Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K for Fiscal Year End December 31, 1998 73 391K
2: EX-3.2 Bylaws of Amr, Amended November 18, 1998 23 57K
4: EX-10.15 Deferred Compensation Agreement - Edward Brennan 3 16K
5: EX-10.19 Deferred Compensation Agreement - Armando Codina 2 14K
6: EX-10.23 Deferred Compensation Agreement - Charles Fisher 2 15K
7: EX-10.27 Deferred Compensation Agreement - Charles Pistor 2 15K
3: EX-10.3 Compensation & Benefit Agreement 9 38K
8: EX-10.30 Deferred Compensation Agreement - Judith Rodin 2 14K
9: EX-10.34 1998 Long-Term Incentive Plan 19 77K
10: EX-10.37 Current Form of Stock Option Agreement 5 23K
11: EX-10.41 Current Form of Career Equity Program 8 29K
12: EX-10.42 Current Form of Career Equity Program-Non Officers 5 24K
13: EX-10.42(A) Current Form of Career Equity Program-Sr. 8 30K
Officers
14: EX-10.50 Performance Share Program for the Years 1999-2001 4 23K
15: EX-10.52 Amr Corporation 1987 Executive Deferral Plan 12 39K
16: EX-10.56 1999 Employee Profit Sharing Plan 5 22K
17: EX-10.60 American Airlines, Inc. 1999 Incentive Comp. Plan 6 26K
18: EX-10.61 Termination Benefits Agreement - Gerard J. Arpey 29 85K
19: EX-10.62 Termination Benefits Agreement - Robert W. Baker 29 85K
20: EX-10.63 Termination Benefits Agreement - Peter M. Bowler 29 85K
21: EX-10.64 Termination Benefits Agreement - Donald J. Carty 29 84K
22: EX-10.65 Termination Benefits Agreement - Peter J. Dolara 29 85K
23: EX-10.66 Termination Benefits Agreement - Daniel P. Garton 29 85K
24: EX-10.67 Termination Benefits Agreement - Michael W. Gunn 29 84K
25: EX-10.68 Termination Benefits Agreement - Thomas J. Kiernan 29 85K
26: EX-10.69 Termination Benefits Agreement - David L. Kruse 29 85K
27: EX-10.70 Termination Benefits Agreement - Charles Marlett 29 85K
28: EX-10.71 Termination Benefits Agreement - Anne McNamara 29 85K
29: EX-10.76 Aircraft Purchase Agreement 44 93K
30: EX-12 Computation of Ratio of Earnings to Fixed Charges 1 11K
31: EX-21 Subsidiaries of the Registrant 3 25K
32: EX-23 Consent of Independent Auditors 1 12K
33: EX-27.1 Financial Data Schedule 1 12K
34: EX-27.2 Restated Financial Data Schedule 1 12K
35: EX-27.3 Restated Financial Data Schedule 1 12K
10-K405 — Form 10-K for Fiscal Year End December 31, 1998
Document Table of Contents
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 1-8400.
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AMR CORPORATION
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(Exact name of registrant as specified in its charter)
[Enlarge/Download Table]
Delaware 75-1825172
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 963-1234
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of exchange on which registered
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Common stock, $1 par value per share New York Stock Exchange
9.00% Debentures due 2016 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 1999, was approximately $10,572,168,428. As of March
12, 1999, 182,278,766 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from
the Proxy Statement for the Annual Meeting of Stockholders to be held May 19,
1999.
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PART I
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ITEM 1. BUSINESS
AMR Corporation (AMR or the Company) was incorporated in October 1982. AMR's
principal subsidiary, American Airlines, Inc. (American), was founded in 1934.
Following the announcement of AMR's plans to sell the companies that comprised
the majority of what was previously the Management Services Group, AMR's
operations fall within two major lines of business: the Airline Group and The
Sabre Group.
AIRLINE GROUP
The Airline Group consists primarily of American and AMR Eagle Holding
Corporation (AMR Eagle), a separate subsidiary of AMR. American is one of the
largest scheduled passenger airlines in the world. At the end of 1998, American
provided scheduled jet service to more than 180 destinations throughout North
America, the Caribbean, Latin America, Europe and the Pacific. American is also
one of the largest scheduled air freight carriers in the world, providing a full
range of freight and mail services to shippers throughout its system. AMR Eagle
owns three regional airlines which operate as "American Eagle" -- American Eagle
Airlines, Inc., Executive Airlines, Inc. and Business Express Airlines, Inc. The
American Eagle carriers provide connecting service from seven of American's
high-traffic cities to smaller markets throughout the United States, Canada, the
Bahamas and the Caribbean.
THE SABRE GROUP
The Sabre Group, in which AMR holds an 82.4 percent economic and 97.9 percent
voting interest, is the world leader in the electronic distribution of travel
through its Sabre(R) computer reservations system (Sabre). Through Sabre, travel
agencies, corporate travel departments and individual consumers can access
information on - and book reservations with - airlines and other providers of
travel and travel-related products and services. In addition, The Sabre Group is
a leading provider of information technology solutions to the travel and
transportation industry and fulfills substantially all of the data processing,
network and distribution systems needs of American and AMR's other subsidiaries,
Canadian Airlines International Limited (Canadian), US Airways, Inc. (US
Airways) and certain other customers. The Sabre Group also employs its airline
technology expertise to offer technology solutions to other clients that face
similar complex operations issues, including companies in the airport, railroad,
trucking and hospitality industries. The services offered by The Sabre Group
include software development and product sales, transactions processing,
consulting and comprehensive information technology outsourcing.
In December 1997, The Sabre Group executed a 25 year, multi-billion
dollar technology agreement with US Airways to provide substantially all of US
Airways' information technology services. The agreement covers the management
and operation of US Airways' systems and information technology services. In
February 1998, The Sabre Group signed long-term agreements with ABACUS
International Holdings Ltd. which created a Singapore-based joint venture
company to manage travel distribution in the Asia-Pacific region. The Sabre
Group owns 35 percent of the joint venture company, called ABACUS International
Ltd., and provides it with transaction processing and product development on the
Sabre system.
OTHER
In September 1998, AMR announced plans to sell three of the companies which were
previously part of the Management Services Group and accounted for a substantial
portion of that group's revenues and operating income: AMR Services, AMR Combs
and TeleService Resources. As of December 31, 1998, the Company had reached
agreements to sell all three companies. The sale of TeleService Resources was
completed on January 31, 1999 and the sale of AMR Combs was completed on March
4, 1999. The Company expects to complete the sale of AMR Services by the end of
the first quarter or early part of the second quarter of 1999. See Note 12 to
the consolidated financial statements for additional information regarding
discontinued operations.
The remaining companies are the AMR Training Group, Americas Ground
Services, Inc. (AGS), AMR Investment Services, Inc. and Airline Management
Services, Inc. (AMS). The AMR Training Group operates the American Airlines
Training & Conference Center and provides a variety of training services to
American and a
1
number of other corporate clients. AGS provides airline ground and cabin service
handling at nine locations in seven countries in the Caribbean and Central and
South America. AMR Investment Services, Inc. serves as an investment advisor to
AMR and other institutional investors. It also manages the American AAdvantage
Funds, which have both institutional shareholders - including pension funds,
financial advisors, corporations and banks - and individual shareholders. As of
December 31, 1998, AMR Investment Services was responsible for management of
approximately $20.4 billion in assets, including direct management of
approximately $7.3 billion in short-term investments. AMS was formed in 1994 to
manage the Company's service contracts with other airlines such as the agreement
to provide a variety of management, technical and administrative services to
Canadian, which the Company signed in 1994.
Additional information regarding business segments is included in Note 15
to the consolidated financial statements.
COMPETITION
AIRLINE GROUP Most major air carriers have developed hub-and-spoke systems and
schedule patterns in an effort to maximize the revenue potential of their
service. American operates four hubs: Dallas/Fort Worth (DFW), Chicago O'Hare,
Miami and San Juan, Puerto Rico. Delta Air Lines and United Airlines also have
hub operations at Dallas/Fort Worth and Chicago O'Hare, respectively.
The American Eagle carriers increase the number of markets the Airline
Group serves by providing connections to American at American's hubs and certain
other major airports. The American Eagle carriers serve smaller markets through
Boston, Dallas/Fort Worth, Chicago, Miami, San Juan, Los Angeles and New York's
John F. Kennedy International Airport. American's competitors also own or have
marketing agreements with regional carriers which provide similar services at
their major hubs.
In addition to its extensive domestic service, American provides
international service to the Caribbean, Canada, Latin America, Europe and the
Pacific. American's operating revenues from foreign operations were
approximately $5.1 billion in 1998 and 1997 and $4.7 billion in 1996. Additional
information about the Company's foreign operations is included in Note 15 to the
consolidated financial statements.
Service over almost all of American's routes is highly competitive.
Currently, any carrier deemed fit by the U.S. Department of Transportation (DOT)
is free to operate scheduled passenger service between any two points within the
U.S. and its possessions. On most of its non-stop routes, American competes with
at least one, and sometimes more than one, major domestic airline including:
America West Airlines, Continental Airlines, Delta Air Lines, Northwest
Airlines, Southwest Airlines, Trans World Airlines, United Airlines and US
Airways. Competition is even greater between cities that require a connection,
where as many as nine airlines may compete via their respective hubs. American
also competes with national, regional, all-cargo, and charter carriers and,
particularly on shorter segments, ground transportation.
On all of its routes, pricing decisions are affected by competition from
other airlines, some of which have cost structures significantly lower than
American's and can therefore operate profitably at lower fare levels. As of
December 31, 1998, approximately 48 percent of American's bookings were impacted
by competition from low-cost carriers. American and its principal competitors
use revenue management systems that permit them to vary the number of discount
seats offered on each flight in an effort to maximize revenues, yet still be
price competitive with low-cost carriers.
In April 1998, American and US Airways announced the creation of a broad
marketing alliance between the two carriers. During 1998, the two carriers
introduced reciprocal benefits to members of both carriers' frequent flyer
programs and access to the carriers' domestic and international airport lounge
facilities. In December 1998, American acquired Reno Air, Inc. (Reno Air). The
Company anticipates that the acquisition of Reno Air will enhance American's
overall network and strengthen American's presence in the western United States.
Also in December 1998, American and Alaska Airlines announced the creation of a
broad marketing alliance between the two carriers. The two carriers intend to
introduce reciprocal benefits to members of both carriers' frequent flyer
programs in April 1999 and initiate code-sharing by Alaska on American-operated
services to and from the West Coast later in 1999.
2
Competition in many international markets is subject to extensive
government regulation. In these markets, American competes with foreign
investor-owned carriers, state-owned carriers and U.S. airlines that have been
granted authority to provide scheduled passenger and cargo service between the
U.S. and various overseas locations. American's operating authority in these
markets is subject to aviation agreements between the U.S. and the respective
countries, and in some cases, fares and schedules require the approval of the
DOT and/or the relevant foreign governments. Because international air
transportation is governed by bilateral or other agreements between the U.S. and
the foreign country or countries involved, changes in U.S. or foreign government
aviation policies could result in the alteration or termination of such
agreements, diminish the value of such route authorities, or otherwise adversely
affect American's international operations. Bilateral agreements between the
U.S. and various foreign countries served by American are subject to frequent
renegotiation. In addition, at most foreign airports, a carrier needs slots
(landing and take-off authorizations) before the carrier can introduce new
service or increase existing service. The availability of such slots is not
assured and can therefore inhibit a carrier's efforts to compete in certain
markets.
The major U.S. carriers have some advantage over foreign competitors in
their ability to generate traffic from their extensive domestic route systems.
In many cases, however, foreign governments, which own and subsidize some of
American's foreign competitors, limit U.S. carriers' rights to carry passengers
beyond designated gateway cities in foreign countries. To improve access to each
other's markets, various U.S. and foreign carriers -- including American -- have
established marketing relationships with other airlines. American currently has
code-sharing programs with Aero California, Air Liberte, Air Pacific, Asiana
Airlines, British Midland, Canadian Airlines, China Airlines, China Eastern
Airlines, Finnair, Grupo TACA, Gulf Air, Hawaiian Airlines, Iberia, Japan
Airlines, LOT Polish Airlines, Qantas Airways, Singapore Airlines, South African
Airways and the TAM Group. Certain of these relationships also include
reciprocity between American and the other airlines' frequent flyer programs. In
addition, the Company expects to implement alliances with other international
carriers, including Aeropostal, Avianca, Aerolineas Argentinas and LanChile,
pending regulatory approval. In the coming years, the Company expects to develop
these code-sharing programs further and to evaluate new alliances with other
international carriers.
During 1998, the Company acquired a 10 percent minority equity interest
in the Argentine holding company Interinvest, S.A., which owns a controlling
interest in the Argentine carriers Aerolineas Argentinas and Austral Lineas
Aereas. In February 1999, the Company agreed to acquire a one percent stake in
Iberia, S.A., which is owned by Sociedad Estatal de Participaciones Industriales
(SEPI), pending regulatory approval.
In September 1998, American, British Airways, Canadian Airlines, Cathay
Pacific Airways and Qantas Airways announced the formation of the global
alliance oneworld(TM). The oneworld alliance links the networks of the five
carriers to enhance service and connections to the destinations served by the
oneworld carriers, including linking the five carriers' frequent flyer programs
and access to the carriers' airport lounge facilities. Oneworld announced the
addition of Finnair and Iberia to the alliance in December 1998 and February
1999, respectively.
In June 1996, American and British Airways announced plans to create a
worldwide alliance. Among other things, the alliance contemplated extensive
code-sharing across both carriers' networks, the combining of passenger and
cargo services on flights between the United States and Europe, and the sharing
of the resulting profits on these services. Regulatory approval of the alliance
has not been obtained. In the interim, however, the carriers' have introduced a
limited reciprocal frequent flyer program and have joined with other carriers in
the formation of the oneworld alliance.
The Airline Group believes that it has several advantages relative to its
competition. Its fleet is efficient and quiet and is one of the youngest fleets
in the U.S. airline industry. It has a comprehensive domestic and international
route structure, anchored by efficient hubs, which permit it to take full
advantage of whatever traffic growth occurs. The Company believes American's
AAdvantage frequent flyer program, which is the largest program in the industry,
and its superior service also give it a competitive advantage.
3
THE SABRE GROUP The Sabre Group competes in electronic travel distribution
primarily against other large and well-established global distribution systems.
Sabre's principal competitors in marketing to travel agents include Amadeus,
Galileo and Worldspan. Each of these competitors offers many products and
services substantially similar to those of The Sabre Group.
Although certain barriers exist for any new provider of electronic
commerce -- barriers such as the need for significant capital investment to
acquire or develop the hardware, software and network facilities necessary to
operate a global distribution system -- The Sabre Group is faced with the
potential of new competitors, particularly as new channels for travel
distribution develop.
The global market to attract and retain agency subscribers is intensely
competitive. Factors affecting competitive success of global distribution
systems include depth and breadth of information, ease of use, reliability,
service and incentives to travel agents and range of products available to
travel providers, travel agents and consumers.
Although distribution through travel agents continues to be the primary
method of travel distribution, new channels of direct distribution to
businesses, consumers and airlines through computer on-line services, the
Internet and private networks are developing rapidly. The adoption of these
tools is currently quite low, but it is growing rapidly. The Sabre Group
believes that it has positioned its Sabre Business Travel Solutions(TM) system
and Travelocity.com(sm) website products to effectively compete in these
emerging distribution channels.
The Sabre Group also competes both against solutions companies and
full-service providers of technology outsourcing, some of which have
considerably greater financial resources than The Sabre Group, and against
smaller companies that offer a limited range of products. Among The Sabre
Group's full-service competitors are Electronic Data Systems, IBM Global
Services, Unisys, Andersen Consulting and Lufthansa Systems. Some of these
competitors have formed strategic alliances with large companies in the travel
industry and The Sabre Group's access to these potential customers is thus
limited. The Sabre Group believes that its competitive position in the travel
and transportation industries is enhanced by its experience in developing
systems for American and other airlines, and by its ability to offer not only
software applications but also systems development, integration and maintenance
and transactions processing services.
REGULATION
GENERAL The Airline Deregulation Act of 1978, as amended, eliminated most
domestic economic regulation of passenger and freight transportation. However,
the DOT and the Federal Aviation Administration (FAA) still exercise certain
regulatory authority over air carriers. The DOT maintains jurisdiction over the
approval of international codeshare agreements, international route authorities
and certain consumer protection matters, such as advertising, denied boarding
compensation, baggage liability and computer reservations systems.
The FAA regulates flying operations generally, including establishing
personnel, aircraft and security standards. As part of that oversight, the FAA
has implemented a number of requirements that American is incorporating into its
maintenance program. These matters relate to, among other things, inspection and
maintenance of aging aircraft, corrosion control, the installation of upgraded
digital flight data recorders, enhanced ground proximity warning systems and
cargo compartment smoke detection and fire suppression systems. Based on its
current implementation schedule, American expects to be in compliance with the
applicable requirements within the required time periods.
The U.S. Department of Justice has jurisdiction over airline antitrust
matters. The U.S. Postal Service has jurisdiction over certain aspects of the
transportation of mail and related services. Labor relations in the air
transportation industry are regulated under the Railway Labor Act, which vests
in the National Mediation Board certain regulatory functions with respect to
disputes between airlines and labor unions relating to union representation and
collective bargaining agreements. To the extent American continues to increase
its alliances with international carriers, American may be subject to certain
regulations of foreign agencies.
4
Legislation has been introduced in Congress that would, if enacted,
provide financial assistance, in the form of guarantees and/or subsidized loans,
to smaller carriers for aircraft purchases. In addition, the Department of
Justice is investigating the competitive practices of major carriers at major
hub airports, including American's practices at DFW. Also, in April 1998, the
DOT issued proposed pricing and capacity rules that would severely limit major
carriers' ability to compete with new entrant carriers. The outcomes of the
proposed legislation, the investigations and the proposed DOT rules are unknown.
However, to the extent that (i) restrictions are imposed upon American's ability
to respond to a competitor, or (ii) competitors have a financial advantage in
the purchase of aircraft because of federal assistance, American's business may
be adversely impacted.
AIRLINE FARES Airlines are permitted to establish their own domestic fares
without governmental regulation, and the industry is characterized by
substantial price competition. Legislation (sometimes referred to as the
"Passengers' Bill of Rights") has been introduced in Congress, however, that
would, if enacted, (i) place various limitations on airline fares and/or (ii)
affect operating practices such as baggage handling and overbooking. To the
extent legislation is enacted that would inhibit American's flexibility with
respect to fares, its revenue management system or other aspects of its customer
service operations, American's financial results could be adversely affected.
The DOT maintains authority over international fares, rates and charges.
International fares and rates are also subject to the jurisdiction of the
governments of the foreign countries which American serves. While air carriers
are required to file and adhere to international fare and rate tariffs,
substantial commissions, overrides and discounts to travel agents, brokers and
wholesalers characterize many international markets.
Fare discounting by competitors has historically had a negative effect on
the Airline Group's financial results because the Airline Group is generally
required to match competitors' fares to maintain passenger traffic. During
recent years, a number of new low-cost airlines have entered the domestic market
and several major airlines, including American, implemented efforts to lower
their cost structures. Further fare reductions, domestic and international, may
occur in the future. If fare reductions are not offset by increases in passenger
traffic, cost reductions or changes in the mix of traffic that improves yields,
the Airline Group's operating results will be negatively impacted.
ELECTRONIC TRAVEL DISTRIBUTION Electronic travel distribution is subject to
regulation in the United States, the European Union, Canada, Australia and New
Zealand. These regulations address the relationships among computer reservation
systems (CRS), airline associates and travel agency subscribers. These
regulations do not currently address relationships with non-airline associates,
but future regulations in the European Union may include rail associates. In
general, these regulations are directed at ensuring fair competition among
travel providers. Among the principles addressed in the current regulations are:
unbiased CRS displays of airline information, fair treatment of airline
associates by CRSs, equal participation by airlines in non-owned CRSs and fair
competition for subscribers. The CRS regulations in the United States and the
European Union are currently being revised, but The Sabre Group does not expect
the revisions to materially adversely affect its operations.
AIRPORT ACCESS In 1968, the FAA issued a rule designating New York John F.
Kennedy, New York LaGuardia, Washington Reagan, Chicago O'Hare and Newark
airports as high density traffic airports. Newark was subsequently removed from
the high density airport classification. The rule limits the number of
Instrument Flight Rule (IFR) operations - take-off and landings - permitted per
hour and requires that a slot support each operation. Recently, the DOT proposed
the elimination of slots at New York John F. Kennedy, New York LaGuardia and
Chicago O'Hare airports. At this time, the probability of such a proposal
becoming effective is unknown and with it, its effect on American. Currently,
the FAA permits the purchasing, selling (except those designated for
international or essential air service), leasing, transferring and trading of
these slots by airlines and others, subject to certain restrictions. Most
foreign airports, including London Heathrow, a major European destination for
American, also have slot allocations. Most foreign authorities do not permit the
purchasing, selling or leasing of slots.
