<DOCUMENT>
<TYPE>10-K/A
<SEQUENCE>1
<FILENAME>ar0510ka.txt
<DESCRIPTION>AMR CORPORATION 10K/A
<TEXT>
United States
Securities and Exchange Commission
Washington, D.C. 20549
___________________________
Form 10-K/A
(Amendment No. 1)
x Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2005
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-8400
AMR Corporation
(Exact name of registrant as specified in its charter)
Delaware 75-1825172
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal executive offices, including zip code)
(817) 963-1234
(Registrant's telephone number, including area code)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, $1 par value per share New York Stock Exchange
9.00% Debentures due 2016 New York Stock Exchange
7.875% Public Income Notes due 2039 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
x Yes No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes x No
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. x Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer" and "large accelerated filer" in
Rule 12b-2 of the Exchange Act.
x Large Accelerated Filer Accelerated Filer Non-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes x No
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 30, 2005, was approximately $2.0 billion.
As of February 17, 2006, 186,117,892 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 17, 2006.
EXPLANATORY NOTE
In response to comments raised by the Staff of the Securities and
Exchange Commission, this Form 10-K/A (Amendment No. 1) is being filed
by AMR Corporation (the Company) to supplement the Company's
description of its decision to change the depreciable lives of certain
of its aircraft types in Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) in the Form 10-K
for the year ended December 31, 2005 that was originally filed with
the Securities and Exchange Commission on February 24, 2006.
As the amendment only relates to Item 7, MD&A, the previously issued
consolidated financial statements and footnotes thereto are unchanged.
No attempt has been made in this Form 10-K/A to modify or update
disclosures in the original report on Form 10-K (original Form 10-K)
except as required to address the additional description of the change
in depreciable lives. This Form 10-K/A does not reflect events
occurring after the filing of the original Form 10-K or modify or
update any related disclosures. Information not affected by the
amendment is unchanged and reflects the disclosure made at the time of
the filing of the original Form 10-K with the Securities and Exchange
Commission on February 24, 2006. Accordingly, this Form 10-K/A should
be read in conjunction with the original Form 10-K and the Company's
filings made with the Securities and Exchange Commission subsequent to
the filing of the original Form 10-K, including any amendments to
those filings.
In accordance with Rule 12b-15 promulgated under the Securities and
Exchange Act of 1934, as amended, the complete text of Item 7, MD&A,
is set forth herein, including those portions of the text that have
not been amended from that set forth in the original Form 10-K. The
only changes to the text in Item 7 of the original Form 10-K are as
follows:
- The paragraph under Results of Operations (page 33 of the
original Form 10-K) was amended to detail the location of additional
description related to the change in depreciable lives of the
Company's aircraft.
- A paragraph was added to Result of Operations (page 33 of the
original Form 10-K).
- Three paragraphs were added to the Critical Accounting Policies
discussion of Long-lived assets (page 40 of the original Form 10-K).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
The discussions under Business, Risk Factors, Properties and Legal
Proceedings and the following discussions under Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative Disclosures about Market
Risk 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," "indicates,"
"believes," "forecast," "guidance," "outlook," "may," "will,"
"should," and similar expressions are intended to identify forward-
looking statements. Forward-looking statements include, without
limitation, the Company's expectations concerning operations and
financial conditions, including changes in capacity, revenues, and
costs, future financing plans and needs, overall economic conditions,
plans and objectives for future operations, and the impact on the
Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other
forward-looking statements include statements which do not relate
solely to historical facts, such as, without limitation, statements
which discuss the possible future effects of current known trends or
uncertainties, or which indicate that the future effects of known
trends or uncertainties cannot be predicted, guaranteed or assured.
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. The Risk Factors listed in Item 1A, in
addition to other possible factors not listed, could cause the
Company's actual results to differ materially from historical results
and from those expressed in forward-looking statements.
Overview
The Company has incurred very large operating and net losses during
the past five years, as shown in the following table:
Year ended December 31,
(in millions) 2005 2004 2003 2002 2001
Operating loss $ (93) $(144) $ (844) $(3,300) $(2,470)
Net loss (861) (761) (1,228) (3,511) (1,762)
These losses reflect, among other things, a substantial decrease in
the Company's revenues in 2001 and 2002. This revenue decrease was
primarily driven by (i) a steep fall-off in the demand for air travel,
particularly business travel, primarily caused by weakness in the U.S.
economy, (ii) reduced pricing power, resulting mainly from greater
cost sensitivity on the part of travelers (especially business
travelers), increasing competition from LCCs, and the use of the
Internet and (iii) the aftermath of the Terrorist Attacks, which
accelerated and exacerbated the trend of decreased demand and reduced
industry revenues. Subsequent to 2002, passenger traffic significantly
improved, reflecting a general economic improvement. In 2005,
mainline passenger load factor increased 3.8 points year-over-year to
78.6 percent. In addition, mainline passenger revenue yield began
rebounding in 2005 and increased 4.0 percent year-over-year. However,
passenger revenue yield remains depressed by historical standards.
The Company believes this depressed passenger yield is the result of
its reduced pricing power resulting from the factors listed in clause
(ii) above, and other factors, which the Company believes will persist
indefinitely and possibly permanently.
1
The Company's 2004 and 2005 financial results were also adversely
affected by significant increases in the price of jet fuel. The
average price per gallon of fuel increased 33.9 cents from 2003 to
2004 and 51.9 cents from 2004 to 2005. These price increases
negatively impacted fuel expense by $1.1 billion and $1.7 billion in
2004 and 2005, respectively. Continuing high fuel prices, additional
increases in the price of fuel, and/or disruptions in the supply of
fuel, would further adversely affect the Company's financial condition
and its results of operations.
In response to the challenges faced by the Company, during the past
five years the Company has implemented several restructuring and other
initiatives:
- Following the Terrorist Attacks, the Company reduced its
operating schedule by approximately 20 percent and reduced its
workforce by approximately 20,000 jobs.
- In 2002, the Company announced a series of initiatives to reduce
its annual costs by $2 billion. These initiatives involved: (i)
scheduling efficiencies, (ii) fleet simplification, (iii) streamlined
customer interaction, (iv) distribution modifications, (v) in-flight
product changes, (vi) operational changes and (vii)
headquarters/administration efficiencies. As a result of these
initiatives, the Company reduced an estimated 7,000 jobs by March
2003.
