American Airlines Group Inc. quarterly report, Q2 FY2010

AMR Corporation 2010 Q2 Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2010. The filing is for AMR Corporation, the predecessor corporate parent of American Airlines, rather than the later American Airlines Group Inc.

Business Context and Financial Overview

AMR’s principal businesses were American Airlines, regional affiliates AMR Eagle, and related airline operations. Results improved materially year over year as passenger demand, load factors, yields, and unit revenues strengthened, although the company remained unprofitable for the first six months and continued to face substantial leverage, pension obligations, fuel-price exposure, and labor-cost disadvantages.

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Operating revenue	$5.674 billion	$4.889 billion	$10.742 billion	$9.728 billion
Operating income (loss)	$196 million	$(226) million	$(102) million	$(420) million
Net loss	$(11) million	$(390) million	$(516) million	$(765) million
Basic loss per share	$(0.03)	$(1.39)	$(1.55)	$(2.74)
Operating margin	3.5%	(4.6)%	(0.9)%	(4.3)%

Cash Flow, Liquidity, Debt and Balance Sheet

Six-month operating cash flow was $1.173 billion, up from $938 million.
Capital expenditures were $729 million, while investing activities used $1.374 billion, primarily reflecting capital expenditures and a $641 million increase in short-term investments.
Financing activities provided $245 million, including $711 million from debt issuance and sale-leaseback transactions, partly offset by $467 million of debt and capital lease payments.
Cash increased to $197 million from $153 million at year-end 2009. Unrestricted cash and short-term investments totaled approximately $5.1 billion, up $685 million from December 31, 2009.
Long-term debt, including current maturities, had a carrying value of $10.869 billion at June 30, 2010; capital lease obligations totaled $628 million. Current maturities of long-term debt were $1.727 billion.
Total current liabilities of $9.359 billion exceeded current assets of $7.344 billion. Stockholders’ deficit was $3.930 billion.
Scheduled principal payments at June 30, 2010 included approximately $529 million of long-term debt and $26 million of capital leases. The company expected approximately $1.3 billion of capital expenditures during the remainder of 2010.

Material Changes Versus the Prior Comparable Period

Second-quarter revenue increased 16.0% and first-half revenue increased 10.4%, driven mainly by higher passenger yields and load factors.
Mainline passenger RASM increased 16.8% in the second quarter and 11.8% for the first half. Q2 load factor rose to 83.9% from 81.8%, while yield increased 14.0%.
Operating expenses increased 7.1% in Q2 and 6.9% in the first half. Aircraft fuel expense increased 24.1% in Q2 and 19.0% year to date.
Average fuel price, including hedging effects, increased to $2.37 per gallon in Q2 from $1.90 in the prior-year quarter. The company estimated $334 million of incremental year-over-year Q2 fuel expense from higher prices.
Interest expense increased $42 million in Q2 and $65 million in the first half, primarily because of higher long-term debt balances.
The company recorded no special charges in 2010 periods presented, compared with $23 million in Q2 2009 and $36 million in the first half of 2009. Prior-year results also included approximately $70 million of non-recurring aircraft-related charges.
The full valuation allowance against net deferred tax assets increased by approximately $150 million to $3.0 billion, and no income tax benefit was recognized on the reported losses.

Guidance, Outlook, Risks and Unusual Items

Management expected Q3 2010 mainline capacity to increase approximately 3.0% year over year and full-year 2010 capacity to increase approximately 1.0%, with marginally lower domestic capacity and approximately 2.4% international growth.
Q3 mainline unit costs were expected to remain approximately flat year over year, including the effects of higher fuel, revenue-related expenses, financing costs, and prior-year special items.
Management estimated that its cornerstone-market strategy, alliance initiatives, and proposed joint businesses could generate more than $500 million of annual incremental revenue and cost savings, with most expected in 2011 and the remainder by year-end 2012. These estimates depended on regulatory approvals and execution.
Antitrust immunity was obtained for cooperation with British Airways, Iberia, Finnair, and Royal Jordanian after quarter-end; the company expected implementation in Q4 2010. Approval for the proposed Japan Airlines joint business remained pending.
Tentative labor agreements could produce approximately $60 million of Q3 2010 lump-sum and salary costs if ratified. The company estimated an annual labor-cost disadvantage of approximately $600 million versus other network carriers.
The company was evaluating a possible divestiture of AMR Eagle, but provided no assurance that a transaction would occur or what its effects would be.
Fuel hedges covered approximately 42% of estimated remaining 2010 fuel requirements. A 10% increase in fuel cost per gallon was estimated to increase the next 12 months’ fuel expense by approximately $526 million, after considering outstanding hedges.
Aircraft purchase commitments required estimated payments of $954 million in the remainder of 2010 and $524 million in 2011. On July 21, 2010, American exercised rights to purchase 35 additional Boeing 737-800 aircraft, increasing expected total aircraft purchase commitments to approximately $4 billion at the end of Q3 2010.
The company’s 2010 minimum pension contribution requirement was reduced from $525 million to approximately $460 million under pension relief legislation. It had contributed $144 million as of the filing date.
Material risks included continued weak demand, high or volatile fuel prices, limited pricing power, substantial debt and lease obligations, future financing needs, pension funding, labor negotiations, credit-card reserve requirements, aircraft commitments, regulatory approvals, and antitrust investigations and litigation. No reserve was recorded for potential European Commission cargo-antitrust fines.
Unusual items included a $53 million loss from the January 2010 Venezuelan currency devaluation and prior-year H1N1-related revenue impacts estimated at $50 million to $80 million.

Investor Verification Checklist

Verify the distinction between this AMR Corporation filing and the later American Airlines Group structure.
Reconcile the $5.1 billion unrestricted liquidity figure with cash, short-term investments, restricted amounts, and any availability under financing arrangements.
Assess debt maturities, capital expenditures, aircraft purchase commitments, lease obligations, and the company’s stated need for substantial additional funding.
Monitor fuel prices, hedge coverage, collateral requirements, and the sensitivity of earnings and liquidity to fuel-price changes.
Track labor-contract ratifications, the estimated $60 million Q3 cost, and progress in reducing the stated labor-cost disadvantage.
Evaluate regulatory approval and execution risks for the British Airways/Iberia and Japan Airlines joint businesses and the possible AMR Eagle divestiture.
Review antitrust proceedings, including potential EU cargo fines and related litigation, for developments that could materially affect results.