Although the Airline Group is constrained by slots, it currently has
sufficient slot authorizations to operate its existing flights and has generally
been able to obtain slots to expand its operations and change its schedules.
However, there is no assurance that American or American Eagle will be able to
obtain slots for these purposes in the future because, among other factors, slot
allocations are subject to changes in government policies.
5
ENVIRONMENTAL MATTERS The Company is subject to various laws and government
regulations concerning environmental matters and employee safety and health in
the U.S. and other countries. U.S. federal laws that have a particular impact on
the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean
Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the
Safe Drinking Water Act, and the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or the Superfund Act). The Company is
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency (EPA), OSHA, and other federal agencies have
been authorized to promulgate regulations that have an impact on the Company's
operations. In addition to these federal activities, various states have been
delegated certain authorities under the aforementioned federal statutes. Many
state and local governments have adopted environmental and employee safety and
health laws and regulations, some of which are similar to federal requirements.
As a part of its continuing safety, health and environmental program, the
Company has maintained compliance with such requirements without any material
adverse effect on its business.
For purposes of noise standards, jet aircraft are rated by categories or
"stages." The ANCA requires the phase-out by December 31, 1999, of Stage II
aircraft operations, subject to certain exceptions. Under final regulations
issued by the FAA in 1991, air carriers are required to reduce, by modification
or retirement, the number of Stage II aircraft in their fleets 75 percent by
December 31, 1998 and 100 percent by December 31, 1999. Alternatively, a carrier
may satisfy the regulations by operating a fleet that is at least 75 percent and
100 percent Stage III by the dates set forth in the preceding sentence,
respectively. At December 31, 1998, approximately 89 percent of American's
active fleet was Stage III, the quietest and most fuel efficient rating
category. American expects to achieve Stage III compliance requirements by the
end of 1999 by retiring or modifying its Boeing 727-200 aircraft not currently
Stage III compliant.
The ANCA recognizes the rights of airport operators with noise problems
to implement local noise abatement programs so long as they do not interfere
unreasonably with interstate or foreign commerce or the national air
transportation system. Authorities in several cities have promulgated aircraft
noise reduction programs, including the imposition of nighttime curfews. The
ANCA generally requires FAA approval of local noise restrictions on Stage III
aircraft first effective after October 1990, and establishes a regulatory notice
and review process for local restrictions on Stage II aircraft first proposed
after October 1990. While American has had sufficient scheduling flexibility to
accommodate local noise restrictions imposed to date, American's operations
could be adversely affected if locally-imposed regulations become more
restrictive or widespread.
American has been identified by the EPA as a potentially responsible
party (PRP) at the Operating Industries, Inc. Superfund Site in California.
American has signed a partial consent decree with respect to this site and is
one of several PRPs named. American's alleged waste disposal volumes are minor
compared to the other PRPs. American has also been identified as a PRP at the
Beede Waste Oil Superfund Site in New Hampshire. American has responded to a
104(e) Request for Information regarding interaction with several companies
related to this Site. In 1998, the EPA named American a de minimis PRP at the
Casmalia Waste Disposal Site in California.
American, along with most other tenants at the San Francisco
International Airport (SFIA), has been ordered by the California Regional Water
Quality Control Board to engage in various studies of potential environmental
contamination at the airport and to undertake remedial measures, if necessary.
SFIA is also seeking to recover its past costs related to the contamination from
the tenants.
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (the
Airport) and funding the remediation costs through landing fee revenues. Future
costs of the remediation effort may be borne by carriers operating at the
Airport, including American, through increased landing fees and/or other charges
since certain of the PRPs are no longer in business. The future increase in
landing fees and/or other charges may be material but cannot be reasonably
estimated due to various factors, including the unknown extent of the remedial
actions that may be required, the proportion of the cost that will ultimately be
recovered from the responsible parties, and uncertainties regarding the
environmental agencies that will ultimately supervise the remedial activities
and the nature of that supervision.
6
American and Executive Airlines, Inc., along with other tenants at the
Luis Munoz Marin International Airport in San Juan, Puerto Rico have been named
as PRPs for environmental claims at the airport.
American Eagle Airlines, Inc. has been notified of its potential
liability under New York law at an inactive hazardous waste site in
Poughkeepsie, New York.
AMR does not expect these matters, individually or collectively, to have
a material impact on its financial position or liquidity.
LABOR
The airline business is labor intensive. Approximately 79 percent of AMR's
employees work in the Airline Group. Wages, salaries and benefits represented
approximately 39 percent of AMR's consolidated operating expenses for the year
ended December 31, 1998.
The majority of American's employees are represented by labor unions and
covered by collective bargaining agreements. American's relations with such
labor organizations are governed by the Railway Labor Act. Under this act, the
collective bargaining agreements among American and these organizations do not
expire but instead become amendable as of a stated date. If either party wishes
to modify the terms of any such agreement, it must notify the other party before
the contract becomes amendable. After receipt of such notice, the parties must
meet for direct negotiations, and if no agreement is reached, either party may
request the National Mediation Board (NMB) to appoint a federal mediator. If no
agreement is reached in mediation, the NMB may determine, at any time, that an
impasse exists, and if an impasse is declared, the NMB proffers binding
arbitration to the parties. Either party may decline to submit to arbitration.
If arbitration is rejected, a 30-day "cooling-off" period commences, following
which the labor organization may strike and the airline may resort to
"self-help," including the imposition of its proposed amendments and the hiring
of replacement workers.
In 1995, American reached agreements with the members of the Association
of Professional Flight Attendants (APFA) and the Transport Workers Union (TWU)
on their labor contracts. American's collective bargaining agreement with the
APFA became amendable on November 1, 1998 and the collective bargaining
agreement with the TWU becomes amendable on March 1, 2001. American exchanged
proposals and commenced negotiations with the APFA on September 2, 1998. Direct
negotiations continue. American's current collective bargaining agreement with
the Allied Pilots Association (APA) was ratified by the APA membership on May 5,
1997. That contract becomes amendable August 31, 2001.
In early February 1999, some members of the APA engaged in certain
activities (increased sick time and declining to fly additional trips) that
resulted in numerous cancellations across American's system. These actions were
taken in response to the acquisition of Reno Air in December 1998. On February
10, 1999, American obtained a temporary restraining order prohibiting the union
from unilaterally taking actions outside the terms allowed under the collective
bargaining agreement. Because of certain actions by the APA and its leaders,
American filed a motion to have the APA and its leaders held in contempt of the
court's temporary restraining order. The court granted that motion on February
13, 1999, and the airline's operations thereafter returned to normal. In an
attempt to resolve the dispute, the Company and the APA have agreed to
non-binding mediation.
The Communications Workers of America (CWA) filed a petition with the NMB
on October 8, 1998, seeking to represent American's passenger service employees,
who currently are not unionized. The mail ballots in the election conducted by
the NMB were counted on December 15, 1998. Forty-one percent of the employees
voted to unionize, short of the 50 percent plus one needed for unionization to
occur. The CWA has challenged the results, claiming that certain of American's
actions during the campaign interfered with the employees' ability to make a
free choice. The CWA has asked that a new election be held. Both sides have
submitted papers in support of their respective positions to the NMB and are
awaiting further action by that agency.
7
The Air Line Pilots Association (ALPA), which represents AMR Eagle
pilots, reached agreement with AMR Eagle effective September 1, 1997, to have
all of the pilots of the Eagle carriers covered by a single collective
bargaining agreement. This agreement lasts until October 31, 2013. The parties
have the right to seek limited changes in 2000, 2004, 2008 and 2012. If the
parties are unable to agree on the limited changes, they also agreed that the
issues would be resolved by interest arbitration, without the exercise of
self-help (such as a strike). The Association of Flight Attendants (AFA), which
represents the flight attendants of the Eagle carriers, reached agreement with
AMR Eagle effective March 2, 1998, to have all flight attendants of the AMR
Eagle carriers covered by a single contract. The agreement becomes amendable on
March 2, 2002. The other union employees at the AMR Eagle carriers are covered
by separate agreements with the TWU; certain of those agreements are currently
in negotiation.
As of December 31, 1998, The Sabre Group had approximately 10,800
full-time employees, excluding contractors. The Sabre Group considers its
current employee relations to be good. None of The Sabre Group employees based
in the United States are represented by a labor union.
FUEL
The Airline Group's operations are significantly affected by the availability
and price of jet fuel. American's fuel costs and consumption for the years 1996
through 1998 were:
[Download Table]
Average
Price Per
Gallon, Percent of
Gallons Average Price Excluding AMR's
Consumed Total Cost Per Gallon Fuel Taxes Operating
Year (in millions) (in millions) (in cents) (in cents) Expenses
---- ------------- ------------- ------------- ---------- ----------
1996 2,734 1,866 68.2 63.3 12.0
1997 2,773 1,860 67.1 62.1 11.4
1998 2,826 1,551 54.9 50.1 9.2
The impact of fuel price changes on the Company and its competitors is
dependent upon various factors, including hedging strategies. The benefit of
lower fuel prices may be offset by increased fare competition and lower revenues
for all air carriers. However, due to the competitive nature of the airline
industry, in the event of any increase in the price of jet fuel, there can be no
assurance that American would be able to pass on increased fuel prices to its
customers by increasing fares.
While American does not anticipate a significant reduction in fuel
availability, dependency on foreign imports of crude oil and the possibility of
changes in government policy on jet fuel production, transportation and
marketing make it impossible to predict the future availability of jet fuel. If
there were major reductions in the availability of jet fuel, American's business
would be adversely affected.
FREQUENT FLYER PROGRAM
American established the AAdvantage frequent flyer program (AAdvantage) to
develop passenger loyalty by offering awards to travelers for their continued
patronage. AAdvantage members earn mileage credits for flights on American,
American Eagle and certain other participating airlines, or by utilizing
services of other program participants, including hotels, car rental companies
and bank credit card issuers. American sells mileage credits and related
services to the other companies participating in the program. American reserves
the right to change the AAdvantage program rules, regulations, travel awards and
special offers at any time without notice. American may initiate changes
impacting, for example, participant affiliations, rules for earning mileage
credit, mileage levels and awards, blackout dates and limited seating for travel
awards, and the features of special offers. American reserves the right to end
the AAdvantage program with six months notice.
8
Mileage credits can be redeemed for free, discounted or upgraded travel
on American, American Eagle or participating airlines, or for other travel
industry awards. Once a member accrues sufficient mileage for an award, the
member may request an award certificate from American. Award certificates may be
redeemed up to one year after issuance. Most travel awards are subject to
blackout dates and capacity controlled seating. Most miles earned after July
1989 must be redeemed within three years or they expire.
American accounts for its frequent flyer obligation on an accrual basis
using the incremental cost method. American's frequent flyer liability is
accrued each time a member accumulates sufficient mileage in his or her account
to claim the lowest level of free travel award (25,000 miles) and such award is
expected to be used for free travel. American includes fuel, food, and
reservations/ticketing costs, but not a contribution to overhead or profit, in
the calculation of incremental cost. The cost for fuel is estimated based on
total fuel consumption tracked by various categories of markets, with an amount
allocated to each passenger. Food costs are tracked by market category, with an
amount allocated to each passenger. Reservation/ticketing costs are based on the
total number of passengers, including those traveling on free awards, divided
into American's total expense for these costs. American defers the portion of
revenues received from companies participating in the AAdvantage program related
to the sale of mileage credits and recognizes such revenues over a period
approximating the period during which the mileage credits are used.
At December 31, 1998 and 1997, American estimated that approximately 4.9
million and 4.8 million free travel awards, respectively, were expected to be
redeemed for free travel. In making the estimate of free travel awards, American
has excluded mileage in inactive accounts, mileage related to accounts that has
not yet reached the lowest level of free travel award, and mileage in active
accounts that has reached the lowest level of free travel award but which is not
expected to ever be redeemed for free travel. The liability for the program
mileage that has reached the lowest level of free travel award and is expected
to be redeemed for free travel and deferred revenues for mileage credits sold to
others participating in the program was $695 million and $628 million,
representing 12.3 percent and 11.3 percent of AMR's total current liabilities at
December 31, 1998 and 1997, respectively.
The number of free travel awards used for travel on American was 2.3
million in 1998 and 2.2 million in 1997 and 1996, respectively, representing 8.8
percent of total revenue passenger miles in 1998, 8.6 percent in 1997 and 8.4
percent in 1996. American believes displacement of revenue passengers is minimal
given American's load factors, its ability to manage frequent flyer seat
inventory, and the relatively low ratio of free award usage to revenue passenger
miles.
OTHER MATTERS
SEASONALITY AND OTHER FACTORS The Airline Group's results of operations for any
interim period are not necessarily indicative of those for the entire year,
since the air transportation business is subject to seasonal fluctuations.
Higher demand for air travel has traditionally resulted in more favorable
operating results for the second and third quarters of the year than for the
first and fourth quarters.
The results of operations in the air transportation business have also
significantly fluctuated in the past in response to general economic conditions.
In addition, fare initiatives, fluctuations in fuel prices, labor actions and
other factors could impact this seasonal pattern. Unaudited quarterly financial
data for the two-year period ended December 31, 1998, is included in Note 16 to
the consolidated financial statements.
No material part of the business of AMR and its subsidiaries is dependent
upon a single customer or very few customers. Consequently, the loss of the
Company's largest few customers would not have a materially adverse effect upon
AMR.
INSURANCE American carries insurance for public liability, passenger liability,
property damage and all-risk coverage for damage to its aircraft, in amounts
which, in the opinion of management, are adequate.
OTHER GOVERNMENT MATTERS In time of war or during an unlimited national
emergency or civil defense emergency, American and other major air carriers may
be required to provide airlift services to the Military Airlift Command under
the Civil Reserve Air Fleet program.
9
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
Owned and leased aircraft operated by American and AMR Eagle at December 31,
1998, included:
[Enlarge/Download Table]
Weighted-
Current Average
Seating Capital Operating Age
Equipment Type Capacity Owned Leased Leased Total (Years)
-------------- ----------- ------- ------- ---------- ------- ----------
AMERICAN AIRCRAFT
Airbus A300-600R 192/266/267 10 -- 25 35 9
Boeing 727-200 150 64 14 -- 78 22
Boeing 757-200 188 51 14 31 96 6
Boeing 767-200 172 8 -- -- 8 16
Boeing 767-200 Extended Range 165 9 13 -- 22 13
Boeing 767-300 Extended Range 207 20 15 10 45 7
Fokker 100 97 66 5 4 75 6
McDonnell Douglas DC-10-10 237/290/297 13 -- -- 13 21
McDonnell Douglas DC-10-30 271/282 4 -- 1 5 24
McDonnell Douglas MD-11 238/255 11 -- -- 11 6
McDonnell Douglas MD-80 133/139 119 25 116 260 11
------- ------- ------- ------- -----
Total 375 86 187 648 11
======= ======= ======= ======= =====
AMR EAGLE AIRCRAFT
ATR 42 46 18 2 15 35 9
Embraer 145 50 20 -- -- 20 1
Super ATR 64/66 40 -- 3 43 4
Saab 340B 34 29 61 -- 90 7
Saab 340B Plus 34 -- -- 21 21 3
------- ------- ------- ------- -----
Total 107 63 39 209 6
======= ======= ======= ======= =====
For information concerning the estimated useful lives and residual values
for owned aircraft, lease terms for leased aircraft and amortization relating to
aircraft under capital leases, see Notes 1 and 4 to the consolidated financial
statements.
In April 1995, American announced an agreement to sell 12 of its
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). In
addition, in March 1998, the Company exercised its option to sell its remaining
seven MD-11 aircraft to FedEx. Eight aircraft had been delivered as of December
31, 1998. The remaining 11 aircraft will be delivered between 2000 and 2002.
10
Lease expirations for the leased aircraft included in the preceding table
as of December 31, 1998, were:
[Download Table]
2004
and
Equipment Type 1999 2000 2001 2002 2003 Thereafter
-------------- ---- ---- ---- ---- ---- ----------
AMERICAN AIRCRAFT
Airbus A300-600R -- -- -- -- -- 25
Boeing 727-200 2 4 8 - -- --
Boeing 757-200 -- 2 2 2 -- 39
Boeing 767-200 Extended Range -- -- -- - -- 13
Boeing 767-300 Extended Range -- 8 -- 1 -- 16
Fokker 100 -- -- 2 3 -- 4
McDonnell Douglas DC-10-30 -- -- 1 - -- --
McDonnell Douglas MD-80 -- 3 9 14 -- 115
---- ---- ---- ---- ---- ----
2 17 22 20 -- 212
==== ==== ==== ==== ==== ====
AMR EAGLE AIRCRAFT
ATR 42 3 4 7 -- 3 --
Super ATR -- -- 3 -- -- --
Saab 340B -- -- -- -- -- 61
Saab 340B Plus -- -- -- -- -- 21
---- ---- ---- ---- ---- ----
3 4 10 -- 3 82
==== ==== ==== ==== ==== ====
The table includes leases for 21 Saab 340B Plus aircraft, seven ATR 42
aircraft and three Super ATR aircraft which can be canceled with twelve months
or less notice with certain restrictions.
Substantially all of the Airline Group's aircraft leases include an
option to purchase the aircraft or to extend the lease term, or both, with the
purchase price or renewal rental to be based essentially on the market value of
the aircraft at the end of the term of the lease or at a predetermined fixed
amount.
GROUND PROPERTIES
American leases, or has built as leasehold improvements on leased property, most
of its airport and terminal facilities; certain corporate office, maintenance
and training facilities in Fort Worth, Texas; its principal overhaul and
maintenance base at Tulsa International Airport, Tulsa, Oklahoma; its regional
reservation offices; and local ticket and administration offices throughout the
system. American has entered into agreements with the Tulsa Municipal Airport
Trust; the Alliance Airport Authority, Fort Worth, Texas; and the Dallas/Fort
Worth, Chicago O'Hare, Raleigh/Durham, Nashville, San Juan, New York, and Los
Angeles airport authorities to provide funds for constructing, improving and
modifying facilities and acquiring equipment which are or will be leased to
American. American also utilizes public airports for its flight operations under
lease or use arrangements with the municipalities or governmental agencies
owning or controlling them and leases certain other ground equipment for use at
its facilities. In January 1999, the Company announced its plans to construct a
new terminal facility at New York's John F. Kennedy International Airport, which
is expected to cost approximately $1 billion. The Company expects to begin
construction on this facility in the latter half of 1999.
The Company's data center (the Data Center) is located in an underground
facility in Tulsa, Oklahoma. The land on which the Data Center is located is
leased from the Tulsa Airport Improvements Trust. Sabre and the Company's data
processing services are dependent on the central computer operations and
information processing facility located in the Data Center.
For information concerning the estimated lives and residual values for
owned ground properties, lease terms and amortization relating to ground
properties under capital leases, and acquisitions of ground properties, see
Notes 1, 3 and 4 to the consolidated financial statements.
11
ITEM 3. LEGAL PROCEEDINGS
In January 1985, American announced a new fare category, the "Ultimate
SuperSaver," a discount, advance purchase fare that carried a 25 percent penalty
upon cancellation. On December 30, 1985, a class action lawsuit was filed in
Circuit Court, Cook County, Illinois entitled Johnson vs. American Airlines,
Inc. The Johnson plaintiff alleges that the 10 percent federal excise
transportation tax should have been excluded from the "fare" upon which the 25
percent penalty was assessed. Summary judgment was granted in favor of American
but subsequently reversed and vacated by the Illinois Appellate Court. In August
1997, the Court denied the plaintiffs' motion for class certification. American
is vigorously defending the lawsuit.
In connection with its frequent flyer program, American was sued in two
purported class action cases (Wolens et al v. American Airlines, Inc. and Tucker
v. American Airlines, Inc.) that were consolidated and are currently pending in
the Circuit Court of Cook County, Illinois. The litigation arises from certain
changes made to American's AAdvantage frequent flyer program in May 1988 which
limited the number of seats available to participants traveling on certain
awards. In the consolidated action, the plaintiffs seek to represent all persons
who joined the AAdvantage program before May 1988 and accrued mileage credits
before the seat limitations were introduced and allege that these changes
breached American's contract with AAdvantage members. Plaintiffs seek money
damages and attorney's fees. The complaint originally asserted several state law
claims, however only the plaintiffs' breach of contract claim remains after the
U. S. Supreme Court ruled that the Airline Deregulation Act preempted the other
claims. Although the case has been pending for numerous years, it still is in
its preliminary stages. The court has not ruled on the plaintiffs' motion for
class certification. American is vigorously defending the lawsuit.
