TMCnet News
AMERICAN AIRLINES 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 AAG continues to move 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 from the effective date of the Merger. Together with our wholly-owned regional airline subsidiaries and third-party regional carriers operating as 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. In the second quarter of 2014, we had approximately 51 million passengers boarding our mainline and regional flights. As of June 30, 2014, we operated 984 mainline jets and were supported by our regional airline subsidiaries and third-party regional carriers which operated an additional 557 regional aircraft. The U.S. Airline Industry During the second quarter of 2014, 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 April May June Passenger Revenues 7.8 % 7.6 % 6.6 % Yields 3.6 % 4.6 % 4.8 % 2013 vs 2012 April May June Passenger Revenues (1.8 )% 0.4 % 2.8 % Yields (1.6 )% (1.6 )% 0.8 % With respect to international versus domestic performance, Airlines for America reported domestic markets, in the second quarter of 2014, outperformed the Atlantic and Pacific markets while the Latin market experienced higher year-over-year growth in passenger revenues. 2014 vs 2013 April May June Domestic 8.7 % 7.6 % 8.2 % Atlantic 4.5 % 8.5 % 2.4 % Latin 15.4 % 12.7 % 6.0 % Pacific (5.5 )% 0.6 % 0.7 % 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 higher in the second quarter of 2014 as compared to the second quarter 2013. The average daily spot price for Brent crude oil during the second quarter of 2014 was $109 per barrel as compared to an average daily spot price of $103 per barrel during the second quarter of 2013. This increase was driven in part by violence in Iraq, which drove Brent Crude in the month of June to its highest levels in the past nine months. On a daily basis, Brent crude oil prices fluctuated during the quarter between a high of $115 per barrel to a low of $103 per barrel and closed the quarter at $111 per barrel on June 30, 2014. 55 -------------------------------------------------------------------------------- While the U.S. airline industry is currently benefiting from a favorable revenue environment as described above, uncertainty exists regarding the economic conditions driving these factors. Additionally, fuel prices remain volatile and subject to uncertainty, principally unrest in the Middle East. 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." American Airlines Group Basis of Presentation Our second quarter 2014 GAAP results are not comparable to the GAAP results for the second quarter of 2013. AAG's second 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. To provide a basis for comparison to prior year results, we have presented in the table below certain "combined" second 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 June 30, 2013 Percent Three Months Ended US Airways Change June 30, 2014 AAG Group Combined (1) (In millions) Mainline and regional passenger revenues $ 9,920 $ 5,640 $ 3,448 $ 9,088 9.2 Total operating revenues 11,355 6,449 3,850 10,299 10.2 Mainline and regional aircraft fuel and related taxes 3,365 2,140 1,133 3,273 2.8 Total operating expenses 9,956 5,937 3,371 9,308 7.0 Operating income 1,399 512 479 991 41.2 Net income 864 220 287 507 70.4 Net special charges (2) 592 137 37 174 nm (1) Percent change is a comparison of the combined results. (2) AAG's second quarter 2014 results were significantly impacted by net special charges of $592 million, consisting principally of a $330 million non-cash income tax provision associated with the sale of its last remaining fuel hedging contract and $163 million of merger integration expenses. See "AAG's Results of Operations" included in Part I, Item 2 of this report for more information on net special items. Second Quarter 2014 Results Driven by growth in revenues resulting from strong demand for air travel, we realized operating income of $1.4 billion and net income of $864 million in the second quarter of 2014. This compares to combined operating income of $991 million and combined net income of $507 million in the second quarter of 2013. Our second quarter 2014 net income included net special charges of $592 million, while the second quarter of 2013 included combined net special charges of $174 million. Excluding the effects of net special items, we recognized net income of $1.5 billion in the second quarter of 2014 which is a $775 million, or 114% improvement as compared to combined net income of $681 million excluding net special items in the second 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 second quarter of 2014, we reported operating revenues of $11.4 billion. Mainline and regional passenger revenues were $9.9 billion, an increase of $832 million, or 9.2%, as compared to the combined second quarter of 2013 mainline and regional passenger revenues of $9.1 billion. The growth in revenues was driven by a 2.5% increase in revenue passenger miles 56 -------------------------------------------------------------------------------- and a 6.5% increase in yield. Our mainline and regional passenger revenue per available seat mile (PRASM) was 14.57 cents in the second quarter of 2014, a 5.9% increase as compared to a combined 13.76 cents in the second quarter of 2013. Fuel Mainline and regional fuel expense was $3.4 billion in second quarter of 2014, which was $92 million, or 2.8%, higher as compared to the combined mainline and regional fuel expense in the second quarter of 2013. This increase was driven by a 1.5% increase in the average price per gallon to $3.03 in the second quarter of 2014 from a combined average price per gallon of $2.98 for the second quarter of 2013. A 1.3% increase in consumption also contributed to the increase. During the second quarter of 2014, we sold our portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. As of June 30, 2014, we do not have any fuel hedging contracts outstanding. We have not entered into any fuel hedges since December 9, 2013 and it is our current policy to not do so. Capacity Total system capacity for the combined company increased 3.1% in the second quarter of 2014 as compared to the combined second quarter of 2013 primarily due to more active aircraft and new larger gauge aircraft replacing smaller legacy aircraft. 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 second quarter mainline cost per available seat mile (CASM) excluding special items and fuel was 8.55 cents. When compared to the 2013 second quarter combined results, mainline CASM excluding special items and fuel increased 2.2% in the second quarter of 2014. The increase was primarily due to higher salaries, wages and benefits driven by merger related labor contracts. 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. Our second quarter 2014 operating performance was negatively impacted by severe weather conditions in May and June which drove flight cancellations, particularly at our Chicago and Dallas/Fort Worth hubs. We reported the following combined operating statistics to the DOT for mainline operations for the second quarter of 2014 and 2013: 2014 2013(a) Better (Worse) 2014-2013 April May June (f) April May June April May June On-time performance (b) 82.7 79.1 72.1 76.1 78.7 71.2 6.6 pts 0.4 pts 0.9 pts Completion factor (c) 99.4 98.2 98.8 98.4 99.0 98.6 1.0 pts (0.8) pts 0.2 pts Mishandled baggage (d) 3.00 3.73 4.16 2.77 2.63 3.38 (8.3)% (41.8)% (23.1)% Customer complaints (e) 1.94 2.25 2.25 2.04 1.59 1.89 4.9% (41.5)% (19.0)% (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) June 2014 operating statistics are preliminary as the DOT has not issued its June 2014 Air Travel Consumer Report as of the date of this filing. Liquidity Position As of June 30, 2014, AAG's total cash and short-term investments was $10.3 billion, of which $882 million was restricted. The Company also has a $1 billion undrawn revolving credit facility. 