- In February 2003, American asked its employees for approximately
$1.8 billion in annual savings through a combination of changes in
wages, benefits and work rules. In April 2003, American reached
agreements with its three unions (the Labor Agreements) and also
implemented various changes in the pay plans and benefits for non-
unionized personnel, including officers and other management (the
Management Reductions). The Labor Agreements and Management Reductions
resulted in an estimated $1.8 billion in annual savings and included a
workforce reduction of approximately 9,300 jobs. In addition, the
Company and American reached concessionary agreements with certain
vendors, lessors, lenders and suppliers (collectively, the Vendors,
and the agreements, the Vendor Agreements), resulting in an estimated
$200 million in annual cost savings. Generally, under the terms of
these Vendor Agreements, the Company or American received the benefit
of lower rates and charges for certain goods and services, and more
favorable rent and financing terms with respect to certain of its
aircraft.
- Subsequent to the April 2003 Labor Agreements and Management
Reductions, the Company announced the Turnaround Plan. The Turnaround
Plan is the Company's strategic framework for returning to sustained
profitability and emphasizes: (i) lower costs, (ii) an increased focus
on what customers' truly value and are prepared to pay for, (iii)
increased union and employee involvement in the operation of the
Company and (iv) the need for a more sound balance sheet and financial
structure.
- Subsequent to the announcement of the Turnaround Plan, the
Company has worked with its unions and employees to identify and
implement additional initiatives designed to increase efficiencies and
revenues and reduce costs. These initiatives included: (i) the return
of under-used gate space and the consolidation of terminal space, (ii)
the de-peaking of its hub at Miami, the reduction in the size of its
St. Louis hub and the simplification of its domestic operations, (iii)
the acceleration of the retirement of certain aircraft and the
cancellation or deferral of aircraft deliveries, (iv) the improvement
of aircraft utilization across its fleet and an increase in seating
density on certain fleet types, (v) the sale of certain non-core
assets, (vi) the expansion of its international network, where the
Company believes that higher revenue generating opportunities
currently exist, (vii) the implementation of an on-board food purchase
program and new fees for ticketing and baggage services, (viii) lower
distribution costs, (ix) the implementation of fuel conservation
initiatives, (x) the increase in third-party maintenance contracts
obtained by the Company's Maintenance and Engineering group, (xi)
upgrading of flight navigation systems to provide more direct routings
and (xii) numerous other initiatives.
- As part of its effort to build greater employee involvement, the
Company has sought to make its labor unions and its employees its
business partners in working for continuous improvement under the
Turnaround Plan. Among other things, the senior management of the
Company meets regularly with union officials to discuss the Company's
financial results as well as the competitive landscape. These
discussions include (i) the Company's own cost reduction and revenue
enhancement initiatives, (ii) a review of initiatives, in-place or
contemplated, at other airlines and the impact of those initiatives on
the Company's competitive position, and (iii) benchmarking the
Company's revenues and costs against what would be considered "best in
class" (the Company's Performance Leadership Initiative).
2
These initiatives have significantly improved the Company's cost
structure and resulted in the Company achieving what the Company
believes to be the lowest unit costs of the traditional carriers in
2004. However, a significant number of the Company's competitors have
recently reorganized or are reorganizing, including under the
protection of Chapter 11 of the Bankruptcy Code, including Delta,
United, US Airways and Northwest. These competitors are significantly
reducing their cost structures through bankruptcy, resulting in the
Company's cost structure once again becoming less competitive.
The Company's ability to become profitable and its ability to continue
to fund its obligations on an ongoing basis will depend on a number of
factors, many of which are largely beyond the Company's control. Some
of the risk factors that affect the Company's business and financial
results are discussed in the Risk Factors listed in Item 1A. As the
Company seeks to improve its financial condition, it must continue to
take steps to generate additional revenues and significantly reduce
its costs. Although the Company has a number of initiatives underway
to address its cost and revenue challenges, the ultimate success of
these initiatives is not known at this time and cannot be assured. It
will be very difficult, absent continued restructuring of its
operations, for the Company to continue to fund its obligations on an
ongoing basis, or to become profitable, if the overall industry
revenue environment does not continue to improve and fuel prices
remain at historically high levels for an extended period.
3
LIQUIDITY AND CAPITAL RESOURCES
Cash, Short-Term Investments and Restricted Assets
At December 31, 2005, the Company had $3.8 billion in unrestricted
cash and short-term investments and $510 million in restricted cash
and short-term investments.
Significant Indebtedness and Future Financing
Substantial indebtedness is a significant risk to the Company as
discussed in the Risk Factors listed in Item 1A. During 2003, 2004
and 2005, in addition to refinancing its Credit Facility and certain
debt with an institutional investor (see Note 6 to the consolidated
financial statements), the Company raised an aggregate of
approximately $4.5 billion of financing to fund capital commitments
(mainly for aircraft and ground properties) and operating losses and
to bolster its liquidity. As of the date of this Form 10-K, the
Company believes that it should have sufficient liquidity to fund its
operations for the foreseeable future, including repayment of debt and
capital leases, capital expenditures and other contractual
obligations. However, to maintain sufficient liquidity as the Company
continues to implement its restructuring and cost reduction
initiatives, and because the Company has significant debt, lease and
other obligations in the next several years, as well as substantial
pension funding obligations (refer to Contractual Obligations in this
Item 7), the Company will need access to additional funding. The
Company's possible financing sources primarily include: (i) a limited
amount of additional secured aircraft debt (a very large majority of
the Company's owned aircraft, including virtually all of the Company's
Section 1110-eligible aircraft, are encumbered) or sale-leaseback
transactions involving owned aircraft, (ii) debt secured by new
aircraft deliveries, (iii) debt secured by other assets, (iv)
securitization of future operating receipts, (v) the sale or
monetization of certain assets, (vi) unsecured debt and (vii) equity
and/or equity-like securities. However, the availability and level of
these financing sources cannot be assured, particularly in light of
the Company's and American's recent financial results, substantial
indebtedness, reduced credit ratings, high fuel prices, historically
weak revenues and the financial difficulties being experienced in the
airline industry. The inability of the Company to obtain additional
funding on acceptable terms would have a material adverse impact on
the ability of the Company to sustain its operations over the long-
term.
