American Airlines Group, Inc. is an American holding company based in Fort Worth, Texas. As a holding company, several airlines are located under the umbrella of the American Airlines Group such as: American Airlines, US Airways, American Eagle, Envoy, Piedmont Airlines and PSA Airlines.
1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1998. [ ]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. AMR Corporation (Exact name of registrant as specified in its charter) Delaware 75-1825172 (State or other (I.R.S. Employer jurisdiction Identification No.) of incorporation or organization) 4333 Amon Carter Blvd. Fort Worth, Texas 76155 (Address of principal (Zip Code) executive offices) Registrant's telephone number, (817) 963-1234 including area code Not Applicable (Former name, former address and former fiscal year , if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $1 par value - 182,342,724 as of August 11, 1998
2 INDEX AMR CORPORATION PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Operations -- Three and six months ended June 30, 1998 and 1997 Condensed Consolidated Balance Sheet -- June 30, 1998 and December 31, 1997 Condensed Consolidated Statement of Cash Flows -- Six months ended June 30, 1998 and 1997 Notes to Condensed Consolidated Financial Statements -- June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II: OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURE
3 PART I: FINANCIAL INFORMATION Item 1. Financial Statements AMR CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In millions, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues Airline Group: Passenger - American Airlines, Inc $3,789 $3,641 $7,367 $7,031 -American Eagle 289 256 545 504 Cargo 169 174 332 338 Other 244 221 470 425 4,491 4,292 8,714 8,298 The SABRE Group 577 449 1,131 889 Management Services Group 148 151 308 312 Less: Intergroup revenues (204) (180) (404) (361) Total operating revenues 5,012 4,712 9,749 9,138 Expenses Wages, salaries and benefits 1,693 1,556 3,317 3,096 Aircraft fuel 404 471 819 991 Commissions to agents 322 329 623 643 Depreciation and amortization 324 310 647 622 Maintenance, materials and repairs 226 219 458 414 Other rentals and landing fees 228 227 446 445 Food service 175 173 339 334 Aircraft rentals 143 143 285 287 Other operating expenses 770 694 1,531 1,367 Total operating expenses 4,285 4,122 8,465 8,199 Operating Income 727 590 1,284 939 Other Income (Expense) Interest income 32 31 66 58 Interest expense (92) (102) (188) (207) Interest capitalized 25 3 43 5 Minority interest (12) (10) (25) (22) Miscellaneous - net (4) (8) (19) (12) (51) (86) (123) (178) Earnings Before Income Taxes 676 504 1,161 761 Income tax provision 267 202 462 307 Net Earnings $ 409 $ 302 $ 699 $ 454 Earnings Per Common Share Basic $ 2.38 $ 1.66 $ 4.06 $ 2.50 Diluted $ 2.30 $ 1.63 $ 3.91 $ 2.45 Number of Shares Used in Computation Basic 172 182 172 182 Diluted 178 185 179 185 </TABLE> The accompanying notes are an integral part of these financial statements. -1-
4 AMR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (In millions) <TABLE> <CAPTION> June 30, December 31, 1998 1997 (Note 1) <S> <C> <C> Assets Current Assets Cash $ 108 $ 64 Short-term investments 2,124 2,370 Receivables, net 1,753 1,370 Inventories, net 651 636 Deferred income taxes 406 406 Other current assets 219 225 Total current assets 5,261 5,071 Equipment and Property Flight equipment, net 8,588 8,543 Other equipment and property, net 1,956 1,874 Purchase deposits for flight equipment 1,164 754 11,708 11,171 Equipment and Property Under Capital Leases Flight equipment, net 1,844 1,923 Other equipment and property, net 165 163 2,009 2,086 Route acquisition costs, net 930 945 Other assets, net 2,037 1,642 $ 21,945 $ 20,915 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 1,104 $ 1,021 Accrued liabilities 1,978 2,020 Air traffic liability 2,279 2,044 Current maturities of long-term debt 379 397 Current obligations under capital leases 135 135 Total current liabilities 5,875 5,617 Long-term debt, less current maturities 2,327 2,260 Obligations under capital leases, less current obligations 1,518 1,629 Deferred income taxes 1,264 1,105 Other liabilities, deferred gains, deferred credits and postretirement benefits 4,320 4,088 Stockholders' Equity Common stock 182 182 Additional paid-in capital 3,073 3,104 Treasury stock (699) (485) Retained earnings 4,085 3,415 6,641 6,216 $ 21,945 $ 20,915 </TABLE> The accompanying notes are an integral part of these financial statements. -2-
5 AMR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In millions) <TABLE> <CAPTION> Six months Ended June 30, 1998 1997 <S> <C> <C> Net Cash Provided by Operating Activities $1,318 $1,059 Cash Flow from Investing Activities: Capital expenditures, including purchase deposits for flight equipment (1,224) (461) Net decrease (increase) in short-term investments 246 (434) Investment in joint venture (140) - Proceeds from sale of equipment and property 179 177 Net cash used for investing activities (939) (718) Cash Flow from Financing Activities: Payments on long-term debt and capital lease obligations (138) (261) Issuance of long-term debt 94 - Repurchases of common stock (366) (158) Proceeds from exercise of stock options 75 32 Net cash used for financing activities (335) (387) Net increase (decrease) in cash 44 (46) Cash at beginning of period 64 68 Cash at end of period $ 108 $ 22 Cash Payments For: Interest $ 158 $ 214 Income taxes 273 231 </TABLE> The accompanying notes are an integral part of these financial statements. -3-
