 

 

    

 

 

    

Total mainline operating expenses

     21,386         21,688         (1.4

Regional expenses:

        

Fuel

     801         970         (17.4

Other

     3,687         3,566         3.4   
  

 

 

    

 

 

    

Total regional operating expenses

     4,488         4,536         (1.1
  

 

 

    

 

 

    

Total operating expenses

   $ 25,874       $ 26,224         (1.3
  

 

 

    

 

 

    

Total operating expenses were $25.9 billion in the first nine months of 2016, a decrease of $350 million, or 1.3%, from the 2015 period. The decrease in operating expenses was primarily driven by lower aircraft fuel costs, offset in part by higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. See detailed explanations below relating to other changes in operating costs.

 

43


Table of Contents

Mainline CASM

Our mainline CASM decreased 0.35 cents, or 2.9%, from 11.97 cents in the first nine months of 2015 to 11.62 cents in the first nine months of 2016. Excluding special items and aircraft fuel and related taxes, our mainline CASM increased 0.43 cents, or 4.8%, from 8.92 cents in the first nine months of 2015 to 9.35 cents in the first nine months of 2016, while mainline capacity increased 1.5%.

The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the nine months ended September 30, 2016 and 2015:

 

     Nine Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In cents, except percentage changes)  

Mainline CASM:

      

Aircraft fuel and related taxes

     2.03        2.71        (25.1

Salaries, wages and benefits

     4.40        3.94        11.7   

Maintenance, materials and repairs

     0.73        0.80        (8.3

Other rent and landing fees

     0.73        0.71        2.5   

Aircraft rent

     0.49        0.52        (5.0

Selling expenses

     0.54        0.58        (7.3

Depreciation and amortization

     0.61        0.56        9.7   

Special items, net

     0.24        0.34        (27.4

Other

     1.84        1.81        1.8   
  

 

 

   

 

 

   

Total mainline CASM

     11.62        11.97        (2.9

Special items, net

     (0.24     (0.34     (27.4

Aircraft fuel and related taxes

     (2.03     (2.71     (25.1
  

 

 

   

 

 

   

Mainline CASM, excluding special items and fuel (1)

     9.35        8.92        4.8   
  

 

 

   

 

 

   

 

(1)

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

Significant changes in the components of mainline CASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 25.1% primarily due to a 24.0% decrease in the average price per gallon of fuel to $1.36 in the first nine months of 2016 from $1.80 in the 2015 period.

 

   

Salaries, wages and benefits per ASM increased 11.7% primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the first nine months of 2016, we accrued $257 million for this profit sharing program.

 

   

Maintenance, materials and repairs per ASM decreased 8.3% and was primarily driven by fewer engine overhauls due to the timing of maintenance cycles in the first nine months of 2016 as compared to the 2015 period.

 

   

Aircraft rent per ASM decreased 5.0% and was primarily due to expirations and early exiting of aircraft leases, driven by our fleet renewal program.

 

   

Selling expenses per ASM decreased 7.3% primarily due to lower revenues in the first nine months of 2016, resulting in lower commissions and credit card fees.

 

   

Depreciation and amortization per ASM increased 9.7% primarily due to new purchased aircraft deliveries since the end of the third quarter of 2015 in connection with our fleet renewal program.

Regional Operating Expenses

Total regional expenses decreased $48 million, or 1.1%, in the first nine months of 2016 from the 2015 period. The period-over-period decrease was primarily due to a $169 million decrease in fuel costs, offset in part by a $121 million increase in other regional operating expenses. The average price per gallon of fuel decreased 21.6% to $1.42 in the first nine months of 2016 from $1.81 in the 2015 period, on a 5.4% increase in consumption. The increase in other regional operating expenses was principally due to increased regional capacity. See Note 10 to AAG’s condensed consolidated financial statements in Part I, Item 1A for more detail on regional operating expenses.

 

44


Table of Contents

Nonoperating Income (Expense)

 

     Nine Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 45      $ 29        54.9   

Interest expense, net of capitalized interest

     (738     (651     13.2   

Other, net

     (25     (143     (82.2
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (718   $ (765     (6.2
  

 

 

   

 

 

   

Our short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $87 million in the first nine months of 2016 as compared to the 2015 period primarily due to issuances of $4.1 billion in aircraft related financings since the end of the third quarter of 2015.

