American Airlines Group Inc. annual report, FY2010

AMR Corporation 2010 Form 10-K Summary

Business context and reporting period

This filing is for AMR Corporation, the parent of American Airlines and AMR Eagle, for the fiscal year ended December 31, 2010. The source metadata identifies American Airlines Group Inc., but the filing registrant is AMR Corporation, not the later American Airlines Group entity. AMR operated an integrated airline network serving more than 250 cities in approximately 50 countries, with about 3,400 daily flights and approximately 900 aircraft.

The filing includes unaudited fourth-quarter 2010 data. Airline results are seasonal, with stronger demand typically in the second and third quarters.

Key financial metrics

Metric	2010	2009	Change
Operating revenue	$22.170 billion	$19.917 billion	+11.3%
Operating income (loss)	$308 million	$(1.004) billion	Improved
Net income (loss)	$(471) million	$(1.468) billion	Loss narrowed by $997 million
Basic and diluted loss per share	$(1.41)	$(4.99)	Improved
Operating expenses	$21.862 billion	$20.921 billion	+4.5%
Cash flow from operations	$1.241 billion	$930 million	+$311 million
Capital expenditures	$1.962 billion	$1.521 billion	+$441 million

Operating margin was approximately 1.4% in 2010 versus negative 5.0% in 2009. Net margin remained negative at approximately 2.1%.

Mainline passenger revenue increased 11.5% to $16.760 billion.
Mainline passenger unit revenue increased 10.4%; load factor rose 1.2 points to 81.9%; yield increased 8.7% to 13.36 cents per passenger mile.
Capacity increased 1.0%, while regional affiliate passenger revenue increased 15.7% to $2.327 billion.
Cargo revenue increased 16.3% to $672 million, and other revenue increased 5.3% to $2.411 billion.
Fuel expense increased $847 million, or 15.3%, to $6.400 billion. Average fuel cost rose to $2.32 per gallon from $2.01.
Wages, salaries and benefits were $6.847 billion, approximately 31% of operating expenses.

Liquidity, debt and balance sheet

Unrestricted cash and short-term investments were $4.5 billion at December 31, 2010, compared with $4.4 billion at year-end 2009. Restricted cash and short-term investments were $450 million.
Total long-term debt, including current maturities, was approximately $10.532 billion; current maturities were $1.776 billion and long-term debt excluding current maturities was $8.756 billion.
Capital lease obligations totaled $604 million on a present-value basis.
Pension and postretirement obligations increased to $7.877 billion from $7.397 billion. Required 2011 pension contributions were estimated at approximately $520 million.
Stockholders’ deficit increased to $(3.945) billion from $(3.489) billion.
Total contractual obligations were $37.928 billion, including $14.558 billion of long-term debt obligations, $10.804 billion of operating lease payments and $2.865 billion of firm aircraft commitments.
2011 obligations included approximately $2.4 billion of debt principal payments, $100 million of capital lease payments, $1.6 billion of capital expenditures and $520 million of pension contributions.

Material changes versus the prior comparable period

Revenue recovery and stronger passenger demand materially improved results from 2009, but higher fuel prices, booking and credit-card fees, and aircraft rent limited profitability.
Operating income improved from a $1.004 billion loss to $308 million of income, although the company still reported a net loss.
Operating cash flow increased to $1.241 billion, but capital expenditures exceeded operating cash flow, resulting in substantial reliance on financing and existing liquidity.
Debt and capital lease payments fell to $1.154 billion from $2.416 billion in 2009, while new long-term debt issued was $542 million and sale-leaseback proceeds were $1.408 billion.
2010 special items totaled $81 million, including a $53 million Venezuelan currency remeasurement loss and a $28 million non-cash impairment of Latin American routes and slot authorities. In 2009, restructuring and special items were materially higher and included aircraft grounding, asset impairments and sale-leaseback losses.
Fourth-quarter 2010 revenue was $5.586 billion, operating income was $68 million and net loss was $97 million. Fourth-quarter 2009 revenue was $5.062 billion, operating loss was $390 million and net loss was $344 million.

Guidance, outlook, commentary and risks

Management expected 2011 mainline capacity to increase approximately 3.6%, with domestic capacity up 1.0% and international capacity up 7.7%.
First-quarter 2011 mainline unit costs were expected to increase approximately 1.6% year over year, while unit costs excluding fuel were expected to decline 3.2%.
FlightPlan 2020 focused on fleet renewal, cornerstone markets, customer loyalty, global alliances, revenue enhancement and cost reduction. Management estimated that alliance and network initiatives could produce more than $500 million of annual incremental revenue and cost savings, primarily in 2011 and the remainder by year-end 2012; the estimate was subject to significant uncertainty.
Management estimated American’s labor cost disadvantage at approximately $600 million annually. Negotiations with the pilots, flight attendants and several Transport Workers Union groups remained in mediation, creating potential cost and operational risks.
Fuel remained the largest external earnings risk. Approximately 35% of estimated 2011 fuel requirements were hedged as of January 2011; a 10% increase in fuel prices was estimated to increase 2011 fuel expense by approximately $502 million.
American faced significant disputes with global distribution systems and online travel agencies. Expedia had stopped selling American tickets after its agreement expired, and disputes with Sabre and Travelport could affect booking visibility, fees and passenger revenue.
The company had below-investment-grade credit ratings, substantial secured debt and limited unencumbered assets. Management stated that additional funding would be required and that access to financing could not be assured.
Other material risks included competitive capacity and fare pressure, pension funding, labor disruption, aircraft and lease commitments, regulatory and environmental costs, international route and slot restrictions, technology failures, litigation and terrorism or other major operating disruptions.
AMR was evaluating a possible divestiture or other separation of AMR Eagle; no transaction was assured and the financial effects were uncertain.

Important facts for investors to verify

Confirm the legal registrant and corporate identity: the filing is AMR Corporation for 2010, not American Airlines Group Inc.
Reconcile the company’s ability to fund 2011 debt maturities, capital expenditures, pension contributions and aircraft commitments against unrestricted liquidity and available financing.
Assess sensitivity to fuel prices, including hedge coverage, collateral requirements and the estimated $502 million impact of a 10% fuel-price increase.
Monitor labor negotiations and the potential impact of contract settlements on the estimated $600 million annual labor cost disadvantage.
Track the Sabre, Travelport, Orbitz and Expedia disputes and their effect on booking volumes, distribution costs and revenue.
Evaluate whether the projected $500 million of alliance and network benefits materialize and whether the JAL joint business agreement is implemented as planned.
Review pension underfunding, the $7.877 billion benefit obligation and the estimated $520 million 2011 contribution.
Review the FAA’s proposed $24.2 million civil penalty, ongoing litigation and antitrust matters, and other contingencies whose ultimate amounts were not fully estimable.