6 AMR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1.The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the AMR Corporation (AMR or the Company) Annual Report on Form 10-K/A No. 1 for the year ended December 31, 1997. Certain amounts from 1997 have been reclassified to conform with the 1998 presentation. 2.Accumulated depreciation of owned equipment and property at June 30, 1998 and December 31, 1997, was $7.1 billion and $6.7 billion, respectively. Accumulated amortization of equipment and property under capital leases at June 30, 1998 and December 31, 1997, was $1.2 billion. 3.The Miami International Airport Authority is currently remediating various environmental conditions at Miami International Airport (Airport) and funding the remediation costs through landing fee revenues. Future costs of the remediation effort may be borne by carriers operating at the Airport, including American Airlines, Inc. (American), through increased landing fees and/or other charges. The ultimate resolution of this matter is not expected to have a significant impact on the financial position or liquidity of AMR. 4.During 1998, the Company exercised its purchase rights to acquire 25 Boeing 737-800s and 23 Boeing 777-200IGWs. As of August 14, 1998, the Company had commitments to acquire the following aircraft: 100 Boeing 737-800s, 34 Boeing 777-200IGWs, 11 Boeing 757-200s, four Boeing 767-300ERs, 32 Embraer EMB-145s and 25 Bombardier CRJ-700s. Deliveries of these aircraft will occur during the remainder of 1998 and will continue through 2004. Payments for these aircraft will approximate $850 million during the remainder of 1998, $2.6 billion in 1999, $1.9 billion in 2000 and an aggregate of approximately $2.3 billion in 2001 through 2004. The exercise of these aircraft purchase rights will allow the Company to continue the retirement of its Boeing 727-200 and McDonnell Douglas DC-10 fleets, which the Company anticipates to be complete by 2004, as well as to provide for modest growth. 5.In March 1998, the Company exercised its option to sell seven MD-11 aircraft to Federal Express Corporation (FedEx), thereby committing to sell its entire MD-11 fleet to FedEx. Eight aircraft have been delivered as of June 30, 1998. The remaining 11 aircraft will be delivered to FedEx between 1999 and 2003. 6.In April 1998, the Company's Board of Directors approved a two-for- one stock split in the form of a stock dividend, subject to shareholder approval of an amendment to the Company's Certificate of Incorporation to increase the number of authorized common shares. On May 20, 1998, the Company's shareholders approved the amendment to the Company's Certificate of Incorporation thereby increasing the total number of authorized shares of all classes of stock to 770 million, of which 20 million are shares of preferred stock (without par value) and 750 million are shares of common stock ($1 par value). The stock split was effective on June 9, 1998 for shareholders of record on May 26, 1998. All share and earnings per share amounts have been restated to give effect to the stock split. 7.In July 1998, the Company's board of directors authorized management to repurchase up to an additional $500 million of the Company's outstanding common stock. -4-
7 AMR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 8.In January 1998, The SABRE Group completed the execution of a 25- year information technology services agreement with US Airways. Under the terms of the agreement, The SABRE Group will provide substantially all of US Airways' information technology services. In connection with the agreement, The SABRE Group purchased substantially all of US Airways' information technology assets for approximately $47 million and granted US Airways two tranches of stock options, each to acquire 3 million shares of The SABRE Group's Class A Common Stock (SABRE Common Stock). During certain periods, US Airways may select an alternative vehicle of substantially equivalent value in place of receiving stock. During the first quarter of 1998, a long-term liability and a related deferred asset equal to the number of options granted multiplied by the difference between the exercise price of the options and the market price of SABRE Common Stock were recorded. The asset and liability are adjusted based on changes in the market price of SABRE Common Stock. The deferred asset is being amortized over the eleven-year non-cancelable portion of the agreement. 9.As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS 130 had no impact on the Company's net income or stockholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and changes in minimum pension liabilities, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. During the second quarter of 1998 and 1997, total comprehensive income was approximately $409 million and $303 million, respectively. Total comprehensive income for the six months ended June 30, 1998 and 1997 was approximately $699 million and $454 million, respectively. Effective January 1, 1998, the Company adopted early the provisions of Statement of Position No. 98-5, "Reporting on the Costs of Start- Up Activities," (SOP 98-5). SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The adoption of SOP 98-5 did not have a material impact on the Company's financial position or results of operations for the six months ended June 30, 1998. 10. The following table sets forth the computations of basic and diluted earnings per share (in millions, except per share data): <TABLE> <CAPTION> Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Numerator: Net Earnings - Numerator for basic and diluted earnings per share $ 409 $ 302 $ 699 $ 454 Denominator: Denominator for basic earnings per share - weighted average shares 172 182 172 182 Effect of dilutive securities: Employee options and shares 12 14 14 10 Assumed treasury shares purchased (6) (11) (7) (7) Dilutive potential common shares 6 3 7 3 Denominator for diluted earnings per share 178 185 179 185 Basic earnings per share $ 2.38 $ 1.66 $ 4.06 $ 2.50 Diluted earnings per share $ 2.30 $ 1.63 $ 3.91 $ 2.45 </TABLE> -5-
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS For the Three Months Ended June 30, 1998 and 1997 Summary AMR recorded net earnings for the three months ended June 30, 1998 of $409 million, or $2.30 per common share diluted. This compares to net earnings of $302 million, or $1.63 per common share diluted for the second quarter of 1997. AMR's operating income of $727 million increased 23.2 percent, or $137 million, compared to $590 million for the same period in 1997. AMR's operations fall within three major lines of business - the Airline Group, which includes American Airlines, Inc.'s Passenger and Cargo Divisions and AMR Eagle Holding Corporation; The SABRE Group, which includes AMR's information technology and consulting businesses; and the Management Services Group, which includes AMR's airline management, aviation services, and investment service activities. The following sections provide a discussion of AMR's results by reporting segment, which are described in AMR's Annual Report on Form 10-K/A No. 1 for the year ended December 31, 1997. The minority interest in the earnings of consolidated subsidiaries of $12 million and $25 million for the three and six months ended June 30, 1998 and $10 million and $22 million for the three and six months ended June 30, 1997, has not been allocated to a reporting segment. AIRLINE GROUP FINANCIAL HIGHLIGHTS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> Three Months Ended June 30, 1998 1997 <S> <C> <C> Revenues Passenger - American Airlines, Inc. $3,789 $3,641 - American Eagle 289 256 Cargo 169 174 Other 244 221 4,491 4,292 Expenses Wages, salaries and benefits 1,449 1,345 Aircraft fuel 404 471 Commissions to agents 322 329 Depreciation and amortization 258 260 Maintenance, materials and repairs 223 215 Other operating expenses 1,229 1,192 Total operating expenses 3,885 3,812 Operating Income 606 480 Other Expense (40) (77) Earnings Before Income Taxes $ 566 $ 403 Average number of equivalent employees 91,500 90,500 </TABLE> -6-