57 -------------------------------------------------------------------------------- June 30, December 31, 2014 2013 (In millions) Cash and short-term investments (1) $ 9,459 $ 9,251 Restricted cash and short-term investments (2) 882 1,035 Total cash and short-term investments $ 10,341 $ 10,286 (1) As of June 30, 2014, $791 million of our unrestricted cash balance was held in Venezuelan bolivars, valued at the weighted average applicable exchange rate of 6.53 bolivars to the dollar. This includes approximately $94 million valued at 4.3 bolivars, approximately $611 million valued at 6.3 bolivars, and approximately $86 million valued at 10.6 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 June 30, 2014 was 10.6 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. However, pending further repatriation of funds, and due to the significant decrease in demand for air travel resulting from the effective devaluation of the bolivar, we recently significantly reduced capacity in this market. We 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 this and other currency risks. (2) Restricted cash and investments primarily include cash collateral to secure workers' compensation claims. In the first six months of 2014, we utilized cash generated from operations to pay down certain debt obligations and reduce our diluted share count. In March, we prepaid $100 million of our 7.50% senior secured notes at a redemption price of 103%, in May we prepaid $113 million of certain aircraft debt, and in June we prepaid $51 million of obligations, of which $29 million was reflected as debt on our balance sheet, associated with special facility revenue bonds issued by municipalities to build or improve certain airport and maintenance facilities. In June, we also gave notice that we intend to prepay an additional $261 million of special facility bond related obligations in the third quarter of 2014, of which $106 million is reflected as debt on our balance sheet. The off-balance sheet portion of these obligations are accounted for as operating leases. We also used $630 million of cash to purchase aircraft that were previously leased. In connection with first and second quarter 2014 distributions under the Plan, we paid $246 million in cash for tax withholdings for employees in lieu of issuing 7 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 May 2014, we settled US Airways Group's 7.25% convertible notes for approximately $175 million in cash instead of shares of AAG Common Stock. This reduced our diluted share count by approximately 4 million shares. Additionally, in July 2014 we announced the following: Capital Deployment Program On July 23, 2014, our Board of Directors authorized a $1.0 billion share repurchase program to be completed no later than December 31, 2015. Shares repurchased under the program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. Additionally on June 23, 2014, the Board of Directors declared a $0.10 per share dividend for stockholders of record on August 4, 2014, and payable on August 18, 2014. The program described above does not obligate us to repurchase any specific number of shares or continue a dividend for any fixed period, and may be suspended at any time at management's discretion. Redemption of 7.50% Senior Secured Notes On July 23, 2014, we gave irrevocable notice calling for the redemption of the $900 million principal amount of 7.50% senior secured notes due March 31, 2016 that remain outstanding at a redemption price of 103.75% of the principal amount plus accrued and unpaid interest. These notes will be required to be redeemed on August 22, 2014. 58 -------------------------------------------------------------------------------- Pension Prefunding On July 23, 2014, our Board of Directors approved plans to make supplemental contributions of up to $600 million to our defined benefit plans in 2014. These contributions would be above and beyond the $120 million minimum required contributions for 2014. 2014 Outlook We have taken significant actions in the last year to restore our competitiveness, including the completion of our restructuring and the Merger. Although it is difficult to predict the price of oil or the strength of the economy, we believe that our second quarter 2014 financial results are evidence of the strong foundation we have in place and can build on. 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 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 and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding. Three Months Ended June 30, 2013 Reconciliation of Operating Cost per ASM Excluding Special Items and Fuel - Three Months Ended June Mainline Only 30, 2014 AAG US Airways Group Combined (In millions, except per ASM amounts) Total operating expenses $ 9,956 $ 5,937 $ 3,371 $ 9,308 Less regional expenses: Fuel (535 ) (260 ) (261 ) (521 ) Other (1,122 ) (509 ) (561 ) (1,070 ) Total mainline operating expenses 8,299 5,168 2,549 7,717 Less: Special items, net (251 ) (12 ) (24 ) (36 ) Mainline operating expenses, excluding special items 8,048 5,156 2,525 7,681 Less: Aircraft fuel and related taxes (2,830 ) (1,880 ) (872 ) (2,752 ) Mainline operating expenses, excluding special items and fuel $ 5,218 $ 3,276 $ 1,653 $ 4,929 Available Seat Miles (ASM) 60,999 38,723 20,192 58,915 (In cents) Mainline operating expenses per ASM $ 13.61 $ 13.10 Less: Special items, net per ASM (0.41 ) (0.06 ) Mainline operating expenses per ASM, excluding special items 13.19 13.04 Less: Aircraft fuel and related taxes per ASM (4.64 ) (4.67 ) Mainline operating expenses per ASM, excluding special items and fuel $ 8.55 $ 8.37 59-------------------------------------------------------------------------------- AAG's Results of Operations In the second quarter of 2014, we realized operating income of $1.4 billion and net income of $864 million. Our second quarter 2014 net income included net special operating charges of $253 million and total net special charges of $592 million. Excluding the effects of these special charges, we realized operating income of $1.7 billion and net income of $1.5 billion. In the first six months of 2014, we realized operating income of $2.1 billion and net income of $1.3 billion. Our 2014 six month period net income included net special operating charges of $120 million and total net special charges of $515 million. Excluding the effects of these special charges, we realized operating income of $2.2 billion and net income of $1.9 billion. Under GAAP, AAG's results do not include the financial results of US Airways Group prior to the closing of the Merger. Accordingly, our 2014 second quarter and six month period GAAP results are not comparable to the GAAP results for the 2013 second quarter and six month period as the 2013 periods exclude the results of US Airways Group. When compared to the combined separate company results of AMR and US Airways Group for the second quarter of 2013, our second quarter 2014 net income excluding net special items improved $775 million. In the second quarter of 2013, on a standalone basis, AMR reported net income of $220 million and US Airways Group reported net income of $287 million. Excluding the effects of net special charges, AMR and US Airways Group reported net income of $357 million and $324 million, respectively. When