AAL

Business Context and Reporting Period

Company: AMR Corporation (American Airlines Group Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: AMR operates primarily through its principal subsidiary, American Airlines, Inc., providing scheduled jet service to approximately 150 destinations globally. The network includes American Eagle and AmericanConnection regional carriers, serving 250 cities in 40 countries with a fleet of approximately 900 aircraft. The company is a founding member of the one world alliance.

Key Financial Metrics

Key Operational Metrics:
- Fuel Expense: $9.014 billion (35.1% of operating expenses), up from $6.670 billion in 2007.
- Average Fuel Price: $3.03 per gallon in 2008 vs. $2.13 in 2007.
- Passenger Load Factor: 80.6% (down 0.9 points from 2007).
- Passenger Yield: 13.84 cents per passenger mile (up 8.6% from 2007).

Material Changes vs. Prior Period

• Net Loss vs. Profit: The company recorded a net loss of $2.1 billion in 2008, a reversal from the $504 million net earnings in 2007. This was driven primarily by a $2.7 billion incremental increase in fuel costs.
• Asset Impairment: A $1.1 billion non-cash impairment charge was recorded in Q2 2008 to write down the carrying values of McDonnell Douglas MD-80 and Embraer RJ-135 aircraft fleets due to capacity reductions.
• Special Charges: Total special charges were $1.213 billion, including $71 million for employee severance and $33 million for grounding leased Airbus A300 aircraft.
• Asset Sales: The company sold American Beacon Advisors for a net gain of $432 million, partially offsetting operating losses.
• Pension Obligations: The obligation for pension and postretirement benefits increased from $3.6 billion in 2007 to $6.6 billion in 2008, largely due to negative investment returns and a $103 million settlement charge related to pilot retirements.
• Equity Deficit: Stockholders' equity turned negative, moving from a $2.657 billion surplus in 2007 to a $2.935 billion deficit in 2008.

Guidance, Outlook, and Risks

Management Commentary & Outlook:
- Capacity Reductions: Mainline capacity for 2009 is expected to decrease approximately 6.5% from 2008 levels (9.0% domestic reduction).
- Cost Outlook: Q1 2009 unit costs are expected to decrease 2.9% year-over-year, primarily due to lower fuel prices, though non-fuel unit costs are expected to rise due to pension expenses and capacity reduction pressures.
- Liquidity Needs: The company anticipates significant funding needs in 2009, including $1.8 billion in long-term debt principal payments, $110 million in capital lease payments, and approximately $1.6 billion in capital expenditures. Access to substantial additional funding is required to meet obligations.

Key Risks and Contingencies:
- Fuel Volatility: Results remain highly sensitive to jet fuel prices. While prices abated from July 2008 highs, volatility persists. The company estimates a $711 million reclassification of fuel hedge losses into earnings over the next 12 months.
- Debt Covenants: The company is subject to liquidity and EBITDAR covenants under its credit facility. While compliant as of Dec 31, 2008, future compliance is uncertain given market volatility.
- Legal Proceedings: The company faces ongoing antitrust investigations regarding cargo and passenger surcharges by the DOJ, EU Commission, and other international bodies, which could result in significant fines.
- Labor Relations: The company is in mediated negotiations with three major unions (pilots, flight attendants, and other groups). Labor costs remain higher than competitors who have reorganized under Chapter 11.

Investor Verification Checklist

• Liquidity Sufficiency: Verify the company's ability to meet the $1.8 billion debt principal payment due in 2009 and the $1.6 billion capital expenditure plan given the current credit market environment.
• Fuel Hedge Impact: Confirm the timing and magnitude of the estimated $711 million fuel hedge loss reclassification into 2009 earnings.
• Covenant Compliance: Monitor quarterly reports for compliance with the EBITDAR and liquidity covenants of the secured bank credit facility.
• Antitrust Exposure: Track developments in the EU Statement of Objection and other global antitrust investigations regarding cargo and passenger surcharges.
• Pension Funding: Assess the impact of the increased pension obligation ($6.6 billion) on future cash flows and required contributions starting in 2010.
• Asset Encumbrance: Note that a very large majority of aircraft assets are encumbered, limiting the ability to use them as collateral for new financing.