Credit Ratings
AMR's and American's credit ratings are significantly below investment
grade. Additional reductions in AMR's or American's credit ratings
could further increase its borrowing or other costs and further
restrict the availability of future financing.
Credit Facility Covenants
American has a credit facility consisting of a fully drawn $540
million senior secured revolving credit facility, with a final
maturity on June 17, 2009, and a fully drawn $248 million term loan
facility, with a final maturity on December 17, 2010 (the Revolving
Facility and the Term Loan Facility, respectively, and collectively,
the Credit Facility). American's obligations under the Credit Facility
are guaranteed by AMR.
4
The Credit Facility contains a covenant (the Liquidity Covenant)
requiring American to maintain, as defined, unrestricted cash,
unencumbered short term investments and amounts available for drawing
under committed revolving credit facilities of not less than $1.25
billion for each quarterly period through the remaining life of the
credit facility. American was in compliance with the Liquidity
Covenant as of December 31, 2005 and expects to be able to continue to
comply with this covenant. In addition, the Credit Facility contains
a covenant (the EBITDAR Covenant) requiring AMR to maintain a ratio of
cash flow (defined as consolidated net income, before interest expense
(less capitalized interest), income taxes, depreciation and
amortization and rentals, adjusted for certain gains or losses and non-
cash items) to fixed charges (comprising interest expense (less
capitalized interest) and rentals). AMR was in compliance with the
EBITDAR covenant as of December 31, 2005 and expects to be able to
continue to comply with this covenant for the period ending March 31,
2006. However, given the historically high price of fuel and the
volatility of fuel prices and revenues, it is difficult to assess
whether AMR and American will, in fact, be able to continue to comply
with the Liquidity Covenant and, in particular, the EBITDAR Covenant,
and there are no assurances that AMR and American will be able to
comply with these covenants. Failure to comply with these covenants
would result in a default under the Credit Facility which - - if the
Company did not take steps to obtain a waiver of, or otherwise
mitigate, the default - - could result in a default under a
significant amount of the Company's other debt and lease obligations
and otherwise adversely affect the Company. See Note 6 to the
consolidated financial statements for the required ratios at each
measurement date through the life of the Credit Facility.
Cash Flow Activity
The Company, or its subsidiaries, recorded the following debt (1)
during the year ended December 31, 2005 (in millions):
JFK Facilities Sublease Revenue Bonds, net (2) $ 491
Sale and leaseback of spare engines 133
Re-marketing of DFW-FIC Revenue Refunding Bonds,
Series 2000A,maturing 2029 198
Various debt agreements related to the purchase of
regional jet aircraft, net 319
$1,141
(1) The table does not include a transaction in which American
purchased certain obligations due October 2006 with a face value of
$261 million at par value from an institutional investor. In
conjunction with the purchase, American borrowed an additional $245
million under an existing mortgage agreement with a final maturity in
December 2012 from the same investor.
(2) Amount shown is net of $207 million the Company will receive to
fund future capital spending at JFK, $77 million held by a trustee for
future debt service on the bonds and a discount of $25 million.
See Notes 5 and 6 to the consolidated financial statements for
additional information regarding the debt issuances listed above.
During the fourth quarter of 2005, the Company issued and sold 13
million shares of its common stock. The Company realized $223 million
from the equity sale.
5
The Company's cash flow from operating activities improved in 2005.
Net cash provided by operating activities during the year ended
December 31, 2005 was $1.0 billion, an increase of $307 million over
2004, due primarily to an improved revenue environment.
Capital expenditures during 2005 were $681 million and primarily
included the acquisition of 20 Embraer 145 aircraft and the cost of
improvements at JFK. A portion of the improvements at JFK were
reimbursed to the Company through a financing transaction discussed
further above and in Note 6 to the consolidated financial statements.
During 2004, the Company sold its remaining interest in Orbitz,
resulting in total proceeds of $185 million and a gain of $146
million.
Working Capital
AMR (principally American) historically operates with a working
capital deficit, as do most other airline companies. In addition, the
Company has historically relied heavily on external financing to fund
capital expenditures. More recently, the Company has also relied on
external financing to fund operating losses.
Off Balance Sheet Arrangements
American has determined that it holds a significant variable interest
in, but is not the primary beneficiary of, certain trusts that are the
lessors under 84 of its aircraft operating leases. These leases
contain a fixed price purchase option, which allows American to
purchase the aircraft at a predetermined price on a specified date.
However, American does not guarantee the residual value of the
aircraft. As of December 31, 2005, future lease payments required
under these leases totaled $2.6 billion.
Certain special facility revenue bonds have been issued by certain
municipalities primarily to purchase equipment and improve airport
facilities that are leased by American and accounted for as operating
leases. Approximately $1.9 billion of these bonds (with total future
payments of approximately $4.8 billion as of December 31, 2005) are
guaranteed by American, AMR, or both. Approximately $523 million of
these special facility revenue bonds contain mandatory tender
provisions that require American to make operating lease payments
sufficient to repurchase the bonds at various times: $28 million in
2006, $100 million in 2007, $218 million in 2008, $112 million in 2014
and $65 million in 2015. Although American has the right to remarket
the bonds, there can be no assurance that these bonds will be
successfully remarketed. Any payments to redeem or purchase bonds
that are not remarketed would generally reduce existing rent leveling
accruals or be considered prepaid facility rentals and would reduce
future operating lease commitments. Approximately $198 million of
special facility revenue bonds with mandatory tender provisions were
successfully remarketed in 2005. They were acquired by American in
2003 under a mandatory tender provision. Thus, the receipt by
American of the proceeds from the remarketing in July 2005 resulted in
an increase to Other liabilities and deferred credits where the
tendered bonds had been classified pending their use to offset certain
future operating lease obligations.
In addition, the Company has other operating leases, primarily for
aircraft and airport facilities, with total future lease payments of
$4.8 billion as of December 31, 2005. Entering into aircraft leases
allows the Company to obtain aircraft without immediate cash outflows.