compared to the combined separate company results of AMR and US Airways Group for the first six months of 2013, our 2014 six month period net income excluding net special items improved $1.1 billion. In the first six months of 2013, on a standalone basis, AMR reported a net loss of $122 million and US Airways Group reported net income of $331 million. Excluding the effects of net special charges, AMR and US Airways Group reported net income of $364 million and $379 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 June 30, Six Months Ended June 30, 2014 2013 2014 2013 Mainline operating special items, net (1) $ 251 $ 12 $ 114 $ 83 Regional operating special items, net 2 1 6 3 Nonoperating special items, net (2) 2 - 50 116 Reorganization items, net (3) - 124 - 284 Income tax special items, net (4) 337 - 345 - Total $ 592 $ 137 $ 515 $ 486 (1) The 2014 second quarter mainline operating special items totaled a net charge of $251 million, which principally included $163 million of merger integration expenses related to information technology, professional fees, severance, re-branding of aircraft and airport facilities, relocation and training as well as a net $38 million charge for bankruptcy related items primarily reflecting fair value adjustments for bankruptcy settlement obligations and $37 million in charges relating to the buyout of leases associated with certain aircraft. The 2014 six month period mainline operating special items totaled a net charge of $114 million, which principally included $365 million of merger integration expenses, $40 million in charges primarily relating to the buyout of leases associated with certain aircraft and a net $5 million charge for bankruptcy related items as described above. These charges were offset in part by a $309 million gain on the sale of slots at Ronald Reagan Washington National Airport (DCA). The 2013 second quarter mainline operating special items primarily consisted of merger related expenses. The 2013 six month period mainline operating special items included $40 million in merger related expenses and a $43 million charge for workers' compensation claims. (2) The 2014 second quarter and six month period nonoperating special items were primarily due to non-cash interest accretion of $2 million and $33 million, respectively, on the bankruptcy settlement obligations. The 2013 six month period nonoperating special items consisted of interest charges to recognize post-petition interest expense on unsecured obligations pursuant to the Plan. (3) In the 2013 second quarter and six month period, we recognized reorganization expenses as a result of the filing of voluntary petitions for relief under Chapter 11. These amounts consisted primarily of estimated allowed claim amounts and professional fees. 60 -------------------------------------------------------------------------------- (4) During the second quarter of 2014, we sold our portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, we recorded a special non-cash tax provision of $330 million in the statement of operations for the second quarter of 2014 that reverses the non-cash tax provision which was recorded in Other Comprehensive Income (OCI), a subset of stockholders' equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of our fuel hedging contracts. In accordance with GAAP, we retained the $330 million tax provision in OCI until the last contract was settled or terminated. In addition, we recorded $7 million in non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter. The 2014 six month period included the $330 million non-cash tax provision related to the settlement of fuel hedges discussed above as well as $15 million in 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 and six months ended June 30, 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 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. During the second quarter of 2014, we recorded a special $330 million non-cash income tax provision in connection with the settlement of our fuel hedges as discussed above. In addition, we recorded a special $7 million and $15 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter and the 2014 six month period, respectively. For the three and six months ended June 30, 2014, we recorded $3 million and $8 million, respectively, of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used. We did not record an income tax provision for the 2013 second quarter. For the six months ended June 30, 2013, we reported a loss before income taxes and recorded an income tax benefit of approximately $22 million as a result of the American Taxpayer Relief Act of 2012. 61 -------------------------------------------------------------------------------- Operating Statistics The table below sets forth selected mainline and regional operating data for the three and six months ended June 30, 2014 and 2013. Three Months Ended June 30, Six Months Ended June 30, 2014 2013 Increase 2014 2013 Increase (Note 1) (Decrease) (Note 1) (Decrease) Mainline Revenue passenger miles (millions) (a) 51,407 50,226 2.4 % 97,234 95,249 2.1 % Available seat miles (ASM) (millions) (b) 60,999 58,915 3.5 % 117,830 114,269 3.1 % (1.0) (0.9)Passenger load factor (percent) (c) 84.3 85.3 pts 82.5 83.4 pts Yield (cents) (d) 15.98 14.83 7.7 % 15.91 14.97 6.3 % Passenger revenue per ASM (cents) (e) 13.46 12.64 6.5 % 13.13 12.48 5.2 % Operating cost per ASM (cents) (f) 13.61 13.10 3.9 % 13.55 13.48 0.6 % Passenger enplanements (thousands) (g) 37,910 36,987 2.5 % 72,754 71,420 1.9 % Departures (thousands) 292 289 0.9 % 571 569 0.4 % Aircraft at end of period 984 975 0.9 % 984 975 0.9 % Block hours (thousands) (h) 901 882 2.2 % 1,754 1,723 1.8 % Average stage length (miles) (i) 1,215 1,193 1.8 % 1,202 1,182 1.6 % Fuel consumption (gallons in millions) 937 922 1.6 % 1,811 1,780 1.8 % Average aircraft fuel price including related taxes ($/gallon) 3.02 2.98 1.2 % 3.06 3.12 (1.8 )% Full-time equivalent employees at end of period 94,061 91,710 2.6 % 94,061 91,710 2.6 % Regional (j) Revenue passenger miles (millions) (a) 5,787 5,589 3.6 % 10,846 10,585 2.5 % Available seat miles (millions) (b) 7,091 7,120 (0.4 )% 13,652 13,895 (1.7 )% Passenger load factor (percent) (c) 81.6 78.5 3.1 pts 79.4 76.2 3.2 pts Yield (cents) (d) 29.49 29.34 0.5 % 28.71 29.11 (1.4 )% Passenger revenue per ASM (cents) (e) 24.07 23.03 4.5 % 22.81 22.18 2.8 % Operating cost per ASM (cents) (f) 23.37 22.35 4.6 % 23.82 23.05 3.3 % Passenger enplanements (thousands) (g) 13,553 12,957 4.6 % 25,262 24,624 2.6 % Aircraft at end of period 557 554 0.5 % 557 554 0.5 % Fuel consumption (gallons in millions) 174 175 (0.3 )% 336 341 (1.4 )% Average aircraft fuel price including related taxes ($/gallon) 3.07 2.98 3.0 % 3.08 3.10 (0.7 )% Total Mainline and Regional Revenue passenger miles (millions) (a) 57,194 55,815 2.5 % 108,080 105,834 2.1 % Available seat miles (millions) (b) 68,090 66,035 3.1 % 131,482 128,164 2.6 % Cargo ton miles (millions) (k) 595 559 6.5 % 1,155 1,059 9.1 % (0.5) (0.4) Passenger load factor (percent) (c) 84.0 84.5 pts 82.2 82.6 pts Yield (cents) (d) 17.34 16.28 6.5 % 17.20 16.38 4.9 % Passenger revenue per ASM (cents) (e) 14.57 13.76 5.9 % 14.13 13.53 4.5 % Total revenue per ASM (cents) (l) 16.68 15.60 6.9 % 16.24 15.42 5.3 % Cargo yield per ton mile (cents) (m) 37.16 36.56 1.6 % 37.02 37.88 (2.3 )% Passenger enplanements (thousands) (g) 51,463 49,944 3.0 % 98,016 96,044 2.1 % Aircraft at end of period 1,541 1,529 0.8 % 1,541 1,529 0.8 % Fuel consumption (gallons in millions) 1,111 1,097 1.3 % 2,147 2,121 1.2 % Average aircraft fuel price including related taxes ($/gallon) 3.03 2.98 1.5 % 3.06 3.11 (1.6 )% 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. 