Business Context and Reporting Period
AMR Corporation, the parent of American Airlines and AMR Eagle, reported unaudited results for the three months ended March 31, 2012. The filing identifies AMR as a debtor-in-possession following its November 29, 2011 Chapter 11 filing. The financial statements apply reorganization accounting under ASC 852 and contain substantial doubt regarding the Company’s ability to continue as a going concern. The filing predates the later American Airlines Group structure.
Financial Highlights
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $6.037 billion | $5.533 billion | +9.1% |
| Operating income (loss) | $(89) million | $(232) million | Improved by $143 million |
| Income (loss) before reorganization items | $(259) million | $(436) million | Improved by $177 million |
| Reorganization items, net | $(1.401) billion | — | New in 2012 |
| Net loss | $(1.660) billion | $(436) million | Loss increased by $1.224 billion |
| Basic and diluted loss per share | $(4.95) | $(1.31) | Loss increased |
| Cash flow from operating activities | $1.067 billion | $708 million | +$359 million |
Passenger revenue increased $515 million to approximately $5.2 billion. Mainline passenger revenue increased 10.2% on essentially flat capacity; load factor improved approximately 2.0 percentage points to 79.0%, passenger yield increased 7.3% to 15.21 cents per passenger mile, and passenger revenue per available seat mile increased 10.0% to 12.02 cents.
Operating expenses increased 6.3% to $6.126 billion. Aircraft fuel expense rose $323 million, or 17.5%, to $2.165 billion, primarily because the average fuel price increased to $3.24 per gallon from $2.76. Fuel hedging reduced expense by approximately $29 million. Mainline operating expense per available seat mile increased 6.1% to 14.22 cents.
Cash, Debt and Liquidity
- At March 31, 2012, cash was $375 million, unrestricted short-term investments were $4.444 billion, and restricted cash and short-term investments were $771 million.
- Unrestricted cash and short-term investments totaled approximately $4.8 billion, up from approximately $4.0 billion at December 31, 2011.
- Operating cash flow of $1.067 billion was partly offset by $985 million of investing cash outflows, including $238 million of capital expenditures and a $726 million increase in short-term investments.
- Financing cash flow was $10 million, including $314 million of debt and capital lease payments and $324 million of sale-leaseback proceeds.
- Debt not subject to compromise had a carrying value of $8.168 billion, including $1.593 billion of current maturities. Liabilities subject to compromise totaled $15.001 billion, including $2.238 billion of debt, $2.830 billion of aircraft lease and facility bond obligations, and $9.430 billion of pension and postretirement obligations.
- The Company was not required to maintain a reserve under its credit-card processing agreements at March 31, 2012, but a future reserve requirement could materially reduce liquidity.
- The Company was not in compliance with the most recently completed collateral coverage test for its 10.5% Notes. It was in compliance with the tests for its Senior Secured Notes and 2005 Spare Engine EETC.
Material Changes Versus the Prior Comparable Period
- Revenue improved substantially, led by stronger passenger pricing, load factor and regional affiliate traffic.
- Operating loss narrowed despite higher fuel and maintenance costs, but the Company recorded $1.401 billion of Chapter 11-related reorganization charges.
- Reorganization charges primarily comprised $1.017 billion for aircraft financing renegotiations and rejections, $339 million for rejection of facility bond-related obligations, and $45 million of professional fees.
- Operating cash flow increased $359 million year over year, while capital expenditures declined from $359 million to $238 million.
- Liabilities subject to compromise increased from $4.843 billion at December 31, 2011 to $15.001 billion at March 31, 2012, reflecting the classification of prepetition obligations affected by the bankruptcy process.
- The Company’s stock and certain debt securities were delisted from the NYSE on January 30, 2012; common stock began trading on the OTCQB under the symbol AAMRQ.
Guidance, Outlook, Risks and Unusual Items
- The February 2012 business plan targeted annual cost savings of $2 billion and annual revenue enhancements of $1 billion, but implementation required stakeholder collaboration and, in some cases, Bankruptcy Court approval.
- The plan contemplated reducing headcount by approximately 13,000, outsourcing certain maintenance and airport work, restructuring debt and leases, grounding older aircraft, and changing pension and retiree medical programs.
- Management expected to use improved cash flow to renew the fleet and invest several hundred million dollars annually in products and services. The plan targeted approximately 20% growth in departures across five key markets over five years and increased international flying.
- No plan of reorganization had been filed by March 31, 2012. Debtors’ exclusivity to file a plan was extended through September 28, 2012, with an exclusive solicitation period through November 29, 2012 if a plan was filed by the first deadline.
- American had rejected 40 aircraft-related leases, relinquished one mortgaged aircraft, elected to retain 347 aircraft and 87 spare engines, and negotiated revised financing terms for 139 aircraft. Failure to reach definitive agreements could result in aircraft repossessions.
- American and AMR Eagle commenced processes seeking modifications or rejection of collective bargaining agreements. The ultimate resolution of labor negotiations was not determinable.
- Aircraft commitments totaled 188 purchase aircraft and 221 lease aircraft. Subject to assumption of the related agreements, remaining 2012 purchase commitments and lease payments were approximately $998 million and $742 million, respectively.
- Fuel price exposure remained significant. A hypothetical 10% increase in fuel prices was estimated to increase next-12-month fuel expense by approximately $756 million. Fuel hedges covered approximately 32% of estimated remaining 2012 requirements.
- Material risks included Chapter 11 outcomes, liquidity and credit-card reserve requirements, high fuel prices, debt and collateral obligations, labor negotiations, aircraft financing, GDS litigation, regulatory investigations, antitrust claims, and potential loss of value for existing equity and unsecured debt securities.
Most Important Facts for Investors to Verify
- Confirm the current status and ultimate terms of the Chapter 11 plan of reorganization, including recoveries for common equityholders and unsecured creditors.
- Reconcile liabilities subject to compromise with allowed claims after completion of the claims-resolution process.
- Assess whether aircraft financing, lease and collective bargaining agreements were assumed, renegotiated or rejected, and quantify resulting cash requirements.
- Evaluate liquidity after debt maturities, aircraft commitments, pension funding, credit-card reserves and potential collateral postings.
- Determine whether the targeted $2 billion of annual cost savings and $1 billion of revenue enhancements were achieved.
- Monitor fuel prices, hedge coverage and the effect of fuel volatility on margins and cash flow.
- Review the outcome of GDS, antitrust and other litigation, including the potential effects on distribution access and booking volumes.
- Verify the filing’s historical issuer identity: the source document is an AMR Corporation Form 10-Q, not a filing by the later American Airlines Group Inc.