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AMERICAN AIRLINES GROUP INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of AAG's and American's Annual Report on Form 10-K for the year ended December 31, 2013 (the 2013 Form 10-K). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the 2013 Form 10-K. American Airlines Group Background Following the consummation of the Merger with US Airways Group on December 9, 2013, AAG began moving toward operating under the single brand name of "American Airlines" through its mainline operations, American and US Airways. Until a single operating certificate is issued by the Federal Aviation Administration (FAA) and the operational integration is complete, American and US Airways will continue to operate as separate airlines. This integration process is expected to take 18-24 months. Together with our wholly-owned regional airline subsidiaries and third-party regional carriers operating under the brand names American Eagle and US Airways Express, our airlines operate an average of nearly 6,700 flights per day to 339 destinations in 54 countries from our hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. For the three months ended March 31, 2014, we had approximately 47 million passengers boarding our mainline and regional flights. As of March 31, 2014, we operated 977 mainline jets and were supported by our regional airline subsidiaries and third-party regional carriers which operated 560 regional aircraft. The U.S. Airline Industry During the first quarter of 2014, the U.S. airline industry was significantly impacted by severe winter weather. The month of February included the highest number of cancellations in the U.S. airline industry in 25 years. Despite these operational challenges, the U.S. airline industry experienced year-over-year growth in passenger revenues driven by strong demand for air travel. In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported the following changes in U.S. industry passenger revenues and yields: 2014 vs 2013 January February March Passenger Revenues 3.5 % 2.6 % 1.4 % Yields 1.4 % 1.4 % (0.5 )% 2013 vs 2012 January February March Passenger Revenues 3.7 % (0.5 )% 2.7 % Yields 1.7 % 0.8 % 1.0 % With respect to international versus domestic performance, Airlines for America reported domestic markets outperformed the Atlantic and Pacific markets while the Latin market experienced higher year-over-year growth in passenger revenues. Jet fuel prices continue to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On average, fuel costs were lower in the first quarter of 2014 as compared to the first quarter 2013. The average daily spot price for Brent crude oil during the first quarter of 2014 was $108 per barrel as compared to an average daily spot price of $112 per barrel during the first quarter of 2013. On a daily basis, Brent crude oil prices fluctuated during the quarter between a high of $111 per barrel to a low of $106 per barrel at the close of the quarter on March 31, 2014. While the U.S. airline industry is currently benefiting from a favorable revenue environment and moderating fuel prices as described above, uncertainty exists regarding the economic conditions driving these factors. See Part II, Item 1A. Risk Factors - "Downturns in economic conditions adversely affect our business" and "Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity." 52 -------------------------------------------------------------------------------- American Airlines Group Basis of Presentation AAG's first quarter 2013 results do not include the financial results of US Airways Group as the closing of the Merger occurred on December 9, 2013. Additionally, US Airways Group applied acquisition accounting as of December 9, 2013 and its financial statements after December 9, 2013 are deemed not comparable to its financial statements for periods prior to the Merger. Accordingly, our first quarter 2014 results under U.S. Generally Accepted Accounting Principles (GAAP) are not comparable to the GAAP results for the first quarter of 2013. However, to provide a basis for comparison to prior year results, we have presented in the table below certain "combined" first quarter 2013 financial data which includes the financial results of AAG and US Airways Group, each on a standalone basis. While this is a non-GAAP measure, management believes this presentation provides a more meaningful quarter-over-quarter comparison. Three Months Ended March 31, 2013 Three Months Ended Percent March 31, 2014 AAG US Airways Group Combined Change (1) (In millions) Mainline and regional passenger revenues $ 8,665 $ 5,293 $ 2,960 $ 8,253 5.0 Total operating revenues 9,995 6,098 3,370 9,468 5.6 Mainline and regional aircraft fuel and related taxes 3,211 2,199 1,132 3,331 (3.6 ) Total operating expenses 9,265 6,027 3,268 9,295 (0.3 ) Operating income 730 71 102 173 nm Net income (loss) 480 (341 ) 44 (297 ) nm Net special charges (credits) (2) (78 ) 349 10 359 nm (1) Percent change is a comparison of the combined results. (2) AAG's first quarter 2013 standalone results were significantly impacted by costs incurred in its Chapter 11 Cases. Included in AAG's standalone net special charges of $349 million for the first quarter of 2013 were $276 million of bankruptcy related reorganization expenses and interest charges. First Quarter 2014 Results In the first quarter of 2014, we realized operating income of $730 million and net income of $480 million. This compares to combined operating income of $173 million and a combined net loss of $297 million in the first quarter of 2013. Our first quarter 2014 net income included net special credits of $78 million, while the first quarter of 2013 included combined net special charges of $359 million. Excluding the effects of net special items, we recognized net income of $402 million in the first quarter of 2014 which is a $340 million improvement as compared to combined net income of $62 million in the first quarter of 2013. See "AAG's Results of Operations" included in Part I, Item 2 of this report for more information on net special items. Revenue In the first quarter of 2014, our operations were significantly impacted by severe weather at our hubs in Charlotte, Chicago, Dallas/Fort Worth, New York, Philadelphia, and Washington, D.C. In total, we canceled more than 34,000 flights. We estimate these weather-related cancellations reduced 2014 first quarter revenue by approximately $115 million. Despite these challenges in the first quarter of 2014, we reported operating revenues of $10.0 billion. Mainline and regional passenger revenues were $8.7 billion, an increase of $412 million, or 5.0%, as compared to the combined first quarter of 2013 passenger revenues of $8.3 billion. The growth in revenues was driven by a 1.7% increase in revenue passenger miles and a 3.2% increase in yield. Our mainline and regional passenger revenue per available seat mile (PRASM) was 13.67 cents in the first quarter of 2014, a 2.9% increase as compared to a combined 13.28 cents in the first quarter of 2013. 53 --------------------------------------------------------------------------------Fuel Mainline and regional fuel expense was $3.2 billion in first quarter of 2014, which was $120 million, or 3.6%, lower as compared to the combined mainline and regional fuel expense in the first quarter of 2013. A 4.7% decrease in the average price per gallon to $3.10 for the first quarter of 2014 from a combined average price per gallon of $3.25 for the first quarter of 2013 drove the reduction in expense. The decrease in average fuel price per gallon was offset in part by a 1.2% increase in consumption. We have not entered into any fuel hedges since the effective date of the Merger, and our current policy is not to do so. Capacity Total system capacity for the combined company increased 2.0% in the first quarter of 2014 primarily due to more active aircraft, larger gauge aircraft replacing smaller legacy aircraft and longer stage length. Cost Control We remain committed to maintaining a low cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our 2014 first quarter mainline cost per available seat mile (CASM) excluding special items, fuel and profit sharing was 8.96 cents. When compared to the 2013 first quarter combined results, mainline CASM excluding special items, fuel and profit sharing increased 4.0% in the first quarter of 2014. The increase was primarily due to fewer flown available seat miles (ASMs) as a result of weather-related conditions, higher salaries, wages and benefits driven by our Merger Pilot Memorandum of Understanding (MOU) that was effective upon the closing of the Merger and newly implemented FAA rules on pilot and flight attendant duty times. Expenses associated with certain stock-based compensation programs also contributed to the increase, as our stock price rose from $25.25 to $36.60 per share during the first quarter of 2014. See below for the "Reconciliation of GAAP Financial Information to Non-GAAP Financial Information." Customer Service We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation. As previously discussed, our operations in the first quarter of 2014 were impacted by severe winter weather conditions resulting in