62--------------------------------------------------------------------------------(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 our subsidiaries, Envoy Aviation Group Inc. (formerly known as AMR Eagle Holding Corporation), Piedmont Airlines, Inc. and 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 June 30, 2014 Compared to Three Months Ended June 30, 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 June Change Excluding Merger 30, $ Change Due Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Mainline passenger $ 8,213 $ 4,888 $ 3,325 $ 2,861 $ 464 9.5 Regional passenger 1,707 752 955 921 34 4.4 Cargo 221 169 52 43 9 5.8 Other 1,214 640 574 388 186 29.0 Total operating revenues $ 11,355 $ 6,449 $ 4,906 $ 4,213 $ 693 10.7 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 second quarter of 2014 increased $693 million, or 10.7%, from the 2013 period which was driven by strong demand for air travel. Significant changes in the components of operating revenues, excluding the results of US Airways Group, are as follows: • Mainline passenger revenues increased $464 million, or 9.5%, in the second quarter of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $9 million, or 5.8%, in the second quarter of 2014 from the 2013 period driven primarily by an increase in transatlantic freight volumes. • Other revenues increased $186 million, or 29.0%, in the second quarter of 2014 from the 2013 period driven primarily by higher revenues associated with our frequent flyer programs. 63--------------------------------------------------------------------------------Operating Expenses Three Months Ended June Change Excluding Merger 30, $ Change Due Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Aircraft fuel and related taxes $ 2,830 $ 1,880 $ 950 $ 932 $ 18 0.9 Salaries, wages and benefits 2,163 1,284 879 720 159 12.4 Maintenance, materials and repairs 514 317 197 168 29 9.1 Other rent and landing fees 441 284 157 153 4 1.9 Aircraft rent 312 181 131 102 29 15.7 Selling expenses 402 273 129 121 8 3.3 Depreciation and amortization 319 207 112 99 13 6.4 Special items, net 251 12 239 74 165 nm Other 1,067 730 337 332 5 0.6Total mainline operating expenses 8,299 5,168 3,131 2,701 430 8.3 Regional expenses: Fuel 535 260 275 265 10 4.0 Other 1,122 509 613 580 33 6.3 Total regional operating expenses 1,657 769 888 845 43 5.5 Total operating expenses $ 9,956 $ 5,937 $ 4,019 $ 3,546 $ 473 8.0 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 second quarter of 2014 increased $473 million, or 8.0%, 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 increased 0.9% primarily due to an increase in the average price per gallon of fuel. • Salaries, wages and benefits increased 12.4% primarily due to merger related labor contracts. • Maintenance, materials and repairs increased 9.1% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 15.7% primarily as a result of new leased aircraft deliveries since the end of the 2013 second quarter as we continue our fleet renewal program. • Depreciation and amortization increased 6.4% primarily as a result of new purchased aircraft deliveries since the end of the 2013 second quarter as we continue our fleet renewal program. Regional Operating Expenses: Total regional expenses, excluding the results of US Airways Group, increased $43 million, or 5.5%, in the second quarter of 2014 from the 2013 period. This increase was primarily due to higher expenses associated with certain capacity purchase agreements. Nonoperating Income (Expense) Change Excluding Merger Three Months Ended June 30, $ Change Due to Impact 2014 2013 $ Change Merger $ % (In millions, except percentage changes) Interest income $ 8 $ 5 $ 3 $ 2 $ 1 34.0 Interest expense, net of capitalized interest (214 ) (161 ) (53 ) (77 ) 24 (15.3 ) Other, net 11 (12 ) 23 (6 ) 29 nmTotal nonoperating expense, net $ (195 ) $ (168 ) $ (27 ) $ (81 ) $ 54 (31.9 ) 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. 64 -------------------------------------------------------------------------------- Interest income was $8 million and $5 million in the second 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 $24 million, or 15.3%, in the second quarter of 2014 from the 2013 period principally due to interest expense recorded in the 2013 second quarter relating to unsecured obligations pursuant to the Plan. Other nonoperating income, net increased $29 million in the second quarter of 2014 from the 2013 period primarily due to the weakening of the U.S. dollar in foreign currency transactions. The second quarter of 2014 included $12 million in net foreign currency gains as compared to $23 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 filing of voluntary petitions for relief under Chapter 11, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on AAG's condensed consolidated statement of operations for the three months ended June 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 83 Professional fees 40 Other 1 Total reorganization items, net $ 124 (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. 65-------------------------------------------------------------------------------- Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 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 Change Excluding Six Months Ended June 30, $ Change Due Merger Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Mainline passenger $ 15,471 $ 9,502 $ 5,969 $ 5,213 $ 756 8.0 Regional passenger 3,114 1,431 1,683 1,660 23 1.7 Cargo 428 325 103 81 22 6.6 Other 2,338 1,289 1,049 768 281 21.7 Total operating revenues $ 21,351 $ 12,547 $ 8,804 $ 7,722 $ 1,082 8.6 The following discussion of operating revenues excludes the results of US Airways Group in order to provide a more meaningful period-over-period comparison. Total operating revenues in the first six months of 2014 increased $1.1 billion, or 8.6%, from the 2013 period which was driven by strong demand for air travel. Significant changes in the components of operating revenues, excluding the results of US Airways Group, are as follows: • Mainline passenger revenues increased $756 million, or 8.0%, in the first six months of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $22 million, or 6.6%, in the first six months of 2014 from the 2013 period driven primarily by an increase in transatlantic freight volumes. • Other revenues increased $281 million, or 21.7%, in the first six months of 2014 from the 2013 period driven primarily by higher revenues associated with our frequent flyer programs. 