American Airlines Group Inc. quarterly report, Q3 FY2012

AMR Corporation Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. The filing is by AMR Corporation, the predecessor company associated with American Airlines; the requested company name is American Airlines Group Inc. The consolidated statements are unaudited and reflect Chapter 11 reorganization accounting. AMR and certain domestic subsidiaries filed for Chapter 11 on November 29, 2011 and operated as debtors in possession.

Financial Performance and Position

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Operating revenues	$6.429 billion	$6.376 billion	$18.918 billion	$18.023 billion
Operating income (loss)	$51 million	$39 million	$104 million	$(270) million
Operating margin	0.8%	0.6%	0.5%	(1.5)%
Net loss	$(238) million	$(162) million	$(2.139) billion	$(884) million
Net margin	(3.7)%	(2.5)%	(11.3)%	(4.9)%
Loss per diluted share	$(0.71)	$(0.48)	$(6.38)	$(2.64)
Net cash from operating activities	Not provided for quarter	Not provided for quarter	$1.567 billion	$346 million

Passenger revenue increased to $5.657 billion in the third quarter, while cargo and other revenue declined to $772 million.
Mainline passenger RASM increased 4.5% in the third quarter and 7.6% for the nine months. Mainline capacity declined 2.5% in the quarter and 1.6% for the nine months; load factor improved 0.6 and 1.3 percentage points, respectively.
Third-quarter operating expenses rose 0.7% to $6.378 billion, including $211 million of severance charges. Nine-month operating expenses rose 2.9% to $18.814 billion, including $329 million of special charges.
Reorganization items were $137 million in the third quarter and $1.767 billion for the nine months, primarily reflecting aircraft financing renegotiations and rejections, facility bond obligations, professional fees and pension-related items.
At September 30, unrestricted cash and short-term investments totaled approximately $4.2 billion; restricted cash and short-term investments totaled $847 million. Cash was $508 million, versus $283 million at December 31, 2011.
Nine-month investing cash outflow was $1.204 billion, including $1.153 billion of capital expenditures. Financing cash outflow was $138 million after $991 million of debt and capital lease payments and $853 million of sale-leaseback proceeds.
Long-term debt not subject to compromise was $7.605 billion, including $1.508 billion of current maturities. Liabilities subject to compromise totaled $13.493 billion, including $2.267 billion of debt, $3.036 billion of aircraft and facility-related obligations, and $7.803 billion of pension and postretirement benefits.
Stockholders’ deficit was $7.375 billion at September 30, 2012, compared with $7.111 billion at December 31, 2011.

Material Changes Versus Prior Period

Revenue increased 0.8% in the third quarter and 5.0% for the first nine months, supported by higher yields, improved load factors and stronger international performance.
Operating results improved year over year, with nine-month operating income of $104 million versus a $270 million operating loss in 2011. Net losses nevertheless widened because of reorganization and severance charges.
Fuel expense decreased 3.3% in the third quarter but increased 4.1% for the nine months. The nine-month average fuel price rose to $3.19 per gallon from $3.01.
Interest expense declined to $161 million in the quarter and $503 million for the nine months, primarily due to Chapter 11 treatment of certain obligations.
Operating cash flow increased to $1.567 billion from $346 million, while capital expenditures and debt repayments remained substantial.
Accumulated other comprehensive loss improved to $2.101 billion from $3.964 billion, primarily reflecting pension and retiree medical plan modifications and other comprehensive items.

Guidance, Outlook, Risks and Unusual Items

Management’s business plan targets approximately $2 billion of annual cost savings and $1 billion of annual revenue enhancements by 2017, with an expected reduction of approximately 10,000 positions. Management stated it was on track toward targeted savings but cautioned that implementation depends on stakeholders, unions and Bankruptcy Court approvals.
The plan contemplates fleet renewal, network growth, alliance development, outsourcing and investment of several hundred million dollars annually in products and services. Management expects approximately 20% growth in departures across five key markets over five years.
Non-pilot defined benefit pension plans were scheduled to freeze on November 1, 2012, with a replacement 401(k) benefit and matching contributions of up to 5.5% of eligible earnings. The Pilot B plan was expected to terminate on November 30, 2012; the Pilot A plan remained unresolved.
Labor agreements were approved for APFA and seven TWU groups. The American pilot collective bargaining agreement was rejected by court order, while appeals and negotiations continued. Additional AMR Eagle labor agreements remained subject to ratification.
AMR had not filed a plan of reorganization as of the filing date. Its exclusive period to file a plan ran through December 28, 2012, subject to a pending request for extension. Management warned that common stock could have little or no value, or could be canceled, upon emergence from bankruptcy.
Approximately 13,259 bankruptcy claims totaling $305.2 billion had been filed as of October 8, 2012. AMR had objected to claims totaling $116.5 billion; the ultimate allowed claims and recoveries remained uncertain.
Management disclosed substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not reflect liquidation values, final allowed claims, or the effects of a confirmed reorganization plan.
The Company was not required to maintain a credit-card processing reserve at September 30, 2012, but a future reserve could materially reduce liquidity. A proposed postpetition aircraft-backed financing of up to $1.5 billion was subject to Bankruptcy Court approval.
Fuel hedges covered approximately 39% of estimated remaining 2012 fuel requirements. A hypothetical 10% increase in fuel prices was estimated to increase next-twelve-month fuel expense by approximately $727 million.
Labor-related operational disruption led to substantial flight cancellations and delays. Capacity was reduced approximately 1% beginning in mid-September through mid-November 2012.
Material contingencies included aircraft repossession risk, labor disputes, GDS litigation involving Sabre, Travelport and Orbitz, antitrust investigations and claims, pension funding obligations, aircraft commitments, and potential outcomes from discussions with US Airways and other parties.

Most Important Facts to Verify

Whether the filing should be analyzed as AMR Corporation rather than the later American Airlines Group Inc., and how successor-company accounting affects comparability.
The status and terms of the Chapter 11 plan, creditor claims resolution, and any treatment or cancellation of prepetition common stock.
Availability of unrestricted liquidity after debt maturities, capital expenditures, pension contributions, potential credit-card reserves and restructuring cash costs.
Final labor agreements, implementation of the 10,000-position reduction, pension changes and retiree medical modifications.
Approval and pricing of the proposed $1.5 billion aircraft-backed financing and the outcome of aircraft financing renegotiations.
Actual operating performance after the reported labor disruption, including capacity, load factor, yield, RASM and fuel costs.
Potential exposure from bankruptcy claims, aircraft leases, facility bonds, litigation, antitrust matters and GDS distribution disputes.