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AMERICAN AIRLINES GROUP INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of AAG's and American's Annual Report on Form 10-K for the year ended December 31, 2013 (the 2013 Form 10-K). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the 2013 Form 10-K. American Airlines Group Background 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 continue for the next 18 months. 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 (DFW), Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. In the third quarter of 2014, we had approximately 51 million passengers boarding our mainline and regional flights. As of September 30, 2014, we operated 978 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 third 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 July August September Passenger Revenues 4.9 % 4.0 % 4.2 % Yields 2.2 % 2.0 % 1.6 % 2013 vs 2012 July August September Passenger Revenues 5.3 % 6.2 % 5.2 % Yields 3.6 % 4.2 % 3.4 % Airlines for America reported the following year-over-year changes in passenger revenues by region. Domestic markets outperformed international markets overall in the third quarter of 2014. 2014 vs 2013 July August September Domestic 6.5 % 5.0 % 5.2 % Atlantic 2.4 % 2.4 % 5.3 % Latin (1.3 )% 1.7 % (5.4 )% Pacific 2.6 % 1.3 % 1.9 % Jet fuel prices continue to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On average, fuel costs were lower in the third quarter of 2014 as compared to the third quarter 2013. The average daily spot price for Brent crude oil during the third quarter of 2014 was $102 per barrel as compared to an average daily spot price of $110 per barrel during the third quarter of 2013. On a daily basis, Brent crude oil prices fluctuated during the quarter between a high of $111 per barrel to a low of $95 per barrel at the close of the quarter on September 30, 2014. 59 -------------------------------------------------------------------------------- While the U.S. airline industry is currently benefiting from a favorable revenue environment and lower fuel prices as described above, uncertainty exists regarding the economic conditions driving these factors. See Part II, Item 1A - Risk Factors - "Downturns in economic conditions adversely affect our business" and "Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity." American Airlines Group Basis of Presentation Our third quarter 2014 GAAP results are not comparable to the GAAP results for the third quarter of 2013. AAG's third 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" third 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 September 30, 2013 Three Months Ended Percent September 30, 2014 AAG US Airways Group Combined Change (1) (In millions) Mainline and regional passenger revenues $ 9,758 $ 6,019 $ 3,458 $ 9,477 2.9 Total operating revenues 11,139 6,828 3,840 10,668 4.4 Mainline and regional aircraft fuel and related taxes 3,367 2,220 1,180 3,400 (1.0 ) Total operating expenses 9,879 6,127 3,413 9,540 3.5 Operating income 1,260 701 427 1,128 11.8 Net income 942 289 216 505 86.7 Special items: Operating special charges, net 223 15 26 41 Nonoperating special charges, net 50 75 5 80 Income tax special charges (credits), net 8 - (6 ) (6 ) Reorganization items, net - 151 - 151 Total net special charges (2) 281 241 25 266 (1) Percent change is a comparison of the combined results. (2) AAG's third quarter 2014 results were significantly impacted by net special charges of $281 million, consisting principally of $168 million of merger integration expenses, $99 million in other charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other asset impairments, and $50 million in debt extinguishment charges, offset in part by net credits of $40 million for bankruptcy related items. See Part I, Item 2 - "AAG's Results of Operations" of this report for more information on net special items. Third Quarter 2014 Results Driven by growth in revenues resulting from strong demand for air travel, we realized operating income of $1.3 billion and net income of $942 million in the third quarter of 2014. This compares to combined operating income of $1.1 billion and combined net income of $505 million in the third quarter of 2013. Our third quarter 2014 net income included net operating and total net special charges of $223 million and $281 million, respectively, while the third quarter of 2013 included combined net operating and total net special charges of $41 million and $266 million, respectively. Excluding the effects of net operating special charges, we recognized operating income of $1.5 billion in the third quarter of 2014, which is a $314 million, or 27% 60 -------------------------------------------------------------------------------- improvement as compared to combined operating income of $1.2 billion excluding net operating special charges in the third quarter of 2013. Excluding the effects of total net special charges, we recognized net income of $1.2 billion in the third quarter of 2014, which is a $452 million, or 59% improvement as compared to combined net income of $771 million excluding total net special charges in the third quarter of 2013. See Part I, Item 2 "AAG's Results of Operations" of this report for more information on net special charges. Revenue In the third quarter of 2014, we reported operating revenues of $11.1 billion. Mainline and regional passenger revenues were $9.8 billion, an increase of $281 million, or 2.9%, as compared to the combined third quarter of 2013 mainline and regional passenger revenues of $9.5 billion. The growth in revenues was driven by a 2.6% increase in yield. Our mainline and regional passenger revenue per available seat mile (PRASM) was 14.12 cents in the third quarter of 2014, a 1.0% increase as compared to a combined 13.98 cents in the third quarter of 2013. Fuel Mainline and regional fuel expense was $3.4 billion in the third quarter of 2014, which was $33 million, or 1.0%, lower as compared to the combined mainline and regional fuel expense in the third quarter of 2013. This decrease was driven by a 1.6% decrease in the average price per gallon to $2.98 in the third quarter of 2014 from a combined average price per gallon of $3.03 for the third quarter of 2013. This decrease was offset in part by a 0.6% increase in consumption. 