Gutterman et al. v. American Airlines, Inc. is also pending in the
Circuit Court of Cook County, Illinois. In December 1993, American announced
that the number of miles required to claim a certain travel award under
American's AAdvantage frequent flyer program would be increased effective
February 1, 1995, giving rise to the Gutterman litigation filed on that same
date. The Gutterman plaintiffs claim that the increase in award mileage level
violated the terms and conditions of the agreement between American and
AAdvantage members. On June 23, 1998, the Court certified the case as a class
action, although to date no notice has been sent to the class. The class
consists of all members who earned miles between January 1, 1992 and February 1,
1995 (the date the change became effective). On July 13, 1998, the Court denied
American's motion for summary judgment as to the claims brought by plaintiff
Steven Gutterman. On July 30, 1998, the plaintiffs filed a motion for summary
judgment as to liability, which motion has not been ruled upon. American is
vigorously defending the lawsuit.
A federal grand jury in Miami is investigating whether American and
American Eagle handled hazardous materials and processed courier shipments,
cargo and excess baggage in accordance with applicable laws and regulations. In
connection with this investigation, federal agents executed a search warrant at
American's Miami facilities on October 22, 1997. Since that time, a number of
employees have testified before the grand jury. In addition, American has been
served with three subpoenas calling for the production of documents relating to
the handling of courier shipments, cargo, excess baggage and hazardous materials
handling and spills. American produced documents responsive to the first two
subpoenas and is in the process of responding to the third subpoena. American
intends to cooperate fully with the government's investigation.
On August 7, 1998, a purported class action was filed against American
Airlines in state court in Travis County, Texas (Boon Ins. Agency v. American
Airlines, Inc., et al.) claiming that the $75 reissuance fee for changes to
non-refundable tickets is an unenforceable liquidated damages clause and seeking
a refund of the fee on behalf of all passengers who paid it, as well as interest
and attorneys' fees. On September 23, 1998, Continental, Delta and America West
were added as defendants to the lawsuit. On February 2, 1999, prior to any
discovery being taken and a class being certified, the court granted the
defendants' motion for summary judgment holding that Plaintiff's claims are
preempted by the Airline Deregulation Act. Plaintiff has filed an appeal of the
dismissal of the lawsuit. American intends to vigorously defend the granting of
the summary judgment on appeal.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
last quarter of its fiscal year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of AMR as of December 31, 1998, were:
Donald J. Carty Mr. Carty was elected Chairman, President
and Chief Executive Office of AMR and
American in May 1998. He has been
President of American since March 1995.
Prior to that, he served as Executive
Vice President of AMR since October 1989.
Except for two years service as President
of Canadian Pacific Air between March
1985 and March 1987, he has been with the
Company in various finance and planning
positions since 1978. Age 52.
Gerard J. Arpey Mr. Arpey was elected Chief Financial
Officer in March 1995 and Senior Vice
President in April 1992. Prior to that,
he served as Vice President of American
since October 1989. Age 40.
Anne H. McNamara Mrs. McNamara was elected Senior Vice
President and General Counsel in June
1988. She had served as Vice President -
Personnel Resources of American from
January 1988 through May 1988. She was
elected Corporate Secretary of AMR in
1982 and American in 1979 and held those
positions through 1987. Age 51.
Charles D. MarLett Mr. MarLett was elected Corporate
Secretary in January 1988. He joined
American as an attorney in June 1984. Age
44.
There are no family relationships among the executive officers of the
Company named above.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation of the
ability and integrity of any director or executive officer during the past five
years.
13
PART II
--------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange (symbol
AMR). The approximate number of record holders of the Company's common stock at
March 12, 1999, was 13,950.
The range of closing market prices for AMR's common stock on the New York
Stock Exchange was:
[Enlarge/Download Table]
1998 1997
------------------------------------ ----------------------------------
High Low High Low
--------------- -------------- -------------- -------------
QUARTER ENDED
March 31 $ 73 1/8 $ 61 13/16 $ 44 1/16 $ 39 3/8
June 30 83 1/4 68 15/16 51 40 1/2
September 30 89 1/4 50 58 1/8 46 5/16
December 31 69 15/16 47 1/8 65 15/16 55 1/4
No cash dividends on common stock were declared for any period during
1998 or 1997. Payment of dividends is subject to the restrictions described in
Note 5 to the consolidated financial statements.
In April 1998, the Company's Board of Directors approved a two-for-one
stock split in the form of a stock dividend, effective on June 9, 1998 for
shareholders of record on May 26, 1998. All share information, including the
market price per share information disclosed above, and earnings per share
amounts have been presented, and where applicable, restated to give effect to
the stock split.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
[Enlarge/Download Table]
(in millions, except per share amounts)
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Total operating revenues $19,205 $18,184 $17,364 $16,553 $15,649
Operating income 2,338 1,907 1,807 984 975
Income from continuing operations
before extraordinary loss 1,306 973 1,083 175 230
Net earnings 1,314 985 1,016 162 228
Earnings per common share from
continuing operations before
extraordinary loss and effect of
preferred stock exchange:(1/2)
Basic 7.73 5.45 6.29 1.15 1.14
Diluted 7.48 5.32 5.95 1.14 1.14
Net earnings per common share:(2)
Basic 7.78 5.52 5.90 1.06 2.25
Diluted 7.52 5.39 5.59 1.05 2.25
Total assets 22,303 20,859 20,451 19,462 19,338
Long-term debt, less current
maturities 2,436 2,248 2,737 4,967 5,585
Obligations under capital leases,
less current obligations 1,764 1,629 1,790 2,069 2,275
Obligation for postretirement benefits 1,649 1,573 1,524 1,434 1,253
(1) The earnings per share computation for the year ended December 31, 1994
includes a $171 million non-cash increase in additional paid-in-capital
resulting from the exchange of outstanding convertible preferred stock
into subordinated convertible debt.
(2) The earnings per share amounts prior to 1998 have been restated to give
effect to the stock split on June 9, 1998.
No dividends were declared on common shares during any of the periods
above.
Information on the comparability of results is included in Management's
Discussion and Analysis and the notes to the consolidated financial statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AMR Corporation (AMR or the Company) was incorporated in October 1982. AMR's
principal subsidiary, American Airlines, Inc. (American), was founded in 1934.
Following the announcement of AMR's plans to sell the companies that comprised
the majority of what was previously the Management Services Group, AMR's
operations fall within two major lines of business: the Airline Group and The
Sabre Group. Additional segment information is included in Note 15 to the
consolidated financial statements.
RESULTS OF OPERATIONS
AMR's net earnings in 1998 were $1.3 billion, or $7.78 per common share ($7.52
diluted). These results represent the strongest net earnings ever reported by
AMR for a fiscal year. AMR's net earnings in 1997 were $985 million, or $5.52
per common share ($5.39 diluted). The Company's 1997 results were adversely
affected by (i) a brief strike and the strike threat from members of the Allied
Pilots Association (APA) during the first quarter of 1997, which negatively
impacted the Company's net earnings by an estimated $70 million, and (ii) the
reinstatement of the airline transportation tax in March of 1997.
16
AIRLINE GROUP
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
[Enlarge/Download Table]
(dollars in millions) Year Ended December 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES
Passenger - American Airlines, Inc. $ 14,695 $ 14,310 $ 13,645
- AMR Eagle 1,121 1,017 1,047
Cargo 656 687 682
Other 977 889 837
--------- --------- ---------
17,449 16,903 16,211
OPERATING EXPENSES
Wages, salaries and benefits 5,763 5,480 5,191
Aircraft fuel 1,604 1,923 1,936
Commissions to agents 1,226 1,278 1,252
Depreciation and amortization 1,038 1,038 1,018
Maintenance, materials and repairs 934 861 686
Other operating expenses 4,933 4,754 4,686
--------- --------- ---------
Total operating expenses 15,498 15,334 14,769
--------- --------- ---------
OPERATING INCOME 1,951 1,569 1,442
OTHER EXPENSE (160) (266) (428)
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS $ 1,791 $ 1,303 $ 1,014
========= ========= =========
Average number of equivalent employees 92,000 90,600 88,900
OPERATING STATISTICS
AMERICAN AIRLINES JET OPERATIONS
Revenue passenger miles (millions) 108,955 107,026 104,710
Available seat miles (millions) 155,297 153,917 152,886
Cargo ton miles (millions) 1,974 2,032 2,028
Passenger load factor 70.2% 69.5% 68.5%
Breakeven load factor 59.9% 61.0% 60.2%
Passenger revenue yield per passenger mile (cents) 13.49 13.37 13.03
Passenger revenue per available seat mile (cents) 9.46 9.30 8.92
Cargo revenue yield per ton mile (cents) 32.85 33.78 33.14
Operating expenses per available seat mile (cents) 9.25 9.27 8.91
Operating aircraft at year-end 648 641 642
AMR EAGLE
Revenue passenger miles (millions) 2,788 2,553 2,590
Available seat miles (millions) 4,471 4,218 4,431
Passenger load factor 62.4% 60.5% 58.5%
Operating aircraft at year-end 209 199 205
17
REVENUES
1998 COMPARED TO 1997 Airline Group revenues of $17.4 billion in 1998 were up
$546 million, or 3.2 percent, versus 1997. American's passenger revenues
increased 2.7 percent, or $385 million. The increase in passenger revenues
resulted from a 0.9 percent increase in passenger yield (the average amount one
passenger pays to fly one mile) from 13.37 to 13.49 cents, and a 1.8 percent
increase in passenger traffic. For the year, domestic yields increased 3.1
percent, while Latin American, Pacific and European yields decreased 5.8
percent, 3.9 percent and 1.0 percent, respectively. The decrease in
international yields was due primarily to an increase in industry capacity and a
decline in economic conditions. In 1998, American derived approximately 70
percent of its passenger revenues from domestic operations and approximately 30
percent from international operations.
American's domestic traffic increased 0.7 percent to 74.9 billion revenue
passenger miles (RPMs), while domestic capacity, as measured by available seat
miles (ASMs), decreased 1.4 percent. International traffic grew 4.3 percent to
34.1 billion RPMs on a capacity increase of 6.4 percent. The increase in
international traffic was led by a 17.1 percent increase in the Pacific on
capacity growth of 29.3 percent, a 4.9 percent increase in Latin America on
capacity growth of 6.6 percent and a 1.8 percent increase in Europe on capacity
growth of 2.7 percent.
AMR Eagle's revenues increased $104 million, or 10.2 percent. The
increase in passenger revenues resulted from a 0.9 percent increase in passenger
yield and a 9.2 percent increase in traffic. AMR Eagle's traffic increased to
2.8 billion RPMs while capacity increased 4.5 billion ASMs, up 6.0 percent.
The Airline Group's other revenues increased $88 million, or 9.9 percent,
primarily as a result of increased administrative service charges, higher
employee travel service charges and increased service contracts, primarily
related to ramp and consulting services.
1997 COMPARED TO 1996 Airline Group revenues of $16.9 billion in 1997 were up
$692 million, or 4.3 percent, versus 1996. American's passenger revenues
increased 4.9 percent, or $665 million. The increase in passenger revenues
resulted from a 2.6 percent increase in passenger yield from 13.03 to 13.37
cents, and a 2.2 percent increase in passenger traffic. For the year, domestic
yields increased 1.8 percent, Latin American yields increased 4.5 percent,
European yields increased 3.8 percent and Pacific yields increased 1.0 percent.
In 1997, American derived 69 percent of its passenger revenues from domestic
operations and 31 percent from international operations.
American's domestic traffic increased 2.0 percent to 74.3 billion RPMs,
while domestic capacity increased 0.8 percent. International traffic grew 2.6
percent to 32.7 billion RPMs on a capacity increase of 0.4 percent. The increase
in international traffic was led by a 7.2 percent increase in Latin America on
capacity growth of 5.5 percent. This increase was partially offset by a 1.7
percent decrease in the Pacific on a capacity decline of 2.9 percent and a 1.5
percent decrease in Europe on a capacity decline of 5.3 percent, primarily due
to the cancellation of several routes during 1997.
The Airline Group benefited from several external factors in 1997. First,
a healthy U.S. economy produced strong demand for air travel. Second, industry
capacity grew at a more modest rate than demand, which led to higher industry
load factors and a healthy pricing environment. However, these benefits were
adversely impacted by a brief strike and the strike threat by members of the APA
during the first quarter of 1997, which negatively impacted the Company's net
earnings by an estimated $70 million.
18
OPERATING EXPENSES
1998 COMPARED TO 1997 Airline Group operating expenses of $15.5 billion in 1998
were up $164 million, or 1.1 percent, versus 1997. American's Jet Operations
cost per ASM decreased 0.2 percent to 9.25 cents. Wages, salaries and benefits
increased $283 million, or 5.2 percent, due primarily to an increase in the
average number of equivalent employees, contractual wage rate and seniority
increases that are built into the Company's labor contracts and an increase in
the provision for profit sharing. Fuel expense decreased $319 million, or 16.6
percent, due to an 18.2 percent decrease in American's average price per gallon,
including taxes, partially offset by a 1.9 percent increase in American's fuel
consumption. Commissions to agents decreased 4.1 percent, or $52 million,
despite a 3.2 percent increase in passenger revenues, due to the continued
benefit from the commission rate reduction initiated during September 1997.
Maintenance, materials and repairs expense increased 8.5 percent, or $73
million, due to an increase in airframe and engine maintenance volumes at
American's maintenance bases as a result of the maturing of its fleet. Other
operating expenses increased $179 million, or 3.8 percent, due primarily to
spending on the Company's Year 2000 readiness program, an increase in outsourced
services and higher costs, such as credit card fees, resulting from higher
passenger revenues.
1997 COMPARED TO 1996 Airline Group operating expenses of $15.3 billion in 1997
were up $565 million, or 3.8 percent, versus 1996. American's Jet Operations
cost per ASM increased 4.0 percent to 9.27 cents. Wages, salaries and benefits
increased $289 million, or 5.6 percent, due primarily to an increase in the
average number of equivalent employees, contractual wage rate and seniority
increases that are built into the Company's labor contracts, including a three
percent rate increase granted to pilots effective August 31, 1997, and an
increase in the provision for profit sharing. Fuel expense decreased $13
million, or 0.7 percent, due to a 1.6 percent decrease in American's average
price per gallon, including taxes, partially offset by a 1.4 percent increase in
American's fuel consumption. Commissions to agents increased 2.1 percent, or $26
million, due primarily to increased passenger revenues. This increase was offset
by changes in the Company's travel agency commission payment structure
implemented in September 1997 which lowered the base commission paid to travel
agents from 10 percent to eight percent on all tickets purchased in the U.S. and
Canada for both domestic and international travel. Maintenance, materials and
repairs expense increased 25.5 percent, or $175 million, due to an increase in
airframe and engine maintenance check volumes at American's maintenance bases as
a result of the maturing of its fleet. Other operating expenses increased $68
million, or 1.5 percent, due primarily to an increase in outsourced services,
additional airport security requirements, and higher costs, such as credit card
fees, resulting from higher passenger revenues. Other operating expenses in 1996
included a $26 million charge to write down the value of aircraft interiors.
OTHER EXPENSE
Other expense consists of interest income and expense, interest capitalized and
miscellaneous - net.
1998 COMPARED TO 1997 Interest expense decreased $48 million, or 11.3 percent,
due primarily to scheduled debt repayments of approximately $400 million in
1998. Interest capitalized increased $84 million, to $104 million, due primarily
to the increase in purchase deposits for flight equipment.
1997 COMPARED TO 1996 Interest expense decreased 18.3 percent, or $95 million,
due primarily to scheduled debt repayments and the repurchase and/or retirement
prior to scheduled maturity of approximately $469 million and $1.1 billion of
long-term debt in 1997 and 1996, respectively, and a reduction of $850 million
of American's long-term debt owed to AMR as part of the reorganization of The
Sabre Group. Also, in 1996, the Company's convertible debentures were converted
into AMR common stock, resulting in an $834 million decrease in long-term debt.
Interest capitalized increased $10 million due to additional aircraft purchase
deposits. Interest income increased approximately 29.1 percent, or $30 million,
due primarily to higher investment balances. Miscellaneous - net for 1996
included a $21 million provision for a cash payment representing American's
share of a multi-carrier travel agency class action litigation settlement.
19
THE SABRE GROUP
FINANCIAL HIGHLIGHTS
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[Download Table]
(dollars in millions) Year Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
REVENUES $ 2,306 $ 1,789 $ 1,625
OPERATING EXPENSES 1,956 1,476 1,295
------- ------- -------
OPERATING INCOME 350 313 330
OTHER INCOME (EXPENSE) 21 11 (24)
------- ------- -------
EARNINGS BEFORE INCOME TAXES $ 371 $ 324 $ 306
======= ======= =======
Average number of equivalent employees 11,400 8,500 7,900
REVENUES
1998 COMPARED TO 1997 Revenues for The Sabre Group increased $517 million, or
28.9 percent. Electronic travel distribution revenues increased approximately
$120 million, or 10.0 percent, due to growth in bookings and an overall increase
in the average price per booking. Revenues from information technology solutions
increased approximately $397 million, or 68.4 percent, primarily due to the
services performed under the information technology services agreement with US
Airways, and Year 2000 testing and readiness enhancements for certain AMR units
and Canadian Airlines International Limited (Canadian).
1997 COMPARED TO 1996 Revenues for The Sabre Group increased 10.1 percent, or
$164 million. Electronic travel distribution revenues increased approximately
$99 million, or 8.9 percent, primarily due to growth in booking fees. The growth
in booking fees was due to an increase in booking volumes primarily attributable
to international expansion in Europe and Latin America and an overall increase
in the price per booking charged to associates. Revenues from information
technology solutions increased approximately $65 million, or 12.1 percent.
Revenues from unaffiliated customers increased approximately $39 million due to
an increase in software development, consulting and software license fee
revenues. Revenues from other AMR units increased $24 million due to an increase
in software development revenue and data processing volumes, offset by a
decrease in data network revenue from the sale, in July 1996, of data network
equipment to a third party which began direct billing certain items to American.
OPERATING EXPENSES
1998 COMPARED TO 1997 Operating expenses increased 32.5 percent, or $480
million, due primarily to increases in salaries, benefits and employee-related
costs, subscriber incentive expenses, depreciation and amortization expense and
other operating expenses. Salaries, benefits and employee-related costs
increased due to an increase in the average number of employees necessary to
support The Sabre Group's business growth, and wage and salary increases for
existing employees. Subscriber incentive expenses increased in order to maintain
and expand The Sabre Group's travel agency subscriber base. The increase in
depreciation and amortization expense is primarily due to the acquisition of
information technology assets to support the US Airways' contract, and normal
additions. Other operating expenses increased primarily due to equipment
maintenance costs, other software development expenses related to The Sabre
Group's Year 2000 readiness program, and increased data processing costs, other
services purchased and facility costs.
1997 COMPARED TO 1996 Operating expenses increased 14.0 percent, or $181
million, due primarily to increases in salaries, benefits and employee-related
costs and subscriber incentive expenses. Salaries, benefits and employee-related
costs increased due to an increase in the average number of equivalent employees
necessary to support The Sabre Group's revenue growth, and wage and salary
increases for existing employees. Subscriber incentive expenses increased in
order to maintain and expand The Sabre Group's travel agency subscriber base.
20
OTHER INCOME (EXPENSE)
1998 COMPARED TO 1997 Other income (expense) increased $10 million due primarily
to a favorable court judgment.
1997 COMPARED TO 1996 Other income (expense) increased $35 million due to an
increase in interest income of $17 million due to higher investment balances, an
increase in other income of $13 million primarily due to losses in 1996 from a
subsidiary of The Sabre Group not active in 1997, and a decrease in interest
expense of approximately $6 million primarily due to a lower principal balance
outstanding on the subordinated debenture payable to AMR and lower interest
rates.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided net cash of $3.2 billion in 1998, $2.9 billion in
1997 and $2.7 billion in 1996. The $326 million increase from 1997 to 1998
resulted primarily from an increase in net earnings. The $181 million increase
from 1996 to 1997 resulted primarily from an increase in the air traffic
liability due to higher advanced sales.
Capital expenditures in 1998 totaled $2.7 billion, compared to $1.4
billion in 1997 and $523 million in 1996, and included purchase deposits on new
aircraft orders of $870 million, aircraft acquisitions of approximately $850
million, and purchases of computer-related equipment totaling approximately $360
million. In 1998, American took delivery of 10 jet aircraft - six Boeing
757-200s and four Boeing 767-300ERs. American Eagle took delivery of 20 Embraer
EMB-145s and five Super ATR aircraft. These expenditures, as well as the
expansion of certain airport facilities, were funded primarily with internally
generated cash, except for (i) the Embraer aircraft acquisitions which were
funded through secured debt agreements, and (ii) five Boeing 757-200 aircraft
which were financed through sale-leaseback transactions. During 1998, The Sabre
Group invested approximately $140 million for a 35 percent interest in ABACUS
International Ltd. The Company made acquisitions and other investments of $137
million, which relate primarily to the acquisition of Reno Air in December 1998.
Proceeds from the sale of equipment and property of $293 million in 1998 include
proceeds received upon the delivery of two of American's McDonnell Douglas MD-11
aircraft to Federal Express Corporation (FedEx) in accordance with the 1995
agreement between the two parties, 10 ATR 42 aircraft, and other aircraft
equipment sales.