9 RESULTS OF OPERATIONS (continued) <TABLE> <CAPTION> OPERATING STATISTICS Three Months Ended June 30, 1998 1997 <S> <C> <C> American Airlines Jet Operations Revenue passenger miles (millions) 27,923 27,318 Available seat miles (millions) 38,963 38,738 Cargo ton miles (millions) 509 521 Passenger load factor 71.7% 70.5% Breakeven load factor 58.9% 60.0% Passenger revenue yield per passenger miles (cents) 13.57 13.33 Passenger revenue per available seat miles (cents) 9.72 9.40 Cargo revenue yield per ton mile (cents) 32.75 32.88 Operating expenses per available seat mile (cents) 9.25 9.15 Fuel consumption (gallons, in millions) 711 697 Fuel price per gallon (cents) 55.0 65.3 Fuel price per gallon, excluding fuel taxes (cents) 50.3 60.4 Operating aircraft at period-end 641 644 American Eagle Revenue passenger miles (millions) 708 652 Available seat miles (millions) 1,099 1,047 Passenger load factor 64.5% 62.3% Operating aircraft at period-end 206 203 </TABLE> Operating aircraft at June 30, 1998, included: <TABLE> <CAPTION> <S> <C> <C> <C> American Airlines American Eagle Aircraft: Aircraft: Airbus A300-600R 35 ATR 42 40 Boeing 727-200 78 Embraer 145 8 Boeing 757-200 90 Super ATR 43 Boeing 767-200 8 Saab 340B 90 Boeing 767-200 Extended 22 Saab 340B Plus 25 Range Boeing 767-300 Extended 44 Total 206 Range Fokker 100 75 McDonnell Douglas DC-10-10 13 McDonnell Douglas DC-10-30 5 McDonnell Douglas MD-11 11 McDonnell Douglas MD-80 260 Total 641 </TABLE> 87.8% of American's aircraft fleet is Stage III, a classification of aircraft meeting noise standards as promulgated by the Federal Aviation Administration. Average aircraft age is 10.5 years for American's aircraft and 5.45 years for American Eagle aircraft. -7-
10 RESULTS OF OPERATIONS (continued) The Airline Group's revenues increased $199 million, or 4.6 percent, in the second quarter of 1998 versus the same period last year. American's passenger revenues increased by 4.1 percent, or $148 million, primarily as a result of strong demand for air travel driven by continual economic growth in the U.S. and Europe and a healthy pricing environment. American's yield (the average amount one passenger pays to fly one mile) of 13.57 cents increased by 1.8 percent compared to the same period in 1997. Domestic yields increased 4.5 percent from the second quarter of 1997. International yields decreased 4.1 percent, primarily due to a 9.2 percent decrease in the Pacific and a 7.6 percent decrease in Latin America. The decrease in Pacific yields was primarily due to the weakness in Asian economies and increased industry capacity while the decrease in Latin America was due primarily to an increase in industry capacity in Central and South America and a decline in economic conditions. American's traffic or revenue passenger miles (RPMs) increased 2.2 percent to 27.9 billion miles for the quarter ended June 30, 1998. American's capacity or available seat miles (ASMs) increased 0.6 percent to 39.0 billion miles in the second quarter of 1998. American's domestic traffic increased 0.9 percent despite capacity decreases of 2.2 percent and international traffic grew 5.2 percent on capacity increases of 7.2 percent. The increase in international traffic was driven by an 11.0 percent increase in traffic to Latin America on capacity growth of 12.0 percent and an 11.8 percent increase in traffic to the Pacific on capacity growth of 26.9 percent, partially offset by a 1.2 decrease in traffic to Europe on a capacity decrease of 1.7 percent. The Airline Group's other revenues increased $23 million, or 10.4 percent, primarily as a result of increased administrative and employee travel service charges and service contracts. The Airline Group's operating expenses increased 1.9 percent, or $73 million. American's Jet Operations cost per ASM increased 1.1 percent to 9.25 cents. Wages, salaries and benefits increased 7.7 percent, or $104 million, primarily due to an increase in the average number of equivalent employees, contractual wage rate and seniority increases that are built into the Company's labor contracts and an increase in the provision for profit sharing. The increased headcount is due primarily to increased volumes of work at American's maintenance bases and increases associated with American's flight dependability initiatives. Aircraft fuel expense decreased 14.2 percent, or $67 million, due to a 15.7 percent decrease in American's average price per gallon, including taxes, partially offset by a 2.0 percent increase in American's fuel consumption. Commissions to agents decreased 2.1 percent, or $7 million, despite a 4.1 percent increase in passenger revenues, due to the continued benefit from the commission rate reduction initiated during September 1997. Other Expense decreased 48.1 percent, or $37 million, due primarily to a $22 million increase in capitalized interest on aircraft purchase deposits and a decrease in interest expense of approximately $11 million due to scheduled debt repayments. -8-