66-------------------------------------------------------------------------------- Operating Expenses Six Months Ended June 30, $ Change Due Change Excluding Merger Impact 2014 2013 $ Change to Merger $ % (Inmillions, except percentage changes) Aircraft fuel and related taxes $ 5,541 $ 3,814 $ 1,727 $ 1,772 $ (45 ) (1.2 ) Salaries, wages and benefits 4,282 2,551 1,731 1,439 292 11.5 Maintenance, materials and repairs 999 643 356 321 35 5.5 Other rent and landing fees 866 572 294 292 2 0.5 Aircraft rent 631 346 285 206 79 23.0 Selling expenses 804 563 241 238 3 0.5 Depreciation and amortization 626 411 215 192 23 5.5 Special items, net 114 83 31 129 (98 ) nm Other 2,108 1,432 676 633 43 3.0 Total mainline operating expenses 15,971 10,415 5,556 5,222 334 3.2 Regional expenses: Fuel 1,035 525 510 512 (2 ) (0.4 ) Other 2,216 1,024 1,192 1,142 50 4.9 Total regional operating expenses 3,251 1,549 1,702 1,654 48 3.1 Total operating expenses $ 19,222 $ 11,964 $ 7,258 $ 6,876 $ 382 3.2 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 six months of 2014 increased $382 million, or 3.2%, 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 1.2% primarily due to a decrease in the average price per gallon of fuel. • Salaries, wages and benefits increased 11.5% primarily due to merger related labor contracts as well as increased costs from certain share-based compensation programs. • Maintenance, materials and repairs increased 5.5% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 23.0% primarily as a result of new leased aircraft deliveries since the end of the 2013 second quarter as we continue our fleet renewal program. • Depreciation and amortization increased 5.5% as a result of new purchased aircraft deliveries since the end of the 2013 second quarter as we continue our fleet renewal program. Regional Operating Expenses: Total regional expenses, excluding the results of US Airways Group, increased $48 million, or 3.1%, in the first six months of 2014 from the 2013 period. Nonoperating Income (Expense) Change Excluding Merger Six Months Ended June 30, $ Change Due to Impact 2014 2013 $ Change Merger $ % (In millions, except percentage changes) Interest income $ 15 $ 9 $ 6 $ 2 $ 4 43.1 Interest expense, net of capitalized interest (457 ) (415 ) $ (42 ) (152 ) 110 (26.4 ) Other, net 9 (37 ) $ 46 (2 ) 48 nmTotal nonoperating expense, net $ (433 ) $ (443 ) $ 10 $ (152 ) $ 162 (36.3 ) The following discussion of nonoperating income and expense excludes the results of US Airways Group in order to provide a more meaningful period-over-period comparison. 67 -------------------------------------------------------------------------------- Interest income was $15 million and $9 million in the first six months 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 $110 million, or 26.4%, in the first six months of 2014 from the 2013 period. This decrease was primarily due to $33 million of special charges recognized in the first six months of 2014 relating to non-cash interest accretion on bankruptcy settlement obligations, as compared to $116 million of special charges recognized in the first six months of 2013 relating to post-petition interest expense on unsecured obligations pursuant to the Plan. Other nonoperating income, net increased $48 million in the first six months of 2014 from the 2013 period primarily due to the weakening of the U.S. dollar in foreign currency transactions. The first six months of 2014 included $15 million in net foreign currency gains as compared to $42 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 filing of voluntary petitions for relief under Chapter 11, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on AAG's condensed consolidated statement of operations for the six months ended June 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 219 Professional fees 79 Other (14 ) Total reorganization items, net $ 284 (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. 68-------------------------------------------------------------------------------- American's Results of Operations In the second quarter of 2014, American realized operating income of $718 million and net income of $265 million. American's second quarter 2014 net income included net special operating charges of $180 million and total net special charges of $511 million. Excluding the effects of these special charges, American realized operating income of $898 million and net income of $776 million. In the first six months of 2014, American realized operating income of $1.3 billion and net income of $666 million. American's 2014 six month period net income included net special operating credits of $35 million and total net special charges of $347 million. Excluding the effects of these special items, we realized operating income of $1.3 billion and net income of $1.0 billion. The components of American's net special charges (credits) are as follows (in millions): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013Mainline operating special items, net (1) $ 179 $ 12 $ (37 ) $ 83 Regional operating special items, net 1 - 2 - Nonoperating special items, net (2) (4 ) - 40 27 Reorganization items, net (3) - 124 - 283 Income tax special items, net (4) 335 - 342 - Total $ 511 $ 136 $ 347 $ 393 (1) The 2014 second quarter mainline operating special items totaled a net charge of $179 million, which principally included $99 million of merger integration expenses related to information technology, professional fees, severance, re-branding of aircraft and airport facilities, relocation and training as well as a net $40 million charge for bankruptcy related items primarily reflecting fair value adjustments for bankruptcy settlement obligations and $26 million in charges relating to the buyout of leases associated with certain aircraft. The 2014 six month period mainline operating special items totaled a net credit of $37 million, which principally included a $305 million gain on the sale of slots at DCA and a net $16 million credit for bankruptcy related items primarily reflecting fair value adjustments for bankruptcy settlement obligations. These special credits were offset in part by $234 million of merger integration expenses as described above as well as $29 million in charges primarily relating to the buyout of leases associated with certain aircraft. The 2013 second quarter mainline operating special items primarily consisted of merger related expenses. The 2013 six month period included $40 million in merger related expenses and a $43 million charge for workers' compensation claims. (2) The 2014 six month period nonoperating special items of $40 million were primarily due to non-cash interest accretion on the bankruptcy settlement obligations. The 2013 six month period nonoperating special items consisted of interest charges to recognize post-petition interest expense on unsecured obligations pursuant to the Plan. (3) In the 2013 second quarter and six month period, American recognized reorganization expenses as a result of the filing of voluntary petitions for relief under Chapter 11. These amounts consisted primarily of estimated allowed claim amounts and professional fees. (4) During the second quarter of 2014, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the statement of operations for the second quarter of 2014 that reverses the non-cash tax provision which was recorded in OCI, a subset of stockholders' equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American's fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated. In addition, American recorded $7 million in non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter. The 2014 six month period included the $328 million non-cash tax provision related to the settlement of fuel hedges discussed above as well as $14 million in non-cash deferred income tax provision related to certain indefinite-lived intangible assets. 69 -------------------------------------------------------------------------------- The emergence from bankruptcy 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. During the second quarter of 2014, American recorded a special $328 million non-cash income tax provision in connection with the settlement of our fuel hedges as discussed above. In addition, American recorded a special $7 million and $14 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets in the 2014 second quarter and 2014 six month period, respectively. For the three and six months ended June 30, 2014, American recorded $1 million and $5 million, respectively, of state and international income tax expense related to certain states and countries where NOLs were limited or unavailable to be used. American did not record an income tax provision in the 2013 second quarter. For the six months ended June 30, 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. 