At December 31, 1998, the Company had commitments to acquire the
following aircraft: 100 Boeing 737-800s, 34 Boeing 777-200IGWs, six Boeing
757-200s, four Boeing 767-300ERs, 75 Embraer EMB-135s, 30 Embraer EMB-145s and
25 Bombardier CRJ-700s. Deliveries of these aircraft commence in 1999 and will
continue through 2005. Future payments, including estimated amounts for price
escalation through anticipated delivery dates for these aircraft and related
equipment, will approximate $2.7 billion in 1999, $2.0 billion in 2000, $1.6
billion in 2001 and an aggregate of approximately $1.5 billion in 2002 through
2005. In addition to these commitments for aircraft, the Company expects to
spend approximately $1.5 billion related to modifications to aircraft,
renovations of -- and additions to -- airport and office facilities, and the
acquisition of various other equipment and assets in 1999, of which
approximately $625 million has been authorized by the Company's Board of
Directors. The Company expects to fund its 1999 capital expenditures from the
Company's existing cash and short-term investments, internally generated cash,
and some new financing depending upon capital market conditions and the
Company's evolving view of its long-term needs.
For the year ended December 31, 1998, a total of approximately 14.3
million shares of the Company's common stock were purchased by the Company under
three separate share repurchase programs at a total cost of approximately $945
million. The Company expects to spend approximately $400 million by the end of
the first quarter of 1999 to complete the $500 million share repurchase program
initiated in October 1998. On March 17, 1999, the Company's Board of Directors
authorized management to repurchase up to an additional $500 million of the
Company's outstanding common stock. Share repurchases may be made from time to
time, depending on market conditions, and may be discontinued at any time.
21
In 1997, the Board of Directors of The Sabre Group approved a stock
repurchase program for The Sabre Group, under which The Sabre Group will
repurchase, subject to certain business and market conditions, up to 1.5 million
shares of The Sabre Group's Class A common stock. During 1998, a total of
approximately 1.4 million shares were purchased by The Sabre Group at a total
cost of approximately $49 million. In addition, on March 16, 1999, the Board of
Directors of The Sabre Group approved an additional stock repurchase program for
The Sabre Group, under which The Sabre Group will repurchase, subject to certain
business and market conditions, up to one million shares of The Sabre Group's
Class A common stock.
At December 31, 1998, the Company owned approximately 3.1 million
depository certificates convertible, subject to certain restrictions, into the
common stock of Equant N.V. (Equant), which completed an initial public offering
in July 1998. As of December 31, 1998, the estimated fair value of these
depository certificates was approximately $210 million, based upon the
publicly-traded market value of Equant common stock. In connection with a
secondary offering of Equant, the Company sold approximately 900,000 depository
certificates in February 1999 for net proceeds of $66 million. The remaining
depository certificates are subject to a final reallocation between the owners
of the certificates during 1999 and thus, the number of certificates owned by
the Company is subject to change.
American has a $1.0 billion credit facility agreement which expires
December 19, 2001. At American's option, interest on the agreement can be
calculated on one of several different bases. For most borrowings, American
would anticipate choosing a floating rate based upon the London Interbank
Offered Rate (LIBOR). At December 31, 1998, no borrowings were outstanding under
the agreement.
AMR (principally American Airlines) historically operates with a working
capital deficit as do most other airline companies. The existence of such a
deficit has not in the past impaired the Company's ability to meet its
obligations as they become due and is not expected to do so in the future.
OTHER INFORMATION
ENVIRONMENTAL MATTERS Subsidiaries of AMR have been notified of potential
liability with regard to several environmental cleanup sites and certain airport
locations. At sites where remedial litigation has commenced, potential liability
is joint and several. AMR's alleged volumetric contributions at these sites are
minimal. AMR does not expect these matters, individually or collectively, to
have a material impact on its results of operations, financial position or
liquidity. Additional information is included in Note 3 to the consolidated
financial statements.
YEAR 2000 READINESS
STATE OF READINESS In 1995, the Company implemented a project (the Year 2000
Project) intended to ensure that hardware and software systems operated by the
Company, including software licensed to or operated for third parties by The
Sabre Group, are designed to operate and properly manage dates beyond December
31, 1999 (Year 2000 Readiness). The Company has assessed (i) the Company's over
1,000 information technology and operating systems that will be utilized after
December 31, 1999 (IT Systems); (ii) non-information technology systems,
including embedded technology, facilities, and other systems (Non-IT Systems);
and (iii) the Year 2000 Readiness of its critical third party service providers.
The Year 2000 Project consists of six phases: (i) awareness, (ii) assessment,
(iii) analysis, design and remediation, (iv) testing and validation, (v) quality
assurance review (to ensure consistency throughout the Year 2000 Project) and
(vi) creation of business continuity strategy, including plans in the event of
Year 2000 failures. In developing the Company's proprietary software analysis,
remediation and testing methodology for Year 2000 Readiness, it studied the best
practices of the Institute of Electrical and Electronics Engineers and the
British Standards Institution.
IT Systems The Company has completed the first three phases of the Year 2000
Project for all of its IT Systems. The Company has completed the testing and
validation phase and quality assurance review phase for 94 percent of its IT
Systems, including its computer reservations and flight operating systems that
perform such "mission critical" functions as passenger bookings, ticketing,
passenger check-in, aircraft weight and balance, flight planning and baggage and
cargo processing. As of February 28, 1999, approximately 38 percent of the IT
Systems (including the computer reservations systems) are already processing
Year 2000 dates correctly.
22
Using dedicated testing environments and applying rigorous test standards,
the Company is actively testing its other IT Systems to determine if they are
Year 2000 ready or if further remediation is necessary. The Company expects to
complete the testing and validation phase and quality assurance review phase for
its remaining IT Systems, and the upgrading of certain hardware and software
that supports its IT Systems by June 30, 1999.
Non-IT Systems The Company has substantially completed the testing and
validation of its critical Non-IT Systems, such as aircraft avionics and flight
simulators, and expects to complete the remainder of the testing and validation
phase and the quality assurance review phase by June 30, 1999. In addition, the
Company expects to complete the quality assurance review phase for substantially
all of its other Non-IT Systems by June 30, 1999. The Company believes that its
business, financial condition, and results of operations would not be materially
adversely affected, and that it has adequate contingency plans to ensure
business continuity if its other Non-IT Systems are not Year 2000 ready.
Third Party Services The Company relies on third party service providers for
many items, such as the Federal Aviation Administration, the Department of
Transportation, airport authorities, telecommunications, electrical power, and
data and credit card transaction processing. Those service providers depend on
their hardware and software systems and on interfaces with the Company's IT
Systems. The Company has polled its critical service providers regarding their
Year 2000 plans and state of readiness. The Company has received responses from
approximately 68 percent of its critical service providers, other than providers
of discretionary services that will not materially adversely affect the
Company's business, financial condition, and results of operations. Most of the
respondees assured the Company that their software and hardware is or will be
Year 2000 ready. To the extent practical, the Company intends to seek
alternatives for third party service providers that have not responded to their
Year 2000 Readiness by June 30, 1999.
COSTS OF YEAR 2000 PROJECT The Company expects to incur significant hardware,
software and labor costs, as well as consulting and other expenses, in its Year
2000 Project. The Company's total estimated cost of the project is approximately
$215 to $250 million, of which approximately $180 million was incurred as of
December 31, 1998. Costs associated with the Year 2000 Project are expensed as
incurred, other than capitalized hardware costs, and have been funded through
cash from operations.
RISKS OF YEAR 2000 NON-READINESS The economy in general, and the travel and
transportation industries in particular, may be adversely affected by risks
associated with the Year 2000. The Company's business, financial condition, and
results of operations could be materially adversely affected if systems that it
operates or systems that are operated by third party service providers upon
which the Company relies are not Year 2000 ready in time. There can be no
assurance that these systems will continue to properly function and interface
and will otherwise be Year 2000 ready. Management believes that its most likely
Year 2000 risks relate to the failure of third parties with whom it has material
relationships to be Year 2000 ready.
BUSINESS CONTINUITY PLANS To the extent practical, the Company is identifying
the most likely Year 2000 failures in an effort to develop and refine plans to
continue its business in the event of failures of the Company's or third
parties' systems to be Year 2000 ready. These plans include performing certain
processes manually; maintaining dedicated staff to be available at crucial dates
to remedy unforeseen problems; installing defensive code to protect real-time
systems from improperly formatted date data supplied by third parties; repairing
or obtaining replacement systems; and reducing or suspending certain aspects of
the Company's services or operations. Because of the pervasiveness and
complexity of the Year 2000 issue, and in particular the uncertainty concerning
the efforts and success of third parties to be Year 2000 ready, the Company will
continue to refine its contingency plans during 1999.
The costs of the project and the date on which the Company plans to complete the
Year 2000 Readiness program are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from these estimates.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, the failure of third
parties to be Year 2000 ready and similar uncertainties.
23
NEW EUROPEAN CURRENCY In January 1999, certain European countries established
fixed conversion rates between their currencies and a new common currency unit
called the "euro". The transition period for the introduction of the euro is
between January 1, 1999 and June 30, 2002. In 1997, the Company implemented a
project intended to ensure that software systems operated by the Company's
businesses as well as software licensed to or operated for third parties by The
Sabre Group were designed to properly handle the euro. The Company completed the
project in 1998.
DALLAS LOVE FIELD In 1968, as part of an agreement between the cities of Fort
Worth and Dallas to build and operate Dallas/Fort Worth Airport (DFW), a bond
ordinance was enacted by both cities (the Bond Ordinance). The Bond Ordinance
required both cities to direct all scheduled interstate passenger operations to
DFW and was an integral part of the bonds issued for the construction and
operation of DFW. In 1979, as part of a settlement to resolve litigation with
Southwest Airlines, the cities agreed to expand the scope of operations allowed
under the Bond Ordinance at Dallas' Love Field. Congress enacted the Wright
Amendment to prevent the federal government from acting inconsistent with this
agreement. The Wright Amendment limited interstate operations at Love Field to
the four states contiguous to Texas (New Mexico, Oklahoma, Arkansas and
Louisiana) and prohibited through ticketing to any destination outside that
perimeter. In 1997, without the consent of either city, Congress amended the
Wright Amendment by (i) adding three states (Kansas, Mississippi and Alabama) to
the perimeter and (ii) removing some federal restrictions on large aircraft
configured with 56 seats or less (the 1997 Amendment). In October 1997, the City
of Fort Worth filed suit in state district court against the City of Dallas and
others seeking to enforce the Bond Ordinance. Fort Worth contends that the 1997
Amendment does not preclude the City of Dallas from exercising its proprietary
rights to restrict traffic at Love Field in a manner consistent with the Bond
Ordinance and, moreover, that Dallas has an obligation to do so. American joined
in this litigation. On October 15, 1998, the state district court granted
summary judgment in favor of Fort Worth and American, which summary judgment is
being appealed to the Fort Worth Court of Appeals. In the same lawsuit, DFW
filed claims alleging that irrespective of whether the Bond Ordinance is
enforceable, the DFW Use Agreement prohibits American and other DFW signatory
airlines from moving any interstate operations to Love Field. These claims
remain unresolved. Dallas filed a separate declaratory judgment action in
federal district court seeking to have the court declare that, as a matter of
law, the 1997 Amendment precludes Dallas from exercising any restrictions on
operations at Love Field. Further, in May 1998, Continental Airlines and
Continental Express filed a lawsuit in federal court seeking a judicial
declaration that the Bond Ordinance cannot be enforced to prevent them from
operating flights from Love Field to Cleveland using regional jets. In December
1998, the Department of Transportation (DOT) issued an order on the federal law
questions concerning the Bond Ordinance, local proprietary powers, DFW's Use
Agreement with DFW carriers such as American, and the Wright and 1997
Amendments, and concluded that the Bond Ordinance was preempted by federal law
and was therefore, not enforceable. The DOT also found that the DFW Use
Agreement did not preclude American from conducting interstate operations at
Love Field. Fort Worth and American have appealed the DOT's order to the Fifth
Circuit Court of Appeals.
As a result of the foregoing, the future of interstate flight operations
at Love Field and American's DFW hub are uncertain. An increase in operations at
Love Field to new interstate destinations could adversely impact American's
business.
In the second half of 1998, American initiated limited intrastate jet
service to Austin from Love Field.
OUTLOOK FOR 1999
During 1998, the Company created and began implementing a new strategic
framework based on four key objectives. The first objective is to invest in and
grow American and American Eagle - consistent with market conditions - to
preserve and enhance the Company's leadership in the U.S. airline industry. The
second objective is to offer the Company's customers the world's most
comprehensive and powerful airline network through a combination of the
industry's strongest domestic route system, the premier regional carrier,
increased international flying and the broadest and best-executed set of airline
alliances. The third objective is to make The Sabre Group the world's leading
provider of information technology for the travel and transportation industries.
The fourth objective is to create a corporate culture within AMR that involves
and excites every employee in all of the Company's businesses. During 1999, the
Company is expected to continue to focus on these four key objectives of the new
strategic plan.
24
AIRLINE GROUP The Company expects 1999 to be another good year for the Airline
Group despite the economic uncertainties, primarily in the international
markets, the deterioration in domestic yields experienced in the fourth quarter
of 1998, the increase in industry capacity both domestically and
internationally, and the activities of the APA in February 1999 that resulted in
numerous cancellations across American's system. American expects that the
downward pressure on domestic yields experienced in the fourth quarter of 1998,
which was primarily due to heavier fare sale activity, a leveling off of the
growth in full fare domestic traffic, and the impact of international yield
decreases on domestic yields, may continue. In 1999, American's total system
capacity is expected to increase by approximately four percent, which includes
domestic growth of 2.5 percent and international growth of approximately 7.5
percent. The recently announced formation of oneworld(TM), the global alliance
linking American's network and frequent flyer program with British Airways,
Canadian Airlines, Cathay Pacific and Qantas - and later this year Finnair and
Iberia - coupled with the expansion of other code-share alliances, the
acquisitions of Reno Air and Business Express, which was completed by American
Eagle in March of 1999, the broad marketing alliances created between American
and US Airways and Alaska Airlines, and the delivery of new jet aircraft at both
American and American Eagle will enable the Airline Group to further strengthen
its network both domestically and internationally during 1999. However, the
Company continues to evaluate the implications of further accelerating the
retirement of certain aircraft in order to keep the Company's capacity growth in
line with general economic conditions.
Pressure to reduce costs will continue, although the volatility of fuel
prices makes any prediction of overall costs very difficult. Excluding fuel, the
Company anticipates an increase in unit costs of about one percent, driven
primarily by higher labor costs associated with the normal seniority and scale
increases in the union contracts and an increase in training costs, landing
fees, airport facility rent expense and various other inflationary pressures.
The increase in costs is partially offset by expected savings in maintenance,
materials and repairs expense on the Company's existing fleet, partially due to
the Company's announcement in late 1998 that it will retire an additional eight
McDonnell Douglas DC-10-10 and two additional Boeing 727-200 aircraft earlier
than anticipated, which will save the Company approximately $40 million during
the next three years in aircraft maintenance and modification costs. The Company
expects to also benefit from maintenance savings associated with new aircraft
deliveries and commission expense savings as a result of changes made in late
1998 to the international commission structure and a decrease in the percentage
of commissionable transactions. Effective January 1, 1999, in order to more
accurately reflect the expected useful life of its aircraft, the Company changed
its estimate of the depreciable lives of certain aircraft types from 20 to 25
years and increased the residual value from five to 10 percent. The impact of
the aircraft depreciation changes is expected to result in an approximate $165
million decrease in 1999 depreciation expense. In addition, the Company will
depreciate its new Boeing 737-800s and Boeing 777-200IGWs over a period of 25
and 30 years, respectively, with a 10 percent residual value.
In early February 1999, some members of the APA engaged in certain
activities (increased sick time and declining to fly additional trips) that
resulted in numerous cancellations across American's system. These actions were
taken in response to the acquisition of Reno Air in December 1998. On February
10, 1999, American obtained a temporary restraining order prohibiting the union
from unilaterally taking actions outside the terms allowed under the collective
bargaining agreement. Because of certain actions by the APA and its leaders,
American filed a motion to have the APA and its leaders held in contempt of the
court's temporary restraining order. The court granted that motion on February
13, 1999, and the airline's operations thereafter returned to normal. In an
attempt to resolve the dispute, the Company and the APA have agreed to
non-binding mediation. The Company estimates that the illegal pilot job action
resulted in a pre-tax earnings impact of approximately $200 to $225 million
during the first quarter of 1999.
THE SABRE GROUP The Company expects continued profitability and revenue growth
for The Sabre Group in 1999. Revenues from The Sabre Group's existing
outsourcing customers, including American, US Airways and Canadian, are expected
to be the same as or less than 1998 revenues as The Sabre Group will have
completed Year 2000 efforts for American and Canadian and most of the migration
services for US Airways. The Company, however, expects strong revenue growth
from outsourcing contracts signed in 1998, new contracts expected in 1999, and
from software development and real-time processing services. Additionally, the
Company expects overall revenue growth from the electronic travel distribution
business to be consistent with prior years. While the Company anticipates a
decline in domestic airline bookings growth in 1999, the Company expects to
compensate for the decline with growth in international bookings, market share
gains worldwide, price increases and revenues from new promotional and marketing
products. The Company expects an improved operating margin for The Sabre Group
in 1999 due to a reduction in its Year 2000 Readiness program activity as the
Year
25
2000 Project is nearing completion. In addition, the Company expects improved
margins on the US Airways contract as the migration services will be completed
in early 1999 and the contract will be moving to steady state. The Company
expects selling, general and administrative expenses for The Sabre Group will
increase in 1999 as a result of sales growth initiatives and increased
administrative requirements to support The Sabre Group's growth.
FORWARD-LOOKING INFORMATION
The preceding discussions under Business and Management's Discussion and
Analysis of Financial Condition and Results of Operations contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events. When used in this document and in documents incorporated herein
by reference, the words "expects," "plans," "anticipates," and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include, without limitation, expectations as to results of operations
and financial condition, including changes in capacity, revenues and unit costs,
expectations as to future financing needs, Year 2000 and euro readiness, overall
economic projections and the Company's plans and objectives for future
operations, including plans to develop future code-sharing programs and to
evaluate new alliances. All forward-looking statements in this report are based
upon information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expectations. The
following factors, in addition to other possible factors not listed, could cause
the Company's actual results to differ materially from those expressed in
forward-looking statements:
UNCERTAINTY OF FUTURE COLLECTIVE BARGAINING AGREEMENTS AND EVENTS The Company's
operations could be adversely affected by failure of the Company to reach
agreement with any labor union representing the Company's employees or by an
agreement with a labor union representing the Company's employees that contains
terms which prevent the Company from competing effectively with other airlines.
In addition, a dispute between the Company and an employee work group (outside
the confines of a collective bargaining agreement) could adversely impact the
Company's operations.
ECONOMIC AND OTHER CONDITIONS The airline industry is affected by changes in
national, regional and local economic conditions, inflation, war or political
instability (or the threat thereof), consumer preferences and spending patterns,
demographic trends, consumer perceptions of airline safety, costs of safety and
security measures, and weather.
COMMODITY PRICES Due to the competitive nature of the airline industry, in the
event of any increase in the price of jet fuel, there can be no assurance that
the Airline Group would be able to pass on increased fuel prices to its
customers by increasing fares.
COMPETITION IN THE AIRLINE INDUSTRY Service over almost all of the Airline
Group's routes is highly competitive. On most of its non-stop routes, the
Airline Group competes with at least one, and usually more than one, major
domestic airline, as well as low-cost carriers. The Airline Group also competes
with national, regional, all-cargo and charter carriers and, particularly on
shorter segments, ground transportation. Pricing decisions are affected by
competition from other airlines. Fare discounting by competitors has
historically had a negative effect on the Airline Group's financial results
because American is generally required to match competitors' fares to maintain
passenger traffic. No assurance can be given that any future fare reduction
would be offset by increases in passenger traffic, a reduction in costs or
changes in the mix of traffic that would improve yields.
COMPETITION FOR THE SABRE GROUP The markets in which The Sabre Group's
electronic travel distribution and information technology solution businesses
competes in are highly competitive. The Sabre Group's electronic travel
distribution business competes primarily against other large and
well-established global distribution systems and is always faced with the
potential of new competitors, particularly as new channels for distribution
develop. The Sabre Group's information technology solutions business competes
against solutions companies, full-service providers of technology outsourcing
and against smaller companies that offer a limited range of products. Increased
competition could cause The Sabre Group to reduce prices, to increase spending
on marketing or product development or to otherwise take actions that might
adversely affect its operating earnings.
26
CHANGING BUSINESS STRATEGY Although it has no current plan to do so, the Company
may change its business strategy in the future and may not pursue some of the
goals stated herein.
GOVERNMENT REGULATION Future results of the Company's operations may vary based
upon any actions which the governmental agencies with jurisdiction over the
Company's operations may take, including the granting and timing of certain
governmental approvals needed for code-sharing alliances and other arrangements
with other airlines, restrictions on competitive practices (e.g., new
regulations which would curtail an airline's ability to respond to a
competitor), the adoption of regulations that impact customer service standards,
and the adoption of more restrictive locally-imposed noise restrictions.