11 RESULTS OF OPERATIONS (continued) THE SABRE GROUP FINANCIAL HIGHLIGHTS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> Three Months Ended June 30, 1998 1997 <S> <C> <C> Revenues $ 577 $ 449 Operating Expenses 468 354 Operating Income 109 95 Other Income 1 1 Earnings Before Income Taxes $ 110 $ 96 Average number of equivalent employees 11,300 8,400 </TABLE> Revenues Revenues for The SABRE Group increased $128 million, or 28.5 percent. Electronic travel distribution revenues increased approximately $28 million, or 9.0 percent, primarily due to growth in booking fees resulting from an overall increase in the price per booking. In addition, the three months ended June 30, 1998 includes approximately $4 million of revenue from services provided to The SABRE Group's joint venture company formed to manage travel distribution in the Asia- Pacific region, ABACUS International Ltd. (ABACUS). Revenues from information technology solutions increased approximately $100 million, or 72.5 percent, primarily due to the services performed under the information technology services agreement with US Airways and Year 2000 testing and compliance enhancements for Canadian Airlines International Limited (Canadian) and other AMR units. Expenses Operating expenses increased 32.2 percent, or $114 million, due primarily to increases in salaries, benefits and employee related costs, depreciation and amortization expense and other operating expenses. Salaries, benefits and employee related costs increased due to an increase in the average number of employees necessary to support The SABRE Group's business growth and wage and salary increases for existing employees. The increase in depreciation and amortization expense is primarily due to the purchase of US Airways' information technology assets in January 1998 and normal additions. Other operating expenses increased primarily due to equipment maintenance costs and other software development expenses related to The SABRE Group's Year 2000 compliance program and increased communication costs. -9-
12 RESULTS OF OPERATIONS (continued) MANAGEMENT SERVICES GROUP FINANCIAL HIGHLIGHTS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> Three Months Ended June 30, 1998 1997 <S> <C> <C> Revenues $ 148 $ 151 Operating Expenses 136 136 Operating Income 12 15 Other Income (Expense) - - Earnings Before Income Taxes $ 12 $ 15 Average number of equivalent employees 13,000 15,500 </TABLE> Revenues Revenues for the Management Services Group decreased 2.0 percent, or $3 million. This decrease in revenues was primarily the result of the sale of Data Management Services in September 1997 and decreased services provided by TeleService Resources and AMR Global Logistics. This decrease was substantially offset by higher revenues for AMR Combs due to higher aircraft sales and increased airline passenger, ramp and cargo handling services provided by AMR Services. Expenses Operating expenses for the second quarter of 1998 remained consistent with the same period in 1997. The decrease in expenses associated with the sale of Data Management Services in September 1997 and decreased services provided by TeleService Resources and AMR Global Logistics was offset by an increase in other operating expenses commensurate with the increase in revenues for AMR Combs and AMR Services. -10-
13 RESULTS OF OPERATIONS (continued) For the Six Months Ended June 30, 1998 and 1997 Summary AMR recorded net earnings for the six months ended June 30, 1998 of $699 million, or $3.91 per common share diluted. This compares with net earnings of $454 million, or $2.45 per common share diluted for the same period in 1997. AMR's operating income of $1.3 billion increased 36.7 percent, or $345 million, compared to $939 million for the same period in 1997. AIRLINE GROUP FINANCIAL HIGHLIGHTS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Revenues Passenger - American Airlines, Inc. $7,367 $7,031 - American Eagle 545 504 Cargo 332 338 Other 470 425 8,714 8,298 Expenses Wages, salaries and benefits 2,831 2,679 Aircraft fuel 819 991 Commissions to agents 623 643 Depreciation and amortization 516 522 Maintenance, materials and repairs 452 408 Other operating expenses 2,442 2,351 Total operating expenses 7,683 7,594 Operating Income 1,031 704 Other Expense (102) (157) Earnings Before Income Taxes $ 929 $ 547 Average number of equivalent employees 91,250 90,200 </TABLE> RESULTS OF OPERATIONS (continued) <TABLE> <CAPTION> OPERATING STATISTICS Six Months Ended June 30, 1998 1997 <S> <C> <C> American Airlines Jet Operations Revenue passenger miles (millions) 53,311 52,613 Available seat miles (millions) 76,670 76,258 Cargo ton miles (millions) 1,005 1,001 Passenger load factor 69.5% 69.0% Breakeven load factor 58.6% 61.4% Passenger revenue yield per passenger mile (cents) 13.82 13.36 Passenger revenue per available seat mile (cents) 9.61 9.22 Cargo revenue yield per ton mile (cents) 32.65 33.31 Operating expenses per available seat mile (cents) 9.30 9.27 Fuel consumption (gallons, in millions) 1,392 1,370 Fuel price per gallon (cents) 56.9 69.9 Fuel price per gallon, excluding fuel taxes (cents) 52.0 65.0 Operating aircraft at period-end 641 644 American Eagle Revenue passenger miles (millions) 1,323 1,254 Available seat miles (millions) 2,170 2,090 Passenger load factor 61.0 60.0 Operating aircraft at period-end 206 203 </TABLE> -11-
14 RESULTS OF OPERATIONS (continued) The Airline Group's revenues increased $416 million, or 5.0 percent, during the first six months of 1998 versus the same period last year. American's passenger revenues increased by 4.8 percent, or $336 million, primarily as a result of strong demand for air travel driven by continual economic growth in the U.S. and Europe and a healthy pricing environment. American's yield (the average amount one passenger pays to fly one mile) of 13.82 cents increased by 3.4 percent compared to the same period in 1997. Domestic yields increased 5.4 percent from the first six months of 1997. International yields decreased 1.1 percent, reflecting a 5.3 percent decrease in the Pacific and a 3.2 percent decrease in Latin America, partially offset by a 1.7 percent increase in Europe. The decrease in Pacific yields was primarily due to the weakness in Asian economies and increased industry capacity. The decrease in Latin America was due primarily to an increase in industry capacity in Central and South America and a decline in economic conditions, while the increase in European yields was partially attributable to the cancellation of American's New York Kennedy - Zurich, New York - Brussels and Miami - Frankfurt routes in 1997. American's traffic or revenue passenger miles (RPMs) increased 1.3 percent to 53.3 billion miles for the six months ended June 30, 1998. American's capacity or available seat miles (ASMs) increased 0.5 percent to 76.7 billion miles in the first six months of 1998. American's domestic traffic increased 5.7 percent on capacity increases of 0.2 percent and international traffic grew 2.7 percent on capacity increases of 3.9 percent. The increase in international traffic was driven by a 3.9 percent increase in traffic to Latin America on capacity growth of 7.3 percent, a 5.6 