the cancellation of more than 34,000 flights. The severe weather conditions impacted the entire U.S. airline industry. As reported through February 2014, the most recent period for which the Department of Transportation (DOT) has published its Air Travel Consumer Report, we ranked first in on-time arrivals among our big hub-and-spoke carrier peers on a year-to-date basis. We reported the following combined operating statistics to the DOT for mainline operations for the first quarter of 2014 and 2013: 2014 2013(a) Better (Worse) 2014-2013 January February March (f) January February March January February March On-time performance (b) 76.5 73.9 80.5 80.9 80.2 81.9 (4.4) pts (6.3) pts (1.4) pts Completion factor (c) 96.7 94.4 98.1 98.6 98.1 98.9 (1.9) pts (3.7) pts (0.8) pts Mishandled baggage (d) 4.37 3.86 3.67 3.11 2.74 2.47 (40.5)% (40.9)% (48.6)% Customer complaints (e) 2.60 2.24 1.76 2.05 1.64 1.35 (26.8)% (36.6)% (30.4)% (a) Represents the combined historical operating statistics for American and US Airways. (b) Percentage of reported flight operations arriving on time as defined by the DOT. (c) Percentage of scheduled flight operations completed. (d) Rate of mishandled baggage reports per 1,000 passengers. (e) Rate of customer complaints filed with the DOT per 100,000 enplanements. (f) March 2014 operating statistics are preliminary as the DOT has not issued its March 2014 Air Travel Consumer Report as of the date of this filing. 54 --------------------------------------------------------------------------------Liquidity Position As of March 31, 2014, AAG's total cash and short-term investments was $10.6 billion, of which $947 million was restricted: March 31, December 31, 2014 2013 (In millions) Cash and short-term investments $ 9,664 $ 9,251 Restricted cash and short-term investments (1) 947 1,035 Total cash and short-term investments $ 10,611 $ 10,286 (1) Restricted cash and investments primarily include cash collateral to secure workers' compensation claims. The improvement in our liquidity in the first quarter of 2014 was due primarily to our first quarter profitability and proceeds from our slot divestitures at Ronald Reagan Washington National Airport (DCA) in connection with our settlement of antitrust litigation brought by the DOJ related to our Merger. During the first quarter of 2014, we paid $84 million in cash for tax withholdings for employees in lieu of issuing 2.5 million shares of AAG Common Stock under the Plan. In April 2014, we paid an additional $162 million in cash for tax withholdings for employees in lieu of issuing 4.5 million shares of AAG Common Stock under the Plan. This brings the total cash paid since the Effective Date for tax withholdings in lieu of the issuance of approximately 20 million shares of AAG Common Stock under the Plan to $542 million. Additionally, in March 2014, we notified the holders of US Airways Group's 7.25% convertible notes that we have elected to settle solely in cash instead of shares of AAG Common Stock all conversions during the period beginning on March 15, 2014 and ending on, and including, the second scheduled trading day immediately preceding the maturity date of May 15, 2014. This will reduce our diluted share count by approximately 4 million shares. As of March 31, 2014, approximately $750 million of our unrestricted cash balance was held in Venezuelan bolivars, valued at the weighted average applicable exchange rate of 6.32 bolivars to the dollar. This includes approximately $94 million valued at 4.3 bolivars, approximately $611 million valued at 6.3 bolivars, and approximately $45 million valued at 10.7 bolivars, with the rate depending on the date we submitted our repatriation request to the Venezuelan government. In the first quarter 2014, the Venezuelan government announced that a newly-implemented system (SICAD I) will determine the exchange rate (which fluctuates as determined by weekly auctions and at March 31, 2014 was 10.7 bolivars to the dollar) for repatriation of cash proceeds from ticket sales after January 1, 2014, and introduced new procedures for approval of repatriation of local currency. We are continuing to work with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local currency, are monitoring this situation closely and continue to evaluate our holdings of Venezuelan bolivars for potential impairment. See Part II, Item 1A. - Risk Factors "We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control" for additional discussion of these and other currency risks. 2014 Outlook We have taken significant actions in the last year, including the completion of our restructuring and the Merger with US Airways Group, to restore our competitiveness. Although it is difficult to predict the price of oil or the strength of the economy, we believe that our first quarter financial results are evidence of the strong foundation we have in place and can build on. 55 -------------------------------------------------------------------------------- Reconciliation of GAAP Financial Information to Non-GAAP Financial Information We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding. Three Months Ended March 31, 2013 Reconciliation of Operating Cost per ASM Excluding Special Items, Fuel and Profit Three Months Ended US Airways Sharing - Mainline Only March 31, 2014 AAG Group Combined (In millions, except per ASM amounts) Total operating expenses $ 9,265 $ 6,027 $ 3,268 $ 9,295 Less regional expenses: Fuel (500 ) (265 ) (271 ) (536 ) Other (1,094 ) (515 ) (561 ) (1,076 ) Total mainline operating expenses 7,671 5,247 2,436 7,683 Less: Special items, net 137 (71 ) (39 ) (110 ) Mainline operating expenses, excluding special items 7,808 5,176 2,397 7,573 Less: Aircraft fuel and related taxes (2,711 ) (1,934 ) (861 ) (2,795 ) Mainline operating expenses, excluding special items and fuel 5,097 3,242 1,536 4,778 Less: Profit sharing (5 ) - (6 ) (6 ) Mainline operating expenses, excluding special items, fuel and profit sharing $ 5,092 $ 3,242 $ 1,530 $ 4,772 Available Seat Miles (ASM) 56,831 37,393 17,961 55,354 (In cents) Mainline operating expenses per ASM $ 13.50 $ 13.88 Less: Special items, net per ASM 0.24 (0.20 ) Mainline operating expenses per ASM, excluding special items 13.74 13.68 Less: Aircraft fuel and related taxes per ASM (4.77 ) (5.05 ) Mainline operating expenses per ASM, excluding special items and fuel 8.97 8.63 Less: Profit sharing per ASM (0.01 ) (0.01 ) Mainline operating expenses per ASM, excluding special items, fuel and profit sharing $ 8.96 $ 8.62 56-------------------------------------------------------------------------------- AAG's Results of Operations In the first quarter of 2014, we realized operating income of $730 million and net income of $480 million. Our first quarter 2014 net income included net special operating credits of $133 million and total net special credits of $78 million. Excluding the effects of these special credits, we realized operating income of $597 million and net income of $402 million. Under GAAP, AAG's results do not include the financial results of US Airways Group prior to the closing of the Merger. Accordingly, our first quarter 2014 GAAP results are not comparable to the GAAP results for the first quarter of 2013 as the 2013 period excludes the results of US Airways Group. When compared to the combined separate company results of AMR and US Airways Group for the first quarter of 2013, our first quarter 2014 net income excluding net special items improved $340 million. In the first quarter of 2013, on a standalone basis, AMR reported a net loss of $341 million and US Airways Group reported net income of $44 million. Excluding the effects of net special charges, AMR and US Airways Group reported net income of $8 million and $54 million, respectively. The components of our net special charges (credits) included in our accompanying condensed consolidated statements of operations are as follows (in millions): Three Months Ended March 31, 2014 2013Mainline operating special items, net (1) $ (137 ) $ 71 Regional operating special items, net 4 2 Nonoperating special items, net (2) 47 116 Reorganization items, net (3) - 160 Income tax special items, net (4) 8 - Total $ (78 ) $ 349 (1) The 2014 first quarter mainline operating special items totaled a net credit of $137 million, which principally included a $309 million gain on the sale of slots at DCA and a net $32 million credit for bankruptcy related items primarily reflecting fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $142 million of cash merger integration expenses including amounts related to the Merger Pilot MOU, information technology, professional fees, severance, re-branding of aircraft and airport facilities, relocation and training as well as $60 million of non-cash compensation expense for merger equity awards. The 2013 first quarter mainline operating special items included $28 million in merger related expenses and a $43 million charge for workers' compensation claims. (2) The 2014 first quarter nonoperating special items of $47 million were principally due to non-cash interest accretion of $31 million on the bankruptcy settlement obligations. The 2013 first quarter nonoperating special items consisted of interest charges