Other nonoperating expense, net in the first nine months of 2016 included $36 million in special charges related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees in connection with a bond refinancing, offset in part by $19 million of foreign currency gains. The foreign currency gains were driven primarily by the weakening of the U.S. dollar relative to other currencies, principally the Brazilian real, which appreciated 19% in the first nine months of 2016.

Other nonoperating expense, net in the first nine months of 2015 included $144 million of foreign currency losses driven primarily by the strengthening of the U.S. dollar in foreign currency transactions relative to other currencies, principally in Latin American and European markets, including a 50% decrease in the value of the Brazilian real, an 8% decrease in the value of the Euro and a 2% decrease in the value of the British pound.

American’s Results of Operations

On December 30, 2015, in order to simplify AAG’s internal corporate structure and as part of the integration efforts following the business combination of AAG and US Airways Group, US Airways merged with and into American, with American as the surviving corporation. As a result of the merger of US Airways and American, US Airways transferred all of its assets, liabilities and off-balance sheet commitments to American. For financial reporting purposes, this transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost. As a result, American’s condensed consolidated financial statements as well as this management’s discussion and analysis of financial condition and results of operations in this Quarterly Report on Form 10-Q (unless otherwise indicated) are presented as though the transaction had occurred on December 9, 2013, when a subsidiary of AMR merged with and into US Airways Group, which represents the earliest date that American and US Airways were under common control. Thus, all periods presented below in American’s Results of Operations are comprised of the financial data of American and US Airways.

American realized pre-tax income of $1.2 billion and $1.7 billion in the third quarters of 2016 and 2015, respectively. Excluding the effects of net special charges, American recognized pre-tax income of $1.5 billion and $1.9 billion in the third quarters of 2016 and 2015, respectively.

American realized pre-tax income of $3.9 billion and $4.4 billion in the first nine months of 2016 and 2015, respectively. Excluding the effects of net special charges, American recognized pre-tax income of $4.4 billion and $5.1 billion in the first nine months of 2016 and 2015, respectively.

American’s 2016 third quarter and first nine months results on both a GAAP basis and excluding net special charges were impacted by a decline in revenues driven by lower yields and travel demand. In addition, our results were impacted by higher salaries, wages and benefits associated with new labor contracts and the addition of an employee profit sharing program. These impacts were offset in part by a year-over-year decline in fuel prices.

 

45


Table of Contents

The table below details American’s pre-tax and net income excluding special items (in millions):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016     2015      2016     2015  

Pre-tax income

   $ 1,223      $ 1,738       $ 3,886      $ 4,408   

Pre-tax special items:

         

Mainline operating special charges, net (1)

     289        163         450        610   

Regional operating special charges, net

     3        2         11        11   

Nonoperating special charges, net (2)

     —          21         36        24   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total pre-tax special items

     292        186         497        645   
  

 

 

   

 

 

    

 

 

   

 

 

 

Pre-tax income excluding special items

   $ 1,515      $ 1,924       $ 4,383      $ 5,053   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 758      $ 1,723       $ 2,441      $ 4,369   

Total special items:

         

Total pre-tax special items

     292        186         497        645   

Income tax special charges, net

     —          6         —          22   

Net tax effect of special items (3)

     (98     —           (188     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total special items

     194        192         309        667   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income excluding special items

   $ 952      $ 1,915       $ 2,750      $ 5,036   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

The 2016 third quarter mainline operating special items totaled a net charge of $289 million, which principally included $225 million of merger integration expenses and a $39 million net charge for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. The 2016 nine month period mainline operating special items totaled a net charge of $450 million, which principally included $467 million of merger integration expenses, offset in part by a $22 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations. For the 2016 third quarter and nine month periods, merger integration expenses included costs related to re-branding of aircraft, airport facilities and uniforms, information technology, alignment of labor union contracts, fleet restructuring, professional fees, relocation and training, as well as severance.