percent increase in traffic to the Pacific on growth of 11.5 percent and a 0.6 percent increase in traffic on a capacity decrease of 1.1 percent in Europe. American's yield and traffic were both negatively impacted in 1997 by the effects of the pilot contract negotiations throughout the first three months of 1997. During the first six months of 1998, American's yield and traffic were adversely impacted by the imposition of the transportation tax for the entire period compared to slightly less than four months during the same period in 1997. The Airline Group's other revenues increased $45 million, or 10.6 percent, primarily as a result of an increase in aircraft maintenance work performed by American for other airlines and increased administrative and employee travel service charges and service contracts. The Airline Group's operating expenses increased 1.2 percent, or $89 million. American's Jet Operations cost per ASM increased by 0.3 percent to 9.30 cents. Wages, salaries and benefits increased $152 million, or 5.7 percent, primarily due to an increase in the average number of equivalent employees, contractual wage rate and seniority increases that are built into the Company's labor contracts and an increase in the provision for profit sharing. The increased headcount is due primarily to increased volumes of work at American's maintenance bases and increases associated with American's flight dependability initiatives. Aircraft fuel expense decreased 17.4 percent, or $172 million, due to an 18.6 percent decrease in American's average price per gallon, including taxes, partially offset by a 1.6 percent increase in American's fuel consumption. Commissions to agents decreased 3.1 percent, or $20 million, despite a 4.8 percent increase in passenger revenues, due to the continued benefit from the commission rate reduction initiated during September 1997. Maintenance, materials and repairs expense increased $44 million, or 10.8 percent, due primarily to higher volumes for both airframe and engine maintenance at American's maintenance bases as a result of the maturing of its fleet. Other operating expenses increased by $91 million, or 3.9 percent, primarily related to spending on the Company's Year 2000 compliance program and higher costs, such as credit card fees, resulting from higher passenger revenues. Other Expense decreased 35.0 percent, or $55 million, due primarily to a $38 million increase in capitalized interest on aircraft purchase deposits and a decrease in interest expense of approximately $19 million due to scheduled debt repayments. -12-
15 RESULTS OF OPERATIONS (continued) THE SABRE GROUP FINANCIAL HIGHLIGHTS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> Six months Ended June 30, 1998 1997 <S> <C> <C> Revenues $1,131 $ 889 Operating Expenses 907 686 Operating Income 224 203 Other Income 3 2 Earnings Before Income Taxes $ 227 $ 205 Average number of equivalent employees 11,000 8,300 </TABLE> Revenues Revenues for The SABRE Group increased $242 million, or 27.2 percent. Electronic travel distribution revenues increased approximately $64 million, or 10.3 percent, primarily due to growth in booking fees resulting from an overall increase in the price per booking. In addition, the six months ended June 30, 1998 includes approximately $16 million of revenue from services provided to ABACUS. Revenues from information technology solutions increased approximately $178 million, or 65.6 percent, primarily due to the services performed under the information technology services agreement with US Airways and Year 2000 testing and compliance enhancements for Canadian and other AMR units. Expenses Operating expenses increased 32.2 percent, or $221 million, due primarily to increases in salaries, benefits and employee related costs, subscriber incentive expenses, depreciation and amortization expense and other operating expenses. Salaries, benefits and employee related costs increased due to an increase in the average number of employees necessary to support The SABRE Group's business growth and wage and salary increases for existing employees. Subscriber incentive expenses increased in order to maintain and expand The SABRE Group's travel agency subscriber base. The increase in depreciation and amortization expense is primarily due to the purchase of US Airways' information technology assets in January 1998 and normal additions. Other operating expenses increased primarily due to equipment maintenance costs and other software development expenses related to The SABRE Group's Year 2000 compliance program, software development expenses related to ABACUS and increased communication costs. -13-
16 RESULTS OF OPERATIONS (continued) MANAGEMENT SERVICES GROUP FINANCIAL HIGHLIGHTS (Unaudited) (Dollars in millions) <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Revenues $ 308 $ 312 Operating Expenses 279 280 Operating Income 29 32 Other Income (Expense) 1 (1) Earnings Before Income Taxes $ 30 $ 31 Average number of equivalent employees 12,950 15,500 </TABLE> Revenues Revenues for the Management Services Group decreased 1.3 percent, or $4 million. This decrease in revenues was primarily the result of the sale of Data Management Services in September 1997 and decreased services provided by TeleService Resources and AMR Global Logistics. This decrease was substantially offset by higher revenues for AMR Combs due to higher aircraft sales and increased airline passenger, ramp and cargo handling services provided by AMR Services. Expenses Operating expenses decreased 0.4 percent, or $1 million, primarily due to a decrease in expenses associated with the sale of Data Management Services in September 1997 and decreased services provided by TeleService Resources and AMR Global Logistics. This decrease was substantially offset by an increase in other operating expenses commensurate with the increase in revenues for AMR Combs and AMR Services. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities in the six month period ended June 30, 1998 was $1.3 billion, an increase of $259 million over the same period in 1997. This increase resulted primarily from increased net earnings and an increase in the air traffic liability due to higher advanced sales. Capital expenditures for the first six months of 1998 were $1.2 billion, and included the purchase deposits on new aircraft orders, the acquisition of three Boeing 767-300ERs, eight Embraer EMB-145s and five ATR 72 aircraft and purchases of computer-related equipment. These capital expenditures were financed primarily with internally generated cash, except for the Embraer aircraft acquisitions which were funded through secured financing. During the first six months of 1998, The SABRE Group invested approximately $140 million for a 35 percent interest in ABACUS. Proceeds from the sale of equipment and property of $179 million for the first six months of 1998 include proceeds received upon the delivery of two of American's McDonnell Douglas MD-11 aircraft to Federal Express Corporation in accordance with the 1995 agreement between the two parties and other aircraft equipment sales. -14-