to recognize post-petition interest expense on unsecured obligations pursuant to the Plan. (3) In the 2013 first quarter, we recognized reorganization expenses as a result of the filing of the Chapter 11 Cases. These amounts consisted primarily of estimated allowed claim amounts and professional fees. (4) The 2014 first quarter included a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. As a result of the Merger, US Airways Group and its subsidiaries are included in the AAG consolidated federal and state income tax returns for the three months ended March 31, 2014. The Merger resulted in a statutory "ownership change" on December 9, 2013, as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), which limits our future ability to utilize net operating losses (NOLs) generated before the ownership change and certain subsequently recognized "built-in" losses and deductions, if any, existing as of the date of the ownership change. The general limitation rules for a debtor in a bankruptcy case are liberalized where an ownership change occurs upon emergence from bankruptcy. Our ability to utilize any new NOLs arising after the ownership change is not affected. At December 31, 2013, we had approximately $10.6 billion of gross NOLs to reduce future federal taxable income, the majority of which are expected to be available for use in 2014, subject to the Section 382 limitation described above. The federal NOLs will expire beginning in 2022 if unused. These NOLs include an unrealized tax benefit of $762 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. We also had approximately $4.7 billion of gross NOLs to reduce future state taxable income at December 31, 2013, which will expire in years 2014 through 2033 if unused. At December 31, 2013, we had an Alternative Minimum Tax (AMT) credit carryforward of 57 -------------------------------------------------------------------------------- approximately $370 million available for federal income tax purposes, which is available for an indefinite period. Our net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At December 31, 2013, the federal and state valuation allowances were $4.6 billion and $415 million, respectively. In accordance with GAAP, utilization of the NOLs after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset our tax provision dollar for dollar. For the three months ended March 31, 2014, we utilized NOLs to reduce our income tax obligation. However, we recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $5 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used. For the three months ended March 31, 2013, we reported a loss before income taxes and recorded an income tax benefit of approximately $22 million as a result of the American Taxpayer Relief Act of 2012. When profitable, we are ordinarily subject to AMT. However as a result of a special tax election made in 2009, we were able to utilize AMT NOLs to fully offset our AMT taxable income for the three months ended March 31, 2014. 58 -------------------------------------------------------------------------------- Operating Statistics The table below sets forth selected mainline and regional operating data for the three months ended March 31, 2014 and 2013. Three Months Ended March 31, 2014 2013 Increase (Note 1) (Decrease) Mainline Revenue passenger miles (millions) (a) 45,828 45,024 1.8 % Available seat miles (ASM) (millions) (b) 56,831 55,354 2.7 % (0.7) Passenger load factor (percent) (c) 80.6 81.3 pts Yield (cents) (d) 15.84 15.13 4.7 % Passenger revenue per ASM (cents) (e) 12.77 12.30 3.8 % Operating cost per ASM (cents) (f) 13.50 13.88 (2.7 )% Passenger enplanements (thousands) (g) 34,843 34,434 1.2 % Departures (thousands) 279 279 - % Aircraft at end of period 977 967 1.0 % Block hours (thousands) (h) 853 841 1.4 % Average stage length (miles) (i) 1,189 1,171 1.5 % Fuel consumption (gallons in millions) 874 858 1.9 % Average aircraft fuel price including related taxes ($/gallon) 3.10 3.26 (4.8 )% Full-time equivalent employees at end of period 93,378 91,838 1.7 % Regional (j) Revenue passenger miles (millions) (a) 5,058 4,997 1.2 % Available seat miles (millions) (b) 6,561 6,775 (3.2 )% Passenger load factor (percent) (c) 77.1 73.8 3.3 pts Yield (cents) (d) 27.82 28.86 (3.6 )% Passenger revenue per ASM (cents) (e) 21.45 21.29 0.8 % Operating cost per ASM (cents) (f) 24.30 23.80 2.1 % Passenger enplanements (thousands) (g) 11,709 11,667 0.4 % Aircraft at end of period 560 531 5.5 % Fuel consumption (gallons in millions) 161 166 (2.6 )% Average aircraft fuel price including related taxes ($/gallon) 3.10 3.23 (4.2 )% Total Mainline and Regional Revenue passenger miles (millions) (a) 50,886 50,021 1.7 % Available seat miles (millions) (b) 63,392 62,129 2.0 % Cargo ton miles (millions) (k) 560 500 11.9 % (0.2) Passenger load factor (percent) (c) 80.3 80.5 pts Yield (cents) (d) 17.03 16.50 3.2 % Passenger revenue per ASM (cents) (e) 13.67 13.28 2.9 % Total revenue per ASM (cents) (l) 15.77 15.24 3.5 % Cargo yield per ton mile (cents) (m) 36.88 39.35 (6.3 )% Passenger enplanements (thousands) (g) 46,552 46,101 1.0 % Aircraft at end of period 1,537 1,498 2.6 % Fuel consumption (gallons in millions) 1,035 1,024 1.2 % Average aircraft fuel price including related taxes ($/gallon) 3.10 3.25 (4.7 )% Note 1: Represents the combined historical operating statistics of American and US Airways Group. (a) Revenue passenger mile (RPM) - A basic measure of sales volume. One RPM represents one passenger flown one mile. (b) Available seat mile (ASM) - A basic measure of production. One ASM represents one seat flown one mile. (c) Passenger load factor - The percentage of available seats that are filled with revenue passengers. 59--------------------------------------------------------------------------------(d) Yield - A measure of airline revenue derived by dividing passenger revenue by RPMs. (e) Passenger revenue per available seat mile (PRASM) - Passenger revenues divided by ASMs. (f) Operating cost per available seat mile (CASM) - Operating expenses divided by ASMs. (g) Passenger enplanements - The number of passengers on board an aircraft, including local, connecting and through passengers. (h) Block hours - The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down. (i) Average stage length - The average of the distances flown on each segment of every route. (j) Regional statistics include Envoy Aviation Group Inc. (formerly known as AMR Eagle Holding Corporation), Piedmont Airlines, Inc., PSA Airlines, Inc. and operating and financial results from our capacity purchase agreements with Air Wisconsin Airlines Corporation, Chautauqua Airlines, Inc., ExpressJet Airlines, Inc., Mesa Airlines, Inc., Republic Airline Inc. and SkyWest Airlines, Inc. (k) Cargo ton miles - A basic measure of cargo transportation. One cargo ton mile represents one ton of cargo transported one mile. (l) Total revenue per available seat mile (RASM) - Total revenues divided by total mainline and regional ASMs. (m) Cargo yield per ton mile - Cargo revenues divided by total mainline and regional cargo ton miles. Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 To conform to current year presentation, certain revenues and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 1 to AAG's condensed consolidated financial statements in Part I, Item 1A for additional information. Operating Revenues Three Months Ended March 31, $ Change Due Change Excluding Merger Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Mainline passenger $ 7,258 $ 4,614 $ 2,644 $ 2,352 $ 292 6.3 Regional passenger 1,407 679 728 738 (10 ) (1.4 ) Cargo 206 156 50 38 12 7.4 Other 1,124 649 475 381 94 14.5 Total operating revenues $ 9,995 $ 6,098 $ 3,897 $ 3,509 $ 388 6.4 The following discussion of operating revenues excludes the results of US Airways Group in order to provide a more meaningful quarter-over-quarter comparison. Total operating revenues in the first quarter of 2014 increased $388 million, or 6.4%, from the 2013 period which was driven by strong demand for air travel. Significant changes in the components of operating revenues are as follows: • Mainline passenger revenues increased $292 million, or 6.3%, in the first quarter of 2014 from the 2013 period due to higher yields and revenue per ASM, offset in part by slightly lower load factors. • Cargo revenues increased $12 million, or 7.4%, in the first quarter of 2014 from the 2013 period driven primarily by an increase in transatlantic freight volumes. • Other revenues increased $94 million, or 14.5%, in the first quarter of 2014 from the 2013 period driven primarily by higher revenues associated with our frequent flyer programs. 