The 2015 third quarter mainline operating special items totaled a net charge of $163 million, which principally included $198 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $66 million credit related to proceeds received from a legal settlement. The 2015 nine month period mainline operating special items totaled a net charge of $610 million, which principally included $741 million of merger integration expenses and a $38 million charge in connection with the dissolution of a joint venture. These charges were offset in part by a $75 million net credit for bankruptcy related items principally consisting of fair value adjustments for bankruptcy settlement obligations and a $66 million credit related to proceeds received from a legal settlement. For the 2015 third quarter and nine month periods, merger integration expenses included costs related to information technology, fleet restructuring, alignment of labor union contracts, professional fees, severance, relocation and training, re-branding of aircraft, airport facilities and uniforms, as well as share-based compensation.

 

(2)

In connection with a bond refinancing, American recorded a $36 million nonoperating special charge in the 2016 nine month period related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees.

The 2015 third quarter nonoperating special items totaled a net charge of $21 million, which was primarily due to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The 2015 nine month period nonoperating special items totaled a net charge of $24 million, which principally included $41 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank.

 

(3)

In the 2015 periods, there was no net tax effect associated with special items. During the 2015 periods, American’s net deferred tax asset, which includes its NOLs, was subject to a full valuation allowance. Accordingly, American’s NOLs offset its taxable income and resulted in the release of a corresponding portion of valuation allowance, which offset the tax provision dollar for dollar.

Income Taxes

At December 31, 2015, American had approximately $8.8 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2016. American is a member of AAG’s consolidated federal

 

46


Table of Contents

and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $8.0 billion, substantially all of which is expected to be available for use in 2016. The federal NOL Carryforwards will expire beginning in 2022 if unused. American also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2015, which will expire in years 2016 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 bankruptcy in 2013. 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 permitted approximately $9.5 billion (with $7.3 billion of unlimited NOL remaining at December 31, 2015) of its federal NOL Carryforwards to be utilized without regard to the Section 382 annual limitation rules. Substantially all of American’s remaining federal NOL Carryforwards are subject to limitation under Section 382; however, American’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. American’s ability to utilize any new NOL Carryforwards arising after the 2013 ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

At December 31, 2015, American had an Alternative Minimum Tax credit carryforward of approximately $458 million available for federal income tax purposes, which is available for an indefinite period.

In connection with the preparation of American’s financial statements for the fourth quarter of 2015, management determined that it was more likely than not that substantially all of its deferred tax assets, which include its NOLs, would be realized. Accordingly, American reversed $3.5 billion of the valuation allowance as of December 31, 2015.

In the first nine months of 2016, American recorded income tax expense with an effective rate of approximately 38%, which is substantially non-cash as American utilized the NOLs described above. For purposes of taxation, substantially all of American’s income before income taxes is attributable to the United States.

Following the filing of AAG’s 2015 annual tax return in the third quarter of 2016, federal NOLs, substantially all of which are expected to be available to reduce future federal taxable income in 2016 and future years, increased by $2.4 billion. The increase in the federal NOLs is attributable to the election to take bonus depreciation on eligible assets (primarily aircraft) in the 2015 federal income tax return.

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Operating Revenues

 

     Three Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 7,419       $ 7,654         (3.1

Regional passenger

     1,731         1,699         1.9   

Cargo

     171         180         (5.1

Other

     1,368         1,200         14.0   
  

 

 

    

 

 

    

Total operating revenues

   $ 10,689       $ 10,733         (0.4
  

 

 

    

 

 

    

Total operating revenues in the third quarter of 2016 decreased $44 million, or 0.4%, from the 2015 period. Mainline and regional passenger revenues declined $203 million, or 2.2%, as compared to the 2015 period driven by competitive capacity growth, continued macroeconomic softness outside of the United States and foreign currency weakness. The decline in mainline and regional passenger revenues was offset in part by an increase in other revenue primarily due to revenue generated from the new co-branded credit card agreements effective in the third quarter of 2016. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues decreased $235 million, or 3.1%, in the third quarter of 2016 from the 2015 period due to a decrease in yield and RPMs.

 

   

Regional passenger revenues increased $32 million, or 1.9%, in the third quarter of 2016 from the 2015 period due to higher RPMs, offset in part by a decrease in yield.