70 -------------------------------------------------------------------------------- Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 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 June 30, Percent Increase 2014 2013 (Decrease) (In millions) Mainline passenger $ 5,352 $ 4,888 9.5 Regional passenger 786 752 4.4 Cargo 178 169 5.3 Other 837 628 33.3 Total operating revenues $ 7,153 $ 6,437 11.1 Total operating revenues in the second quarter of 2014 increased $716 million, or 11.1%, 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 $464 million, or 9.5%, in the second quarter of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $9 million, or 5.3%, in the second quarter of 2014 from the 2013 period driven primarily by an increase in transatlantic freight volumes. • Other revenues increased $209 million, or 33.3%, in the second quarter of 2014 from the 2013 period driven primarily by higher revenues associated with American's frequent flyer program. 71-------------------------------------------------------------------------------- Operating Expenses Three Months Ended June 30, Percent Increase 2014 2013 (Decrease) (In millions) Aircraft fuel and related taxes $ 1,897 $ 1,880 0.9 Salaries, wages and benefits 1,441 1,282 12.4 Maintenance, materials and repairs 346 317 9.1 Other rent and landing fees 289 284 1.9 Aircraft rent 214 181 17.9 Selling expenses 282 273 3.3 Depreciation and amortization 220 207 6.4 Special items, net 179 12 nm Other 763 739 3.3 Total mainline operating expenses 5,631 5,175 8.8 Regional expenses: Fuel 270 259 4.2 Other 534 502 6.2 Total regional operating expenses 804 761 5.7 Total operating expenses $ 6,435 $ 5,936 8.4 Total operating expenses in the second quarter of 2014 increased $499 million, or 8.4%, from the 2013 period. Significant changes in the components of mainline operating expenses are as follows: • Aircraft fuel and related taxes increased 0.9% primarily due to a increase in the average price per gallon of fuel. • Salaries, wages and benefits increased 12.4% primarily due to merger related labor contracts. • Maintenance, materials and repairs increased 9.1% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 17.9% primarily as a result of new leased aircraft deliveries since the end of the 2013 second quarter as American continues its fleet renewal program. • Depreciation and amortization increased 6.4% primarily as a result of new purchased aircraft deliveries since the end of the 2013 second quarter as American continues its fleet renewal program. Regional Operating Expenses Total regional expenses increased $43 million, or 5.7%, in the second quarter of 2014 from the 2013 period. This increase is primarily due to higher expenses associated with certain capacity purchase agreements. Nonoperating Income (Expense) Three Months Ended June 30, Percent Increase 2014 2013 (Decrease) (In millions) Interest income $ 6 $ 5 37.9 Interest expense, net of capitalized interest (139 ) (147 ) (5.4 ) Other, net 16 (7 ) nm Total nonoperating expense, net $ (117 ) $ (149 ) 21.8 Interest income was $6 million and $5 million in the second quarter of 2014 and 2013, respectively. American's short-term investments in each period consisted of highly liquid investments which provided nominal returns. 72 -------------------------------------------------------------------------------- Interest expense, net of capitalized interest decreased $8 million, or 5.4%, in the second quarter of 2014 from the 2013 period principally due to interest expense recorded in the 2013 second quarter relating to unsecured obligations pursuant to the Plan. Other nonoperating income, net increased $23 million in the second quarter of 2014 from the 2013 period primarily due to the weakening of the U.S. dollar in foreign currency transactions. The second quarter of 2014 included $11 million in net foreign currency gains as compared to $23 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 filing of voluntary petitions for relief under Chapter 11, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on American's condensed consolidated statement of operations for the three months ended June 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 83 Professional fees 40 Other 1 Total reorganization items, net $ 124 (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. 73-------------------------------------------------------------------------------- Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 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 Six Months Ended June 30, Percent Increase 2014 2013 (Decrease) (In millions) Mainline passenger $ 10,258 $ 9,502 8.0 Regional passenger 1,455 1,431 1.7 Cargo 346 325 6.5 Other 1,563 1,264 23.6 Total operating revenues $ 13,622 $ 12,522 8.8 Total operating revenues in the first six months of 2014 increased $1.1 billion, or 8.8%, 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 $756 million or 8.0%, in the first six months of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $21 million, or 6.5%, in the first six months of 2014 from the 2013 period driven primarily by an increase in transatlantic freight volumes. • Other revenues increased $299 million, or 23.6%, in the first six months of 2014 from the 2013 period driven primarily by higher revenues associated with American's frequent flyer program. 74-------------------------------------------------------------------------------- Operating Expenses Six Months Ended June 30, Percent Increase 2014 2013 (Decrease) (In millions) Aircraft fuel and related taxes $ 3,768 $ 3,814 (1.2 ) Salaries, wages and benefits 2,839 2,546 11.5 Maintenance, materials and repairs 678 643 5.4 Other rent and landing fees 574 572 0.5 Aircraft rent 430 346 24.2 Selling expenses 566 563 0.5 Depreciation and amortization 434 411 5.5 Special items, net (37 ) 83 nm Other 1,512 1,449 4.4 Total mainline operating expenses 10,764 10,427 3.2 Regional expenses: Fuel 523 524 (0.3 ) Other 1,039 1,004 3.6 Total regional operating expenses 1,562 1,528 2.2 Total operating expenses $ 12,326 $ 11,955 3.1 Total operating expenses in the first six months of 2014 increased $371 million, or 3.1%, from the 2013 period. Significant changes in the components of mainline operating expenses are as follows: • Aircraft fuel and related taxes decreased 1.2% primarily due to a decrease in the average price per gallon of fuel. • Salaries, wages and benefits increased 11.5% primarily due to merger related labor contracts as well as increased costs from certain share-based compensation programs. • Maintenance, materials and repairs increased 5.4% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 24.2% primarily as a result of new leased aircraft deliveries since the end of the 2013 second quarter as American continues its fleet renewal program. • Depreciation and amortization increased 5.5% primarily as a result of new purchased aircraft deliveries since the end of the 2013 second quarter as American continues its fleet renewal program. Regional Operating Expenses Total regional expenses increased $34 million, or 2.2%, in the second quarter of 2014 from the 2013 period. Nonoperating Income (Expense) Six Months Ended June 30, Percent Increase 2014 2013 (Decrease) (In millions) Interest income $ 13 $ 9 47.2 Interest expense, net of capitalized interest (307 ) (315 ) (2.5 ) Other, net 11 (33 ) nm Total nonoperating expense, net $ (283 ) $ (339 ) (16.5 ) Interest income was $13 million and $9 million in the first six months of 2014 and 2013, respectively. American's short-term investments in each period consisted of highly liquid investments which provided nominal returns. 