UNCERTAINTY IN INTERNATIONAL OPERATIONS The Company's current international
activities and prospects could be adversely affected by factors such as
reversals or delays in the opening of foreign markets, exchange controls,
currency and political risks, taxation and changes in international government
regulation of the Company's operations.
YEAR 2000 READINESS The Company's operations could be adversely affected to the
extent its systems or the systems of third parties fail to process Year 2000
dates correctly.
27
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
fuel, foreign currency exchange rates and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management may take to mitigate its exposure to such changes. Actual
results may differ. See Note 6 to the consolidated financial statements for
accounting policies and additional information.
AIRCRAFT FUEL The Company's earnings are affected by changes in the price and
availability of aircraft fuel. In order to provide a measure of control over
price and supply, the Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. The Company also manages the price
risk of fuel costs primarily utilizing fuel swap and fuel option contracts.
Market risk is estimated as a hypothetical 10 percent increase in the December
31, 1998 and 1997 cost per gallon of fuel. Based on projected 1999 fuel usage,
such an increase would result in an increase to aircraft fuel expense of
approximately $73 million in 1999, net of fuel hedge instruments outstanding at
December 31, 1998. Comparatively, based on projected 1998 fuel usage, such an
increase would have resulted in an increase to aircraft fuel expense of
approximately $110 million in 1998, net of fuel hedge instruments outstanding at
December 31, 1997. The change in market risk is due primarily to the Company
having more hedge instruments outstanding at December 31, 1998 as compared to
December 31, 1997. As of December 31, 1998, the Company had hedged approximately
48 percent of its 1999 fuel requirements and approximately 19 percent of its
2000 fuel requirements, compared to approximately 23 percent of its 1998 fuel
requirements hedged at December 31, 1997.
FOREIGN CURRENCY The Company is exposed to the effect of foreign exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated operating
revenues and expenses. The Company's largest exposure comes from the British
pound, Japanese yen, and various Latin and South American currencies. The
Company uses options to hedge a portion of its anticipated foreign
currency-denominated net cash flows. The result of a uniform 10 percent
strengthening in the value of the U.S. dollar from December 31, 1998 and 1997
levels relative to each of the currencies in which the Company has foreign
currency exposure would result in a decrease in operating income of
approximately $22 million and $24 million for the years ending December 31, 1999
and 1998, respectively, net of hedge instruments outstanding at December 31,
1998 and 1997, due to the Company's foreign-denominated revenues exceeding its
foreign-denominated expenses. This sensitivity analysis was prepared based upon
projected 1999 and 1998 foreign currency-denominated revenues and expenses as of
December 31, 1998 and 1997. Furthermore, this calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar.
INTEREST The Company's earnings are also affected by changes in interest rates
due to the impact those changes have on its interest income from cash and
short-term investments and its interest expense from variable-rate debt
instruments. The Company has variable-rate debt instruments representing
approximately six percent and five percent, respectively, of its total long-term
debt, and interest rate swaps on notional amounts of approximately $1.1 billion
and $1.4 billion, respectively, at December 31, 1998 and 1997. If interest rates
average 10 percent more in 1999 than they did during 1998, the Company's
interest expense would increase by approximately $6 million and interest income
from cash and short-term investments would increase by approximately $12
million. In comparison, at December 31, 1997, the Company estimated that if
interest rates averaged 10 percent more in 1998 than they did during 1997, the
Company's interest expense would have increased by approximately $10 million and
interest income from cash and short-term investments would have increased by
approximately $14 million. These amounts are determined by considering the
impact of the hypothetical interest rates on the Company's variable-rate
long-term debt, interest rate swap agreements, and cash and short-term
investment balances at December 31, 1998 and 1997.
28
Market risk for fixed-rate long-term debt is estimated as the potential
increase in fair value resulting from a hypothetical 10 percent decrease in
interest rates, and amounts to approximately $96 million and $105 million as of
December 31, 1998 and 1997, respectively. The fair values of the Company's
long-term debt were estimated using quoted market prices or discounted future
cash flows based on the Company's incremental borrowing rates for similar types
of borrowing arrangements.
INVESTMENTS The Company is subject to market risk related to its ownership of
approximately 3.1 million depository certificates convertible, subject to
certain restrictions, into the common stock of Equant. The estimated fair value
of these depository certificates was approximately $210 million as of December
31, 1998, based upon the market value of Equant common stock. In February 1999,
in connection with a secondary offering of Equant, AMR sold approximately
900,000 depository certificates for net proceeds of $66 million. The remaining
depository certificates are subject to a final reallocation between the owners
of the certificates during 1999 and thus, the number of certificates owned by
the Company is subject to change.
In addition, the Company holds investments in certain other entities,
primarily foreign airlines, which are subject to market risk. However, the
impact of such market risk on earnings is not significant due to the
immateriality of the carrying value and the geographically diverse nature of
these holdings.
29
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Page
----
Report of Independent Auditors 31
Consolidated Statements of Operations 32
Consolidated Balance Sheets 34
Consolidated Statements of Cash Flows 36
Consolidated Statements of Stockholders' Equity 37
Notes to Consolidated Financial Statements 38
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AMR Corporation
We have audited the accompanying consolidated balance sheets of AMR
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AMR
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 18, 1999, except for the last
paragraph of Note 2 and the
last paragraph of Note 3, for
which the date is February 22, 1999.
31
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
REVENUES
Airline Group:
Passenger - American Airlines, Inc. $ 14,695 $ 14,310 $ 13,645
- AMR Eagle 1,121 1,017 1,047
Cargo 656 687 682
Other 977 889 837
-------- -------- --------
17,449 16,903 16,211
The Sabre Group 2,306 1,789 1,625
Other revenues 119 95 102
Less: Intersegment revenues (669) (603) (574)
-------- -------- --------
Total operating revenues 19,205 18,184 17,364
-------- -------- --------
EXPENSES
Wages, salaries and benefits 6,507 6,056 5,706
Aircraft fuel 1,604 1,923 1,936
Depreciation and amortization 1,287 1,225 1,185
Commissions to agents 1,226 1,278 1,252
Maintenance, materials and repairs 937 863 687
Other rentals and landing fees 875 876 874
Food service 675 677 672
Aircraft rentals 569 574 616
Other operating expenses 3,187 2,805 2,629
-------- -------- --------
Total operating expenses 16,867 16,277 15,557
-------- -------- --------
OPERATING INCOME 2,338 1,907 1,807
OTHER INCOME (EXPENSE)
Interest income 140 140 82
Interest expense (372) (420) (514)
Interest capitalized 104 20 10
Gain on sale of stock by subsidiary -- -- 497
Miscellaneous - net (46) (23) (286)
-------- -------- --------
(174) (283) (211)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS 2,164 1,624 1,596
Income tax provision 858 651 513
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY LOSS 1,306 973 1,083
INCOME FROM DISCONTINUED OPERATIONS, NET OF
APPLICABLE INCOME TAXES 8 12 22
-------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS 1,314 985 1,105
EXTRAORDINARY LOSS, NET OF TAX BENEFIT -- -- (89)
-------- -------- --------
NET EARNINGS $ 1,314 $ 985 $ 1,016
======== ======== ========
--------------------------------------------------------------------------------
Continued on next page.
32
AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(in millions, except per share amounts)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
EARNINGS APPLICABLE TO COMMON SHARES $ 1,314 $ 985 $ 1,016
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
BASIC
Income from continuing operations before
extraordinary loss $ 7.73 $ 5.45 $ 6.29
Discontinued operations 0.05 0.07 0.12
Extraordinary loss -- -- (0.51)
--------- --------- ---------
Net earnings $ 7.78 $ 5.52 $ 5.90
========= ========= =========
DILUTED
Income from continuing operations before
extraordinary loss $ 7.48 $ 5.32 $ 5.95
Discontinued operations 0.04 0.07 0.12
Extraordinary loss -- -- (0.48)
--------- --------- ---------
Net earnings $ 7.52 $ 5.39 $ 5.59
========= ========= =========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
AMR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
December 31,
-------------------
1998 1997
------- -------
ASSETS
CURRENT ASSETS
Cash $ 95 $ 62
Short-term investments 1,978 2,370
Receivables, less allowance for uncollectible
accounts (1998 - $31; 1997 - $18) 1,543 1,301
Inventories, less allowance for obsolescence
(1998 - $214; 1997 - $203) 596 626
Deferred income taxes 476 406
Other current assets 187 221
------- -------
Total current assets 4,875 4,986
EQUIPMENT AND PROPERTY
Flight equipment, at cost 13,688 13,002
Less accumulated depreciation 4,976 4,459
------- -------
8,712 8,543
Purchase deposits for flight equipment 1,624 754
Other equipment and property, at cost 4,243 3,966
Less accumulated depreciation 2,340 2,190
------- -------
1,903 1,776
------- -------
12,239 11,073
EQUIPMENT AND PROPERTY UNDER CAPITAL LEASES
Flight equipment 3,159 2,980
Other equipment and property 267 273
------- -------
3,426 3,253
Less accumulated amortization 1,279 1,167
------- -------
2,147 2,086
OTHER ASSETS
Route acquisition costs, less accumulated amortization
(1998 - $240; 1997 - $211) 916 945
Airport operating and gate lease rights, less accumulated amortization
(1998 - $161; 1997 - $143) 312 325
Prepaid pension cost 304 382
Other 1,510 1,062
------- -------
3,042 2,714
------- -------
TOTAL ASSETS $22,303 $20,859
======= =======
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34
AMR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
December 31,
-----------------------
1998 1997
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,152 $ 1,028
Accrued salaries and wages 991 879
Accrued liabilities 1,131 1,091
Air traffic liability 2,163 2,044
Current maturities of long-term debt 48 395
Current obligations under capital leases 154 135
-------- --------
Total current liabilities 5,639 5,572
LONG-TERM DEBT, LESS CURRENT MATURITIES 2,436 2,248
OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT OBLIGATIONS 1,764 1,629
OTHER LIABILITIES AND CREDITS
Deferred income taxes 1,491 1,112
Deferred gains 573 610
Postretirement benefits 1,649 1,573
Other liabilities and deferred credits 2,053 1,899
-------- --------
5,766 5,194
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $1 par value; shares authorized: 750,000,000;
shares issued: 1998 and 1997 - 182,278,766 182 182
Additional paid-in capital 3,075 3,104
Treasury shares at cost: 1998 - 20,927,692; 1997 - 9,080,832 (1,288) (485)
Accumulated other comprehensive income (4) (4)
Retained earnings 4,733 3,419
-------- --------
6,698 6,216
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,303 $ 20,859
======== ========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
AMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 1,314 $ 985 $ 1,016
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,006 977 948
Amortization 281 248 237
Deferred income taxes 312 363 217
Gain on disposition of equipment and property (19) (24) --
Gain on sale of stock by subsidiary -- -- (497)
Provisions for losses -- -- 251
Extraordinary loss -- -- 136
Change in assets and liabilities:
Decrease (increase) in receivables (242) 12 (225)
Increase in inventories (35) (41) (66)
Increase in accounts payable
and accrued liabilities 268 117 261
Increase in air traffic liability 119 155 423
Other, net 191 77 (13)
------- ------- -------
Net cash provided by operating activities 3,195 2,869 2,688
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including purchase deposits
on flight equipment (2,661) (1,358) (523)
Net decrease (increase) in short-term investments 392 (627) (924)
Proceeds from sale of equipment and property 293 305 257
Acquisitions and other investments (137) -- --
Investment in joint ventures, net (135) -- --
------- ------- -------
Net cash used for investing activities (2,248) (1,680) (1,190)
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (547) (648) (2,130)
Repurchase of common stock (994) (740) --
Proceeds from:
Sale-leaseback transactions 270 -- --
Issuance of long-term debt 246 -- --
Exercise of stock options 111 200 25
Sale of stock by subsidiary -- -- 589
------- ------- -------
Net cash used for financing activities (914) (1,188) (1,516)
------- ------- -------
Net increase (decrease) in cash 33 1 (18)
Cash at beginning of year 62 61 79
------- ------- -------
Cash at end of year $ 95 $ 62 $ 61
======= ======= =======
FINANCING ACTIVITIES NOT AFFECTING CASH
Capital lease obligations incurred $ 270 $ -- $ --
======= ======= =======
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
AMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions, except shares and per share amounts)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Accumulated
Additional Other
Preferred Common Paid-in Treasury Comprehensive Retained
Stock Stock Capital Stock Income Earnings Total
--------- ------- ---------- -------- ------------- -------- -------
Balance at January 1, 1996 $ 78 $ 152 $ 2,163 $ -- $ (91) $ 1,418 $ 3,720
Net earnings -- -- -- -- -- 1,016 1,016
Adjustment for minimum pension
liability, net of tax benefit of $13 -- -- -- -- (21) -- (21)
Unrealized loss on investments, net of
tax benefit of $1 -- -- -- -- (2) -- (2)
Reversal of unrealized loss on
investment in Canadian Airlines
International Limited -- -- -- -- 91 -- 91
-------
Total comprehensive income 1,084
Issuance of 27,853,548 shares upon
conversion of convertible
subordinated debentures and
preferred stock, net of conversion
fees and issuance costs (78) 28 867 -- -- -- 817
Issuance of 1,403,656 shares pursuant
to stock option, deferred stock and
restricted stock incentive plans -- 2 45 -- -- -- 47
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1996 -- 182 3,075 -- (23) 2,434 5,668
Net earnings -- -- -- -- -- 985 985
Adjustment for minimum pension
liability, net of tax expense of $13 -- -- -- -- 19 -- 19
-------
Total comprehensive income 1,004
Issuance of 312,140 shares pursuant to
stock option, deferred stock and
restricted stock incentive plans -- -- 13 -- -- -- 13
Issuance of 11,500,000 stock options
at $5 below market value at date of
grant -- -- 58 -- -- -- 58
Repurchase of 14,086,750 common shares -- -- -- (740) -- -- (740)
Issuance of 5,005,918 shares from
Treasury pursuant to stock option,
deferred stock and restricted stock
incentive plans, net of tax benefit
of $15 -- -- (42) 255 -- -- 213
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997 -- 182 3,104 (485) (4) 3,419 6,216
Net earnings and total comprehensive
income -- -- -- -- -- 1,314 1,314
Repurchase of 14,342,008 common shares -- -- -- (944) -- -- (944)
Issuance of 2,495,148 shares from
Treasury pursuant to stock option,
deferred stock and restricted stock
incentive plans, net of tax benefit
of $17 -- -- (29) 141 -- -- 112
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1998 $ -- $ 182 $ 3,075 $(1,288) $ (4) $ 4,733 $ 6,698
======= ======= ======= ======= ======= ======= =======
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of AMR Corporation (AMR or the Company), its wholly-owned subsidiaries,
including its principal subsidiary American Airlines, Inc. (American), and its
majority-owned subsidiaries, including The Sabre Group Holdings, Inc. (The Sabre
Group). All significant intercompany transactions have been eliminated. The
results of operations for AMR Services, AMR Combs and TeleService Resources have
been reflected in the consolidated statements of operations as discontinued
operations. All share and per share amounts have been restated to give effect to
the stock split on June 9, 1998, where appropriate. Certain amounts from prior
years have been reclassified to conform with the 1998 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES Spare parts, materials and supplies relating to flight equipment are
carried at average acquisition cost and are expensed when incurred in
operations. Allowances for obsolescence are provided, over the estimated useful
life of the related aircraft and engines, for spare parts expected to be on hand
at the date aircraft are retired from service, plus allowances for spare parts
currently identified as excess. These allowances are based on management
estimates, which are subject to change.
EQUIPMENT AND PROPERTY The provision for depreciation of operating equipment and
property is computed on the straight-line method applied to each unit of
property, except that major rotable parts, avionics and assemblies are
depreciated on a group basis. The depreciable lives and residual values used for
the principal depreciable asset classifications are:
[Enlarge/Download Table]
Residual
Depreciable Life Value
---------------------------- ----------
Boeing 727-200 (Stage II) December 31, 1999(1) None
Boeing 727-200 (to be converted to Stage III) December 31, 2003(1) None
DC-10 December 31, 2002(1) None
Other American jet aircraft 20 years 5%
Regional jet aircraft 16 years (2)
Other regional aircraft and engines 17 years 10%
Major rotable parts, avionics and assemblies Life of equipment to which 0-10%
applicable
Improvements to leased flight equipment Term of lease None
Buildings and improvements (principally on 10-30 years or term of lease None
leased land)
Furniture, fixtures and other equipment 3-20 years None
Capitalized software 3-10 years None
(1) Approximate common retirement date.
(2) Depreciated to guaranteed residual value.
Effective January 1, 1999, in order to more accurately reflect the
expected useful life of its aircraft, the Company changed its estimate of the
depreciable lives of certain American aircraft types from 20 to 25 years and
increased the residual value from five to 10 percent. In addition, the Company
will depreciate its new Boeing 737-800s and Boeing 777-200IGWs over a period of
25 and 30 years, respectively, with a 10 percent residual value.
Equipment and property under capital leases are amortized over the term
of the leases or, in the case of certain aircraft, over their expected useful
lives, and such amortization is included in depreciation and amortization. Lease
terms vary but are generally 10 to 25 years for aircraft and seven to 40 years
for other leased equipment and property.
38
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
MAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased
flight equipment are charged to operating expense as incurred, except engine
overhaul costs incurred by AMR Eagle, which are accrued on the basis of hours
flown.
INTANGIBLE ASSETS Route acquisition costs and airport operating and gate lease
rights represent the purchase price attributable to route authorities, airport
take-off and landing slots and airport gate leasehold rights acquired. These
assets are being amortized on a straight-line basis over 40 years for route
authorities, 25 years for airport take-off and landing slots, and the term of
the lease for airport gate leasehold rights.
CAPITALIZED SOFTWARE In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1), effective
for fiscal years beginning after December 15, 1998. SOP 98-1 requires the
capitalization of certain costs incurred during an internal-use development
project. The adoption of SOP 98-1 is not expected to have a material impact on
the Company's financial position or results of operations.
PASSENGER REVENUES Passenger ticket sales are initially recorded as a component
of air traffic liability. Revenue derived from ticket sales is recognized at the
time transportation is provided. However, due to various factors, including the
complex pricing structure and interline agreements throughout the industry,
certain amounts are recognized in revenue using estimates regarding both the
timing of the revenue recognition and the amount of revenue to be recognized.
Actual results could differ from those estimates.
ELECTRONIC TRAVEL DISTRIBUTION REVENUES Revenues for airline travel reservations
are recognized at the time of the booking of the reservation, net of estimated
future cancellations. Revenues for car rental and hotel bookings and other
travel providers are recognized at the time the reservation is used by the
customer. Fees billed on service contracts are recognized as revenue in the
month earned.
INFORMATION TECHNOLOGY SOLUTIONS REVENUES Revenues from information technology
services are recognized in the period earned. Revenues from software license
fees for standard software products are recognized when the software is
delivered, fees are fixed and determinable, no undelivered elements are
essential to the functionality of delivered software and collection is probable.
Revenues on long-term software development and consulting contracts are
recognized under the percentage of completion method of accounting. Losses, if
any, on long-term contracts are recognized when the current estimate of total
contract costs indicates a loss on a contract is probable. Fixed fees for
software maintenance are recognized ratably over the life of the contract.
ADVERTISING COSTS The Company expenses the costs of advertising as incurred.
Advertising expense was $216 million, $204 million and $203 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
FREQUENT FLYER PROGRAM The estimated incremental cost of providing free travel
awards is accrued when such award levels are reached. American sells mileage
credits and related services to companies participating in its frequent flyer
program. The portion of the revenue related to the sale of mileage credits is
deferred and recognized over a period approximating the period during which the
mileage credits are used.
STATEMENTS OF CASH FLOWS Short-term investments, without regard to remaining
maturity at acquisition, are not considered as cash equivalents for purposes of
the statements of cash flows.
STOCK OPTIONS The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations. Under APB 25,
no compensation expense is recognized for stock option grants if the exercise
price of the Company's stock option grants is at or above the fair market value
of the underlying stock on the date of grant.
39
2. INVESTMENTS
Short-term investments consisted of (in millions):
[Download Table]
December 31,
-----------------
1998 1997
------ ------
Overnight investments and time deposits $ 133 $ 322
Corporate notes 950 921
Asset backed securities 498 428
U. S. Government agency mortgages 169 305
Other 228 394
------ ------
$1,978 $2,370
====== ======
Short-term investments at December 31, 1998, by contractual maturity
included (in millions):
[Download Table]
Due in one year or less $ 494
Due after one year through three years 1,470
Due after three years 14
------
$1,978
======
All short-term investments are classified as available-for-sale and
stated at fair value. Net unrealized gains and losses, net of deferred taxes,
are reflected as an adjustment to stockholders' equity.