 

   

Cargo revenue decreased $9 million, or 5.1%, in the third quarter of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

 

   

Other revenue increased $168 million, or 14.0%, in the third quarter of 2016 from the 2015 period primarily due to new co-branded credit card agreements effective in the third quarter of 2016.

 

47


Table of Contents

Operating Expenses

 

     Three Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 1,393       $ 1,593         (12.6

Salaries, wages and benefits

     2,770         2,402         15.3   

Maintenance, materials and repairs

     481         456         5.3   

Other rent and landing fees

     463         432         7.2   

Aircraft rent

     299         308         (3.0

Selling expenses

     347         366         (5.0

Depreciation and amortization

     399         336         18.6   

Special items, net

     289         163         77.8   

Other

     1,184         1,133         4.6   
  

 

 

    

 

 

    

Total mainline operating expenses

     7,625         7,189         6.1   

Regional expenses:

        

Fuel

     303         310         (2.4

Other

     1,329         1,231         7.9   
  

 

 

    

 

 

    

Total regional operating expenses

     1,632         1,541         5.9   
  

 

 

    

 

 

    

Total operating expenses

   $ 9,257       $ 8,730         6.0   
  

 

 

    

 

 

    

Total operating expenses in the third quarter of 2016 increased $527 million, or 6.0%, from the 2015 period. Significant changes in the components of mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes decreased $200 million, or 12.6%, in the third quarter of 2016 from the 2015 period primarily due to a decrease in the average price per gallon of fuel.

 

   

Salaries, wages and benefits increased $368 million, or 15.3%, in the third quarter of 2016 from the 2015 period primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the third quarter of 2016, American accrued $86 million for this profit sharing program.

 

   

Other rent and landing fees increased $31 million, or 7.2%, and was primarily driven by rate increases at certain airports in the third quarter of 2016 as compared to the 2015 period.

 

   

Selling expenses decreased $19 million, or 5.0%, primarily due to lower revenues in the third quarter of 2016, resulting in lower commissions and credit card fees.

 

   

Depreciation and amortization increased $63 million, or 18.6%, primarily due to new purchased aircraft deliveries since the end of the third quarter of 2015 in connection with American’s fleet renewal program.

Regional Operating Expenses

Total regional expenses increased $91 million, or 5.9%, in the third quarter of 2016 from the 2015 period. The period-over-period increase was primarily due to a $98 million increase in other regional operating expenses principally due to increased flying under capacity purchase agreements, offset in part by a $7 million decrease in fuel costs due to a decrease in the average price per gallon of fuel. See Note 8 to American’s condensed consolidated financial statements in Part I, Item 1B for more detail on regional operating expenses.

Nonoperating Income (Expense)

 

     Three Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 28      $ 13        nm   

Interest expense, net of capitalized interest

     (229     (197     16.3   

Other, net

     (8     (81     (89.8
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (209   $ (265     (21.2
  

 

 

   

 

 

   

American’s short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $32 million in the third quarter of 2016 as compared to the 2015 period primarily due to issuances of $4.1 billion in aircraft related financings since the end of the third quarter of 2015.

 

48


Table of Contents

Other nonoperating expense, net in the third quarter of 2016 included $7 million of foreign currency losses.

Other nonoperating expense, net in the third quarter of 2015 included $62 million of foreign currency losses and $21 million in special charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with the purchase and subsequent remarketing of certain special facility revenue bonds. The foreign currency losses in the 2015 period were driven primarily by the strengthening of the U.S. dollar in foreign currency transactions relative to other currencies, principally in Latin American and European markets, including a 30% decrease in the value of the Brazilian real and a 4% decrease in the value of the British pound.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Operating Revenues

 

     Nine Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Mainline passenger

   $ 21,192       $ 22,298         (5.0

Regional passenger

     5,040         4,910         2.7   

Cargo

     506         568         (10.9

Other

     3,897         3,647         6.8   
  

 

 

    

 

 

    

Total operating revenues

   $ 30,635       $ 31,423         (2.5
  

 

 

    

 

 

    

Total operating revenues in the first nine months of 2016 decreased $788 million, or 2.5%, from the 2015 period primarily due to a decline in mainline and regional passenger revenues driven by competitive capacity growth, continued macroeconomic softness outside of the United States and foreign currency weakness. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues decreased $1.1 billion, or 5.0%, in the first nine months of 2016 from the 2015 period due to a decrease in yield.