60-------------------------------------------------------------------------------- Operating Expenses Three Months Ended March 31, $ Change Due Change Excluding Merger Impact 2014 2013 $ Change to Merger $ % (Inmillions, except percentage changes) Aircraft fuel and related taxes $ 2,711 $ 1,934 $ 777 $ 840 $ (63 ) (3.3 ) Salaries, wages and benefits 2,119 1,267 852 719 133 10.5 Maintenance, materials and repairs 485 326 159 153 6 1.9 Other rent and landing fees 424 288 136 139 (3 ) (0.9 ) Aircraft rent 320 165 155 104 51 31.1 Selling expenses 401 290 111 117 (6 ) (2.1 ) Depreciation and amortization 307 204 103 94 9 4.7 Special items, net (137 ) 71 (208 ) 55 (263 ) nm Other 1,041 702 339 301 38 5.4 Total mainline operating expenses 7,671 5,247 2,424 2,522 (98 ) (1.8 ) Regional expenses: Fuel 500 265 235 247 (12 ) (4.8 ) Other 1,094 515 579 561 18 3.4 Total regional operating expenses 1,594 780 814 808 6 0.6 Total operating expenses $ 9,265 $ 6,027 $ 3,238 $ 3,330 $ (92 ) (1.5 ) The following discussion of operating expenses excludes the results of US Airways Group in order to provide a more meaningful quarter-over-quarter comparison. Total operating expenses in the first quarter of 2014 decreased $92 million, or 1.5%, from the 2013 period. Significant changes in the components of mainline operating expenses, excluding the results of US Airways Group, are as follows: • Aircraft fuel and related taxes decreased 3.3% primarily due to a decrease in the average price per gallon of fuel, net of the effects of hedging, which was offset in part by an increase in consumption. • Salaries, wages and benefits increased 10.5% primarily due to the Merger Pilot MOU that was effective upon the closing of the Merger, newly implemented FAA rules on pilot and flight attendant duty times, as well as increased costs from certain stock-based compensation programs driven by a 45% increase in the price of our common stock from $25.25 to $36.60 during the first quarter of 2014. • Aircraft rent increased 31.1% primarily as a result of new aircraft deliveries since the end of the 2013 first quarter as we continue our fleet renewal program. Regional Operating Expenses: Total regional expenses, excluding the results of US Airways Group, increased $6 million, or 0.6%, in the first quarter of 2014 from the 2013 period. Nonoperating Income (Expense) Change Excluding Merger Three Months Ended March 31, $ Change Due to Impact 2014 2013 $ Change Merger $ % (In millions, except percentage changes) Interest income $ 7 $ 4 $ 3 $ - $ 3 53.2 Interest expense, net of capitalized interest (243 ) (254 ) 11 (74 ) 85 (33.4 ) Other, net (1 ) (24 ) 23 4 19 (81.8 )Total nonoperating expense, net $ (237 ) $ (274 ) $ 37 $ (70 ) $ 107 (39.1 ) The following discussion of nonoperating income and expense excludes the results of US Airways Group in order to provide a more meaningful quarter-over-quarter comparison. 61 -------------------------------------------------------------------------------- Interest income was $7 million and $4 million in the first quarter of 2014 and 2013, respectively. Our short-term investments in each period consisted of highly liquid investments which provided nominal returns. Interest expense, net of capitalized interest decreased $85 million, or 33.4%, in the first quarter of 2014 from the 2013 period. This decrease was primarily due to $31 million of special charges recognized in the first quarter of 2014 relating to non-cash interest accretion on bankruptcy settlement obligations, as compared to $116 million of special charges recognized in the first quarter of 2013 relating to post-petition interest expense on unsecured obligations pursuant to the Plan. Other nonoperating expense, net decreased $19 million in the first quarter of 2014 from the 2013 period primarily due to the weakening of the U.S. dollar in foreign currency transactions. The first quarter of 2014 included $3 million in net foreign currency gains as compared to $19 million in net foreign currency losses in the 2013 period. Reorganization Items, Net Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 Cases, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on AAG's condensed consolidated statements of operations for the three months ended March 31, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1), (2) $ 136 Professional fees 39 Other (15 ) Total reorganization items, net $ 160 (1) Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to (i) the rejection or modification of financings related to aircraft and (ii) entry of orders treated as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors recorded an estimated claim associated with the rejection or modification of a financing or facility agreement when the applicable motion was filed with the Bankruptcy Court to reject or modify such financing and the Debtors believed that it was probable the motion would be approved, and there was sufficient information to estimate the claim. (2) Pursuant to the Plan, the Debtors agreed to allow certain post-petition unsecured claims on obligations. As a result, during the three months ended March 31, 2013, we recorded reorganization charges to adjust estimated allowed claim amounts previously recorded on rejected special facility revenue bonds of $127 million, which are included in the table above. 62-------------------------------------------------------------------------------- American's Results of Operations In the first quarter of 2014, American realized operating income of $578 million and net income of $401 million. American's first quarter 2014 net income included net special operating credits of $215 million and total net special credits of $164 million. Excluding the effects of these special credits, American realized operating income of $363 million and net income of $237 million. The components of American's net special charges (credits) are as follows (in millions): Three Months Ended March 31, 2014 2013Mainline operating special items, net (1) $ (216 ) $ 71 Regional operating special items, net 1 - Nonoperating special items, net (2) 44 27 Reorganization items, net (3) - 160 Income tax special items, net (4) 7 - Total $ (164 ) $ 258 (1) The 2014 first quarter mainline operating special items totaled a net credit of $216 million, which principally included a $305 million gain on the sale of slots at DCA and a net $56 million credit for bankruptcy related items primarily reflecting fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $91 million of cash merger integration expenses including amounts related to the Merger Pilot MOU, information technology, professional fees, severance, re-branding of aircraft and airport facilities, relocation and training as well as $43 million of non-cash compensation expense for merger equity awards. The 2013 first quarter mainline operating special items included $28 million in merger related expenses and a $43 million charge for workers' compensation claims. (2) The 2014 first quarter nonoperating special items of $44 million were principally due to non-cash interest accretion of $27 million on the bankruptcy settlement obligations. The 2013 first quarter nonoperating special items consisted of interest charges to recognize post-petition interest expense on unsecured obligations pursuant to the Plan. (3) In the 2013 first quarter, American recognized reorganization expenses as a result of the filing of the Chapter 11 Cases. These amounts consisted primarily of estimated allowed claim amounts and professional fees. (4) The 2014 first quarter included a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. The Merger resulted in a statutory "ownership change" on December 9, 2013, as defined in Section 382, which limits American's future ability to utilize NOLs generated before the ownership change and certain subsequently recognized "built-in" losses and deductions, if any, existing as of the date of the ownership change. The general limitation rules for a debtor in a bankruptcy case are liberalized where an ownership change occurs upon emergence from bankruptcy. American's ability to utilize any new NOLs arising after the ownership change is not affected. At December 31, 2013, American had approximately $9.5 billion of gross NOLs to reduce future federal taxable income, the majority of which are expected to be available for use in 2014, subject to the Section 382 limitation described above. The federal NOLs will expire beginning in 2022 if unused. These NOLs include an unrealized tax benefit of $647 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. American also had approximately $3.8 billion of gross NOLs to reduce future state taxable income at December 31, 2013, which will expire in years 2014 through 2033 if unused. At December 31, 2013, American had an AMT credit carryforward of approximately $467 million available for federal income tax purposes, which is available for an indefinite period. American's net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At December 31, 2013, the federal and state valuation allowances were $4.9 billion and $378 million, respectively. In accordance with GAAP, utilization of the NOLs after December 9, 2013 will result in a corresponding decrease in the valuation allowance and offset American's tax provision dollar for dollar. For the three months ended March 31, 2014, American utilized NOLs to reduce its income tax obligation. However, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets and $4 million of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used. 63 -------------------------------------------------------------------------------- For the three months ended March 31, 2013, American reported a loss before income taxes and recorded an income tax benefit of approximately $30 million as a result of the American Taxpayer Relief Act of 2012. When profitable, American is ordinarily subject to AMT. However as a result of a special tax election made in 2009, American was able to utilize AMT NOLs to fully offset its AMT taxable income for the three months ended March 31, 2014. Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 To conform to current year presentation, certain revenues and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 1 to American's condensed consolidated financial statements in Part I, Item 1B for additional information. Operating Revenues Three Months Ended March 31, Percent Increase 2014 2013 (Decrease) (In millions) Mainline passenger $ 4,906 $ 4,614 6.3 Regional passenger 669 679 (1.4 ) Cargo 168 156 7.7 Other 726 636 14.1 Total operating revenues $ 6,469 $ 6,085 6.3 Total operating revenues in the first quarter of 2014 increased $384 million, or 6.3%, from the 2013 period which was driven by strong demand for air travel. Significant changes in the components of operating revenues are as follows: • Mainline passenger revenues increased $292 million, or 6.3%, in the first quarter of 2014 from the 2013 period due to higher yields and revenue per ASM, offset in part by slightly lower load factors. • Cargo revenues increased $12 million, or 7.7%, in the first quarter of 2014 from the 2013 period driven primarily by an increase in transatlantic freight volumes. • Other revenues increased $90 million, or 14.1%, in the first quarter of 2014 from the 2013 period driven primarily by higher revenues associated with American's frequent flyer program. 64--------------------------------------------------------------------------------Operating Expenses Three Months Ended March 31, Percent Increase 2014 2013 (Decrease) (In millions) Aircraft fuel and related taxes $ 1,871 $ 1,934 (3.3 ) Salaries, wages and benefits 1,398 1,264 10.6 Maintenance, materials and repairs 332 326 1.9 Other rent and landing fees 285 287 (0.9 ) Aircraft rent 216 165 31.0 Selling expenses 284 290 (2.1 ) Depreciation and amortization 214 204 4.7 Special items, net (216 ) 71 nm Other 749 712 5.2 Total mainline operating expenses 5,133 5,253 (2.3 ) Regional expenses: Fuel 252 265 (4.7 ) Other 506 501 0.9 Total regional operating expenses 758 766 (1.0 ) Total operating expenses $ 5,891 $ 6,019 (2.1 ) Total operating expenses in the first quarter of 2014 decreased $128 million, or 2.1%, from the 2013 period. Significant changes in the components of mainline operating expenses are as follows: • Aircraft fuel and related taxes decreased 3.3% primarily due to a decrease in the average price per gallon of fuel, net of the effects of hedging, which was offset in part by an increase in consumption. • Salaries, wages and benefits increased 10.6% primarily due to the Merger Pilot MOU that was effective upon the closing of the Merger, newly implemented FAA rules on pilot and flight attendant duty times, as well as increased costs from certain stock-based compensation programs driven by a 45% increase in the price of AAG's common stock from $25.25 to $36.60 during the first quarter of 2014. • Aircraft rent increased 31.0% primarily as a result of new aircraft deliveries since the end of the 2013 first quarter as American continues its fleet renewal program. Regional Operating Expenses Total regional expenses decreased $8 million, or 1.0%, in the first quarter of 2014 from the 2013 period. Nonoperating Income (Expense) Three Months Ended March 31, Percent Increase 2014 2013 (Decrease) (In millions) Interest income $ 7 $ 4 57.6 Interest expense, net of capitalized interest (168 ) (169 ) (0.6 ) Other, net (5 ) (24 ) (82.6 ) Total nonoperating expense, net $ (166 ) $ (189 ) (12.4 ) Interest income was $7 million and $4 million in the first quarter of 2014 and 2013, respectively. American's short-term investments in each period consisted of highly liquid investments which provided nominal returns. Other nonoperating expense, net decreased $19 million in the first quarter of 2014 from the 2013 period primarily due to the weakening of the U.S. dollar in foreign currency transactions. The first quarter of 2014 included $3 million in net foreign currency gains as compared to $19 million in net foreign currency losses in the 2013 period. 65 -------------------------------------------------------------------------------- Reorganization Items, Net Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 Cases, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on American's condensed consolidated statements of operations for the three months ended March 31, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1), (2) $ 136 Professional fees 39 Other (15 ) Total reorganization items, net $ 160 (1) Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to (i) the rejection or modification of financings related to aircraft and (ii) entry of orders treated as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors recorded an estimated claim associated with the rejection or modification of a financing or facility agreement when the applicable motion was filed with the Bankruptcy Court to reject or modify such financing and the Debtors believed that it was probable the motion would be approved, and there was sufficient information to estimate the claim. (2) Pursuant to the Plan, the Debtors agreed to allow certain post-petition unsecured claims on obligations. As a result, during the three months ended March 31, 2013, American recorded reorganization charges to adjust estimated allowed claim amounts previously recorded on rejected special facility revenue bonds of $127 million, which are included in the table above. 66-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash, Short-Term Investments and Restricted Cash As of March 31, 2014, AAG's total cash, short-term investments and restricted cash and short-term investments was $10.6 billion, of which $947 million was restricted. Additional detail is provided in the table below (in millions): AAG American March 31, December 31, March 31, December 31, 2014 2013 2014 2013 Cash $ 1,259 $ 1,140 $ 983 $ 829 Short-term investments 8,405 8,111 4,979 5,162 Restricted cash and short-term investments (1) 947 1,035 699 702 Total cash, short-term investments and restricted cash and short-term investments $ 10,611 $ 10,286 $ 6,661 $ 6,693 (1) Our restricted cash and short-term investments related primarily to collateral held to support projected workers compensation obligations. As of March 31, 2014, approximately $855 million of American's cash and short-term investments balances were held in foreign bank accounts, of which $750 million is held in Venezuelan bolivars. The Venezuelan bolivars are valued at the weighted average applicable exchange rate of 6.32 bolivars to the dollar. This includes approximately $94 million valued at 4.3 bolivars, approximately $611 million valued at 6.3 bolivars, and approximately $45 million valued at 10.7 bolivars, with the rate depending on the date we submitted our repatriation request to the Venezuelan government. In the first quarter of 2014, the Venezuelan government announced that a newly-implemented system (SICAD I) will determine the exchange rate (which fluctuates as determined by weekly auctions and at March 31, 2014 was 10.7 bolivars to the dollar) for repatriation of cash proceeds from ticket sales after January 1, 2014, and introduced new procedures for approval of repatriation of local currency. We are continuing to work with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local currency, monitoring this situation closely and continue to evaluate our holdings of Venezuelan bolivars for potential impairment. See Part II, Item 1A. - Risk Factors "We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control" for additional discussion of this and other currency risks. Sources and Uses of Cash AAG Operating Activities Net cash provided by operating activities was $1.3 billion and $700 million for the first three months of 2014 and 2013, respectively, a period-over-period improvement of $556 million. This period-over-period improvement is principally due to the inclusion of US Airways Group's net cash provided by operating activities of $520 million for the 2014 period. Investing Activities Net cash used in investing activities was $943 million and $1.1 billion for the first three months of 2014 and 2013, respectively. Principal investing activities in the 2014 period included expenditures of $1.0 billion for property and equipment, consisting primarily of the purchase of aircraft, including five Boeing 737 family aircraft, one Boeing 777 aircraft, nine A320 family aircraft and one A330 aircraft, as well as pre-delivery deposits for certain aircraft on order, and $294 million in net purchases of short-term investments. These cash outflows were offset in part by proceeds from the sale of DCA slots of $307 million and an $88 million decrease in restricted cash and short-term investments due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which we had not yet provided air transportation. Principal investing activities in the 2013 period included expenditures of $885 million for property and equipment, consisting primarily of the purchase of nine Boeing 737 family aircraft and three Boeing 777 aircraft, as well as pre-delivery deposits for certain aircraft on order and $226 million in net purchases of short-term investments. 