17 LIQUIDITY AND CAPITAL RESOURCES (continued) During 1998, the Company exercised its purchase rights to acquire 25 Boeing 737-800s and 23 Boeing 777-200IGWs. As of August 14, 1998, the Company had commitments to acquire the following aircraft: 100 Boeing 737-800s, 34 Boeing 777-200IGWs, 11 Boeing 757-200s, four Boeing 767-300ERs, 32 Embraer EMB-145s and 25 Bombardier CRJ-700s. Deliveries of these aircraft will occur during the remainder of 1998 and will continue through 2004. Payments for these aircraft will approximate $850 million during the remainder of 1998, $2.6 billion in 1999, $1.9 billion in 2000 and an aggregate of approximately $2.3 billion in 2001 through 2004. The exercise of these aircraft purchase rights will allow the Company to continue the retirement of its Boeing 727-200 and McDonnell Douglas DC-10 fleets, which the Company anticipates to be complete by 2004, as well as to provide for modest growth. While the Company expects to fund the majority of its capital expenditures from the Company's existing cash balance and internally generated cash, some new financing may be raised depending upon capital market conditions and the Company's evolving view of its long-term needs. During the six months ended June 30, 1998, a total of approximately 4.8 million shares were purchased by the Company at a total cost of approximately $333 million. As of June 30, 1998, the Company had completed the $500 million stock repurchase program initiated in 1997. On July 15, 1998, the Company's board of directors authorized management to repurchase up to an additional $500 million of the Company's outstanding common stock. Share repurchases may be made from time to time, depending on market conditions, and may be discontinued at any time. In 1997, The SABRE Group's Board of Directors authorized, subject to certain business and market conditions, the repurchase of up to 1.5 million shares of The SABRE Group's Class A Common Stock. During the six months ended June 30, 1998, a total of approximately one million shares were purchased by The SABRE Group at a total cost of approximately $33 million. YEAR 2000 COMPLIANCE The Company has implemented a Year 2000 compliance program designed to ensure that the Company's computer systems and applications and its embedded operating systems will function properly beyond 1999. Such program includes both systems and applications operated by the Company's businesses as well as software licensed to or operated for third parties by The SABRE Group. Substantially all of the Company's core systems are either completed or in the final testing phases of the Year 2000 project. The Company expects its Year 2000 project to be substantially completed in the first quarter of 1999 and believes that it has allocated adequate resources to meet this goal. However, there can be no assurance that the systems of other parties (e.g., Federal Aviation Administration, Department of Transportation, airport authorities, data providers) upon which the Company's businesses also rely will be Year 2000 compliant on a timely basis. The Company's business, financial condition, or results of operations could be materially adversely affected by the failure of its systems and applications, those licensed to or operated for third parties, or those operated by other parties to properly operate or manage dates beyond 1999. The Company is currently evaluating responses from and addressing issues with significant vendors to determine the extent to which the Company's systems are vulnerable to those third parties which fail to remedy their own Year 2000 issues. The Company is developing contingency plans designed to enable it to continue operations, even in the event of certain third party failures, to the extent that such operations can be conducted safely. The Company expects to incur significant internal staff costs, as well as consulting and other expenses, related to infrastructure and facilities enhancements necessary to prepare its systems for the Year 2000. The Company's total estimated cost of the Year 2000 compliance program is approximately $215 million to $250 million, of which approximately $130 million was incurred as of June 30, 1998. The Company expects to incur most of the remaining expenses during the remainder of 1998. A significant portion of these costs are not likely to be incremental costs to the Company, but rather will represent the redeployment of existing information technology resources. Maintenance or modification costs associated with making existing computer systems Year 2000 compliant are expensed as incurred and are funded through cash from operations. -15-
18 YEAR 2000 COMPLIANCE (continued) The expected costs and completion dates for the Year 2000 project are forward-looking statements based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of resources, third party modification plans and other factors. Actual results could differ materially from these estimates as a result of factors such as the availability and cost of trained personnel, the ability to locate and correct all relevant computer codes and similar uncertainties. NEW EUROPEAN CURRENCY In January 1999, certain European countries are scheduled to introduce a new currency unit called the "euro". The Company has implemented a project intended to ensure that software systems operated by the Company's businesses as well as software licensed to or operated for third parties by The SABRE Group are designed to properly handle the euro. The Company expects its euro project to be substantially completed by the fourth quarter of 1998 and believes that it has allocated adequate resources to meet this goal. The Company estimates that the introduction of the euro, including the total cost for the euro project, will not have a material effect on the Company's