6
Contractual Obligations
The following table summarizes the Company's obligations and
commitments as of December 31, 2005 (in millions):
Payments Due by Year(s) Ended December 31,
2007 2009
and and 2011 and
Contractual Obligations Total 2006 2008 2010 Beyond
Operating lease payments for
aircraft and facility obligations 1 $ 12,217 $ 1,065 $ 2,012 $ 1,687 $ 7,453
Firm aircraft commitments 2 2,895 102 - - 2,793
Capacity purchase agreements 3 237 90 129 18 -
Long-term debt 4 20,644 1,924 3,472 4,108 11,140
Capital lease obligations 1,804 263 432 315 794
Other purchase obligations 5 1,563 376 420 307 460
Other long-term liabilities 6,7 2,234 196 407 433 1,198
Total obligations and commitments $ 41,594 $ 4,016 $ 6,872 $ 6,868 $23,838
1 Certain special facility revenue bonds issued by
municipalities - which are supported by operating
leases executed by American - are guaranteed by AMR
and/or American. The special facility revenue bonds
with mandatory tender provisions discussed above are
included in this table under their ultimate maturity
date rather than their mandatory tender provision
date. See Note 5 to the consolidated financial
statements for additional information.
2 As of December 31, 2005, the Company had commitments
to acquire two Boeing 777-200ERs in 2006; and an
aggregate of 47 Boeing 737-800s and seven Boeing 777-
200ERs in 2013 through 2016. The Company has pre-
arranged backstop financing available for the
aircraft scheduled to be delivered in 2006.
3 The table reflects minimum required payments under
capacity purchase contracts between American and two
regional airlines, Chautauqua Airlines, Inc.
(Chautauqua) and Trans States Airlines Inc. If the
Company terminates its contract with Chautauqua
without cause, Chautauqua has the right to put its 15
Embraer aircraft to the Company. If this were to
happen, the Company would take possession of the
aircraft and become liable for lease obligations
totaling approximately $21 million per year with
lease expirations in 2018 and 2019. These lease
obligations are not included in the table above. See
Note 4 to the consolidated financial statements for
additional information.
4 Amounts represent contractual amounts due, including
interest. Interest on variable rate debt was
estimated based on the current rate at December 31,
2005.
7
5 Includes noncancelable commitments to purchase goods or
services, primarily construction related costs at JFK
and information technology related support.
Substantially all of the Company's construction costs
at JFK will be reimbursed through a fund established
from a previous financing transaction. The Company
has made estimates as to the timing of certain
payments primarily for construction related costs.
The actual timing of payments may vary from these
estimates. Substantially all of the Company's
purchase orders issued for other purchases in the
ordinary course of business contain a 30-day
cancellation clause that allows the Company to cancel
an order with 30 days notice.
6 Includes expected other postretirement benefit payments through
2015.
7 Excludes a $2.3 billion accident liability, related to the
Terrorist Attacks and flight 587, recorded in Other liabilities
and deferred credits, as discussed in Note 2 to the consolidated
financial statements. This liability is offset in its entirety
by a receivable, recorded in Other assets, which the Company
expects to receive from insurance carriers as claims are resolved.
Pension Obligations In addition to the commitments summarized above,
the Company is required to make contributions to its defined benefit
pension plans under the minimum funding requirements of the Employee
Retirement Income Security Act (ERISA). The Company's estimated 2006
contributions to its defined benefit pension plans are approximately
$250 million. This estimate reflects the provisions of the Pension
Funding Equity Act of 2004. (The effect of the Pension Funding Equity
Act was to defer to later years a portion of the minimum required
contributions that would otherwise have been due for the 2004 and 2005
plan years.)
Under Generally Accepted Accounting Principles, the Company's defined
benefit plans are underfunded as of December 31, 2005 by $3.2 billion
based on the Projected Benefit Obligation (PBO) and by $2.3 billion
based on the Accumulated Benefit Obligation (ABO) (refer to Note 10 to
the consolidated financial statements). The Company's funded status
at December 31, 2005 under the relevant ERISA funding standard is
similar to its funded status using the ABO methodology. Due to
uncertainties regarding significant assumptions involved in estimating
future required contributions to its defined benefit pension plans,
such as interest rate levels, the amount and timing of asset returns,
and, in particular, the impact of proposed legislation currently
pending the reconciliation process of the U.S. Congress, the Company
is not able to reasonably estimate its future required contributions
beyond 2006. However, absent significant legislative relief or
significant favorable changes in market conditions, or both, the
Company could be required to fund in 2007 a majority of the
underfunded balance under the relevant ERISA funding standard. Even
with significant legislative relief (including proposed airline-
specific relief), the Company's 2007 required minimum contributions
are expected to be higher than the Company's 2006 contributions.
Results of Operations
The Company incurred an $861 million net loss in 2005 compared to a
net loss of $761 million in 2004. The Company's 2005 results were
impacted by the continuing increase in fuel prices and certain other
costs, offset by an improvement in revenues; a $108 million decrease
in depreciation expense related to a change in the depreciable lives
of certain aircraft types described below, in Critical Accounting
Policies in this Item 7, and in Note 1 to the consolidated financial
statements; and productivity improvements and other cost reductions
resulting from progress under the Turnaround Plan. The Company's 2005
results were also impacted by a $155 million aircraft charge, a $73
million facility charge, an $80 million charge for the termination of
a contract, a $37 million gain related to the resolution of a debt
restructuring and a $22 million credit for the reversal of an
insurance reserve. All of these amounts are included in Other
operating expenses in the consolidated statement of operations, except
for a portion of the facility charge which is included in Other
rentals and landing fees. Also included in the 2005 results was a $69
million fuel tax credit. Of this amount, $55 million is included in
Aircraft fuel expense and $14 million is included in Interest income
in the consolidated statement of operations. The Company's 2004
results include a $146 million gain on the sale of the Company's
remaining investment in Orbitz that is included in Miscellaneous, net
in the consolidated statement of operations and net restructuring
charges of $11 million included in Other operating expenses in the
consolidated statement of operations. In addition, the Company did
not record a tax benefit associated with its 2005 or 2004 losses.
8
Although the Company is currently receiving a depreciation expense
benefit from the change in estimate of depreciable lives discussed
above, the Company's operating expenses excluding depreciation will
likely be higher than operating new aircraft during the extended life
of the MD-80 aircraft. For example, based on current estimates, the
Company's MD-80 aircraft consume more fuel and incur higher
maintenance expense than a new aircraft that requires minimal
maintenance during the first several years of operation.