 

   

Regional passenger revenues increased $130 million, or 2.7%, in the first nine months of 2016 from the 2015 period due to higher RPMs, offset in part by a decrease in yield.

 

   

Cargo revenue decreased $62 million, or 10.9%, in the first nine months of 2016 from the 2015 period driven primarily by a decrease in domestic and international freight yields.

Operating Expenses

 

     Nine Months Ended
September 30,
     Percent
Increase
(Decrease)
 
     2016      2015     
     (In millions, except percentage changes)  

Aircraft fuel and related taxes

   $ 3,736       $ 4,912         (23.9

Salaries, wages and benefits

     8,087         7,134         13.4   

Maintenance, materials and repairs

     1,352         1,452         (6.9

Other rent and landing fees

     1,342         1,290         4.0   

Aircraft rent

     908         941         (3.6

Selling expenses

     990         1,051         (5.9

Depreciation and amortization

     1,128         1,013         11.4   

Special items, net

     450         610         (26.3

Other

     3,391         3,281         3.4   
  

 

 

    

 

 

    

Total mainline operating expenses

     21,384         21,684         (1.4

Regional expenses:

        

Fuel

     801         970         (17.4

Other

     3,937         3,644         8.0   
  

 

 

    

 

 

    

Total regional operating expenses

     4,738         4,614         2.7   
  

 

 

    

 

 

    

Total operating expenses

   $ 26,122       $ 26,298         (0.7
  

 

 

    

 

 

    

Total operating expenses in the first nine months of 2016 decreased $176 million, or 0.7%, from the 2015 period. Significant changes in the components of mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes decreased $1.2 billion, or 23.9%, in the first nine months of 2016 from the 2015 period primarily due to a decrease in the average price per gallon of fuel.

 

49


Table of Contents
   

Salaries, wages and benefits increased $953 million, or 13.4%, in the first nine months of 2016 from the 2015 period primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program effective January 1, 2016. During the first nine months of 2016, American accrued $257 million for this profit sharing program.

 

   

Maintenance, materials and repairs decreased $100 million, or 6.9%, and was primarily driven by fewer engine overhauls due to the timing of maintenance cycles in the first nine months of 2016 as compared to the 2015 period.

 

   

Aircraft rent decreased $33 million, or 3.6%, and was primarily due to expirations and early exiting of aircraft leases, driven by American’s fleet renewal program.

 

   

Selling expenses decreased $61 million, or 5.9%, in the first nine months of 2016 from the 2015 period primarily due to lower revenues in the first nine months of 2016, resulting in lower commissions and credit card fees.

 

   

Depreciation and amortization increased $115 million, or 11.4%, primarily due to new purchased aircraft deliveries since the end of the third quarter of 2015 in connection with American’s fleet renewal program.

Regional Operating Expenses

Total regional expenses increased $124 million, or 2.7%, in the first nine months of 2016 from the 2015 period. The period-over-period increase was primarily due to a $293 million increase in other regional operating expenses principally due to increased flying under capacity purchase agreements, offset in part by a $169 million decrease in fuel costs due to a decrease in the average price per gallon of fuel. See Note 8 to American’s condensed consolidated financial statements in Part I, Item 1B for more detail on regional operating expenses.

Nonoperating Income (Expense)

 

     Nine Months Ended
September 30,
    Percent
Increase
(Decrease)
 
     2016     2015    
     (In millions, except percentage changes)  

Interest income

   $ 74      $ 36        nm   

Interest expense, net of capitalized interest

     (674     (587     14.7   

Other, net

     (27     (166     (83.7
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (627   $ (717     (12.6
  

 

 

   

 

 

   

American’s short-term investments in each period consisted of highly liquid investments which provided nominal returns.

Interest expense, net of capitalized interest increased $87 million in the first nine months of 2016 as compared to the 2015 period primarily due to issuances of $4.1 billion in aircraft related financings since the end of the third quarter of 2015.