business, financial condition, or results of operations. Costs associated with the euro project will be expensed as incurred and will be funded through cash from operations. Statements related to the Company's euro project are forward-looking statements that are based on management's best estimates. Actual results could differ materially from these estimates. DALLAS LOVE FIELD In 1968, as part of an agreement between the cities of Fort Worth and Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond ordinance was enacted by both cities (the Bond Ordinance). The Bond Ordinance required both cities to direct all scheduled interstate passenger operations to DFW and was an integral part of the bonds issued for the construction and operation of DFW. In 1979, as part of a settlement to resolve litigation with Southwest Airlines, the cities agreed to expand the scope of operations allowed under the Bond Ordinance at Dallas' Love Field. This settlement was codified by Congress and became known as the Wright Amendment. The Wright Amendment limited interstate operations at Love Field to the four states contiguous to Texas (New Mexico, Oklahoma, Arkansas and Louisiana) and prohibited through ticketing to any destination outside that perimeter. In 1997, without the consent of either city, Congress amended the Wright Amendment by (i) adding three states (Kansas, Mississippi and Alabama) to the perimeter and (ii) removing all federal restrictions on large aircraft configured with 56 seats or less (the 1997 Amendment). In October 1997, the City of Fort Worth filed suit in state district court against the City of Dallas and others seeking to enforce the Bond Ordinance. Fort Worth contends that the 1997 Amendment does not preclude the City of Dallas from exercising its proprietary rights to restrict traffic at Love Field in a manner consistent with the Bond Ordinance and, moreover, that it has an obligation to do so. American has joined in this litigation. Thereafter, Dallas filed a separate declaratory judgment action in federal district court seeking to have the court declare that, as a matter of law, the 1997 Amendment precludes Dallas from exercising any restrictions on operations at Love Field. Further, in May 1998, Continental Airlines and Continental Express filed a lawsuit in federal court seeking a judicial declaration that the Bond Ordinance cannot be enforced to prevent them from operating flights from Love Field to Cleveland using regional jets. As a result of the foregoing, the future of interstate flight operations at Love Field and American's DFW hub is uncertain. To the extent that operations at Love Field to new interstate destinations increase, American may be compelled for competitive reasons to divert resources from DFW to Love Field. A substantial diversion of resources could adversely impact American's business. Recently, American announced its intent to initiate limited intrastate service to Austin from Love Field and has commenced implementation of a business plan to start such service on August 31, 1998.
19 OTHER INFORMATION Several items of legislation have been introduced in Congress that would, if enacted; (i) authorize the withdrawal of slots from major carriers -- including American -- at key airports for redistribution to new entrants and smaller carriers and/or (ii) provide financial assistance, in the form of guarantees and/or subsidized loans, to smaller carriers for aircraft purchases. In addition, the Department of Justice is investigating competition at major hub airports, and in April 1998, the Department of Transportation (DOT) issued proposed pricing and capacity rules that would severely limit major carriers' ability to compete with new entrant carriers. The outcomes of the proposed legislation, the investigations and the proposed DOT guidelines are unknown. However, to the extent that (i) slots are taken from American at key airports, (ii) restrictions are imposed upon American's ability to respond to a competitor, or (iii) competitors have a financial advantage in the purchase of aircraft because of federal assistance, American's business may be adversely impacted. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), effective for fiscal years beginning after December 15, 1997. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," and requires that a public company report annual and interim financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Because this statement addresses how supplemental financial information is disclosed in annual and interim reports, the adoption will have no impact on the Company's financial condition or results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is required to be adopted in years beginning after June 15, 1999. SFAS 133 permits early adoption as of the beginning of any fiscal quarter after its issuance. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company is currently evaluating the impact of SFAS 133; however, based on current market conditions, SFAS 133 is not expected to have a material impact on the Company's financial condition or results of operations. FORWARD-LOOKING INFORMATION Statements in this report contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. When used in this report, the words "expects," "plans," "anticipates," and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements are subject to a number of factors that could cause actual results to differ materially from our expectations. The following factors, in addition to other possible factors not listed, could cause the Company's actual results to differ materially from those expressed in forward-looking statements: risks related to the Company's Year 2000 and Euro currency compliance programs and government regulations, including restrictions on competitive practices (e.g., new regulations which would curtail an airlines ability to respond to a competitor). Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings, included but not limited to the Form 10-K/A No. 1 for the year ended December 31, 1997. -17-