Revenues
2005 Compared to 2004 The Company's revenues increased
approximately $2.1 billion, or 11.1 percent, to $20.7 billion in 2005
compared to 2004. American's passenger revenues increased by 10.6
percent, or $1.6 billion, on a capacity (available seat mile) (ASM)
increase of 1.2 percent. American's passenger load factor increased
3.8 points to 78.6 percent and passenger revenue yield per passenger
mile increased 4.0 percent to 12.01 cents. This resulted in an
increase in passenger revenue per available seat mile (RASM) of 9.3
percent to 9.43 cents. In 2005, American derived approximately 65
percent of its passenger revenues from domestic operations and
approximately 35 percent from international operations. Following is
additional information regarding American's domestic and international
RASM and capacity:
Year Ended December 31, 2005
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 9.37 10.6 % 115 (2.3)%
International 9.56 6.6 61 8.6
DOT Latin America 9.48 7.9 30 6.0
DOT Atlantic 10.08 9.0 24 6.7
DOT Pacific 8.12 (7.7) 7 30.1
The Company's Regional Affiliates include two wholly owned
subsidiaries, American Eagle Airlines, Inc. and Executive Airlines,
Inc. (collectively, AMR Eagle), and two independent carriers with
which American has capacity purchase agreements, Trans States
Airlines, Inc. (Trans States) and Chautauqua Airlines, Inc.
(Chautauqua).
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $272 million, or 14.5 percent, to $2.1 billion as a
result of increased capacity and load factors. Regional Affiliates'
traffic increased 22.8 percent to 8.9 billion revenue passenger miles
(RPMs), while capacity increased 17.3 percent to 12.7 billion ASMs,
resulting in a 3.2 point increase in passenger load factor to 70.4
percent.
Cargo revenues decreased 0.5 percent, or $3 million, primarily due to
a 0.5 percent decrease in cargo revenue yield per ton mile. However,
the cargo division saw a $49 million increase in fuel surcharges and
other service fees. These amounts are included in Other revenues
which are discussed below.
Other revenues increased 18.3 percent, or $205 million, to $1.3
billion due in part to increased cargo fuel surcharges, increased
third-party maintenance contracts obtained by the Company's
maintenance and engineering group and increases in certain passenger
fees.
9
2004 Compared to 2003 The Company's revenues increased
approximately $1.2 billion, or 6.9 percent, to $18.6 billion in 2004
compared to 2003. American's passenger revenues increased by 4.8
percent, or $689 million, on a capacity (available seat mile) (ASM)
increase of 5.3 percent. American's passenger load factor increased
2.0 points to 74.8 percent while passenger revenue yield per passenger
mile decreased by 3.1 percent to 11.54 cents. This resulted in a
decrease in passenger revenue per available seat mile (RASM) of 0.5
percent to 8.63 cents. In 2004, American derived approximately 66
percent of its passenger revenues from domestic operations and
approximately 34 percent from international operations. Following is
additional information regarding American's domestic and international
RASM and capacity:
Year Ended December 31, 2004
RASM Y-O-Y ASMs Y-O-Y
(cents) Change (billions) Change
DOT Domestic 8.47 (2.1)% 118 1.1%
International 8.97 2.8 56 15.4
DOT Latin America 8.78 (3.3) 28 18.6
DOT Atlantic 9.25 8.4 23 9.1
DOT Pacific 8.79 14.9 5 27.7
Regional Affiliates' passenger revenues, which are based on industry
standard proration agreements for flights connecting to American
flights, increased $357 million, or 23.5 percent, to $1.9 billion as a
result of increased capacity and load factors. Regional Affiliates'
traffic increased 32.0 percent to 7.3 billion revenue passenger miles
(RPMs), while capacity increased 26.0 percent to 10.8 billion ASMs,
resulting in a 3.0 point increase in passenger load factor to 67.2
percent.
Cargo revenues increased 12.0 percent, or $67 million, primarily due
to a 10.2 percent increase in cargo ton miles.
10
Operating Expenses
2005 Compared to 2004 The Company's total operating expenses
increased 10.7 percent, or $2.0 billion, to $20.8 billion in 2005
compared to 2004. American's mainline operating expenses per ASM in
2005 increased 7.9 percent compared to 2004 to 10.50 cents. This
increase in operating expenses per ASM is due primarily to a 42.1
percent increase in American's price per gallon of fuel (net of the
impact of a fuel tax credit and fuel hedging) in 2005 relative to
2004.
(in millions) Year ended
Operating Expenses December 31, Change Percentage
2005 from 2004 Change
Wages, salaries and benefits $ 6,755 $ 36 0.5 %
Aircraft fuel 5,615 1,646 41.5 (a)
Other rentals and landing fees 1,262 75 6.3
Depreciation and amortization 1,164 (128) (9.9) (b)
Commissions, booking fees
and credit card expense 1,113 6 0.5
Maintenance,materials
and repairs 989 18 1.9
Aircraft rentals 591 (18) (3.0)
Food service 507 (51) (9.1)
Other operating expenses 2,809 432 18.2 (c)
Total operating expenses $20,805 $2,016 10.7 %
(a) Aircraft fuel expense increased primarily due to a 42.1 percent
increase in American's price per gallon of fuel (including the benefit
of a $55 million fuel excise tax refund received in March 2005 and the
impact of fuel hedging) offset by a 2.2 percent decrease in American's
fuel consumption.
(b) Effective January 1, 2005, in order to more accurately reflect
the expected useful lives of its aircraft, the Company changed its
estimate of the depreciable lives of its Boeing 737-800, Boeing 757-
200 and McDonnell Douglas MD-80 aircraft from 25 to 30 years. As a
result of this change, Depreciation and amortization expense was
reduced by approximately $108 million during the year and the per
share net loss was $0.65 less than it otherwise would have been.
(c) Other operating expenses increased due to a $155 million charge
for the retirement of 27 MD-80 aircraft, facilities charges of $56
million as part of the Company's restructuring initiatives and an $80
million charge for the termination of an airport construction
contract. These charges were somewhat offset by a $37 million gain
related to the resolution of a debt restructuring and a $22 million
credit for the reversal of an insurance reserve. The account was also
impacted by an increase in communications charges of $53 million year-
over-year due to increased international flying and higher rates.