Other nonoperating expense, net in the first nine months of 2016 included $36 million in special charges related to non-cash write offs of unamortized bond discounts and issuance costs as well as payments of redemption premiums and fees in connection with a bond refinancing, offset in part by $19 million of foreign currency gains. The foreign currency gains were driven primarily by the weakening of the U.S. dollar relative to other currencies, principally the Brazilian real, which appreciated 19% in the first nine months of 2016.

Other nonoperating expense, net in the first nine months of 2015 included $143 million of foreign currency losses and a net $24 million in special charges, which principally included $41 million in charges primarily related to non-cash write offs of unamortized debt discount and debt issuance costs associated with refinancing American’s secured term loan facilities, prepayments of certain aircraft financings and the purchase and subsequent remarketing of certain special facility revenue bonds. These charges were offset in part by a $17 million early debt extinguishment gain associated with the repayment of American’s AAdvantage loan with Citibank. The foreign currency losses were driven primarily by the strengthening of the U.S. dollar in foreign currency transactions relative to other currencies, principally in Latin American and European markets, including a 50% decrease in the value of the Brazilian real, an 8% decrease in the value of the Euro and a 2% decrease in the value of the British pound.

 

50


Table of Contents

Liquidity and Capital Resources

Liquidity

As of September 30, 2016, AAG had approximately $9.2 billion in total available liquidity and $635 million in restricted cash and short-term investments. Additional detail of our available liquidity is provided in the table below (in millions):

 

     AAG      American  
     September 30, 2016      December 31, 2015      September 30, 2016      December 31, 2015  

Cash

   $ 381       $ 390       $ 372       $ 364   

Short-term investments

     6,374         5,864         6,371         5,862   

Undrawn revolver capacity

     2,425         2,425         2,425         2,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available liquidity

   $ 9,180       $ 8,679       $ 9,168       $ 8,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our cash and short-term investments located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition. See Part II, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.

Share Repurchase Programs

Since July 2014, our Board of Directors has approved several share repurchase programs aggregating $9.0 billion of authority of which, as of September 30, 2016, $555 million remained unused under repurchase programs that expire on December 31, 2017. Share repurchases under our share repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.

During the three months ended September 30, 2016, we repurchased 18.2 million shares of AAG common stock for $616 million at a weighted average cost per share of $33.87. During the nine months ended September 30, 2016, we repurchased 107.7 million shares of AAG common stock for $3.9 billion at a weighted average cost per share of $35.87. Since the inception of the share repurchase programs in July 2014, we have repurchased 216.2 million shares of AAG common stock for $8.4 billion at a weighted average cost per share of $39.06.

Cash Dividends Paid

Our Board of Directors declared the following cash dividends during the first nine months of 2016:

 

Period

   Per share      For stockholders
of record as of
     Payable on      Cash paid
(millions)
 

First Quarter

   $ 0.10         February 10, 2016         February 24, 2016       $ 61   

Second Quarter

   $ 0.10         May 4, 2016         May 18, 2016         58   

Third Quarter

   $ 0.10         August 5, 2016         August 19, 2016         53   
           

 

 

 

Total

            $ 172   
           

 

 

 

In October 2016, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on November 7, 2016, and payable on November 21, 2016.

Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

Sources and Uses of Cash

AAG and American

Operating Activities

AAG’s net cash provided by operating activities was $5.9 billion and $6.0 billion for the first nine months of 2016 and 2015, respectively. While AAG’s profitability was lower in the 2016 period as compared to the same period in 2015, cash provided by operating activities remained relatively flat on a year-over-year basis due to favorable changes in working capital primarily driven by certain payments related to our new co-branded credit card agreements effective in the third quarter of 2016.

 

51


Table of Contents

American’s net cash provided by operating activities was $1.8 billion and $3.9 billion for the first nine months of 2016 and 2015, respectively, a period-over-period decrease of $2.1 billion. The decline in operating cash flows was primarily due to American’s increased cash funding of AAG’s share repurchases and dividend payments in the 2016 period. In addition, American received the proceeds of the $500 million senior notes issued by AAG during the first quarter of 2015, which also contributed to the period-over-period decline in operating cash flows.

Investing Activities

Net cash used in investing activities was $4.6 billion and $6.0 billion for the first nine months of 2016 and 2015, respectively, for both AAG and American.