67-------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash used in financing activities was $194 million for the first three months of 2014 as compared to net cash provided by financing activities of $514 million for the first three months of 2013. Principal financing activities in the 2014 period included debt repayments of $501 million, including a $100 million prepayment on American's 7.5% Senior Secured Notes and $84 million of cash payments for tax withholdings associated with equity distributions to employees. These cash outflows were offset in part by proceeds from the issuance of debt of $224 million due to the issuance of EETC equipment notes associated with aircraft deliveries in 2014 and proceeds from sale-leaseback transactions of $165 million related to the financing of four Boeing 737 family aircraft. Principal financing activities in the 2013 period included proceeds from sale-leaseback transactions of $764 million related to the financing of eight Boeing 737 family aircraft and three Boeing 777 aircraft and proceeds from the issuance of debt of $161 million due to the issuance of EETC equipment notes. These proceeds were offset in part by debt repayments of $394 million. American Operating Activities Net cash provided by operating activities was $742 million and $696 million for the first three months of 2014 and 2013, respectively, a period-over-period increase of $46 million. Investing Activities Net cash used in investing activities was $234 million and $1.1 billion for the first three months of 2014 and 2013, respectively. Principal investing activities in the 2014 period included expenditures of $722 million for property and equipment, consisting primarily of the purchase of aircraft, including five Boeing 737 family aircraft, one Boeing 777 aircraft and five A320 family aircraft, as well as pre-delivery deposits for certain aircraft on order. These cash outflows were offset in part by proceeds from the sale of DCA slots of $299 million and $183 million in net sales of short-term investments. Principal investing activities in the 2013 period included expenditures of $882 million for property and equipment, consisting primarily of the purchase of nine Boeing 737 family aircraft and three Boeing 777 aircraft, as well as pre-delivery deposits for certain aircraft on order and $228 million in net purchases of short-term investments. Financing Activities Net cash used in financing activities was $354 million for the first three months of 2014 as compared to net cash provided by financing activities of $516 million for the first three months of 2013. Principal financing activities in the 2014 period included debt repayments of $430 million, including a $100 million prepayment on American's 7.5% Senior Secured Notes and $84 million of cash funding to AAG for tax withholdings associated with equity distributions to employees. These cash outflows were offset in part by proceeds from sale-leaseback transactions of $165 million related to the financing of four Boeing 737 family aircraft. Principal financing activities in the 2013 period included proceeds from sale-leaseback transactions of $764 million related to the financing of eight Boeing 737 family aircraft and three Boeing 777 aircraft and proceeds from the issuance of debt of $161 million due to the issuance of EETC equipment notes. These proceeds were offset in part by debt repayments of $392 million. Commitments Significant Indebtedness As of March 31, 2014, AAG and American had $16.8 billion and $10.6 billion, respectively, in long-term debt and capital leases (including current maturities and before debt discount). See Note 7 to AAG's condensed consolidated financial statements in Part I, Item 1A and Note 6 to American's condensed consolidated financial statements in Part I, Item 1B for further information on all indebtedness as of March 31, 2014. Our significant indebtedness includes the following agreements: 68-------------------------------------------------------------------------------- Table of Contents Credit Facilities (American) On June 27, 2013, American and AAG entered into a Credit and Guaranty Agreement (as amended, the Credit Agreement) with certain lenders. The Credit Agreement provides for a $1.9 billion term loan facility (the Term Loan Facility) and a $1.0 billion revolving credit facility (the Revolving Facility and, together with the Term Loan Facility, the Credit Facilities). As of March 31, 2014, American had borrowed $1.9 billion under the Term Loan Facility. The Credit Facilities are secured obligations of American and guaranteed by AAG. The Revolving Facility provides that American may from time to time borrow, repay and reborrow loans thereunder and have letters of credit issued thereunder in an aggregate amount outstanding at any time of up to $1.0 billion. As of March 31, 2014, there were no borrowings outstanding under the Revolving Facility. Upon consummation of the Merger, US Airways Group and US Airways joined the Credit Facilities as guarantors. Following the joinder, certain minimum dollar-thresholds under the negative and financial covenants in the Credit Facilities were automatically increased. The Term Loan Facility and Revolving Facility mature on June 27, 2019 and June 27, 2018, respectively, unless otherwise extended by the applicable parties. The Term Loan Facility is repayable in quarterly installments in an amount equal to 0.25% of the original principal amount thereof with any unpaid balance due on the maturity date of the Term Loan Facility. Voluntary prepayments may be made by American at any time, with a premium of 1.00% applicable to certain prepayments made prior to the date that is six months following December 27, 2013. Mandatory prepayments at par of term loans and revolving loans are required to the extent necessary to comply with American's covenants regarding the collateral coverage ratio and certain dispositions of collateral. In addition, if a "change of control" (as defined in the Credit Agreement) occurs, American will, absent an amendment or waiver, be required to repay at par the loans outstanding under the Credit Facilities and terminate the Revolving Facility. The Credit Facilities bear interest at an index rate plus an applicable index margin or, at American's option, LIBOR (subject to a floor of 0.75%, with respect to the Term Loan) plus an applicable LIBOR margin. The applicable LIBOR margin is 3.00% for borrowings under both the Term Loan Facility and the Revolving Facility. Subject to certain limitations and exceptions, the Credit Facilities are secured by certain collateral, including liens on certain route authorities to operate between certain specified cities and certain take-off and landing rights at certain airports, and American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the Credit Facilities as more fully described below in "Collateral Related Covenants." The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the Credit Facilities may be accelerated and become due and payable immediately. The Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the Credit Facilities) of not less than $2.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions. Senior Secured Notes (American) In March 2011, American issued $1.0 billion aggregate principal amount of senior secured notes due 2016 (the Senior Secured Notes) guaranteed on an unsecured basis by AAG. In connection with the closing of the Merger, US Airways and US Airways Group entered into a First Supplemental Indenture, dated as of December 9, 2013, pursuant to which US Airways and US Airways Group became guarantors. The Senior Secured Notes bear interest at a rate of 7.50% per annum, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2011. As is customary for financings of this nature, the indebtedness evidenced by the Senior Secured Notes may be accelerated upon the occurrence of events of default under the related indenture. Subject to certain limitations and exceptions, the Senior Secured Notes are secured by certain route authorities, airport landing and takeoff slots, and rights to use or occupy space in airport terminals, in each case that American uses to operate non-stop services between certain airports and American is required maintain a certain minimum ratio of appraised value of the collateral to the outstanding amounts under the Senior Secured Notes as more fully described below in "Collateral Related Covenants." American, at its option, may redeem some or all of the Senior Secured Notes at any time on or after March 15, 2013 or prior to such date in certain limited circumstances, in each case, at specified redemption prices, plus accrued and unpaid interest, if any. If such redemption occurs during the twelve month period beginning on (1) March 15, 2013, the redemption price will be 105.625% of the aggregate principal amount of the Senior Secured Notes to be redeemed, (2) March 15, 2014, the redemption price will be 103.75% of the aggregate principal amount of the Senior Secured Notes to be redeemed and (3) March 15, 2015, the redemption price