75 -------------------------------------------------------------------------------- Other nonoperating income, net increased $44 million in the first six months of 2014 from the 2013 period primarily due to the weakening of the U.S. dollar in foreign currency transactions. The first six months of 2014 included $15 million in net foreign currency gains as compared to $42 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 filing of voluntary petitions for relief under Chapter 11, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on American's condensed consolidated statement of operations for the six months ended June 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 219 Professional fees 78 Other (14 ) Total reorganization items, net $ 283 (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. 76-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash, Short-Term Investments and Restricted Cash As of June 30, 2014, AAG's total cash, short-term investments and restricted cash and short-term investments was $10.3 billion, of which $882 million was restricted. Additional detail is provided in the table below (in millions): AAG American June 30, December 31, June 30, December 31, 2014 2013 2014 2013 Cash $ 1,210 $ 1,140 $ 981 $ 829 Short-term investments 8,249 8,111 4,822 5,162 Restricted cash and short-term investments (1) 882 1,035 650 702 Total cash, short-term investments and restricted cash and short-term investments $ 10,341 $ 10,286 $ 6,453 $ 6,693 (1) Our restricted cash and short-term investments related primarily to collateral held to support projected workers compensation obligations. As of June 30, 2014, approximately $887 million of our cash and short-term investments balances were held in foreign bank accounts, of which $791 million is held in Venezuelan bolivars. The Venezuelan bolivars are valued at the weighted average applicable exchange rate of 6.53 bolivars to the dollar. This includes approximately $94 million valued at 4.3 bolivars, approximately $611 million valued at 6.3 bolivars, and approximately $86 million valued at 10.6 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 June 30, 2014 was 10.6 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. However, pending further repatriation of funds, and due to the significant decrease in demand for air travel resulting from the effective devaluation of the bolivar, we recently significantly reduced capacity in this market. We 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 this and other currency risks. Sources and Uses of Cash AAG Operating Activities Net cash provided by operating activities was $2.6 billion and $1.9 billion for the first six months of 2014 and 2013, respectively, a period-over-period improvement of $767 million. This period-over-period improvement is principally due to the inclusion of US Airways Group's net cash provided by operating activities for the 2014 period. Investing Activities Net cash used in investing activities was $2.3 billion and $4.0 billion for the first six months of 2014 and 2013, respectively. Principal investing activities in the 2014 period included expenditures of $2.7 billion for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 10 Boeing 737 family aircraft, three Boeing 777 aircraft, 14 A320 family aircraft, three A330 aircraft and three Bombardier CRJ-900 aircraft, the purchase of three A330 aircraft, two Boeing 777 aircraft and two A320 family aircraft previously being leased, as well as pre-delivery deposits for certain aircraft on order, and $138 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 a $153 million decrease in restricted cash and short-term investments primarily 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 $2.2 billion in net purchases of short-term investments and expenditures of $1.8 billion for property and equipment, consisting primarily of the purchase of 18 Boeing 737 family aircraft and six Boeing 777 aircraft, as well as pre-delivery deposits for certain aircraft on order. 77-------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash used in financing activities was $220 million for the first six months of 2014 as compared to net cash provided by financing activities of $2.3 billion for the first six months of 2013. Principal financing activities in the 2014 period included debt repayments of $1.1 billion including the $175 million settlement of our 7.25% Convertible Notes, $113 million prepayment of outstanding debt secured by certain aircraft and $100 million prepayment on our 7.50% Senior Secured Notes. These cash outflows were offset in part by proceeds of $534 million primarily from the issuance of EETC equipment notes and other debt associated with aircraft deliveries in 2014 and $411 million from sale-leaseback transactions related to the financing of 10 Boeing 737 family aircraft. Principal financing activities in the 2013 period included proceeds of $1.7 billion from the issuance of EETC equipment notes and $1.1 billion from sale-leaseback transactions related to the financing of 17 Boeing 737 family aircraft and three Boeing 777 aircraft. These proceeds were offset in part by debt repayments of $551 million. American Operating Activities Net cash provided by operating activities was $1.7 billion and $1.9 billion for the first six months of 2014 and 2013, respectively, a period-over-period decrease of $172 million. Investing Activities Net cash used in investing activities was $1.3 billion and $4.0 billion for the first six months of 2014 and 2013, respectively. Principal investing activities in the 2014 period included expenditures of $1.8 billion for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 10 Boeing 737 family aircraft, three Boeing 777 aircraft, seven A320 family aircraft and three Bombardier CRJ-900 aircraft, the purchase of two Boeing 777 aircraft and two A320 family aircraft previously being leased, as well as pre-delivery deposits for certain aircraft on order, and $198 million of cash transferred to affiliates. These cash outflows were offset in part by $340 million in net sales of short-term investments, $299 million in proceeds from the sale of DCA slots and a $52 million decrease in restricted cash and short-term investments primarily 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 $2.2 billion in net purchases of short-term investments and expenditures of $1.8 billion for property and equipment, consisting primarily of the purchase of 18 Boeing 737 family aircraft and six Boeing 777 aircraft, as well as pre-delivery deposits for certain aircraft on order. Financing Activities Net cash used in financing activities was $203 million for the first six months of 2014 as compared to net cash provided by financing activities of $2.3 billion for the first six months of 2013. Principal financing activities in the 2014 period included debt repayments of $655 million including the $100 million prepayment on American's 7.50% Senior Secured Notes and $61 million prepayment of outstanding debt secured by certain aircraft. These cash outflows were offset in part by proceeds of $411 million from sale-leaseback transactions related to the financing of 10 Boeing 737 family aircraft and $53 million from the issuance of debt associated with aircraft deliveries in 2014. Principal financing activities in the 2013 period included proceeds of $1.7 billion from the issuance of EETC equipment notes and $1.1 billion from sale-leaseback transactions related to the financing of 17 Boeing 737 family aircraft and three Boeing 777 aircraft. These proceeds were offset in part by debt repayments of $551 million. Commitments Significant Indebtedness As of June 30, 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 June 30, 2014. Our significant indebtedness includes the following agreements: 78-------------------------------------------------------------------------------- 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 June 30, 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 June 30, 2014, there were no borrowings or letters of credit 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 would 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 79-------------------------------------------------------------------------------- Table of Contents case, accrued and unpaid interest, if any. In addition, at any time prior to March 15, 2014, American, at its option, could 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 June 30, 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. 