AAG and American’s principal investing activities in the 2016 period included expenditures of $4.3 billion and $4.2 billion, respectively, for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 19 Airbus A321 aircraft, 18 Bombardier CRJ900 aircraft, 18 Embraer 175 aircraft, 15 Boeing 737-800 aircraft, five Boeing 787 family aircraft and two Boeing 777 aircraft, as well as $491 million in net purchases of short-term investments.

AAG and American’s principal investing activities in the 2015 period each included expenditures of $4.6 billion for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 24 Airbus A321 aircraft, 15 Embraer 175 aircraft, 14 Bombardier CRJ900 aircraft, 12 Boeing 737-800 aircraft, 11 Boeing 787 aircraft, seven Airbus A319 aircraft and one Boeing 777 aircraft, the purchase of five Boeing 757 aircraft previously being leased, as well as $1.6 billion in net purchases of short-term investments.

Financing Activities

AAG’s net cash used in financing activities was $1.3 billion for the first nine months of 2016 as compared to $33 million provided by financing activities for the first nine months of 2015. American’s net cash provided by financing activities was $2.8 billion and $2.2 billion for the first nine months of 2016 and 2015, respectively.

AAG and American’s principal financing activities in the 2016 period each included proceeds of $5.4 billion from the issuance of debt, primarily including the $2.1 billion issuance of enhanced equipment trust certifications (EETCs) by American, $1.0 billion provided under the 2016 Term Loan Facility, the $844 million issuance of special facility revenue refunding bonds related to John F. Kennedy International Airport (JFK) and an additional $1.4 billion borrowed in connection with the financing of certain aircraft. These cash inflows were offset in part by debt repayments of $2.5 billion by AAG and American, primarily including the repayment of approximately $588 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B-2 and the refunding of approximately $1.0 billion of special facility revenue bonds related to JFK. In addition, AAG had cash outflows of $3.9 billion in share repurchases and $172 million in dividend payments.

AAG and American’s principal financing activities in the 2015 period included proceeds from the issuance of debt of $4.5 billion and $4.0 billion, respectively, primarily including the $2.3 billion issuance of EETCs by American and the $500 million issuance of 4.625% senior notes by AAG. These cash inflows were offset in part by debt repayments of $1.8 billion by AAG and American, including the $400 million repayment of American’s AAdvantage loan with Citibank. In addition, AAG had cash outflows of $2.4 billion in share repurchases and $206 million in dividend payments.

Commitments

Significant Indebtedness

As of September 30, 2016, AAG and American had $23.6 billion and $21.8 billion, respectively, in long-term debt and capital leases (including current maturities of $1.8 billion each). During the nine months ended September 30, 2016, there have been no material changes in our significant indebtedness as discussed in our 2015 Form 10-K, except for our new 2016 Credit Facilities, the repayment of the 2013 Citicorp Credit Facility Tranche B-2, the refinancing of certain special facility revenue bonds related to JFK, the amendment of the 2014 Credit Facilities to reduce the applicable interest rate margins, and new aircraft related indebtedness. See Note 5 to AAG’s condensed consolidated financial statements in Part I, Item 1A and Note 3 to American’s condensed consolidated financial statements in Part I, Item 1B for all indebtedness as of September 30, 2016, as well as 2016 financing activities.

Collateral Related Covenants

Certain of our debt financing agreements contain loan to value ratio covenants and require us to annually appraise the related collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, we are required, as applicable, to

 

52


Table of Contents

pledge additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part. We were in compliance with the collateral coverage tests for the 2013 Credit Facilities, 2013 Citicorp Credit Facility, the 2014 Credit Facilities and the 2016 Credit Facilities as of the most recent measurement dates.

Credit Ratings

The following table details our credit ratings as of September 30, 2016:

 

     S&P
Local Issuer
Credit Rating
   Fitch
Issuer Default
Credit Rating
   Moody’s
Corporate
Family Rating

AAG

   BB-    BB-    Ba3

American

   BB-    BB-    *

 

*

The credit agency does not rate this category for the respective entity.

A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness. See Part II, Item 1A. Risk Factors – “Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, results of operations and financial condition” for additional discussion.