At December 31, 1998, the Company owned approximately 3.1 million
depository certificates convertible, subject to certain restrictions, into the
common stock of Equant N.V. (Equant), which completed an initial public offering
in July 1998. As of December 31, 1998, the estimated fair value of these
depository certificates was approximately $210 million, based upon the
publicly-traded market value of Equant common stock. The estimated fair value of
the certificates was not readily determinable as of December 31, 1997. The
carrying value (cost basis) of the Company's investment in the depository
certificates as of December 31, 1998 and 1997 was de minimis.
In connection with a secondary offering of Equant, the Company sold
approximately 900,000 depository certificates in February 1999 for net proceeds
of $66 million. The remaining depository certificates are subject to a final
reallocation between the owners of the certificates during 1999 and thus, the
number of certificates owned by the Company is subject to change.
3. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company had commitments to acquire the
following aircraft: 100 Boeing 737-800s, 34 Boeing 777-200IGWs, six Boeing
757-200s, four Boeing 767-300ERs, 75 Embraer EMB-135s, 30 Embraer EMB-145s and
25 Bombardier CRJ-700s. Deliveries of these aircraft commence in 1999 and will
continue through 2005. Future payments, including estimated amounts for price
escalation through anticipated delivery dates for these aircraft and related
equipment, will approximate $2.7 billion in 1999, $2.0 billion in 2000, $1.6
billion in 2001 and an aggregate of approximately $1.5 billion in 2002 through
2005. In addition to these commitments for aircraft, the Company's Board of
Directors has authorized expenditures of approximately $2.1 billion over the
next five years related to modifications to aircraft, renovations of -- and
additions to -- airport and office facilities, and the acquisition of various
other equipment and assets. AMR expects to spend approximately $625 million of
this authorized amount in 1999.
40
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Miami International Airport Authority is currently remediating
various environmental conditions at the Miami International Airport (the
Airport) and funding the remediation costs through landing fee revenues. Future
costs of the remediation effort may be borne by carriers operating at the
Airport, including American, through increased landing fees and/or other charges
since certain of the potentially responsible parties are no longer in business.
The future increase in landing fees and/or other charges may be material but
cannot be reasonably estimated due to various factors, including the unknown
extent of the remedial actions that may be required, the proportion of the cost
that will ultimately be recovered from the responsible parties, and
uncertainties regarding the environmental agencies that will ultimately
supervise the remedial activities and the nature of that supervision.
In April 1995, American announced an agreement to sell 12 of its
McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). In
addition, in March 1998, the Company exercised its option to sell its remaining
seven MD-11 aircraft to FedEx. No significant gain or loss is expected to be
recognized as a result of these transactions. Eight aircraft had been delivered
as of December 31, 1998. The remaining 11 aircraft will be delivered between
2000 and 2002. The carrying value of the 11 remaining aircraft American has
committed to sell was approximately $711 million as of December 31, 1998.
AMR and American have included an event risk covenant in approximately
$3.0 billion of debt and lease agreements. The covenant permits the holders of
such instruments to receive a higher rate of return (between 50 and 700 basis
points above the stated rate) if a designated event, as defined, should occur
and the credit rating of the debentures or the debt obligations underlying the
lease agreements is downgraded below certain levels.
Special facility revenue bonds have been issued by certain
municipalities, primarily to purchase equipment and improve airport facilities
which are leased by American. In certain cases, the bond issue proceeds were
loaned to American and are included in long-term debt. Certain bonds have rates
that are periodically reset and are remarketed by various agents. In certain
circumstances, American may be required to purchase up to $437 million of the
special facility revenue bonds prior to scheduled maturity, in which case
American has the right to resell the bonds or to use the bonds to offset its
lease or debt obligations. American may borrow the purchase price of these bonds
under standby letter of credit agreements. At American's option, these letters
of credit are secured by funds held by bond trustees and by approximately $519
million of short-term investments.
In early February 1999, some members of the APA engaged in certain
activities (increased sick time and declining to fly additional trips) that
resulted in numerous cancellations across American's system. These actions were
taken in response to the acquisition of Reno Air in December 1998. In an attempt
to resolve the dispute, the Company and the APA have agreed to non-binding
mediation. These actions adversely impacted the Company's first quarter 1999 net
earnings.
41
4. LEASES
AMR's subsidiaries lease various types of equipment and property,
including aircraft, passenger terminals, equipment and various other facilities.
The future minimum lease payments required under capital leases, together with
the present value of net minimum lease payments, and future minimum lease
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 1998, were
(in millions):
[Download Table]
Capital Operating
Year Ending December 31, Leases Leases
--------- ---------
1999 $ 273 $ 1,012
2000 341 951
2001 323 949
2002 274 904
2003 191 919
2004 and subsequent 1,261 12,480
------- -------
2,663(1) $17,215(2)
=======
Less amount representing interest 745
-------
Present value of net minimum lease payments $ 1,918
=======
(1) Future minimum payments required under capital leases include $192
million guaranteed by AMR relating to special facility revenue bonds
issued by municipalities.
(2) Future minimum payments required under operating leases include $6.1
billion guaranteed by AMR relating to special facility revenue bonds
issued by municipalities.
At December 31, 1998, the Company had 187 jet aircraft and 39 turboprop
aircraft under operating leases, and 86 jet aircraft and 63 turboprop aircraft
under capital leases. The aircraft leases can generally be renewed at rates
based on fair market value at the end of the lease term for one to five years.
Most aircraft leases have purchase options at or near the end of the lease term
at fair market value, but generally not to exceed a stated percentage of the
defined lessor's cost of the aircraft or at a predetermined fixed amount.
Rent expense, excluding landing fees, was $1.2 billion for 1998, 1997 and
1996.
5. INDEBTEDNESS
Long-term debt (excluding amounts maturing within one year) consisted of
(in millions):
[Enlarge/Download Table]
December 31,
-----------------------------------
1998 1997
------------- -------------
8.05% - 10.62% notes due through 2021 $ 865 $ 874
Secured debt due through 2015
(effective rates from 6.317% - 9.957% at December 31, 1998) 857 644
9.0% - 10.20% debentures due through 2021 437 437
6.0% - 7.10% bonds due through 2031 176 176
Variable rate indebtedness due through 2024
(3.55% at December 31, 1998) 86 86
Other 15 31
------------- -------------
Long-term debt, less current maturities $ 2,436 $ 2,248
============= =============
Maturities of long-term debt (including sinking fund requirements) for
the next five years are: 1999 - $48 million; 2000 - $244 million; 2001 - $451
million; 2002 - $83 million; 2003 - $47 million.
42
5. INDEBTEDNESS (CONTINUED)
During 1996, AMR repurchased and/or retired prior to scheduled maturity
approximately $1.1 billion in face value of long-term debt and capital lease
obligations. Cash from operations provided the funding for the repurchases and
retirements. These transactions resulted in an extraordinary loss of $136
million ($89 million after tax) in 1996.
American has a $1.0 billion credit facility agreement which expires
December 19, 2001. At American's option, interest on the agreement can be
calculated on one of several different bases. For most borrowings, American
would anticipate choosing a floating rate based upon the London Interbank
Offered Rate (LIBOR). At December 31, 1998, no borrowings were outstanding under
the agreement.
Certain debt is secured by aircraft, engines, equipment and other assets
having a net book value of approximately $929 million. In addition, certain of
American's debt and credit facility agreements contain restrictive covenants,
including a minimum net worth requirement, which could limit American's ability
to pay dividends. At December 31, 1998, under the most restrictive provisions of
those debt and credit facility agreements, approximately $2.6 billion of the
retained earnings of American were available for payment of dividends to AMR.
Cash payments for interest, net of capitalized interest, were $277
million, $410 million and $520 million for 1998, 1997 and 1996, respectively.
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, AMR uses a variety of
financial instruments, including interest rate swaps, fuel swap and option
contracts and currency exchange agreements. The Company does not hold or issue
derivative financial instruments for trading purposes.
NOTIONAL AMOUNTS AND CREDIT EXPOSURES OF DERIVATIVES
The notional amounts of derivative financial instruments summarized in
the tables which follow do not represent amounts exchanged between the parties
and, therefore, are not a measure of the Company's exposure resulting from its
use of derivatives. The amounts exchanged are calculated based on the notional
amounts and other terms of the instruments, which relate to interest rates,
exchange rates or other indices.
The Company is exposed to credit losses in the event of non-performance
by counterparties to these financial instruments, but it does not expect any of
the counterparties to fail to meet its obligations. The credit exposure related
to these financial instruments is represented by the fair value of contracts
with a positive fair value at the reporting date, reduced by the effects of
master netting agreements. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position of the
program and its relative market position with each counterparty. The Company
also maintains industry-standard security agreements with the majority of its
counterparties which may require the Company or the counterparty to post
collateral if the value of these instruments falls below certain mark-to-market
thresholds. As of December 31, 1998, no collateral was required under these
agreements, and the Company does not expect to post collateral in the near
future.
43
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
INTEREST RATE RISK MANAGEMENT
American enters into interest rate swap contracts to effectively convert
a portion of its fixed-rate obligations to floating-rate obligations. These
agreements involve the exchange of amounts based on a floating interest rate for
amounts based on fixed interest rates over the life of the agreement without an
exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the obligation. The
related amount payable to or receivable from counterparties is included in
current liabilities or assets. The fair values of the swap agreements are not
recognized in the financial statements. Gains and losses on terminations of
interest rate swap agreements are deferred as an adjustment to the carrying
amount of the outstanding obligation and amortized as an adjustment to interest
expense related to the obligation over the remaining term of the original
contract life of the terminated swap agreement. In the event of the early
extinguishment of a designated obligation, any realized or unrealized gain or
loss from the swap would be recognized in income coincident with the
extinguishment.
The following table indicates the notional amounts and fair values of the
Company's interest rate swap agreements (in millions):
[Download Table]
December 31,
-----------------------------------------------
1998 1997
---------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Interest rate swap agreements $1,054 $ 38 $1,410 $ 12
The fair values represent the amount the Company would receive if the
agreements were terminated at December 31, 1998 and 1997, respectively.
At December 31, 1998, the weighted-average remaining life of the interest
rate swap agreements in effect was 4.2 years. The weighted-average floating
rates and fixed rates on the contracts outstanding were:
[Download Table]
December 31,
-------------------------------------
1998 1997
--------------- ---------------
Average floating rate 5.599% 5.844%
Average fixed rate 6.277% 5.901%
Floating rates are based primarily on LIBOR and may change significantly,
affecting future cash flows.
FUEL PRICE RISK MANAGEMENT
American enters into fuel swap and option contracts to protect against
increases in jet fuel prices. Under the fuel swap agreements, American receives
or makes payments based on the difference between a fixed price and a variable
price for certain fuel commodities. Under the fuel option agreements, American
pays a premium to cap prices at a fixed level. The changes in market value of
such agreements have a high correlation to the price changes of the fuel being
hedged. Gains or losses on fuel hedging agreements are recognized as a component
of fuel expense when the underlying fuel being hedged is used. Any premiums paid
to enter into option contracts are recorded as a prepaid expense and amortized
to fuel expense over the respective contract periods. Gains and losses on fuel
hedging agreements would be recognized immediately should the changes in the
market value of the agreements cease to have a high correlation to the price
changes of the fuel being hedged. At December 31, 1998, American had fuel
hedging agreements with broker-dealers on approximately two billion gallons of
fuel products, which represents approximately 48 percent of its expected 1999
fuel needs and approximately 19 percent of its expected 2000 fuel needs. The
fair value of the Company's fuel hedging agreements at December 31, 1998,
representing the amount the Company would pay to terminate the agreements,
totaled $108 million.
44
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
FOREIGN EXCHANGE RISK MANAGEMENT
To hedge against the risk of future exchange rate fluctuations on a
portion of American's foreign cash flows, the Company enters into various
currency put option agreements on a number of foreign currencies. The option
contracts are denominated in the same foreign currency in which the projected
foreign cash flows are expected to occur. These contracts are designated and
effective as hedges of probable quarterly foreign cash flows for various periods
through December 31, 1999, which otherwise would expose the Company to foreign
currency risk. Realized gains on the currency put option agreements are
recognized as a component of passenger revenues. At December 31, 1998, the
notional amount related to these options totaled approximately $597 million and
the fair value, representing the amount AMR would receive to terminate the
agreements, totaled approximately $10 million.
The Company has entered into Japanese yen currency exchange agreements to
effectively convert certain lease obligations into dollar-based obligations.
Changes in the value of the agreements due to exchange rate fluctuations are
offset by changes in the value of the yen-denominated lease obligations
translated at the current exchange rate. Discounts or premiums are accreted or
amortized as an adjustment to interest expense over the lives of the underlying
lease obligations. The related amounts due to or from counterparties are
included in other liabilities or other assets. The net fair values of the
Company's currency exchange agreements, representing the amount the Company
would pay to terminate the agreements, were (in millions):
[Enlarge/Download Table]
December 31,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Notional Notional
Amount Fair Value Amount Fair Value
-------------- --------------- -------------- --------------
Japanese yen 33.7 billion $ (5) 24.5 billion $ (15)
The exchange rates on the Japanese yen agreements range from 66.50 to
118.35 yen per U.S. dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt were estimated using
quoted market prices where available. For long-term debt not actively traded,
fair values were estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts and estimated fair values of the Company's
long-term debt, including current maturities, were (in millions):
[Download Table]
December 31,
-------------------------------------------
1998 1997
------------------ -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ -------- ------
8.05% - 10.62% notes $ 875 $ 973 $1,249 $1,372
Secured debt 890 1,013 660 766
9.0% - 10.20% debentures 437 531 437 540
6.0% - 7.10% bonds 176 189 176 194
Variable rate indebtedness 86 86 86 86
Other 20 20 35 36
------ ------ ------ ------
$2,484 $2,812 $2,643 $2,994
====== ====== ====== ======
All other financial instruments, except for the investment in Equant, are
either carried at fair value or their carrying value approximates fair value.
45
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is required to be adopted
in years beginning after June 15, 1999. SFAS 133 permits early adoption as of
the beginning of any fiscal quarter after its issuance. SFAS 133 will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company is currently evaluating the
impact of SFAS 133 to the Company's financial condition or results of
operations.
7. INCOME TAXES
The significant components of the income tax provision were (in
millions):
[Download Table]
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Current $ 546 $ 288 $ 296
Deferred 312 363 217
------------- ------------- -------------
$ 858 $ 651 $ 513
============= ============= =============
The income tax provision includes a federal income tax provision of $741
million, $566 million and $452 million and a state income tax provision of $93
million, $71 million and $53 million for the years ended December 31, 1998, 1997
and 1996, respectively.
The income tax provision differed from amounts computed at the statutory
federal income tax rate as follows (in millions):
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Statutory income tax provision $ 757 $ 568 $ 559
State income tax provision, net 60 46 35
Meal expense 19 21 18
Minority interest 14 12 1
Gain on sale of stock by subsidiary -- -- (174)
Change in valuation allowance (4) -- 67
Other, net 12 4 7
------------ ------------ ------------
Income tax provision $ 858 $ 651 $ 513
============ ============ ============
The change in valuation allowance in 1998 relates to the utilization of
foreign tax credits. The change in the valuation allowance in 1996 is primarily
attributable to the write-off of AMR's investment in Canadian Airlines
International Limited (Canadian) (see Note 14).
46
7. INCOME TAXES (CONTINUED)
The components of AMR's deferred tax assets and liabilities were (in
millions):
[Download Table]
December 31,
---------------------
1998 1997
------- -------
Deferred tax assets:
Postretirement benefits other than pensions $ 616 $ 580
Alternative minimum tax credit carryforwards 515 862
Rent expense 376 322
Frequent flyer obligation 258 232
Gains from lease transactions 223 234
Other 405 412
Valuation allowance (68) (72)
------- -------
Total deferred tax assets 2,325 2,570
------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization (3,097) (2,963)
Pensions (54) (94)
Other (189) (219)
------- -------
Total deferred tax liabilities (3,340) (3,276)
------- -------
Net deferred tax liability $(1,015) $ (706)
======= =======
At December 31, 1998, AMR had available for federal income tax purposes
approximately $515 million of alternative minimum tax credit carryforwards which
are available for an indefinite period.
Cash payments for income taxes were $560 million, $423 million and $194
million for 1998, 1997 and 1996, respectively.
8. COMMON AND PREFERRED STOCK
In April 1998, the Company's Board of Directors approved a two-for-one
stock split in the form of a stock dividend, subject to shareholder approval of
an amendment to the Company's Certificate of Incorporation to increase the
number of authorized common shares. On May 20, 1998, the Company's shareholders
approved the amendment, thereby increasing the total number of authorized shares
of all classes of stock to 770 million, of which 20 million are shares of
preferred stock (without par value) and 750 million are shares of common stock
($1 par value). The stock split was effective on June 9, 1998 for shareholders
of record on May 26, 1998. All prior period share and earnings per share amounts
have been restated to give effect to the stock split.
9. STOCK AWARDS AND OPTIONS
Under the 1998 Long Term Incentive Plan, as amended, officers and key
employees of AMR and its subsidiaries may be granted stock options, stock
appreciation rights, restricted stock, deferred stock, stock purchase rights,
other stock-based awards and/or performance-related awards, including cash
bonuses. The total number of common shares authorized for distribution under the
1998 Long Term Incentive Plan is 10,000,000 shares. The 1998 Long Term Incentive
Plan, the successor to the 1988 Long Term Incentive Plan which expired May 18,
1998, will terminate no later than May 21, 2008. Options granted under the 1988
and 1998 Long Term Incentive Plans (collectively, the Plans) are awarded with an
exercise price equal to the fair market value of the stock on date of grant,
become exercisable in equal annual installments over five years following the
date of grant and expire 10 years from the date of grant. Stock appreciation
rights may be granted in tandem with options awarded.
47
9. STOCK AWARDS AND OPTIONS (CONTINUED)
In 1998, 1997 and 1996, the total charge for stock compensation expense
included in wages, salaries and benefits expense was $65 million, $75 million
and $49 million, respectively. No compensation expense was recognized for stock
option grants under the Plans since the exercise price was the fair market value
of the underlying stock on the date of grant.
Stock option activity was:
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- ---------- ----------
Outstanding at January 1 3,506,774 $ 38.77 3,663,590 $ 33.59 4,645,560 $ 31.42
Granted 1,216,720 63.01 895,480 52.28 784,950 39.21
Exercised (470,810) 31.82 (985,776) 32.17 (1,161,600) 29.70
Canceled(1) (105,560) 42.34 (66,520) 33.82 (605,320) 31.48
--------- --------- ----------
Outstanding at December 31 4,147,124 $ 46.60 3,506,774 $ 38.77 3,663,590 $ 33.59
========= ========= ==========
(1) Includes 471,900 options canceled upon conversion to The Sabre Group
stock options for 1996.
The following table summarizes information about the stock options
outstanding at December 31, 1998:
[Download Table]
Weighted
Range of Number of Weighted Average Number of Average
Exercise Options Remaining Weighted Average Options Exercise
Prices Outstanding Life (years) Exercise Price Exercisable Price
--------- ----------- ---------------- ---------------- ----------- -----------
$22-$33 842,424 4.24 $ 30.11 731,564 $ 30.45
$34-$42 1,251,060 6.94 37.81 603,810 37.66
$43-$52 1,072,080 9.19 50.61 182,760 48.67
$58-$73 981,560 9.27 67.58 68,840 58.11
--------- ---------
4,147,124 7.50 $ 46.60 1,586,974 $ 36.49
========= =========
In May 1997, in conjunction with the labor agreement reached between
American and members of the APA, the Company established the Pilots Stock Option
Plan (The Pilot Plan). The Pilot Plan granted members of the APA the option to
purchase 11.5 million shares of AMR stock at $41.69 per share, $5 less than the
average fair market value of the stock on the date of grant, May 5, 1997. These
shares were exercisable immediately.
Pilot Plan option activity was:
[Download Table]
Year Ended December 31,
-----------------------------
1998 1997
----------- -----------
Outstanding at January 1 7,438,220 --
Granted -- 11,500,000
Exercised (1,646,839) (4,061,780)
----------- -----------
Outstanding at December 31 5,791,381 7,438,220
=========== ===========
The weighted-average grant date fair value of all stock option awards
granted during 1998, 1997 and 1996 was $21.15, $11.00 and $12.90, respectively.
48
9. STOCK AWARDS AND OPTIONS (CONTINUED)
Shares of deferred stock are awarded at no cost to officers and key
employees under the Plans' Career Equity Program and will be issued upon the
individual's retirement from AMR or, in certain circumstances, will vest on a
pro rata basis. Deferred stock activity was:
[Download Table]
Year Ended December 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
Outstanding at January 1 2,457,190 2,394,662 2,848,116
Granted 185,812 175,500 205,300
Issued (190,911) (67,340) (109,448)
Canceled(1) (50,559) (45,632) (549,306)
---------- ---------- ----------
Outstanding at December 31 2,401,532 2,457,190 2,394,662
========== ========== ==========
(1) Includes 420,800 shares canceled upon conversion to The Sabre Group
stock options and awards for 1996.