11
2004 Compared to 2003 The Company's total operating expenses
increased 2.8 percent, or $505 million, to $18.8 billion in 2004
compared to 2003. American's mainline operating expenses per ASM in
2004 decreased 4.1 percent compared to 2003 to 9.73 cents. This
decrease in operating expenses per ASM is due primarily to American's
cost savings initiatives and occurred despite the benefit in 2003 of
the receipt of a grant from the U.S. government and a 38.5 percent
increase in American's price per gallon of fuel (net of the impact of
fuel hedging) in 2004 relative to 2003.
(in millions) Year ended
Operating Expenses December 31, Change Percentage
2004 from 2003 Change
Wages,salaries and benefits $ 6,719 $ (545) (7.5) % (a)
Aircraft fuel 3,969 1,197 43.2 (b)
Other rentals and landing fees 1,187 14 1.2
Depreciation and amortization 1,292 (85) (6.2)
Commissions, booking fees
and credit card expense 1,107 44 4.1
Maintenance, materials
and repairs 971 111 12.9 (c)
Aircraft rentals 609 (78) (11.4) (d)
Food service 558 (53) (8.7)
Other operating expenses 2,377 (458) (16.2) (e)
U.S. government grant - 358 NM (f)
Total operating expenses $18,789 $ 505 2.8 %
(a) Wages, salaries and benefits decreased due to lower wage rates
and reduced headcount primarily as a result of the Labor Agreements
and Management Reductions, discussed in the Company's 2003 Form 10-K,
which became effective in the second quarter of 2003. This decrease
was offset to some degree by increased headcount related to capacity
increases.
(b) Aircraft fuel expense increased due to a 38.7 percent increase in
the Company's price per gallon of fuel (net of the impact of fuel
hedging) and a 3.3 percent increase in the Company's fuel consumption.
(c) Maintenance, materials and repairs increased primarily due to
increased aircraft utilization, the benefit from retiring aircraft
subsiding and increases in contractual rates in certain flight hour
agreements for outsourced aircraft engine maintenance.
(d) Aircraft rentals decreased primarily due to the removal of leased
aircraft from the fleet in the second half of 2003 as part of the
Company's restructuring initiatives and concessionary agreements with
certain lessors, which reduced future lease payment amounts and
resulted in the conversion of 30 operating leases to capital leases in
the second quarter of 2003.
(e) Included in this amount are restructuring charges for 2004 which
included (i) the reversal of reserves previously established for
aircraft return costs of $20 million, facility exit costs of $21
million and employee severance of $11 million, (ii) $21 million in
aircraft charges and (iii) $42 million in employee charges.
Restructuring charges for 2003 included approximately (i) $341 million
in aircraft charges offset by a $20 million credit to adjust prior
accruals, (ii) $92 million in employee charges, (iii) $62 million in
facility exit costs and a (iv) $68 million gain resulting from a
transaction involving 33 of the Company's Fokker 100 aircraft and
related debt.
(f) U.S. government grant for 2003 reflects the reimbursement of
security service fees from the U.S. government under the Emergency
Wartime Supplemental Appropriations Act, discussed in Note 2 to the
consolidated financial statements.
12
Other Income (Expense)
Other income (expense) consists of interest income and expense,
interest capitalized and miscellaneous - net.
2005 Compared to 2004 Increases in both short-term investment
balances and interest rates caused an increase in Interest income of
$83 million, or 125.8 percent, to $149 million. Interest expense
increased $86 million, or 9.9 percent, to $957 million primarily as a
result of increases in interest rates. Miscellaneous-net for 2004
includes a $146 million gain on the sale of the Company's remaining
interest in Orbitz.
2004 Compared to 2003 Interest income increased $11 million, or 20.0
percent, to $66 million due primarily to increases in short-term
investment balances and interest rates. Interest expense increased
$168 million, or 23.9 percent, to $871 million resulting primarily
from the increase in the Company's long-term debt coupled with
increases in interest rates, and an $84 million reduction in interest
expense in 2003 related to the agreement reached with the IRS
discussed below.
Income Tax Benefit
2005 and 2004 The Company did not record a net tax benefit associated
with its 2005 and 2004 losses due to the Company providing a valuation
allowance, as discussed in Note 8 to the consolidated financial
statements.
2003 The Company did not record a net tax benefit associated with its
2003 losses due to the Company providing a valuation allowance.
Additionally, in 2003, the Company reached an agreement with the IRS
covering tax years 1990 through 1995. As a result of this agreement,
the Company recorded an $80 million tax benefit to reduce previously
accrued income tax liabilities and an $84 million reduction in
interest expense to reduce previously accrued interest related to the
accrued income tax liabilities.
13
Operating Statistics
The following table provides statistical information for American and
Regional Affiliates for the years ended December 31, 2005, 2004 and
2003.
Year Ended December 31,
2005 2004 2003
American Airlines, Inc. Mainline
Jet Operations
Revenue passenger miles (millions) 138,374 130,164 120,328
Available seat miles (millions) 176,112 174,015 165,209
Cargo ton miles (millions) 2,209 2,203 2,000
Passenger load factor 78.6% 74.8% 72.8%
Passenger revenue yield per
passenger mile (cents) 12.01 11.54 11.91
Passenger revenue per available
seat mile (cents) 9.43 8.63 8.67
Cargo revenue yield per ton mile
(cents) 28.21 28.36 27.87
Operating expenses per available
seat mile, excluding
Regional Affiliates (cents) (*) 10.50 9.73 10.15
Fuel consumption (gallons,in millions) 2,948 3,014 2,956
Fuel price per gallon (cents) 172.3 121.2 87.5
Operating aircraft at year-end 699 727 770
Regional Affiliates
Revenue passenger miles (millions) 8,946 7,283 5,516
Available seat miles (millions) 12,714 10,835 8,597
Passenger load factor 70.4% 67.2% 64.2%
(*) Excludes $2.5 billion, $2.1 billion and $1.8 billion of expense
incurred related to Regional Affiliates in 2005, 2004 and 2003,
respectively.
Outlook
The Company currently expects first quarter mainline unit costs to be
approximately 10.7 cents. Capacity for American's mainline jet
operations is expected to be essentially flat in the first quarter of
2006 compared to the first quarter of 2005. American's mainline
capacity for the full year 2006 is expected to decrease by 1.3
percent, with a decrease in domestic capacity of 4.1 percent and an
increase in international capacity of 4.0 percent.