Aircraft and Engine Purchase Commitments

As of September 30, 2016, we have definitive purchase agreements with Airbus, Boeing and Embraer for the acquisition of the following mainline and regional aircraft:

 

     Remainder
of 2016
     2017      2018      2019      2020      2021 and
Thereafter
     Total  

Airbus

                    

A320 Family

     6         20         —           —           —           —           26   

A320neo Family

     —           —           —           25         25         50         100   

A350 XWB

     —           —           2         5         5         10         22   
Boeing                     

737-800

     5         20         —           —           —           —           25   

737 MAX Family

     —           4         16         20         20         40         100   

787 Family

     3         13         8         —           —           —           24   
Embraer                     

ERJ175 (1)

     6         12         —           —           —           —           18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     20         69         26         50         50         100         315   

 

(1)

These aircraft may be operated by wholly-owned subsidiaries or leased to third-party regional carriers which would operate the aircraft under capacity purchase arrangements.

We also have agreements for 48 spare engines to be delivered in 2016 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of September 30, 2016 are expected to be as follows (in millions):

 

     Remainder
of 2016
     2017      2018      2019      2020      2021 and
Thereafter
     Total  

Payments for the above aircraft commitments and certain engines (1)

   $ 1,089       $ 4,060       $ 2,196       $ 3,119       $ 3,138       $ 5,512       $ 19,114   

 

(1)

These amounts are net of purchase deposits currently held by the manufacturers and include all commitments for regional aircraft. American has granted a security interest in its purchase deposits with Boeing. Our purchase deposits held by all manufacturers totaled $1.1 billion as of September 30, 2016.

 

53


Table of Contents

In July 2016, we amended our purchase agreement with Airbus, the principal purpose of which was to revise the delivery schedule of the A350s, and such revised delivery schedule is reflected in the table and future payment schedule above. Prior to the effectiveness of the amendment, the delivery schedule for the A350s was four in 2017, 10 in 2018, six in 2019 and two in 2020.

As of September 30, 2016, we did not have financing commitments for the following aircraft currently on order and scheduled to be delivered through 2017: 19 Airbus A320 family aircraft in 2017, 12 Boeing 787 family aircraft in 2017, ten Boeing 737-800 aircraft in 2017 and four Boeing 737 MAX family aircraft in 2017. In addition, we do not have financing commitments in place for substantially all aircraft currently on order and scheduled to be delivered in 2018 and beyond. See Part II, Item 1A. Risk Factors – “We will need to obtain sufficient financing or other capital to operate successfully.”

Labor Agreements

In March 2016, we reached a tentative agreement with the Transport Workers Union (TWU) for a new five-year joint collective bargaining agreement applicable to dispatchers and operational specialists, which was ratified by TWU membership in April 2016 and provides immediate and significant pay increases.

In August 2016, we reached an interim agreement with the Transport Workers Union International Association of Machinists & Aerospace Workers (TWU-IAM) to move approximately 35,000 maintenance, fleet service, stores and planner employees represented by the TWU-IAM to new pay rates and to provide additional flexibility in assigning work to these employees. This new interim agreement provides immediate and significant pay increases and does not constitute a new joint collective bargaining agreement, and negotiations for such an agreement will continue.

In September 2016, we reached a tentative agreement with the TWU-IAM on a new joint collective bargaining agreement applicable to flight simulator engineers, which is subject to ratification by the TWU-IAM membership.

In October 2016, we reached a tentative agreement with the TWU on a new joint collective bargaining agreement applicable to flight crew training instructors and simulator instructors, which is subject to ratification by the TWU membership.

Co-branded Credit Card Agreements

In July 2016, American, Citi, Barclaycard US and MasterCard announced new agreements relating to American’s co-branded credit card program. Under the new arrangements, American will partner with two banks to provide co-branded credit cards. Citi and Barclaycard US will both issue AAdvantage co-branded credit cards commencing in January 2017. American also announced a new exclusive partnership and direct relationship with MasterCard. All new AAdvantage co-branded credit cards will be affiliated with MasterCard going forward. Consistent with our prior co-branded credit card agreements, we are accounting for these new agreements in accordance with Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements” as disclosed in our critical accounting policies and the consolidated financial statements and accompanying notes contained in our 2015 Form 10-K.

Republic Capacity Purchase Agreement