The weighted-average grant date fair value of career equity awards
granted during 1998, 1997 and 1996 was $57.77, $54.98 and $39.64, respectively.
A performance share plan was implemented in 1993 under the terms of which
shares of deferred stock are awarded at no cost to officers and key employees
under the Plans. The fair value of the performance shares granted is equal to
the market price of the Company's stock at the date of grant. The shares vest
over a three-year performance period based upon AMR's ratio of cash flow to
adjusted gross assets. Performance share activity was:
[Download Table]
Year Ended December 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
Outstanding at January 1 1,737,274 1,679,460 1,648,822
Granted 644,680 808,736 764,614
Issued (205,458) (190,766) (137,008)
Awards settled in cash (522,234) (513,064) (356,176)
Canceled(1) (88,646) (47,092) (240,792)
---------- ---------- ----------
Outstanding at December 31 1,565,616 1,737,274 1,679,460
========== ========== ==========
(1) Includes 181,102 shares canceled upon conversion to The Sabre Group
stock awards for 1996.
The weighted-average grant date fair value of performance share awards
granted during 1998, 1997 and 1996 was $62.06, $52.28 and $39.41, respectively.
There were approximately 21 million shares of AMR's common stock at
December 31, 1998 reserved for the issuance of stock upon the exercise of
options and the issuance of stock awards.
The Sabre Group has established the 1996 Long Term Incentive Plan (1996
Plan), whereby its officers and other key employees may be granted stock options
and other stock-based awards. Initially, 13 million shares of The Sabre Group's
Class A Common Stock (Sabre Common Stock) were authorized to be issued under the
1996 Plan. At December 31, 1998, approximately five million options for Sabre
Common Stock were outstanding under the 1996 Plan.
49
9. STOCK AWARDS AND OPTIONS (CONTINUED)
In January 1998, in connection with the information technology services
agreement executed between The Sabre Group and US Airways, The Sabre Group
granted two tranches of stock options to US Airways, each to acquire three
million shares of Sabre Common Stock. During certain periods, US Airways may
select an alternative vehicle of substantially equivalent value in place of
receiving stock. The first tranche of options is exercisable during the six
month period ending two years after the transfer of US Airways' information
technology assets, which occurred in January 1998, has an exercise price of $27
per share and is subject to a cap on share price of $90. The second tranche of
options is exercisable during the 10-year period beginning on the fifth
anniversary of the asset transfer date, has an exercise price of $27 per share
and is subject to a cap on share price of $127. During 1998, a long-term
liability and a related deferred asset equal to the number of options
outstanding multiplied by the difference between the exercise price of the
options and the market price of Sabre Common Stock were recorded. The asset and
liability are adjusted based on changes in the market price of Sabre Common
Stock. As of December 31, 1998, the liability relating to these options was $105
million. The deferred asset is being amortized over the 11-year non-cancelable
portion of the agreement.
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As required by SFAS 123, pro forma information
regarding net earnings and earnings per share has been determined as if the
Company and The Sabre Group had accounted for its employee stock options and
awards granted subsequent to December 31, 1994 using the fair value method
prescribed by SFAS 123. The fair value for the stock options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996: risk-free interest rates
ranging from 5.01% to 6.70%; dividend yields of 0%; expected stock volatility
ranging from 25.4% to 32.0%; and expected life of the options of 4.5 years for
all Plans, with the exception of The Pilot Plan which was 1.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because SFAS 123 is applicable only to options and stock-based awards granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999.
The Company's pro forma net earnings and earnings per share assuming the
Company had accounted for its employee stock options using the fair value method
would have resulted in 1998 net earnings of $1,311 million and basic and diluted
earnings per share of $7.76 and $7.51, respectively, and 1997 net earnings of
$960 million and basic and diluted earnings per share of $5.38 and $5.25,
respectively. The pro forma impact of SFAS 123 on the Company's 1996 net
earnings and earnings per share was not material.
10. RETIREMENT BENEFITS
Substantially all employees of American and employees of certain other
subsidiaries are eligible to participate in pension plans. The defined benefit
plans provide benefits for participating employees based on years of service and
average compensation for a specified period of time before retirement. Airline
pilots and flight engineers also participate in defined contribution plans for
which Company contributions are determined as a percentage of participant
compensation.
In October 1997, American spun off the portion of its defined benefit
pension plan applicable to employees of The Sabre Group to the Legacy Pension
Plan, a defined benefit plan established by The Sabre Group effective January 1,
1997. At the date of the spin-off, the net obligation attributable to The Sabre
Group employees participating in American's plan was approximately $20 million.
The Sabre Group also established The Sabre Group Retirement Plan (SGRP), a
defined contribution plan. Upon establishment, substantially all employees of
The Sabre Group under the age of 40 at December 31, 1996 and all new employees
began participating in the SGRP. Costs for the SGRP were $16 million and $11
million in 1998 and 1997, respectively.
50
10. RETIREMENT BENEFITS (CONTINUED)
In addition to pension benefits, other postretirement benefits, including
certain health care and life insurance benefits, are also provided to retired
employees. The amount of health care benefits is limited to lifetime maximums as
outlined in the plan. Substantially all employees of American and employees of
certain other subsidiaries may become eligible for these benefits if they
satisfy eligibility requirements during their working lives.
Certain employee groups make contributions toward funding a portion of
their retiree health care benefits during their working lives. AMR funds
benefits as incurred and makes contributions to match employee prefunding.
The following table provides a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended December
31, 1998 and 1997, and a statement of funded status as of December 31, 1998 and
1997 (in millions):
[Enlarge/Download Table]
Pension Benefits Other Benefits
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
Reconciliation of benefit obligation
Obligation at January 1 $ 5,825 $ 5,166 $ 1,398 $ 1,213
Service cost 224 189 57 48
Interest cost 430 403 103 95
Actuarial loss 330 475 81 109
Benefit payments (464) (408) (66) (67)
Settlements (16) -- -- --
------- ------- ------- -------
Obligation at December 31 $ 6,329 $ 5,825 $ 1,573 $ 1,398
======= ======= ======= =======
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 5,219 $ 4,617 $ 56 $ 39
Actual return on plan assets 858 977 5 8
Employer contributions 78 33 76 76
Benefit payments (464) (408) (66) (67)
Settlements (16) -- -- --
------- ------- ------- -------
Fair value of plan assets at December 31 $ 5,675 $ 5,219 $ 71 $ 56
======= ======= ======= =======
Funded status
Accumulated benefit obligation (ABO) $ 5,187 $ 4,859 $ 1,573 $ 1,398
Projected benefit obligation (PBO) 6,329 5,825 -- --
Fair value of assets 5,675 5,219 71 56
Funded status at December 31 (654) (606) (1,502) (1,342)
Unrecognized loss (gain) 709 788 (101) (179)
Unrecognized prior service cost 68 63 (46) (52)
Unrecognized transition asset (11) (20) -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost $ 112 $ 225 $(1,649) $(1,573)
======= ======= ======= =======
At December 31, 1998 and 1997, plan assets of approximately $111 million
and $92 million, respectively, were invested in shares of mutual funds managed
by a subsidiary of AMR.
51
10. RETIREMENT BENEFITS (CONTINUED)
The following tables provide the components of net periodic benefit cost
for the years ended December 31, 1998, 1997 and 1996 (in millions):
[Download Table]
Pension Benefits
-----------------------------
1998 1997 1996
----- ----- -----
Components of net periodic benefit cost
Defined benefit plans:
Service cost $ 224 $ 189 $ 204
Interest cost 430 403 375
Expected return on assets (486) (429) (422)
Amortization of:
Transition asset (11) (11) (11)
Prior service cost 4 4 4
Unrecognized net loss 24 27 16
Settlement loss 6 -- --
----- ----- -----
Net periodic benefit cost for defined benefit
plans 191 183 166
Defined contribution plans 174 153 132
----- ----- -----
Total $ 365 $ 336 $ 298
===== ===== =====
[Download Table]
Other Benefits
-----------------------------
1998 1997 1996
----- ----- -----
Components of net periodic benefit cost
Service cost $ 57 $ 48 $ 58
Interest cost 103 95 102
Expected return on assets (6) (4) (3)
Amortization of:
Prior service cost (5) (5) (5)
Unrecognized net gain (2) (9) --
----- ----- -----
Net periodic benefit cost $ 147 $ 125 $ 152
===== ===== =====
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 1998 and 1997 (in millions):
[Enlarge/Download Table]
Pension Benefits Other Benefits
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
Prepaid benefit cost $ 297 $ 377 $ -- $ --
Accrued benefit liability (185) (152) (1,649) (1,573)
Additional minimum liability (13) (11) -- --
Intangible asset 7 5 -- --
Accumulated other comprehensive income 6 6 -- --
------- ------- ------- -------
Net amount recognized $ 112 $ 225 $(1,649) $(1,573)
======= ======= ======= =======
52
10. RETIREMENT BENEFITS (CONTINUED)
The following assumptions were used by the Company in the measurement of
the benefit obligation as of December 31:
[Download Table]
Pension Benefits Other Benefits
---------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted-average assumptions
Discount rate 7.00% 7.25% 7.00% 7.25%
Salary scale 4.32 4.19 -- --
Expected return on plan assets 9.50 9.50 9.50 9.50
The assumed health care cost trend rate was five percent in 1998 and
1997, decreasing gradually to an ultimate rate of four percent by 2001.
A one percentage point change in the assumed health care cost trend rates
would have the following effects (in millions):
[Download Table]
One percent One percent
increase decrease
----------- -----------
Impact on 1998 service and interest cost $ 23 $ (24)
Impact on postretirement benefit obligation
as of December 31, 1998 $ 141 $(148)
53
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in millions, except per share amounts):
[Enlarge/Download Table]
Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
NUMERATOR:
Numerator for basic earnings per share
-earnings from continuing operations before
extraordinary loss $ 1,306 $ 973 $ 1,083
Effect of dilutive securities:
Interest upon assumed conversion of
convertible subordinated debentures, net
of tax -- -- 14(a)
Dividends upon assumed conversion of
convertible preferred stock -- -- 1(a)
------- ------- -------
-- -- 15
Numerator for diluted earnings per
share - earnings from continuing operations
before extraordinary loss $ 1,306 $ 973 $ 1,098
======= ======= =======
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 169 178 172
Effect of dilutive securities:
Convertible subordinated debentures -- -- 8
Convertible preferred stock -- -- 1
Employee options and shares 13 14 7
Assumed treasury shares purchased (7) (9) (4)
------- ------- -------
Dilutive potential common shares 6 5 12
Denominator for diluted earnings per share -
adjusted weighted-average shares 175 183 184
======= ======= =======
Basic earnings per share from continuing
operations before extraordinary loss $ 7.73 $ 5.45 $ 6.29
======= ======= =======
Diluted earnings per share from continuing
operations before extraordinary loss $ 7.48 $ 5.32 $ 5.95
======= ======= =======
(a) Through date of actual conversion
54
12. DISCONTINUED OPERATIONS
In September 1998, the Company announced plans to sell three of the
companies within the Management Services Group that accounted for a substantial
portion of that group's revenues and operating income: AMR Services, AMR Combs
and TeleService Resources. As of December 31, 1998, the Company had reached
agreements to sell all three companies and expects to complete the sales by the
end of the first quarter or early part of the second quarter of 1999. As a
result of the sales, the Company expects to record a significant gain during the
first quarter of 1999.
The results of operations for AMR Services, AMR Combs and TeleService
Resources have been reflected in the consolidated statements of operations as
discontinued operations. The amounts shown are net of income taxes of
approximately $6.7 million, $9.7 million and $14.8 million for 1998, 1997 and
1996, respectively. Revenues from the operations of AMR Services, AMR Combs and
TeleService Resources were $513 million, $517 million and $519 million for 1998,
1997 and 1996, respectively.
13. GAIN ON SALE OF STOCK BY SUBSIDIARY
During October 1996, The Sabre Group completed an initial public offering
of 23,230,000 shares of Sabre Common Stock, representing 17.8 percent of its
economic interest, at $27 per share for net proceeds of approximately $589
million. This transaction resulted in a reduction of the Company's economic
interest in The Sabre Group from 100 percent to 82.2 percent. In accordance with
the Company's policy of recognizing gains or losses on the sale of a
subsidiary's stock based on the difference between the offering price and the
Company's carrying amount of such stock, the Company recorded a $497 million
gain. The issuance of stock by The Sabre Group was not subject to federal income
taxes. In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," no income tax expense was recognized on the gain.
14. OTHER INCOME (EXPENSE) - MISCELLANEOUS
Other income (expense) - miscellaneous, net included the following (in
millions):
[Download Table]
Year Ended December 31,
-----------------------------
1998 1997 1996
----- ----- -----
Minority interest $ (40) $ (36) $ (2)
Canadian Airlines charges -- -- (251)
Litigation settlement/judgment 14 -- (21)
Other, net (20) 13 (12)
----- ----- -----
$ (46) $ (23) $(286)
===== ===== =====
During 1996, the Company determined that the decline in the value of its
investment in the cumulative mandatorily redeemable convertible preferred stock
of Canadian was not temporary and, in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," recorded a $192 million charge to write-off the investment.
Additionally, the Company recorded a charge of $59 million to write-off certain
deferred costs relating to the Company's agreement to provide a variety of
services to Canadian.
55
15. SEGMENT REPORTING
AMR's operations fall within two lines of business: the Airline Group and
The Sabre Group. The Airline Group consists primarily of American, one of the
largest scheduled passenger airlines and air freight carriers in the world, and
AMR Eagle Holding Corporation (AMR Eagle), a separate subsidiary of AMR. At
December 31, 1998, AMR Eagle owns two regional airlines which operate as
"American Eagle", and provide connecting service to American. The Sabre Group
provides electronic distribution of travel through its Sabre(R) computer
reservations system and information technology solutions to the travel and
transportation industries.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," and requires that a public company report annual and
interim financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The Company evaluates performance and allocates resources based upon
segment operating income, which is defined as income before interest, other
non-operating income and expense and income taxes. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies. The Company accounts for substantially all
intersegment transactions at amounts which approximate current market prices.
Financial information by reportable segment is as follows (in millions):
[Download Table]
Airline The Sabre
Group Group Total
------- --------- -------
December 31, 1998
Revenues from external customers $17,396 $ 1,732 $19,128
Intersegment revenues 53 574 627
Operating income 1,951 350 2,301
Depreciation and amortization expense 1,038 248 1,286
Capital expenditures 2,340 320 2,660
Segment assets 19,582 1,927 21,509
December 31, 1997
Revenues from external customers $16,856 $ 1,263 $18,119
Intersegment revenues 47 526 573
Operating income 1,569 313 1,882
Depreciation and amortization expense 1,038 185 1,223
Capital expenditures 1,139 218 1,357
Segment assets 18,708 1,504 20,212
December 31, 1996
Revenues from external customers $16,170 $ 1,125 $17,295
Intersegment revenues 41 500 541
Operating income 1,442 330 1,772
Depreciation and amortization expense 1,018 165 1,183
Capital expenditures 338 184 522
Segment assets 18,519 1,287 19,806
56
15. SEGMENT REPORTING (CONTINUED)
The following provides a reconciliation of reportable segment revenues,
operating income and assets to the Company's consolidated financial statement
totals (in millions):
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
Revenues
Total external revenues for reportable segments $ 19,128 $ 18,119 $ 17,295
Intersegment revenues for reportable segments 627 573 541
Other revenues (1) 119 95 102
Elimination of intersegment revenues (669) (603) (574)
-------- -------- --------
Total consolidated revenues $ 19,205 $ 18,184 $ 17,364
======== ======== ========
Operating income
Total operating income for reportable segments $ 2,301 $ 1,882 $ 1,772
Other operating income 37 25 35
-------- -------- --------
Total consolidated operating income $ 2,338 $ 1,907 $ 1,807
======== ======== ========
Assets
Total assets for reportable segments $ 21,509 $ 20,212 $ 19,806
Other assets 285 241 241
Unallocated amounts:
Income tax assets 509 406 404
-------- -------- --------
Total consolidated assets $ 22,303 $ 20,859 $ 20,451
======== ======== ========
(1) Revenues from segments below the quantitative threshold for
determining reportable segments consist primarily of revenues from
AMR Training Group, AMR Investment Services, Inc., Americas Ground
Services and Airline Management Services.
The Company's operating revenues by geographic region are summarized
below (in millions):
[Download Table]
Year Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
Domestic $13,546 $12,651 $11,979
Latin America 2,968 2,915 2,884
Europe 2,247 2,214 2,134
Pacific 444 404 367
------- ------- -------
Total consolidated revenues $19,205 $18,184 $17,364
======= ======= =======
The Company attributes operating revenues by geographic region based upon
the origin and destination of each flight segment for the Airline Group and
location of customer for The Sabre Group.
The Company's tangible assets consist primarily of flight equipment which
is mobile across geographic markets and, therefore, has not been allocated.
57
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1998 and 1997 (in
millions, except per share amounts):
[Download Table]
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1998 (*)
Operating revenues $ 4,634 $ 4,924 $ 5,046 $ 4,601
Operating income 548 724 732 334
Income from continuing operations 285 408 431 182
Net earnings 290 409 433 182
Earnings per common share:
Basic
From continuing operations 1.65 2.37 2.56 1.12
Net earnings 1.68 2.38 2.57 1.12
Diluted
From continuing operations 1.59 2.29 2.48 1.09
Net earnings 1.62 2.30 2.49 1.09
1997 (*)
Operating revenues $ 4,323 $ 4,614 $ 4,706 $ 4,541
Operating income 340 580 607 380
Income from continuing operations 146 297 322 208
Net earnings 152 302 323 208
Earnings per common share:
Basic
From continuing operations 0.81 1.63 1.83 1.20
Net earnings 0.84 1.66 1.83 1.20
Diluted
From continuing operations 0.79 1.60 1.78 1.16
Net earnings 0.82 1.63 1.78 1.16
(*) Results for 1997 and the first and second quarters of 1998 have been
restated for discontinued operations. The impact of the restated
amounts was not material to any given quarter.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of stockholders on May 19, 1999. Information concerning
the executive officers is included in Part I of this report on page 13.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of stockholders on May 19, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of stockholders on May 19, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of stockholders on May 19, 1999.
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and Independent Auditors'
Report are filed as part of this report:
[Download Table]
Page
----
Report of Independent Auditors 31
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 32-33
Consolidated Balance Sheets at December 31, 1998 and 1997 34-35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 36
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 37
Notes to Consolidated Financial Statements 38-58
(2) The following financial statement schedule and Independent
Auditors' Report are filed as part of this report:
[Download Table]
Page
----
Report of Independent Auditors 68
Schedule II Valuation and Qualifying Accounts and Reserves 69
Schedules not included have been omitted because they are not
applicable or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
(Where the amount of securities authorized to be issued under any
of AMR's long-term debt agreements does not exceed 10 percent of
AMR's assets, pursuant to paragraph (b)(4) of Item 601 of
Regulation S-K, in lieu of filing such as an exhibit, AMR hereby
agrees to furnish to the Commission upon request a copy of any
agreement with respect to such long-term debt.)
[Download Table]
EXHIBIT
-------
3.1 Restated Certificate of Incorporation of AMR, incorporated
by reference to AMR's Registration Statement on Form S-4,
file number 33-55191.
3.2 Bylaws of AMR, amended as of November 18, 1998.
10.1 Employment Agreement among AMR, American Airlines and
Robert L. Crandall, dated January 1, 1988, incorporated by
reference to Exhibit 10(t) to AMR's report on Form 10-Q for
the period ended March 31, 1988; amendments thereto
incorporated by reference to Exhibit 10(ff) to AMR's report
on Form 10-K for the year ended December 31, 1989, Exhibit
10(tt) to AMR's report on Form 10-K for the year ended
December 31, 1990, Exhibit 10(uu) to AMR's report on Form
10-Q for the period ended June 30, 1992, and Exhibit
10(ooo) to AMR's report on Form 10-Q for the period ended
March 31, 1995.
10.2 Amended and Restated Employment Agreement among AMR,
American Airlines and Robert L. Crandall, dated January 21,
1998, incorporated by reference to Exhibit 10.2 to AMR's
report on Form 10-K for the year ended December 31, 1997.
10.3 Compensation and Benefit Agreement relative to the
retirement of Robert L. Crandall, between AMR and Robert L.
Crandall, dated September 18, 1998.
10.4 Irrevocable Executive Trust Agreement, dated as of May 1,
1992, between AMR and Wachovia Bank of North Carolina N.A.,
incorporated by reference to Exhibit 10(vv) to AMR's report
on Form 10-K for the year ended December 31, 1992.
10.5 Deferred Compensation Agreement, dated April 14, 1973, as
amended March 1, 1975, between American and Robert L.
Crandall, incorporated by reference to Exhibit 10(c)(7) to
American's Registration Statement No. 2-76709.
