AMR Corporation (American Airlines) — Form 10-Q Summary
Business context and reporting period
This filing is for AMR Corporation, the predecessor corporate entity associated with American Airlines Group, and covers the unaudited quarter and nine months ended September 30, 2010, compared with the corresponding 2009 periods. The consolidated group includes American Airlines, AMR Eagle and related subsidiaries.
Key financial metrics
| Metric | Three months ended Sept. 30, 2010 | Three months ended Sept. 30, 2009 | Nine months ended Sept. 30, 2010 | Nine months ended Sept. 30, 2009 |
|---|---|---|---|---|
| Operating revenues | $5.842 billion | $5.127 billion | $16.584 billion | $14.855 billion |
| Operating income (loss) | $342 million | $(194) million | $240 million | $(614) million |
| Net earnings (loss) | $143 million | $(359) million | $(373) million | $(1.124) billion |
| Diluted EPS | $0.39 | $(1.26) | $(1.12) | $(4.00) |
| Operating margin | 5.9% | (3.8)% | 1.4% | (4.1)% |
| Operating cash flow | Not separately provided | Not separately provided | $1.090 billion | $926 million |
- Third-quarter revenue increased 13.9%, driven primarily by improved passenger unit revenues. Mainline passenger RASM increased 10.7% to 11.15 cents, while the 84.0% load factor was broadly stable.
- Nine-month revenue increased 11.6%. Mainline passenger load factor improved to 82.0% from 80.5%, yield increased 9.5%, and RASM increased 11.5% to 10.91 cents.
- Third-quarter operating expenses increased 3.4% to $5.500 billion; nine-month expenses increased 5.7% to $16.344 billion. Fuel was the principal pressure, rising 11.0% in the quarter and 16.1% year to date.
- Interest expense was $204 million in the third quarter and $622 million for the nine months, compared with $182 million and $535 million, respectively, in 2009.
- Cash provided by operations increased to $1.090 billion for the first nine months. Capital expenditures were $1.412 billion, debt and capital lease payments were $873 million, and financing activities provided $455 million.
- At September 30, unrestricted cash and short-term investments were approximately $4.6 billion, consisting of $202 million of cash and $4.355 billion of short-term investments. Restricted cash and investments were $447 million.
- Long-term debt, including current maturities, had a carrying value of $10.679 billion; capital lease obligations totaled $610 million. Pension and postretirement liabilities were $7.409 billion. Stockholders’ deficit was $3.643 billion.
Material changes versus the prior comparable period
- The company moved from a $359 million third-quarter 2009 net loss to $143 million of net income, and from a $614 million year-to-date operating loss to $240 million of operating income.
- Revenue growth materially exceeded expense growth in the third quarter, producing a positive operating margin. The improvement was primarily attributable to higher fares and unit revenues rather than materially higher load factors.
- Fuel expense increased by $160 million in the third quarter and $659 million year to date. Average fuel cost, including hedging, rose to $2.24 per gallon in the quarter from $2.07 in 2009 and to $2.28 year to date from $1.96.
- Fuel-hedging losses declined to $21 million in the third quarter and $135 million year to date, compared with $105 million and $570 million, respectively, in the prior-year periods.
- No special charges were recorded in 2010 through September 30, compared with $64 million in the third quarter and $100 million year to date in 2009. Remaining restructuring accruals were $98 million.
- Debt carrying value declined from $11.008 billion at December 31, 2009 to $10.679 billion at September 30, 2010, while current maturities increased from $1.024 billion to $1.669 billion.
Guidance, outlook, commentary and risks
- Management expected fourth-quarter 2010 mainline capacity to increase approximately 3.4% year over year and full-year 2010 capacity to increase approximately 1%. Mainline capacity was expected to increase approximately 3.5% in 2011, primarily in international markets.
- Fourth-quarter 2010 mainline unit costs were expected to decline approximately 3.5% year over year, while full-year 2010 unit costs were expected to increase approximately 3% because of fuel, revenue-related expenses and aircraft financing costs.
- FlightPlan 2020 focuses on fleet renewal, core hub markets, customer loyalty, global alliances and profitable flying. Management estimated that network and alliance initiatives could generate more than $500 million of annual incremental revenue and cost savings, mostly in 2011 and the balance by year-end 2012; realization was uncertain.
- Antitrust-immunity approval was obtained for cooperation with British Airways, Iberia, Finnair and Royal Jordanian. The proposed Japan Airlines joint business remained subject to final regulatory and commercial approvals.
- Management stated that substantial additional funding would be needed to meet aircraft, debt, lease and pension obligations. Approximately $263 million of debt principal, $8 million of capital lease payments and $629 million of capital expenditures were expected for the remainder of 2010.
- Scheduled debt maturities were approximately $2.4 billion in 2011, $1.7 billion in 2012, $989 million in 2013 and $1.4 billion in 2014. Aircraft purchase commitments required estimated payments of $488 million for the remainder of 2010 and $883 million in 2011.
- The 2010 minimum pension contribution was reduced to approximately $460 million and had been completed; the estimated 2011 contribution was approximately $520 million.
- Key risks include high and volatile fuel prices, weak or changing travel demand, intense competition, labor-cost disadvantages and ongoing union negotiations, substantial leverage, limited unencumbered assets, refinancing needs, pension funding, potential credit-card processor reserves and regulatory requirements.
- Fuel hedges covered approximately 40% of estimated remaining 2010 fuel requirements. A hypothetical 10% increase in fuel prices was estimated to increase the next twelve months’ fuel expense by approximately $572 million, after hedging.
- Material contingencies included a proposed FAA civil penalty of $24.2 million, unresolved cargo and passenger antitrust investigations and litigation, and potential European Union cargo-surcharge fines. No reserve was recorded for the European Commission cargo matter.
Important facts for investors to verify
- Verify the issuer identity: the source filing names AMR Corporation, not the later American Airlines Group Inc. entity.
- Assess whether the third-quarter improvement can persist after higher fuel costs, competitive pricing pressure and expected capacity growth.
- Review liquidity against near-term debt maturities, aircraft commitments, lease payments, pension contributions and the company’s stated need for additional financing.
- Evaluate the sustainability of the reported earnings improvement, including the absence of 2010 special charges and the effect of tax valuation allowances.
- Monitor labor negotiations, alliance approvals, the potential AMR Eagle divestiture and the realization of the projected $500 million-plus annual alliance and network benefits.
- Track antitrust proceedings, the FAA penalty, fuel-hedging effectiveness and any future requirements to post credit-card or derivative collateral.