American Airlines Group Inc. (formerly AMR Corporation) — 2013 Q2 Form 10-Q
Business context and reporting period
AMR Corporation, the parent of American Airlines, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company and certain subsidiaries remained debtors in possession under Chapter 11, filed November 29, 2011. The proposed reorganization plan contemplated AMR's emergence from bankruptcy and merger with US Airways Group, after which AMR would be renamed American Airlines Group Inc.
The Bankruptcy Court approved the plan disclosure statement on June 7, 2013, and plan confirmation was scheduled for August 15, 2013. Management expected emergence from Chapter 11 and completion of the merger in the third quarter of 2013, subject to required approvals and closing conditions.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Operating revenues | $6.449 billion | $6.452 billion | $12.547 billion | $12.490 billion |
| Operating income | $489 million | $142 million | $540 million | $53 million |
| Operating margin | 7.6% | 2.2% | 4.3% | 0.4% |
| Net earnings (loss) | $220 million | $(241) million | $(122) million | $(1.900) billion |
| Reorganization items, net | $124 million | $230 million | $284 million | $1.630 billion |
| Basic earnings (loss) per share | $0.65 | $(0.72) | $(0.36) | $(5.67) |
Second-quarter passenger revenue was approximately $5.640 billion, up modestly year over year. Mainline passenger yield increased 0.2%, while load factor declined 0.3 percentage points and passenger revenue per available seat mile declined 0.1% to 12.62 cents. Six-month mainline passenger revenue per available seat mile increased 1.3% to 12.48 cents, supported by a 0.7-point increase in load factor.
Second-quarter operating expenses declined 5.5% to $5.960 billion. The principal drivers were lower wages, salaries and benefits, lower fuel expense, and lower special charges. Mainline operating expense per available seat mile declined 7.5% to 13.46 cents. Aircraft fuel expense was $2.139 billion for the quarter and $4.339 billion for the six months.
Interest expense was $169 million in the second quarter and $431 million for the six months, compared with $164 million and $342 million, respectively, in the prior-year periods. The increase primarily reflected post-petition interest allowed under the support agreement. The company recorded no income-tax provision for the quarter and a $22 million tax benefit for the six-month period, principally from refundable credits.
Cash flow, liquidity, debt and balance sheet
- Six-month operating cash flow was $1.840 billion, compared with $1.722 billion in 2012.
- Capital expenditures, including aircraft deposits, were $1.804 billion, compared with $733 million in the prior-year period.
- Financing cash flow was $2.269 billion, including $1.684 billion of debt issuance and $1.132 billion of sale-leaseback proceeds.
- Cash increased to $604 million at June 30, 2013, from $480 million at December 31, 2012.
- Unrestricted cash and short-term investments totaled approximately $6.2 billion, compared with $3.9 billion at year-end 2012; restricted cash and short-term investments totaled $863 million.
- Debt not subject to compromise totaled $9.285 billion, including $1.045 billion drawn under a new term loan. Current maturities were $1.298 billion and long-term debt was $7.987 billion.
- Liabilities subject to compromise totaled $6.847 billion, up from $6.606 billion at December 31, 2012. Total stockholders' deficit was $8.216 billion.
- The new credit facilities included a $1.05 billion term loan and a $1 billion revolving facility. The company was required to maintain minimum aggregate liquidity of $1.5 billion before the merger and $2.0 billion after the merger.
Material changes versus the prior comparable period
- Second-quarter operating income improved by $347 million, and the company moved from a $241 million net loss to $220 million of net income.
- Six-month net loss narrowed substantially to $122 million from $1.900 billion, primarily because 2012 included $1.513 billion of aircraft and facility financing reorganization charges versus $219 million in 2013.
- Wages, salaries and benefits declined $328 million in the quarter and $626 million for the six months, reflecting benefit-plan modifications and workforce reductions.
- Fuel expense declined $70 million in the quarter and $36 million for the six months, although fuel remained the largest operating expense.
- Aircraft rental expense increased $49 million in the quarter and $71 million for the six months, principally due to new aircraft deliveries.
- Maintenance, materials and repairs, food service, other rentals and landing fees, and other operating expenses increased year over year.
- Net reorganization charges declined by $106 million in the quarter and $1.346 billion for the six months.
Guidance, outlook, risks and unusual items
Management expected the Chapter 11 plan and US Airways merger to close in the third quarter of 2013, but emphasized that confirmation, stakeholder approval, regulatory approvals, financing conditions and other closing requirements remained uncertain. Existing AMR equity interests were expected to be canceled upon effectiveness of the plan and merger, subject to distributions under the plan; the ultimate recovery was uncertain.
- Management estimated approximately $1.4 billion of cash costs to settle certain obligations that matured during the Chapter 11 proceedings and approximately $1.2 billion of merger integration transition costs.
- Aircraft purchase commitments totaled 317 aircraft, with estimated payments of approximately $0.8 billion for the remainder of 2013, $2.0 billion in 2014, $1.7 billion in 2015, $2.0 billion in 2016, $2.1 billion in 2017 and $12.2 billion thereafter, subject to assumptions and agreement approvals.
- The company had approximately $1.0 billion of long-term debt principal payments and $1.3 billion of capital expenditures expected in the remainder of 2013.
- Credit card processors could require reserves if specified liquidity conditions were not met; no such reserve was required at June 30, 2013.
- Nearly all aircraft assets were encumbered, and the company had limited additional collateral available for financing. Appeals relating to aircraft refinancing remained pending, and potential make-whole amounts could have exceeded $400 million.
- Fuel hedges covered approximately 34% of estimated remaining 2013 fuel requirements. A hypothetical 10% increase in fuel prices would have increased projected fuel expense by approximately $671 million over the following 12 months.
- Chapter 11 created substantial uncertainty regarding allowed claims, debt and lease restructurings, aircraft financing, pension funding and the company's ability to continue as a going concern. Management stated that the financial statements were prepared on a going-concern basis but that substantial doubt existed regarding that ability.
- Approximately 13,500 bankruptcy claims totaling about $290 billion had been filed as of July 10, 2013. Approximately $116 billion had been disallowed, while objections to claims aggregating approximately $1.1 billion remained unresolved.
- Remaining special-charge accruals were $67 million at June 30, 2013, primarily for employee-related costs. Merger-related expenses were $6.2 million in the quarter and $21.6 million for the six months.
Important facts for investors to verify
- Whether the Bankruptcy Court confirmed the plan and whether the AMR-US Airways merger closed on the expected timetable.
- The final treatment and recovery, if any, for existing AMR common stockholders and prepetition creditors.
- The amount and priority of ultimately allowed bankruptcy claims compared with recorded liabilities subject to compromise.
- Whether the company maintained the $1.5 billion pre-merger and $2.0 billion post-merger liquidity requirements and whether credit card reserves were triggered.
- The outcome of aircraft financing appeals and any resulting make-whole payments, refinancing costs or aircraft repossession risk.
- The cash required for matured obligations, pension contributions, aircraft commitments and merger integration.
- Actual fuel prices, hedge effectiveness and the ability to maintain fuel hedging and aircraft financing during and after restructuring.
- The effect of the merger on leverage, liquidity, operating margins, integration costs and expected synergies.