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 compared to
others. 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 Item 1 and Note 4 to the consolidated financial statements.
Critical Accounting Policies and Estimates The preparation of the
Company's 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. The Company believes its
estimates and assumptions are reasonable; however, actual results and
the timing of the recognition of such amounts could differ from those
estimates. The Company has identified the following critical
accounting policies and estimates used by management in the
preparation of the Company's financial statements: accounting for long-
lived assets, passenger revenue, frequent flyer program, pensions and
other postretirement benefits, income taxes and tax contingencies.
14
Long-lived assets - The Company has approximately $19 billion of
long-lived assets as of December 31, 2005, including approximately
$18 billion related to flight equipment and other fixed assets.
In addition to the original cost of these assets, their recorded
value is impacted by a number of policy elections made by the
Company, including estimated useful lives and salvage values. In
accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144), the Company records impairment charges on long-
lived assets used in operations when events and circumstances
indicate that the assets may be impaired, the undiscounted cash
flows estimated to be generated by those assets are less than the
carrying amount of those assets and the net book value of the
assets exceeds their estimated fair value. In making these
determinations, the Company uses certain assumptions, including,
but not limited to: (i) estimated fair value of the assets; and
(ii) estimated future cash flows expected to be generated by these
assets, which are based on additional assumptions such as asset
utilization, length of service and estimated salvage values. A
change in the Company's fleet plan has been the primary indicator
that has resulted in an impairment charge in the past. In the
fourth quarter of 2005, the Company permanently grounded and
retired 27 McDonnell Douglas MD-80 airframes, 24 of which had
previously been in temporary storage. See further discussion of
the charge related to the retirement in Note 2 to the consolidated
financial statements.
On November 17, 2004, American deferred the delivery date of 54
Boeing aircraft by approximately seven years which, in combination
with numerous other factors, led American to re-evaluate the
expected useful lives of its aircraft. As a result of this
evaluation, American changed its estimate of the depreciable lives
of its Boeing 737-800, Boeing 757-200 and McDonnell Douglas MD-80
aircraft from 25 to 30 years effective January 1, 2005. The
primary factors that supported changing the estimated useful life
of these aircraft were (i) the absence of scheduled narrow body
deliveries until 2013 (even these 47 narrow body deliveries would
only replace less than ten percent of the Company's existing
narrow body fleet of 547 aircraft assuming the deliveries are not
used to grow the Company's capacity at that time), (ii) the
financial condition of the Company, which significantly limits its
flexibility to purchase new aircraft and (iii) the absence of
technology step change for narrow body aircraft, such as
technology that would allow the Company to fly its aircraft
substantially more efficiently (as was the case with replacements
for previous generation aircraft such as the B-727 which had three
engines versus two on the replacement aircraft) that would clearly
economically compel the Company to replace the fleet. In
addition, there are currently no government regulations, such as
noise reduction requirements, that would require aircraft
replacement.
Subsequent to the change in depreciable lives on January 1, 2005,
all of American's fleet types are depreciated over 30 years except
for the Airbus A300 and the Boeing 767, which did not generally
meet the above conditions to support extending their lives.
It is possible that the ultimate lives of the Company's aircraft
will be significantly different than the current estimate due to
unforeseen events in the future that impact the Company's fleet
plan, including positive or negative developments in the areas
described above. For example, operating the aircraft for a longer
period will result in higher maintenance, fuel and other operating
costs than if the Company replaced the aircraft. At some point in
the future, higher operating costs could change the Company's
analysis of the economic impact of retaining aircraft versus
replacing them with new aircraft.
Passenger revenue - Passenger ticket sales are initially recorded
as a component of Air traffic liability. Revenue derived from
ticket sales is recognized at the time service is provided.
However, due to various factors, including the industry's 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, including breakage. These
estimates are generally based upon the evaluation of historical
trends, including the use of regression analysis and other methods
to model the outcome of future events based on the Company's
historical experience, and are recognized at the time of
departure. The Company's estimation techniques have been applied
consistently from year to year. However, due to changes in the
Company's ticket refund policy and changes in the travel profile
of customers, historical trends may not be representative of
future results.
15
Frequent flyer program - American uses the incremental cost
method to account for the portion of its frequent flyer liability
incurred when AAdvantage members earn mileage credits by flying on
American or American Eagle. 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 the award is expected to be used for free
travel. American includes fuel, food, and reservations/ticketing
costs in the calculation of incremental cost. These estimates are
generally updated based upon the Company's 12-month historical
average of such costs. American also accrues a frequent flyer
liability for the mileage credits that are expected to be used for
travel on participating airlines based on historical usage
patterns and contractual rates.
At both December 31, 2005 and 2004, American estimated that
approximately ten million free travel awards were expected to be
redeemed for free travel on American and American Eagle. In
making the estimate of free travel awards, American has excluded
mileage in inactive accounts, mileage related to accounts that
have not yet reached the lowest level of free travel award, and
mileage in active accounts that have reached the lowest level of
free travel award but which are not expected to ever be redeemed
for free travel on American or participating airlines. The
Company's total liability for future AAdvantage award redemptions
for free, discounted or upgraded travel on American, American
Eagle or participating airlines as well as unrecognized revenue
from selling AAdvantage miles to other companies was approximately
$1.5 billion and $1.4 billion (and is recorded as a component of
Air traffic liability in the consolidated balance sheets),
representing 17.7 percent and 19.6 percent of AMR's total current
liabilities, at December 31, 2005 and 2004, respectively.
Revenue earned from selling AAdvantage miles to other companies is
recognized in two components. The first component represents the
revenue for air transportation sold and is valued at fair value.
This revenue is deferred and recognized over the period the
mileage is expected to be used, which is currently estimated to be
28 months. The second revenue component, representing the
marketing products sold and administrative costs associated with
operating the AAdvantage program, is recognized in the month of
sale.
The number of free travel awards used for travel on American and
American Eagle was 2.6 million in 2005 and 2004, representing
approximately 7.2 percent and 7.5 percent of passengers boarded,
respectively. The Company believes displacement of revenue
passengers is minimal given the Company's load factors, its
ability to manage frequent flyer seat inventory, and the
relatively low ratio of free award usage to total passengers
boarded.
