American Airlines Group Inc. quarterly report, Q2 FY2011

AMR Corporation Form 10-Q Summary

Business Context and Reporting Period

This filing is for AMR Corporation, the parent of American Airlines and AMR Eagle, for the quarter and six months ended June 30, 2011. The filing predates the current American Airlines Group structure. Results were affected by higher fuel prices, fleet renewal activity, international operating conditions, and ongoing distribution-system litigation.

Financial Performance and Key Metrics

Metric	Q2 2011	Q2 2010	Six Months 2011	Six Months 2010
Operating revenues	$6.114 billion	$5.674 billion	$11.647 billion	$10.742 billion
Operating income (loss)	$(78) million	$196 million	$(309) million	$(102) million
Net income (loss)	$(286) million	$(11) million	$(722) million	$(516) million
Basic and diluted loss per share	$(0.85)	$(0.03)	$(2.16)	$(1.55)
Operating margin	$(1.3)%	3.5%	$(2.7)%	$(0.9)%
Net margin	$(4.7)%	$(0.2)%	$(6.2)%	$(4.8)%

Second-quarter revenue increased 7.8%, while operating expenses increased 13.0% to $6.192 billion.
Passenger revenue increased $389 million to approximately $5.3 billion; cargo and other revenue increased $51 million to $846 million.
Aircraft fuel expense increased $547 million, or 33.1%, to $2.202 billion in the second quarter. The average fuel price, including hedging, increased to $3.12 per gallon from $2.37.
Fuel hedging reduced second-quarter fuel expense by approximately $136 million and first-half fuel expense by approximately $237 million.
Mainline passenger unit revenue increased 4.3% in the second quarter and 4.6% for the first six months. Second-quarter load factor declined 0.3 percentage points to 83.6%; first-half load factor declined 0.5 percentage points to 80.4%.
Six-month operating cash flow was $653 million, down from $1.173 billion. Capital expenditures were $748 million and debt and capital-lease payments were $1.184 billion.
At June 30, 2011, unrestricted cash and short-term investments were $5.2 billion, and restricted cash and short-term investments were $457 million. Cash alone was $318 million.
Total long-term debt, including current maturities, was $11.169 billion, compared with $10.532 billion at December 31, 2010. Current maturities were $1.741 billion, and long-term debt excluding current maturities was $9.428 billion.
Stockholders’ deficit increased to $4.509 billion from $3.945 billion at year-end 2010. Pension and postretirement liabilities were $7.969 billion.

Material Changes Versus the Prior Comparable Period

Revenue growth did not offset fuel inflation and other operating-cost increases, resulting in a $275 million deterioration in second-quarter net loss and a $206 million deterioration in first-half net loss.
Fuel expense was the principal adverse change. Wages, salaries and benefits increased modestly, while aircraft rentals, commissions, booking fees and credit-card expense also increased.
Operating cash generation declined by $520 million in the first half despite higher revenue.
Debt increased primarily because of new aircraft-related financing, including $1 billion of 7.50% senior secured notes issued in March 2011 and a $657 million pass-through trust certificate offering announced in January.
Liquidity increased from year-end, but the company continued to report significant losses, substantial debt, large pension obligations and extensive aircraft and lease commitments.

Guidance, Outlook, Risks and Unusual Items

Management expected third-quarter 2011 mainline capacity to increase approximately 1.0% year over year and full-year 2011 capacity to increase approximately 1.9%, with domestic capacity down 0.1% and international capacity up 5.0%.
Third-quarter 2011 mainline unit costs were expected to increase approximately 13.1% to 13.80 cents per available seat mile.
Full-year 2011 fuel cost per gallon, including hedging, was expected to increase approximately 30% from 2010. The company expected high fuel prices to materially and adversely affect operating results, cash flow and liquidity.
As of July 2011, fuel hedges covered approximately 48% of estimated 2011 requirements. A hypothetical 10% increase in fuel prices was estimated to increase the next twelve months’ fuel expense by approximately $671 million.
Management stated that substantial additional funding would be needed to meet debt, lease, aircraft, pension and other obligations. The company believed liquidity was sufficient at the filing date but provided no assurance.
Approximately $1.3 billion of long-term debt principal and $31 million of capital-lease principal were due in the remainder of 2011, alongside approximately $1.0 billion of expected capital expenditures.
The company estimated a 2011 minimum defined-benefit pension contribution of approximately $520 million; $188 million had been contributed during the first six months, with an additional $99 million paid on July 15, 2011.
Aircraft purchase commitments required approximately $705 million in the remainder of 2011 and $1.4 billion in 2012. Subsequent July 2011 Boeing and Airbus agreements materially expanded the planned fleet-renewal program and were expected to produce approximately $10.3 billion of total purchase commitments by the end of the third quarter.
AMR announced its intent to pursue a potential spin-off or other divestiture of AMR Eagle. Completion, timing and structure were uncertain, and the transaction could involve asset and liability restructuring, a cash contribution and allocation of tax attributes.
The company received $576 million of insurance proceeds related to September 11 claims and used the proceeds to pay part of the associated liability. The remaining liability and offsetting insurance receivable were each approximately $1.1 billion.
American was in disputes and litigation with Sabre, Travelport and Orbitz concerning distribution access, pricing and alleged anticompetitive conduct. Failure to maintain reasonable distribution agreements could reduce bookings and materially adversely affect results.
The JAL joint-business revenue guarantee had a maximum potential annual payment of $100 million, but its fair value was not estimable because of uncertainty following the earthquake and tsunami in Japan.
Other risks included below-investment-grade credit ratings, possible credit-card processing reserves, highly encumbered aircraft, pension funding, fuel and liquidity risk, labor relations, regulatory matters, competition, and pending antitrust and patent litigation.

Most Important Facts to Verify

Whether fuel prices, hedging results and fare increases are sufficient to restore positive operating margins.
The company’s ability to refinance or otherwise fund near-term debt maturities, aircraft purchases, leases and pension contributions.
Liquidity requirements under credit-card processing agreements and fuel-derivative collateral arrangements.
The ultimate outcome and financial effect of the Sabre, Travelport and Orbitz disputes.
Whether the planned AMR Eagle divestiture is completed and how liabilities, cash funding and operating agreements are allocated.
The scale, financing terms and potential impairment effects of the expanded Boeing and Airbus fleet commitments.
Potential liabilities from cargo and passenger antitrust matters, patent litigation and other contingencies.