American Airlines Group Inc. quarterly report, Q1 FY2013

Business Context and Reporting Period

AMR Corporation, the predecessor to American Airlines Group Inc., filed this unaudited Form 10-Q for the quarter ended March 31, 2013. AMR and American Airlines were operating as debtors in possession under Chapter 11, filed November 29, 2011. The proposed merger with US Airways Group was announced in February 2013; the combined company was expected to be named American Airlines Group Inc. The financial statements therefore reflect AMR’s pre-merger operations and reorganization accounting.

Key Financial Metrics

Metric	Q1 2013	Q1 2012	Change
Total operating revenue	$6.098 billion	$6.037 billion	Up 1.0%
Operating income (loss)	$52 million	$(89) million	Improved $141 million
Operating margin	Approximately 0.9%	Approximately (1.5)%	Improved
Net income (loss)	$(341) million	$(1.660) billion	Loss improved $1.319 billion
Diluted loss per share	$(1.02)	$(4.95)	Improved
Net cash provided by operating activities	$683 million	$1.067 billion	Down $384 million
Capital expenditures	$885 million	$238 million	Up $647 million

Passenger revenue increased to approximately $5.3 billion, supported by stronger yields and higher load factors. Mainline passenger revenue increased 1.3% despite a 1.4% capacity reduction; passenger yield rose 0.7%, load factor increased approximately 1.6 percentage points, and mainline passenger revenue per available seat mile increased 2.7% to 12.34 cents.

Total operating expenses declined 1.3% to $6.046 billion. Wages, salaries and benefits decreased $298 million, primarily from benefit modifications and workforce reductions. Aircraft fuel increased $35 million to $2.200 billion, while maintenance, aircraft rentals, food service and other operating expenses increased.

Net loss included $160 million of reorganization items, compared with $1.401 billion in Q1 2012. Interest expense increased to $262 million, including $116 million of post-petition interest on unsecured obligations allowed under the restructuring support agreement. A $22 million tax benefit was recorded.

Liquidity, Debt and Balance Sheet

Cash was $606 million at March 31, 2013, compared with $480 million at December 31, 2012.
Unrestricted cash and short-term investments totaled approximately $4.2 billion; restricted cash and short-term investments totaled $853 million.
Total assets were $23.852 billion and stockholders’ deficit was $8.376 billion.
Long-term debt not subject to compromise totaled $7.902 billion, including $1.256 billion of current maturities. Long-term debt subject to compromise totaled $1.198 billion.
Total liabilities subject to compromise were $6.779 billion, representing estimated prepetition obligations subject to the Chapter 11 claims process.
Financing activities included $161 million of new debt issuance and $764 million of sale-leaseback proceeds. The company also completed a $664 million enhanced equipment trust certificate offering.
The company expects approximately $1.2 billion of principal debt payments, $34 million of capital lease payments and $2.2 billion of capital expenditures during the remainder of 2013.

Material Changes Versus the Prior Comparable Period

Operating results improved from a loss to modest operating income, primarily because operating expenses fell faster than revenue changed.
Net loss improved substantially because reorganization charges declined by $1.241 billion year over year.
Wages, salaries and benefits declined 16.7%, while fuel expense increased 1.6% and maintenance expense increased 11.8%.
Operating cash flow declined 36.0%, principally reflecting the comparison with Chapter 11-related cash effects in the prior-year quarter and increased investment needs.
Capital expenditures increased significantly, primarily for new aircraft and aircraft modifications.
Pension and retiree benefit costs changed materially following plan modifications: pension expense declined to $14 million from $194 million, and retiree medical and other benefit costs were a $54 million credit compared with $40 million of expense.

Guidance, Outlook, Risks and Unusual Items

Management stated that, if AMR were to emerge independently, it targeted approximately $2 billion of annual cost savings and $1 billion of annual revenue enhancements by 2017, although there was no assurance these targets would be achieved. The proposed merger and Plan of Reorganization contemplated emergence from Chapter 11 and combination with US Airways Group.

The Plan of Reorganization and related disclosure statement were filed April 15, 2013, after quarter end. Confirmation, stakeholder approval, regulatory approvals and merger closing remained uncertain.
The proposed merger could terminate if required conditions were not met, including Bankruptcy Court action. If terminated, AMR expected to pursue an alternative restructuring plan.
Approximately 13,400 bankruptcy claims totaling about $290.0 billion had been filed as of April 10, 2013. The ultimate amount of allowed claims and creditor recoveries remained unknown.
The financial statements disclosed substantial doubt about the company’s ability to continue as a going concern because of the Chapter 11 proceedings, liquidity needs and uncertainty over liability resolution.
At emergence, the company estimated that cash costs to settle obligations that matured during the Chapter 11 cases would be at least $1.3 billion. Estimated merger integration costs were approximately $1.2 billion.
Aircraft acquisition commitments totaled 325 purchase aircraft and 194 leased aircraft, with estimated purchase payments of $22.0 billion from the remainder of 2013 through 2018 and beyond, before considering future changes and conditions.
Fuel remained a major risk. A hypothetical 10% increase in fuel prices was estimated to increase the next twelve months’ fuel expense by approximately $665 million after hedging. Fuel hedges covered approximately 28% of estimated remaining 2013 requirements.
Credit card processors could require reserves if specified liquidity conditions were breached; no reserve was required at March 31, 2013.
Almost all aircraft assets were encumbered, credit ratings were significantly below investment grade, and substantially all debt and lease obligations had been subject to defaults or restructuring claims in the Chapter 11 cases.
Pending matters included appeals relating to employee benefit and collective bargaining changes, competition investigations, bankruptcy claims, aircraft financing appeals and settlements with Travelport and Orbitz subject to Bankruptcy Court approval.

Important Facts for Investors to Verify

Whether the Bankruptcy Court confirmed and implemented the Plan of Reorganization and whether the US Airways merger closed on the contemplated terms.
The ultimate allowed amount and priority of bankruptcy claims, liabilities subject to compromise and recoveries for creditors and existing AMR equity holders.
The amount of cash required at emergence, including matured obligations, pension funding and merger integration costs.
Availability and terms of financing for aircraft deliveries, refinancing transactions and ongoing capital expenditures.
Progress toward the stated cost savings and revenue enhancement targets and the sustainability of the improved operating performance.
Exposure to fuel prices, credit card reserve requirements, collateral covenants, aircraft commitments and significant lease obligations.