Changes to the percentage of the amount of revenue deferred,
deferred recognition period, percentage of awards expected to be
redeemed for travel on participating airlines, cost per mile
estimates or the minimum award level accrued could have a
significant impact on the Company's revenues or incremental cost
accrual in the year of the change as well as in future years.
Pensions and other postretirement benefits - The Company's pension
and other postretirement benefit costs and liabilities are
calculated using various actuarial assumptions and methodologies.
The Company uses certain assumptions including, but not limited
to, the selection of the: (i) discount rate; (ii) expected return
on plan assets; and (iii) expected health care cost trend rate.
These assumptions as of December 31 were:
2005 2004
Discount rate
5.75% 6.00%
Expected return on plan assets 8.75% 9.00%
Expected health care cost trend rate:
Pre-65 individuals
Initial 4.5% 4.5%
Ultimate 4.5% 4.5%
Post-65 individuals
Initial 9.0% 10.0%
Ultimate (2010) 4.5% 4.5%
16
The Company's discount rate is determined based upon the review of
year-end high quality corporate bond rates. Lowering the discount
rate by 50 basis points as of December 31, 2005 would increase the
Company's pension and postretirement benefits obligations by
approximately $662 million and $170 million, respectively, and
increase estimated 2006 pension and postretirement benefits
expense by $75 million and $9 million, respectively.
The expected return on plan assets is based upon an evaluation of
the Company's historical trends and experience taking into account
current and expected market conditions and the Company's target
asset allocation of 40 percent longer duration corporate bonds, 25
percent U.S. value stocks, 20 percent developed international
stocks, five percent emerging markets stocks and bonds and ten
percent alternative (private) investments. The expected return on
plan assets component of the Company's net periodic benefit cost
is calculated based on the fair value of plan assets and the
Company's target asset allocation. The Company monitors its
actual asset allocation and believes that its long-term asset
allocation will continue to approximate its target allocation.
The Company's historical annualized ten-year rate of return on
plan assets, calculated using a geometric compounding of monthly
returns, is approximately 10.6 percent as of December 31, 2005.
Lowering the expected long-term rate of return on plan assets by
50 basis points as of December 31, 2005 would increase estimated
2006 pension expense by approximately $38 million.
The health care cost trend rate is based upon an evaluation of the
Company's historical trends and experience taking into account
current and expected market conditions. Increasing the assumed
health care cost trend rate by 100 basis points would increase
estimated 2006 postretirement benefits expense by $40 million.
The Company has pension and postretirement benefit unrecognized
net actuarial losses as of December 31, 2005, of approximately
$2.2 billion and $300 million, respectively. The unrecognized net
actuarial losses represent changes in the amount of the projected
benefit obligation, the postretirement accumulated benefit
obligation and plan assets resulting from (i) changes in
assumptions and (ii) actual experience differing from assumptions.
The amortization of unrecognized net actuarial loss component of
the Company's 2006 pension and postretirement benefit net periodic
benefit costs are expected to be approximately $81 million and $1
million, respectively. The Company's total 2006 pension expense
and postretirement expense is currently estimated to be
approximately $467 million and $248 million, respectively.
The Company records an additional minimum pension liability when
its accumulated benefit obligation exceeds the pension plans'
assets in excess of amounts previously accrued for pension costs.
As of December 31, 2005, the Company's additional minimum pension
liability was $1.4 billion, up from $1.0 billion as of December
31, 2004, primarily as a result of a decrease in the discount
rate. The increase in the Company's minimum pension liability
resulted in a 2005 debit to equity of approximately $379 million.
An additional minimum pension liability is recorded as an increase
to the pension liability, an increase to other assets (to the
extent that a plan has unrecognized prior service costs) and a
charge to stockholders' equity (deficit) as a component of
Accumulated other comprehensive loss. See Note 10 to the
consolidated financial statements for additional information
regarding the Company's pension and other postretirement benefits.
Income taxes - The Company accounts for income taxes in accordance
with Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Accordingly, the Company records a deferred tax
asset valuation allowance when it is more likely than not that
some portion or all of its deferred tax assets will not be
realized. The Company considers its historical earnings, trends,
and outlook for future years in making this determination. The
Company had a deferred tax valuation allowance of $1.3 billion and
$833 million as of December 31, 2005 and 2004, respectively. See
Note 8 to the consolidated financial statements for additional
information.
17
Tax contingencies - The Company has reserves for taxes and
associated interest that may become payable in future years as a
result of audits by tax authorities. Although the Company
believes that the positions taken on previously filed tax returns
are reasonable, it nevertheless has established tax and interest
reserves in recognition that various taxing authorities may
challenge the positions taken by the Company resulting in
additional liabilities for taxes and interest. The tax reserves
are reviewed as circumstances warrant and adjusted as events occur
that affect the Company's potential liability for additional
taxes, such as lapsing of applicable statutes of limitations,
conclusion of tax audits, additional exposure based on current
calculations, identification of new issues, release of
administrative guidance, or rendering of a court decision
affecting a particular tax issue. In 2003, the Company reached an
agreement with the IRS covering tax years 1990 through 1995 and as
a result, recorded an $80 million tax benefit to reduce previously
accrued income tax liabilities and an $84 million reduction in
interest expense to reduce previously accrued interest related to
accrued tax liabilities.
New Accounting Pronouncement In December 2004, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)).
SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial
statements based on their fair values. Prior to SFAS 123(R),
companies could elect to account for share-based payments under APB 25
and provide the pro forma disclosures required by SFAS 123 (described
in Note 1 to the consolidated financial statements). SFAS 123(R) is
effective January 1, 2006 for AMR. Under SFAS 123(R), compensation
expense will be recognized for the portion of outstanding awards as
service is provided, based on the grant-date fair value of those
awards calculated under SFAS 123 for pro forma disclosures. The
Company expects that the impact of adoption on its first quarter 2006
results will be similar to the amounts disclosed in each quarterly
period during 2005. However, subsequent to the first quarter of 2006,
the impact of SFAS 123(R) will decrease significantly due to the
vesting period ending for stock options issued under the 2003 Employee
Stock Incentive Plan.
18
Exhibit Listing
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a).
19
SIGNATURE
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
By: /s/ Gerard J. Arpey
Gerard J. Arpey
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Date: July 17, 2006
20
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