20 PART II: OTHER INFORMATION Item 1. Legal Proceedings In January 1985, American announced a new fare category, the "Ultimate SuperSaver," a discount, advance purchase fare that carried a 25 percent penalty upon cancellation. On December 30, 1985, a class action lawsuit was filed in Circuit Court, Cook County, Illinois entitled Johnson vs. American Airlines, Inc. The Johnson plaintiff alleges that the 10 percent federal excise transportation tax should have been excluded from the "fare" upon which the 25 percent penalty was assessed. Summary judgment was granted in favor of American but subsequently reversed and vacated by the Illinois Appellate Court. In August 1997, the Court denied the plaintiffs' motion for class certification. American is vigorously defending the lawsuit. In connection with its frequent flyer program, American was sued in two cases (Wolens et al v. American Airlines, Inc. and Tucker v. American Airlines, Inc.) seeking class action certification that were consolidated and are currently pending in the Circuit Court of Cook County, Illinois. The litigation arises from certain changes made to American's AAdvantage frequent flyer program in May 1988 which limited the number of seats available to participants traveling on certain awards and established blackout dates during which no AAdvantage seats would be available for certain awards. In the consolidated action, the plaintiffs allege that these changes breached American's contract with AAdvantage members, seek money damages for the alleged breach and attorney's fees and seek to represent all persons who joined the AAdvantage program before May 1988 and accrued mileage credits before the seat limitations were introduced. The complaint originally asserted several state law claims, however only the plaintiffs' breach of contract claim remains after the U. S. Supreme Court ruled that federal law preempted the other claims. Although the case has been pending for numerous years, it still is in its preliminary stages. The court has not ruled as to whether the case should be certified as a class action. American is vigorously defending the lawsuit. Gutterman et al. v. American Airlines, Inc. is also pending in the Circuit Court of Cook County, Illinois, arising from an announced increase in AAdvantage mileage credits required for free travel. In December 1993, American announced that the number of miles required to claim a certain travel award under American's AAdvantage frequent flyer program would be increased effective February 1, 1995, giving rise to the Gutterman litigation filed on that same date. The Gutterman plaintiffs claim that the announced increase in award mileage level violated the terms and conditions of the agreement between American and AAdvantage members. On June 23, 1998, the Court certified the case as a class action although to date no notice has been sent to the class. The class consists of all members who earned miles between January 1, 1992 (the date the change was announced) and February 1, 1995 (the date the change was made). On July 13, 1998, the Court denied American's motion for summary judgment as to the claims brought by plaintiff Steven Gutterman. On July 30, 1998, the plaintiffs filed a motion for summary judgment as to liability. American is vigorously defending the lawsuit. A federal grand jury is investigating whether American handled hazardous materials and processed courier shipments, cargo and excess baggage in accordance with applicable laws and regulations. In connection with this investigation, federal agents executed a search warrant at American's Miami facilities on October 22, 1997. In addition, American was served with a subpoena calling for the production of documents relating to the handling of courier shipments, cargo, excess baggage and hazardous materials. American has produced documents responsive to the subpoena and intends to cooperate fully with the government's investigation. -18-
21 PART II Item 4. Submission of Matters to a Vote of Security Holders (*) The owners of 74,978,665 shares of common stock, or 82 percent of shares outstanding, were represented at the annual meeting of stockholders on May 20, 1998 at The Worthington Hotel, 200 Main Street, Fort Worth, Texas. Elected as directors of the Corporation, each receiving a minimum of 73,103,948 votes were: David L. Boren Dee J. Kelly Edward A. Brennan Ann D. McLaughlin Donald J. Carty Charles H. Pistor, Jr. Armando M. Codina Joe M. Rodgers Charles T. Fisher, III Judith Rodin Earl G. Graves Maurice Segall Stockholders ratified the appointment of Ernst & Young LLP as independent auditors for the Corporation for 1998. The vote was 74,941,290 in favor; 17,724 against; and 19,651 abstaining. Stockholders approved an amendment to the Certificate of Incorporation of the Corporation increasing the number of authorized shares of common stock of the Corporation. The vote was 50,872,087 in favor; 24,073,517 against; and 33,061 abstaining. Stockholders approved the 1998 Long Term Incentive Plan of the Corporation. The vote was 40,333,217 in favor; 28,976,118 against; 107,065 abstaining; and 5,562,265 non-voting. * The share information contained in this section have not been restated to give effect to the two-for-one stock split on June 9, 1998. Item 6. Exhibits and Reports on Form 8-K The following exhibits are included herein: 3.1 Amended Certificate of Incorporation of AMR, effective May 26, 1998 10.1 American Airlines, Inc. Supplemental Executive Retirement Program, as amended April 1998 27.1 Financial Data Schedule as of June 30, 1998. 27.2 Restated Financial Data Schedule as of June 30, 1997. On April 15, 1998, AMR filed a report on Form 8-K relative to two press releases issued by the Company. The first press release was to report the Company's first quarter 1998 earnings and to announce a proposed two-for-one stock split in the form of a stock dividend. The second press release was issued to announce that Robert L. Crandall, Chairman, President and CEO of the Company and Chairman and CEO of American Airlines, Inc. would retire from his affiliations with the Company after the AMR annual meeting on May 20, 1998. On May 20, 1998, AMR filed a report on Form 8-K relative to a press release issued to report the approval by the Company's shareholders of an amendment to the Company's Certificate of Incorporation that increased the number of authorized shares of common stock. On July 15, 1998, AMR filed a report on Form 8-K relative to a press release issued to report the Company's second quarter 1998 earnings and to announce that the Company's board of directors authorized management to repurchase additional shares of the Company's outstanding common stock. -19-
22 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMR CORPORATION Date: August 14, 1998 BY: /s/ Gerard J. Arpey Gerard J. Arpey Senior Vice President and Chief Financial Officer