will be 100% of the aggregate principal amount of the Senior Secured Notes to be redeemed, plus, in each 69-------------------------------------------------------------------------------- Table of Contents case, accrued and unpaid interest, if any. In addition, at any time prior to March 15, 2014, American, at its option, may redeem (1) up to 35% of the aggregate principal amount of the Senior Secured Notes with the proceeds of certain equity offerings at a redemption price of 107.5% of their principal amount, plus accrued and unpaid interest, if any, and (2) during any 12-month period, up to 10% of the original aggregate principal amount of the Senior Secured Notes at a redemption price of 103% of their principal amount, plus accrued and unpaid interest, if any. If American sells certain assets or if a "change of control" (as defined in the indenture) occurs, American must offer to repurchase the Senior Secured Notes at prices specified in the indenture. The indenture for the Senior Secured Notes includes covenants that, among other things, limit our ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends. The indenture for the Senior Secured Notes also contains events of default customary for similar financings, including cross-default to certain material indebtedness of American. Upon the occurrence of certain events of default, the Senior Secured Notes may be accelerated and become due and payable. In March 2014, American prepaid $100 million of its 7.50% senior secured notes at a redemption price of 103% of their principal amount plus accrued and unpaid interest. 2013 Citicorp Credit Facility (US Airways) On May 23, 2013, US Airways entered into a term loan credit facility (the 2013 Citicorp Credit Facility) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders. US Airways Group and certain other subsidiaries of US Airways Group are guarantors of the 2013 Citicorp Credit Facility agreement. In connection with the closing of the Merger, AAG and American entered into a joinder to the 2013 Citicorp credit facility loan agreement pursuant to which AAG and American became guarantors under such agreement. The 2013 Citicorp Credit Facility consists of $1.0 billion of tranche B-1 term loans (Tranche B-1) and $600 million of tranche B-2 term loans (Tranche B-2). Voluntary prepayments may be made at any time, with a premium of 1.00% applicable to certain prepayments made prior to the date that is six months following January 16, 2014. Mandatory prepayments of the term loans are required to the extent necessary to comply with US Airways' covenants regarding the collateral coverage ratio and certain dispositions of collateral. In addition, under the 2013 Citicorp Credit Facility agreement, if a "change of control" (as defined in the 2013 Citicorp Credit Facility agreement) occurs, US Airways will (absent an amendment or waiver) be required to repay the outstanding loans in full together with accrued interest thereon to the date of such prepayment. As of March 31, 2014, the 2013 Citicorp Credit Facility bears interest at an index rate plus an applicable index margin or, at US Airways' option, LIBOR (subject to a floor of 0.75%) plus an applicable LIBOR margin. The applicable LIBOR margin is 2.75% for Tranche B-1 and 2.25% for Tranche B-2. Tranche B-1 and Tranche B-2 mature on May 23, 2019 and November 23, 2016, respectively (unless otherwise extended by the applicable parties), and each is repayable in annual installments to be paid on each anniversary of the closing date in an amount equal to 1.00% of the initial aggregate principal amount of the loans with any unpaid balance due on the maturity date of the respective tranche. The obligations of US Airways under the 2013 Citicorp Credit Facility are secured by liens on certain route authorities, certain take-off and landing rights at certain airports, and certain other assets of US Airways. US Airways is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2013 Citicorp Credit Facility as more fully described below in "Collateral Related Covenants." The 2013 Citicorp Credit Facility agreement includes affirmative, negative and financial covenants that, among other things, (a) require AAG and its restricted subsidiaries to maintain unrestricted liquidity of not less than $2.0 billion, with not less than $750 million held in accounts subject to control agreements, and (b) restrict the ability of US Airways Group, its subsidiaries party to the 2013 Citicorp Credit Facility, AAG and American to make certain investments, pay dividends and make certain other payments, make certain acquisitions, incur liens on the collateral, dispose of collateral, enter into certain affiliate transactions, enter into certain hedging transactions, and engage in certain business activities, in each case subject to certain exceptions. The 2013 Citicorp Credit Facility agreement contains events of default customary for similar financings, including a cross-default provision to certain other material indebtedness of US Airways and certain of its affiliates. Upon the occurrence of an event of default, the outstanding obligations under the 2013 Citicorp Credit Facility may be accelerated and become due and payable immediately. 2013-1 EETCs (US Airways) In April 2013, US Airways created two pass-through trusts which issued approximately $820 million aggregate face amount of Series 2013-1 Class A and Class B EETCs in connection with the financing of 18 Airbus aircraft scheduled to be 70-------------------------------------------------------------------------------- Table of Contents delivered from September 2013 to June 2014. The 2013-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways' condensed balance sheet because the proceeds held by the depository are not US Airways' assets. In the first quarter of 2014, US Airways issued $224 million of equipment notes in two series under its 2013-1 EETCs completed in April 2013: Series A equipment notes in the amount of $170 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $54 million bearing interest at 5.375% per annum. The equipment notes are secured by liens on aircraft. 7.25% Convertible Notes (US Airways Group) In March 2014, we notified the holders of US Airways Group's 7.25% convertible notes that we have elected to settle solely in cash instead of shares of AAG Common Stock all conversions during the period beginning on March 15, 2014 and ending on, and including, the second scheduled trading day immediately preceding the maturity date of May 15, 2014. As a result, as of March 31, 2014, we have reclassified from equity into other current liabilities the cash payment expected upon conversion of these notes less the carrying amount of debt in the amount of $157 million. Guarantees In March 2014, AAG, US Airways Group and US Airways entered into amended and restated guarantees of the payment obligations of US Airways under the equipment notes relating to each of its Series 2010-1, 2011-1, 2012-1, 2012-2 and 2013-1 Pass Through Certificates the result of which was to add AAG as a guarantor of such equipment notes on a joint and several basis with US Airways Group. Collateral Related Covenants Certain of our debt financing agreements contain loan to value ratio covenants and require us to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, we are required, as applicable, to subject additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part, with premium (if any), or pay additional interest on the related indebtedness, as described below. Specifically, American is required to meet certain collateral coverage tests on a periodic basis on two financing transactions: (1) the Senior Secured Notes and (2) the Credit Facilities, and US Airways is required to meet a collateral coverage test on a periodic basis on the 2013 Citicorp Credit Facility. We were in compliance with the collateral coverage tests for each of these financing transactions as of the most recent measurement dates. Credit Ratings The following table details our credit ratings as of March 31, 2014: S&P Local Fitch Issuer Moody's Issuer Default Corporate Credit Credit Family Rating Rating Rating American Airlines Group B B+ B1 American Airlines B B+ * * The credit agency does not rate this category for the respective entity. A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness. 71-------------------------------------------------------------------------------- Table of Contents Aircraft and Engine Purchase Commitments As of March 31, 2014, we have definitive purchase agreements with Airbus, Boeing and other manufacturers for the acquisition of the following mainline and regional aircraft: Remainder of 2014 2015 2016 2017 2018 2019 and Thereafter Total Airbus A320 Family 40 43 25 20 - - 128 A320 Neo - - - 10 25 65 100 A330-200 2 - - - - - 2 A350 XWB - - - 6 10 6 22 Boeing 737 Family 15 20 20 20 - - 75 737 MAX - - - 3 17 80 100 777-300 ER 5 2 2 - - - 9 787 Family 2 11 13 9 7 - 42 Bombardier CRJ900 (1) 15 15 - - - - 30 Embraer ERJ175 (1) - 24 24 12 - - 60 Total 79 115 84 80 59 151 568 (1) These aircraft may be operated by wholly-owned subsidiaries or leased to third-party regional carriers which would operate the aircraft under capacity purchase arrangements. We also have