10.6 Form of Executive's Termination Benefits Agreement
incorporated by reference to Exhibit 10(p) to AMR's report
on Form 10-K for the year ended December 31, 1985.
10.7 Management Severance Allowance, dated as of February 23,
1990, for levels 1-4 employees of American Airlines, Inc.,
incorporated by reference to Exhibit 10(oo) to AMR's report
on Form 10-K for the year ended December 31, 1989.
10.8 Management Severance Allowance, dated as of February 23,
1990, for level 5 and above employees of American Airlines,
Inc., incorporated by reference to Exhibit 10(pp) to AMR's
report on Form 10-K for the year ended December 31, 1989.
60
[Download Table]
10.9 Description of informal arrangement relating to deferral of
payment of directors' fees, incorporated by reference to
Exhibit 10(c)(11) to American's Registration Statement No.
2-76709.
10.10 Directors Stock Equivalent Purchase Plan, incorporated by
reference to Exhibit 10(gg) to AMR's report on Form 10-K
for the year ended December 31, 1989.
10.11 Directors Stock Incentive Plan dated May 18, 1994, as
amended, incorporated by reference to Exhibit 10.9 to AMR's
report on Form 10-K for the year ended December 31, 1996.
10.13 Deferred Compensation Agreement, dated as of December 27,
1995, between AMR and Howard P. Allen, incorporated by
reference to Exhibit 10(sss) to AMR's report on Form 10-K
for the year ended December 31, 1995.
10.14 Deferred Compensation Agreement, dated as of January 31,
1990, between AMR and Edward A. Brennan, incorporated by
reference to Exhibit 10(hh) to AMR's report on Form 10-K
for the year ended December 31, 1989.
10.15 Deferred Compensation Agreement, dated as of June 1, 1998,
between AMR and Edward A. Brennan.
10.16 Deferred Compensation Agreement, dated as of February 7,
1996, between AMR and Armando M. Codina, incorporated by
reference to Exhibit 10(ttt) to AMR's report on Form 10-K
for the year ended December 31, 1995.
10.17 Deferred Compensation Agreement, dated as of February 10,
1997, between AMR and Armando M. Codina, incorporated by
reference to Exhibit 10.13 to AMR's report on Form 10-K for
the year ended December 31, 1996.
10.18 Deferred Compensation Agreement, dated as of February 19,
1998, between AMR and Armando M. Codina, incorporated by
reference to Exhibit 10.15 to AMR's report on Form 10-K for
the year ended December 31, 1997.
10.19 Deferred Compensation Agreement, dated as of January 13,
1999, between AMR and Armando M. Codina.
10.20 Deferred Compensation Agreement, dated as of February 9,
1996, between AMR and Charles T. Fisher, III, incorporated
by reference to Exhibit 10(uuu) to AMR's report on Form
10-K for the year ended December 31, 1995.
10.21 Deferred Compensation Agreement, dated as of January 30,
1997, between AMR and Charles T. Fisher, III, incorporated
by reference to Exhibit 10.15 to AMR's report on Form 10-K
for the year ended December 31, 1996.
10.22 Deferred Compensation Agreement, dated as of February 19,
1998, between AMR and Charles T. Fisher, III, incorporated
by reference to Exhibit 10.18 to AMR's report on Form 10-K
for the year ended December 31, 1997.
10.23 Deferred Compensation Agreement, dated as of February 16,
1999, between AMR and Charles T. Fisher, III.
61
[Download Table]
10.24 Deferred Compensation Agreement, dated as of February 23,
1996, between AMR and Charles H. Pistor, Jr., incorporated
by reference to Exhibit 10(vvv) to AMR's report on Form
10-K for the year ended December 31, 1995.
10.25 Deferred Compensation Agreement, dated as of January 30,
1997, between AMR and Charles H. Pistor, Jr., incorporated
by reference to Exhibit 10.17 to AMR's report on Form 10-K
for the year ended December 31, 1996.
10.26 Deferred Compensation Agreement, dated as of February 19,
1998, between AMR and Charles H. Pistor, Jr., incorporated
by reference to Exhibit 10.21 to AMR's report on Form 10-K
for the year ended December 31, 1997.
10.27 Deferred Compensation Agreement, dated as of January 7,
1999, between AMR and Charles H. Pistor, Jr.
10.28 Deferred Compensation Agreement, dated as of July 16, 1997,
between AMR and Judith Rodin, incorporated by reference to
Exhibit 10.22 to AMR's report on Form 10-K for the year
ended December 31, 1997.
10.29 Deferred Compensation Agreement, dated as of February 19,
1998, between AMR and Judith Rodin, incorporated by
reference to Exhibit 10.23 to AMR's report on Form 10-K for
the year ended December 31, 1997.
10.30 Deferred Compensation Agreement, dated as of January 7,
1999, between AMR and Judith Rodin.
10.31 Description of American's Split Dollar Insurance Program,
dated December 28, 1977, incorporated by reference to
Exhibit 10(c)(1) to American's Registration Statement No.
2-76709.
10.32 AMR Corporation 1988 Long-Term Incentive Plan, incorporated
by reference to Exhibit 10(t) to AMR's report on Form 10-K
for the year ended December 31, 1988.
10.33 Amendment to AMR's 1988 Long-term Incentive Plan dated May
18, 1994, incorporated by reference to Exhibit A to AMR's
definitive proxy statement with respect to the annual
meeting of stockholders held on May 18, 1994.
10.34 AMR Corporation 1998 Long-Term Incentive Plan, as amended.
10.35 Form of Stock Option Agreement for Corporate Officers under
the AMR 1988 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10(rr) to AMR's report on Form 10-K
for the year ended December 31, 1990.
10.36 Current form of Stock Option Agreement under the AMR 1988
Long-Term Incentive Plan, incorporated by reference to
Exhibit 10.28 to AMR's report on Form 10-K for the year
ended December 31, 1997.
10.37 Current form of Stock Option Agreement under the AMR 1998
Long-Term Incentive.
10.38 Form of Career Equity Program Agreement, incorporated by
reference to Exhibit 10(nnn) to AMR's report on Form 10-K
for the year ended December 31, 1994.
10.39 Current Form of Career Equity Program Deferred Stock Award
Agreement for Corporate Officers under the AMR 1988
Long-Term Incentive Plan, incorporated by reference to
Exhibit 10.30 to AMR's report on Form 10-K for the year
ended December 31, 1997.
62
[Download Table]
10.40 Current form of Career Equity Program Deferred Stock Award
Agreement for non-officers under the AMR 1988 Long-Term
Incentive Plan, incorporated by reference to Exhibit 10.31
to AMR's report on Form 10-K for the year ended December
31, 1997.
10.41 Current Form of Career Equity Program Deferred Stock Award
Agreement for Corporate Officers under the AMR 1998
Long-Term Incentive Plan.
10.42 Current form of Career Equity Program Deferred Stock Award
Agreement for non-officers under the AMR 1998 Long-Term
Incentive Plan.
10.42(a) Current form of Career Equity Program Deferred Stock
Award Agreement for Senior Officers under the AMR 1998
Long-Term Incentive Plan.
10.43 Form of Guaranty to Career Equity Program under the AMR
1988 Long-Term Incentive Plan, incorporated by reference to
Exhibit 10(ccc) to AMR's report on Form 10-K for the year
ended December 31, 1993.
10.44 Performance Share Program for the years 1994 to 1996 under
the 1988 Long-term Incentive Program, incorporated by
reference to Exhibit 10(lll) to AMR's report on Form 10-K
for the year ended December 31, 1994.
10.45 Performance Share Program for the years 1995 to 1997 under
the 1988 Long-term Incentive Program, incorporated by
reference to Exhibit 10(ooo) to AMR's report on Form 10-K
for the year ended December 31, 1995.
10.46 Performance Share Program for the years 1996 to 1998 under
the 1988 Long-term Incentive Program, incorporated by
reference to Exhibit 10.26 to AMR's report on Form 10-K for
the year ended December 31, 1996.
10.47 Performance Share Program for the years 1997 to 1999 under
the 1988 Long-term Incentive Program, incorporated by
reference to Exhibit 10.27 to AMR's report on Form 10-K for
the year ended December 31, 1996.
10.48 Form of Performance Share Program for the years 1997 to
1999 under the 1988 Long-term Incentive Program,
incorporated by reference to Exhibit 10.37 to AMR's report
on Form 10-K for the year ended December 31, 1997.
10.49 Performance Share Program for the years 1998 to 2000 under
the 1988 Long-term Incentive Program, incorporated by
reference to Exhibit 10.38 to AMR's report on Form 10-K for
the year ended December 31, 1997.
10.50 Performance Share Program for the years 1999 to 2001 under
the 1998 Long-term Incentive Program
10.51 American Airlines, Inc. Supplemental Executive Retirement
Program, as amended January 1997, incorporated by reference
to Exhibit 10.28 to AMR's report on Form 10-K for the year
ended December 31, 1996.
10.52 AMR Corporation 1987 Executive Deferral Plan, as amended
through 1999.
10.53 American Airlines, Inc. 1996 Employee Profit Sharing Plan,
incorporated by reference to Exhibit 10.29 to AMR's report
on Form 10-K for the year ended December 31, 1996.
10.54 American Airlines, Inc. 1997 Employee Profit Sharing Plan,
incorporated by reference to Exhibit 10.30 to AMR's report
on Form 10-K for the year ended December 31, 1996.
63
[Download Table]
10.55 American Airlines, Inc. 1998 Employee Profit Sharing Plan,
incorporated by reference to Exhibit 10.43 to AMR's report
on Form 10-K for the year ended December 31, 1997.
10.56 American Airlines, Inc. 1999 Employee Profit Sharing Plan.
10.57 American Airlines, Inc. 1996 Incentive Compensation Plan
for Officers and Key Employees, incorporated by reference
to Exhibit 10(qqq) to AMR's report on Form 10-K for the
year ended December 31, 1995.
10.58 American Airlines, Inc. 1997 Incentive Compensation Plan
for Officers and Key Employees, incorporated by reference
to Exhibit 10.32 to AMR's report on Form 10-K for the year
ended December 31, 1996.
10.59 American Airlines, Inc. 1998 Incentive Compensation Plan
for Officers and Key Employees, incorporated by reference
to Exhibit 10.46 to AMR's report on Form 10-K for the year
ended December 31, 1997.
10.60 American Airlines, Inc. 1999 Incentive Compensation Plan
for Officers and Key Employees.
10.61 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Gerard J.
Arpey, dated May 21, 1998.
10.62 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Robert W.
Baker, dated May 21, 1998.
10.63 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Peter M.
Bowler, dated May 21, 1998.
10.64 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Donald J.
Carty, dated May 21, 1998.
10.65 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Peter J.
Dolara, dated May 21, 1998.
10.66 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Daniel P.
Garton, dated May 21, 1998.
10.67 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Michael W.
Gunn, dated May 21, 1998.
10.68 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Thomas J.
Kiernan, dated May 21, 1998.
10.69 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and David L.
Kruse, dated May 21, 1998.
10.70 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Charles D.
MarLett, dated May 21, 1998.
10.71 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Anne H.
McNamara, dated May 21, 1998.
10.72 Aircraft Sales Agreement by and between American Airlines,
Inc. and Federal Express Corporation, dated April 7, 1995,
incorporated by reference to Exhibit 10(rrr) to AMR's
report on Form 10-K for the year ended December 31, 1995.
Confidential treatment was granted as to a portion of this
document.
64
[Download Table]
10.73 Aircraft Purchase Agreement by and between American
Airlines, Inc. and The Boeing Company, dated October 31,
1997, incorporated by reference to Exhibit 10.48 to AMR's
report on Form 10-K for the year ended December 31, 1997.
Confidential treatment was granted as to a portion of this
document.
10.74 Aircraft Purchase Agreement by and between AMR Eagle
Holding Corporation and Bombardier Inc., dated January 31,
1998, incorporated by reference to Exhibit 10.49 to AMR's
report on Form 10-K for the year ended December 31, 1997.
Confidential treatment was granted as to a portion of this
document.
10.75 Aircraft Purchase Agreement by and between AMR Eagle, Inc.
and Embraer-Empresa Brasileira de Aeronautica S.A., dated
December 22, 1997, incorporated by reference to Exhibit
10.50 to AMR's report on Form 10-K for the year ended
December 31, 1997. Confidential treatment was granted as to
a portion of this document.
10.76 Aircraft Purchase Agreement by and between AMR Eagle
Holding Corporation and Embraer-Empresa Brasileira de
Aeronautica S.A., dated September 30, 1998. Confidential
treatment has been requested as to a portion of this
document.
10.77 The Sabre Group, Inc. Long-Term Incentive Plan,
incorporated by reference to Exhibit 10.25 to The Sabre
Group Holdings, Inc.'s Registration Statement on Form S-1,
file number 333-09747.
10.78 The Sabre Group, Inc. Directors' Stock Incentive Plan,
incorporated by reference to Exhibit 10.26 to The Sabre
Group Holdings, Inc.'s Registration Statement on Form S-1,
file number 333-09747.
10.79 Form of Executive Termination Benefits Agreement for The
Sabre Group, Inc., incorporated by reference to Exhibit
10.27 to The Sabre Group Holdings, Inc.'s Registration
Statement on Form S-1, file no. 333-09747.
12 Computation of ratio of earnings to fixed charges for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998
21 Significant subsidiaries of the registrant as of December
31, 1998.
23 Consent of Independent Auditors.
27.1 Financial Data Schedule as of December 31, 1998.
27.2 Restated Financial Data Schedule as of December 31, 1997.
27.3 Restated Financial Data Schedule as of December 31, 1996.
65
(b) Reports on Form 8-K:
On October 22, 1998, AMR filed a report on Form 8-K relative to a press
release issued to report the Company's third quarter 1998 earnings and
to announce that the Company's board of directors authorized management
to repurchase additional shares of the Company's outstanding common
stock.
On November 19, 1998, AMR filed a report on Form 8-K relative to a press
release issued by American Airlines, Inc. to announce that American Airlines,
Inc. has signed a definitive merger agreement with Reno Air, Inc. to acquire
Reno Air, Inc. for a total cash consideration of $124 million.
On January 21, 1999, AMR filed a report on Form 8-K relative to a press
release issued to report the Company's fourth quarter and full year 1998
earnings.
On February 18, 1999, AMR filed a report on Form 8-K relative to a press
release issued by American Airlines, Inc. to report certain of the estimated
damages it had suffered as a consequence of the illegal job actions of the
Allied Pilots Association.
On February 24, 1999, AMR filed a report on Form 8-K to announce the
completion of the merger of American Airlines, Inc. and Reno Air, Inc.
On March 18, 1999, AMR filed a report on Form 8-K relative to a press
release issued to announce that the Company's board of directors has authorized
management to repurchase up to an additional $500 million of its outstanding
common stock and to report the estimated pre-tax earnings impact of the Allied
Pilots Association illegal job action during the first quarter of 1999.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMR CORPORATION
/s/ Donald J. Carty
-------------------------------------------------
Donald J. Carty
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard J. Arpey
-------------------------------------------------
Gerard J. Arpey
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates noted:
Directors:
[Download Table]
/s/ David L. Boren /s/ Ann D. McLaughlin
--------------------------------------- ---------------------------------------
David L. Boren Ann D. McLaughlin
/s/ Edward A. Brennan /s/ Charles H. Pistor, Jr.
--------------------------------------- ---------------------------------------
Edward A. Brennan Charles H. Pistor, Jr.
/s/ Armando M. Codina /s/ Joe M. Rodgers
--------------------------------------- ---------------------------------------
Armando M. Codina Joe M. Rodgers
/s/ Earl G. Graves /s/ Judith Rodin
--------------------------------------- ---------------------------------------
Earl G. Graves Judith Rodin
/s/ Dee J. Kelly /s/ Maurice Segall
--------------------------------------- ---------------------------------------
Dee J. Kelly Maurice Segall
Date: March 19, 1999
67
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AMR Corporation
We have audited the consolidated financial statements of AMR Corporation as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, and have issued our report thereon dated January 18, 1999,
except for the last paragraph of Note 2 and the last paragraph of Note 3, for
which the date is February 22, 1999. Our audits also included Schedule II -
Valuation and Qualifying Accounts and Reserves. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this schedule based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
2121 San Jacinto
Dallas, Texas 75201
January 18, 1999, except for the last
paragraph of Note 2 and the
last paragraph of Note 3, for
which the date is February 22, 1999.
68
AMR CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
[Enlarge/Download Table]
INCREASES SALES,
BALANCE CHARGED TO WRITE- RETIRE- BALANCE
AT INCOME OFFS MENTS AT
BEGINNING STATEMENT (NET OF AND END OF
OF YEAR ACCOUNTS PAYMENTS RECOVERIES) TRANSFERS YEAR
--------- ---------- -------- ----------- --------- -------
YEAR ENDED DECEMBER 31, 1998
Allowance for
obsolescence of inventories $203 $ 40 $ -- $ -- $(29) $214
Allowance for
uncollectible accounts 18 24 -- (11) -- 31
Booking fee cancellation
reserve 15 3 -- -- -- 18
Reserves for environmental
remediation costs 14 12 (3) -- -- 23
YEAR ENDED DECEMBER 31, 1997
Allowance for
obsolescence of inventories 212 36 -- -- (45) 203
Allowance for
uncollectible accounts 11 23 -- (16) -- 18
Booking fee cancellation
reserve 14 1 -- -- -- 15
Reserves for environmental
remediation costs 18 -- (4) -- -- 14
YEAR ENDED DECEMBER 31, 1996
Allowance for
obsolescence of inventories 249 23 -- -- (60) 212
Allowance for
uncollectible accounts 16 17 -- (22) -- 11
Booking fee cancellation
reserve 12 2 -- -- -- 14
Reserves for environmental
remediation costs 21 3 (6) -- -- 18
69
INDEX TO EXHIBITS
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
3.2 Bylaws of AMR, amended as of November 18, 1998.
10.3 Compensation and Benefit Agreement relative to the
retirement of Robert L. Crandall, between AMR and Robert L.
Crandall, dated September 18, 1998.
10.15 Deferred Compensation Agreement, dated as of June 1, 1998,
between AMR and Edward A. Brennan.
10.19 Deferred Compensation Agreement, dated as of January 13,
1999, between AMR and Armando M. Codina.
10.23 Deferred Compensation Agreement, dated as of February 16,
1999, between AMR and Charles T. Fisher, III.
10.27 Deferred Compensation Agreement, dated as of January 7,
1999, between AMR and Charles H. Pistor, Jr.
10.30 Deferred Compensation Agreement, dated as of January 7,
1999, between AMR and Judith Rodin.
10.34 AMR Corporation 1998 Long-Term Incentive Plan, as amended.
10.37 Current form of Stock Option Agreement under the AMR 1998
Long-Term Incentive.
10.41 Current Form of Career Equity Program Deferred Stock Award
Agreement for Corporate Officers under the AMR 1998
Long-Term Incentive Plan.
10.42 Current form of Career Equity Program Deferred Stock Award
Agreement for non-officers under the AMR 1998 Long-Term
Incentive Plan.
10.42(a) Current form of Career Equity Program Deferred Stock
Award Agreement for Senior Officers under the AMR 1998
Long-Term Incentive Plan.
10.50 Performance Share Program for the years 1999 to 2001 under
the 1998 Long-term Incentive Program
10.52 AMR Corporation 1987 Executive Deferral Plan, as amended
through 1999.
[Download Table]
10.56 American Airlines, Inc. 1999 Employee Profit Sharing Plan.
10.60 American Airlines, Inc. 1999 Incentive Compensation Plan
for Officers and Key Employees.
10.61 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Gerard J.
Arpey, dated May 21, 1998.
10.62 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Robert W.
Baker, dated May 21, 1998.
10.63 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Peter M.
Bowler, dated May 21, 1998.
10.64 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Donald J.
Carty, dated May 21, 1998.
10.65 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Peter J.
Dolara, dated May 21, 1998.
10.66 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Daniel P.
Garton, dated May 21, 1998.
10.67 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Michael W.
Gunn, dated May 21, 1998.
10.68 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Thomas J.
Kiernan, dated May 21, 1998.
10.69 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and David L.
Kruse, dated May 21, 1998.
10.70 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Charles D.
MarLett, dated May 21, 1998.
10.71 Amended and Restated Executive Termination Benefits
Agreement between AMR, American Airlines and Anne H.
McNamara, dated May 21, 1998.
[Download Table]
10.76 Aircraft Purchase Agreement by and between AMR Eagle
Holding Corporation and Embraer-Empresa Brasileira de
Aeronautica S.A., dated September 30, 1998. Confidential
treatment has been requested as to a portion of this
document.
12 Computation of ratio of earnings to fixed charges for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998
21 Significant subsidiaries of the registrant as of December
31, 1998.
23 Consent of Independent Auditors.
27.1 Financial Data Schedule as of December 31, 1998.
27.2 Restated Financial Data Schedule as of December 31, 1997.
27.3 Restated Financial Data Schedule as of December 31, 1996.
Dates Referenced Herein and Documents Incorporated by Reference
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