80-------------------------------------------------------------------------------- Table of Contents Current Developments 2013-1 EETCs (US Airways) In the first six months of 2014, US Airways issued $481 million of equipment notes in two series under its 2013-1 EETCs completed in April 2013: Series A equipment notes in the amount of $364 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $117 million bearing interest at 5.375% per annum. The equipment notes are secured by liens on aircraft. Other Secured Indebtedness (American and US Airways) In May 2014, we elected to prepay $113 million principal amount of outstanding debt secured by certain aircraft. In June 2014, American entered into a loan agreement to borrow $53 million in connection with financing certain aircraft deliveries. The notes mature in 2026 and bear interest at a rate of LIBOR plus an applicable margin. Obligations Associated with Special Facility Revenue Bonds (American and US Airways) In June 2014, we prepaid $51 million of obligations, of which $29 million was reflected as debt on our balance sheet, associated with special facility revenue bonds issued by municipalities to build or improve certain airport and maintenance facilities. Also in June, we gave notice that we intend to prepay an additional $261 million of special facility bond related obligations in the third quarter of 2014, of which $106 million is reflected as debt on our balance sheet. The off-balance sheet portion of these obligations are accounted for as operating leases. 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 had 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. In May 2014, the Company settled all outstanding 7.25% convertible notes in cash for approximately $175 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 pledge 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 June 30, 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. 81-------------------------------------------------------------------------------- Table of Contents 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. Aircraft and Engine Purchase Commitments As of June 30, 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 29 42 25 20 - - 116 A320 Neo - - - 10 25 65 100 A350 XWB - - - 6 10 6 22 Boeing 737 Family 10 20 20 20 - - 70 737 MAX - - - 3 17 80 100 777-300 ER 3 2 2 - - - 7 787 Family 2 11 13 9 7 - 42 Bombardier CRJ900 (1) 12 15 - - - - 27 Embraer ERJ175 (1) - 24 24 12 - - 60 Total 56 114 84 80 59 151 544 (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 52 spare engines to be delivered in 2014 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of June 30, 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) $ 1,434 $ 3,982 $ 3,947 $ 3,625 $ 3,656 $ 11,159 $ 27,803 Payments for US Airways aircraft commitments and certain engines $ 453 $ 520 $ 112 $ 716 $ 985 $ 556 $ 3,342 (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. Our purchase deposits totaled $1.0 billion as of June 30, 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 our 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: 72 Airbus 320 family aircraft, 4 Boeing 737 family aircraft, 7 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." 82-------------------------------------------------------------------------------- Table of Contents 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 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 six months of 2014, we contributed $71 million to our defined benefit pension plans. On July 15, 2014, we contributed an additional $37 million to our defined benefit pension plans. Our 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. Labor Agreements In June 2014, we reached three tentative agreements with the International Association of Machinists (IAM) covering 11,000 US Airways mechanics, fleet service agents and maintenance training specialists. In July 2014, these three-year agreements that amend pre-merger contracts were ratified by IAM and will remain in effect until a joint collective bargaining agreement can be reached with their colleagues at the Transport Workers Union (TWU) to cover more than 30,000 employees at the new American Airlines. 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. 83 -------------------------------------------------------------------------------- AAG Contractual Obligations The following table provides details of our future cash contractual obligations as of June 30, 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) $ 563 $ 890 $ 1,712 $ 859 $ 742 $ 5,844 $ 10,610 Interest obligations (2), (3) 287 538 445 403 411 1,151 3,235 Commitments for aircraft and engine purchases and operating leases (4), (5) 2,222 5,271 5,107 4,722 4,663 16,405 38,390 Regional capacity purchase agreements (6) 220 712 804 648 640 3,868 6,892 Minimum pension contribution and other purchase obligations (7) 245 376 318 294 285 3,979 5,497 Total AA Contractual Obligations $ 3,537 $ 7,787 $ 8,386 $ 6,926 $ 6,741 $ 31,247 $ 64,624 US Airways Group and Other AAG subsidiaries Debt and capital lease obligations (1), (3) $ 298 $ 472 $ 959 $ 391 $ 1,032 $ 3,033 $ 6,185 Interest obligations (2), (3) 152 272 260 235 203 394 1,516 Commitments for aircraft and engine purchases and operating leases (4), (5) 848 1,262 760 1,312 1,432 1,894 7,508 Regional capacity purchase agreements (6) 582 1,033 888 757 580 1,293 5,133 Total AAG Contractual Obligations $ 5,417 $ 10,826 $ 11,253 $ 9,621 $ 9,988 $ 37,861 $ 84,966 (1) Amounts represent contractual amounts due. For American, excludes $49 million and for US Airways Group, excludes $18 million of unamortized debt discount as of June 30, 2014. (2) For variable-rate debt, future interest obligations are estimated using the current forward rates at June 30, 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 $2.9 billion of future principal payments and $933 million of future interest payments, respectively, as of June 30, 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 $280 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 June 30, 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 84 -------------------------------------------------------------------------------- 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 second 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. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. We are currently evaluating the requirements of ASU 2014-09 and have not yet determined its impact on our consolidated financial statements. 85-------------------------------------------------------------------------------- |