AAL

Business Context and Reporting Period

This Form 10-Q covers AMR Corporation (American Airlines Group Inc.) for the quarterly period ended March 31, 2002. The Company's results continue to be severely impacted by the September 11, 2001 terrorist attacks and a broader economic slowdown affecting business travel. The reporting period includes the operating results of Trans World Airlines (TWA), acquired in April 2001, which were not present in the comparable 2001 period.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 13.1% ($624 million) year-over-year. Passenger revenues dropped 11.5% due to reduced capacity and fare sales, while cargo revenues fell 23.9%.
• Expense Increases: Total operating expenses rose 2.1% ($101 million). Wages, salaries, and benefits increased 19.1% ($334 million) due to contractual obligations and rising healthcare costs. Aircraft rentals surged 52.7% ($78 million) primarily due to the inclusion of TWA aircraft.
• Fuel Savings: Aircraft fuel expense decreased 25.5% ($180 million) driven by a 23.3% drop in the average price per gallon.
• Interest Costs: Interest expense increased 39.5% ($47 million) resulting from higher long-term debt levels.
• Tax Impact: A $27 million tax charge was recorded due to changes in net operating loss (NOL) carryback rules, which displaced foreign tax credits expected to expire.

Guidance, Outlook, and Risks

Outlook

Management expects a loss for the second quarter of 2002 and likely for the full year 2002. Capacity is projected to be down approximately 11% for American Airlines and 3% for AMR Eagle in Q2 compared to the prior year. While fuel prices are expected to rise from Q1 levels, they should remain lower than Q2 2001. Unit costs are forecast to be 2-3% higher than the prior year due to wage increases, security costs, and insurance premiums.

Risks and Contingencies

• Legal Proceedings: Significant litigation includes a class action regarding travel agency debit memos, Department of Justice antitrust suits regarding DFW airport monopolization, and environmental remediation lawsuits at Miami International Airport (MIA) where costs cannot be reasonably estimated.
• Insurance: Commercial war-risk insurance coverage has been reduced. The Company relies on government-supplemented coverage which is renewable for 60-day periods; failure to renew could adversely impact operations.
• Labor Constraints: Pilot contract provisions limit available seat miles (ASMs) when pilots are on furlough, potentially capping capacity in the first half of 2002.
• Goodwill Impairment: The Company adopted SFAS 142 and expects to complete its goodwill impairment analysis in Q2 2002, which could result in a charge.

Investor Verification Checklist

• Liquidity Position: Verify the sustainability of the $2.3 billion cash and short-term investment balance against the $406 million operating cash burn and $619 million capital expenditures in Q1.
• Debt Obligations: Review the $825 million in aircraft payments due for the remainder of 2002 and the total debt load of over $9 billion.
• Government Support: Confirm the status of the U.S. Government grant under the Air Transportation Safety and System Stabilization Act and the renewal of war-risk insurance coverage.
• Legal Exposure: Assess the potential financial impact of the Miami-Dade environmental lawsuit and the antitrust litigation outcomes.
• Unit Cost Trends: Monitor the trajectory of wages and benefits, which rose 19.1%, against the backdrop of declining revenue per available seat mile (RASM).