AAL

Business Context and Reporting Period

Company: AMR Corporation (Parent of American Airlines, Inc.)
Filing Type: Form 8-K (Current Report)
Reporting Period: First Quarter ended March 31, 2009
Event Date: April 15, 2009

AMR Corporation reported its first-quarter 2009 results, highlighting the impact of a struggling global economy and capital markets on airline revenues. Despite lower fuel prices providing a buffer, the company faced significant headwinds from reduced passenger traffic and lower fares.

Key Financial Metrics

Liquidity: The company estimated at least $3.6 billion in unencumbered assets and other sources of liquidity at the end of the quarter, including aircraft, AAdvantage miles, route authorities, and slots.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues dropped 15% year-over-year, driven by an 8% reduction in mainline capacity and economic factors reducing passenger traffic and cargo demand.
• Yield Pressure: Mainline yield (average fare) decreased 4.5%, marking the first year-over-year decline after 15 consecutive quarters of increases. This was attributed to aggressive industry pricing and reduced premium cabin traffic.
• Load Factor: Mainline load factor fell to 75.7% from 79.1% in the prior year.
• Cost Structure: While total unit costs decreased 6.8% (largely due to lower fuel), unit costs excluding fuel increased 6.8% due to capacity reductions, pension expenses, and medical costs, partially offset by IT and materials discipline.
• Special Items: The Q1 2009 results included a $13 million charge related to the net present value of future lease payments for A300 aircraft retirements.

Guidance, Outlook, and Management Commentary

Management Commentary

CEO Gerard Arpey noted that while lower fuel prices helped, the economy remains a significant challenge. The company focused on areas within its control, including obtaining nearly $100 million in aircraft-secured financing, cutting non-aircraft capital expenditures by approximately $100 million, and improving customer dependability (on-time performance improved nearly 15 percentage points).

2009 Guidance Updates

• Capacity: Full-year mainline capacity expected to decrease ~6.5% vs. 2008. Q2 mainline capacity expected to decrease >7.5% vs. Q2 2008.
• Fuel Price: Planning for an average system price of $1.89 per gallon for Q2 and full-year 2009.
• Unit Costs: Full-year mainline unit costs expected to decrease 10.4% (improved from Jan. 21 forecast of 6.6% decrease). Full-year unit costs excluding fuel expected to increase 6.6% (improved from Jan. 21 forecast of 9.2% increase).

Risks and Contingencies

• Antitrust Immunity: Application for global antitrust immunity with oneworld partners (British Airways, Iberia, Royal Jordanian, Finnair) is pending DOT approval, expected in H2 2009.
• Forward-Looking Risks: Risks include the weakened financial condition, severe global economic downturn, need to raise additional funds, volatile fuel prices, and potential industry consolidation.

Investor Verification Checklist

• Liquidity Runway: Verify the sufficiency of the $3.6 billion in unencumbered assets against the $11.5 billion net debt and ongoing cash burn.
• Debt Covenants: Confirm the company's ability to satisfy existing financial covenants given the net loss and reduced cash balance.
• Capital Expenditure Cuts: Assess the impact of the $100 million reduction in non-aircraft capital expenditures on long-term operational efficiency and fleet modernization.
• Antitrust Approval: Monitor the status of the DOT application for antitrust immunity, which is critical for the planned joint business relationship with European partners.
• Fleet Replacement: Track the progress of the MD-80 replacement program with Boeing 737-800s and the associated financing commitments.