agreements for 41 spare engines to be delivered in 2014 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of March 31, 2014 are expected to be as follows (approximately, in millions): Remainder of 2019 and 2014 2015 2016 2017 2018 Thereafter TotalPayments for American aircraft commitments and certain engines (1) $ 2,161 $ 3,926 $ 4,059 $ 3,667 $ 3,692 $ 11,348 $ 28,853 Payments for US Airways aircraft commitments and certain engines $ 705 $ 561 $ 112 $ 716 $ 985 $ 556 $ 3,635 (1) These amounts are net of purchase deposits currently held by the manufacturers and include all commitments for regional aircraft. American has granted Boeing a security interest in its purchase deposits with Boeing. American's purchase deposits totaled $1.0 billion as of March 31, 2014. In April 2014, we exercised our option to purchase and terminated our existing lease financing arrangements with respect to 62 Airbus A320 family aircraft scheduled to be delivered between the first quarter of 2015 and the third quarter of 2017. In connection with its exercise of such option, we also exercised our right to convert firm orders for 30 Airbus A320 family NEO aircraft, scheduled to be delivered in 2021 and 2022, to options to acquire such aircraft. The table above reflects these changes. We do not have financing commitments for the following aircraft currently on order and scheduled to be delivered through 2016: 53 Airbus 320 family aircraft, 2 Boeing 737 family aircraft, 9 Boeing 777-300ER aircraft and 18 Boeing 787 family aircraft. In addition, we do not have financing commitments in place for the majority of aircraft currently on order and scheduled to be delivered in 2017 and beyond. See Part II, Item 1A, Risk Factors - "We will need to obtain sufficient financing or other capital to operate successfully." Credit Card Processing and Other Reserves We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Credit card processors have financial risk associated with tickets purchased for travel because, although the processor generally forwards the cash related to the purchase to us soon after the purchase is completed, the air travel generally occurs after that time, and the processor may have liability if we do not ultimately provide the air travel. Our agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a "holdback") equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. We are not 72-------------------------------------------------------------------------------- Table of Contents currently required to maintain any holdbacks pursuant to these requirements. Certain of our agreements provide that these holdback requirements can be modified at the discretion of the processing companies, up to the estimated liability for future air travel purchased with the respective credit cards, upon the occurrence of specified events, including material adverse changes in our financial condition. The amount that the processing companies may withhold also varies as a result of changes in financial risk due to seasonal fluctuations in ticket volume. Additional holdback requirements will reduce our liquidity in the form of unrestricted cash by the amount of the holdbacks. Pension Funding Obligation We are required to make minimum contributions to our defined benefit pension plans under the minimum funding requirements of ERISA, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, the Pension Relief Act of 2010, and the Moving Ahead for Progress in the 21st Century Act of 2012. During the first three months of 2014, we contributed $34 million to our defined benefit pension plans. On April 15, 2014, we contributed an additional $37 million to our defined benefit pension plans. American's minimum required contribution to our pension plans for 2014 is $120 million. Currently, our minimum funding obligation for our pension plans is subject to temporary favorable rules that are scheduled to expire at the end of 2017. Upon expiration of these rules, our funding obligations are likely to increase materially. Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us. There have been no material changes in our off-balance sheet arrangements as set forth in our 2013 AAG Form 10-K. 73 -------------------------------------------------------------------------------- AAG Contractual Obligations The following table provides details of our future cash contractual obligations as of March 31, 2014. Payments due by Period Remainder of 2019 and 2014 2015 2016 2017 2018 Thereafter Total (In millions) American Airlines Debt and capital lease obligations (1), (3) $ 662 $ 882 $ 1,703 $ 850 $ 733 $ 5,750 $ 10,580 Interest obligations (2), (3) 347 526 434 392 400 1,099 3,198 Commitments for aircraft and engine purchases and operating leases (4), (5) 3,245 5,144 5,193 4,746 4,686 16,719 39,733 Regional capacity purchase agreements (6) 276 670 676 520 511 3,849 6,502 Minimum pension contribution and other purchase obligations (7) 356 334 302 281 275 3,961 5,509 Total AA Contractual Obligations $ 4,886 $ 7,556 $ 8,308 $ 6,789 $ 6,605 $ 31,378 $ 65,522 US Airways Group and Other AAG subsidiaries Debt and capital lease obligations (1), (3) $ 423 $ 459 $ 947 $ 391 $ 1,046 $ 2,931 $ 6,197 Interest obligations (2), (3) 263 271 264 240 208 396 1,642 Commitments for aircraft and engine purchases and operating leases (4), (5) 1,276 1,295 753 1,311 1,434 1,918 7,987 Regional capacity purchase agreements (6) 863 1,014 869 734 552 1,161 5,193 Total AAG Contractual Obligations $ 7,711 $ 10,595 $ 11,141 $ 9,465 $ 9,845 $ 37,784 $ 86,541 (1) Amounts represent contractual amounts due. For American, excludes $66 million and for US Airways Group, excludes $26 million of unamortized debt discount as of March 31, 2014. (2) For variable-rate debt, future interest obligations are estimated using the current forward rates at March 31, 2014. (3) For American, includes $3.4 billion of future principal payments and $918 million of future interest payments, respectively, and for US Airways Group, includes $2.7 billion of future principal payments and $929 million of future interest payments, respectively, as of March 31, 2014, related to EETCs associated with mortgage financings for the purchase of certain aircraft. (4) See Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and Capital Resources" for additional information about the obligations of American and US Airways Group. (5) For American, includes $305 million and for US Airways Group, includes $1.9 billion of future minimum lease payments related to EETC leverage leased financings of certain aircraft as of March 31, 2014. (6) Represents minimum payments under capacity purchase agreements with third-party regional carriers. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and our actual payments could differ materially. (7) Includes minimum pension contributions based on actuarially determined estimates and other postretirement benefit payments based on estimated payments through 2023. See Note 9 to American's condensed consolidated financial statements in Part I, Item 1B. Capital Raising Activity and Other Possible Actions In light of our significant financial commitments related to, among other things, new aircraft and the servicing and amortization of existing debt and equipment leasing arrangements, we and our subsidiaries will regularly consider, and enter into negotiations related to, capital raising activity, which may include the entry into leasing transactions and future issuances of secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise. The cash available from operations and these sources, however, may not be sufficient to cover cash contractual obligations because economic factors may reduce the amount of cash generated by operations or increase costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks or natural disasters could reduce the demand for air travel, which would reduce the amount of cash generated by operations. An increase in costs, either due to an increase in borrowing costs caused by a reduction in credit ratings or a general increase in interest rates, or due to an increase in the cost 74 -------------------------------------------------------------------------------- of fuel, maintenance, or aircraft, aircraft engines or parts, could decrease the amount of cash available to cover cash contractual obligations. Moreover, the Credit Facilities, the 2013 Citicorp Credit Facility and certain of our other financing arrangements contain significant minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements. In the past, we have from time to time refinanced, redeemed or repurchased our debt and taken other steps to reduce or otherwise manage the aggregate amount and cost of our debt or lease obligations or otherwise improve our balance sheet. Going forward, depending on market conditions, our cash position and other considerations, we may continue to take such actions. Critical Accounting Policies and Estimates In the first quarter of 2014, there were no changes to our critical accounting policies and estimates from those disclosed in the consolidated financial statements and accompanying notes contained in our 2013 Form 10-K. 75-------------------------------------------------------------------------------- |