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 September 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 2.0% in the third quarter of 2014 as compared to the combined third quarter of 2013 primarily due to more active aircraft and 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 third quarter mainline cost per available seat mile (CASM) excluding special items and fuel was 8.35 cents. When compared to the 2013 third quarter combined results, mainline CASM excluding special items and fuel increased 0.7% in the third quarter of 2014. The increase was primarily due to higher salaries, wages and benefits driven by merger related labor contracts and higher maintenance costs driven by an increase in the number of engine overhauls. 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 third quarter 2014 operating performance was negatively impacted in part by severe weather conditions at our hubs as well as the September 2014 fire at the FAA's Chicago Air Route Traffic Control Center, which caused significant flight delays and cancellations. We reported the following combined operating statistics to the U.S. Department of Transportation (DOT) for mainline operations for the third quarter of 2014 and 2013: 2014 2013(a) Better (Worse) 2014-2013 July August September (f) July August September July August September On-time performance (b) 74.2 77.3 82.7 73.8 81.2 85.7 0.4 pts (3.9) pts (3.0) pts Completion factor (c) 98.5 99.1 99.4 98.5 99.1 99.3 - - 0.1 pts Mishandled baggage (d) 3.98 3.87 3.12 3.21 2.68 2.29 (24.0)% (44.4)% (36.2)% Customer complaints (e) 2.57 2.39 2.00 2.41 1.95 1.63 (6.6)% (22.6)% (22.7)% (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. 61 -------------------------------------------------------------------------------- (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) September 2014 operating statistics are preliminary as the DOT has not issued its September 2014 Air Travel Consumer Report as of the date of this filing. Liquidity Position As of September 30, 2014, AAG's total cash and short-term investments was $8.8 billion, of which $875 million was restricted. We also had a $1.0 billion undrawn revolving credit facility. September 30, December 31, 2014 2013 (In millions) Cash and short-term investments (1) $ 7,899 $ 9,251 Restricted cash and short-term investments (2) 875 1,035 Total cash and short-term investments $ 8,774 $ 10,286 (1) As of September 30, 2014, $721 million of our unrestricted cash balance was held in Venezuelan bolivars, valued at the weighted average applicable exchange rate of 6.41 bolivars to the dollar. Our cash balance held in Venezuelan bolivars decreased $70 million from the June 30, 2014 balance of $791 million, due primarily to $48 million in repatriations in the third quarter of 2014 ($31 million valued at 6.3 bolivars to the dollar and $17 million valued at 10.6 bolivars to the dollar). This balance also reflects our significant reduction in capacity in this market, pending further repatriation of funds and due to a decrease in demand for air travel resulting from the effective devaluation of the bolivar. Our September 30, 2014 cash balance includes approximately $94 million valued at 4.3 bolivars, approximately $580 million valued at 6.3 bolivars, and approximately $47 million valued at 12.0 bolivars, with the rate depending on the date we submitted our repatriation request to the Venezuelan government. We are continuing to work with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local currency. 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 nine months of 2014, we utilized cash generated from operations to pay down certain higher rate debt obligations, reduce our diluted share count and make supplemental contributions to our pension plans. Additionally, we declared our first cash dividend since 1980 of $0.10 per share for shareholders of record on August 4, 2014. These cash outflows were offset in part by certain new debt issuances to strengthen our liquidity position. Further information on our significant transactions affecting our liquidity position for the first nine months of 2014 is as follows: Debt Repayments • We prepaid $1.0 billion of American's 7.50% senior secured notes. • We prepaid or repurchased $532 million of obligations associated with special facility revenue bonds issued by municipalities to build or improve certain airport and maintenance facilities. Of this amount, $355 million was reflected as debt on our balance sheet. The off-balance sheet portion of these obligations was accounted for as an operating lease. Reductions in Diluted Share Count • In 2014, we paid $265 million for tax withholdings associated with distributions to 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 $561 million. We also paid $42 million for tax withholdings associated with equity awards in lieu of issuing 1.2 million shares of AAG Common Stock. • We redeemed US Airways Group's 7.25% convertible notes for $175 million in cash in lieu of issuing 4 million shares of AAG Common Stock. • We repurchased 2.9 million shares of AAG Common Stock for $113 million in the third quarter of 2014 pursuant to our $1.0 billion share repurchase program to be completed no later than December 31, 2015. 62--------------------------------------------------------------------------------Pension Prefunding • In September 2014, we made $613 million in supplemental contributions to fund our pension plans. These contributions are above and beyond the $168 million aggregate amount of minimum required contributions made in 2014. New Debt Issuances: • In September 2014, we issued $750 million aggregate principal 5.50% Senior Notes due 2019. We also issued $957 million in equipment notes pursuant to the 2014-1 Enhanced Equipment Trust Certificates to finance unencumbered aircraft. • In October 2014, subsequent to the close of the quarter, we borrowed $750 million under a new term loan facility due in 2021 and arranged a $400 million revolving credit facility due in 2019. We also increased our existing revolving credit facility from $1.0 billion to $1.4 billion and extended its maturity date from 2018 to 2019. 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 third 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 September 30, 2013 Reconciliation of Operating Cost per ASM Excluding Special Items and Fuel - Three Months Ended US Airways Mainline Only September 30, 2014 AAG Group Combined (In millions, except per ASM amounts) Total operating expenses $ 9,879 $ 6,127 $ 3,413 $ 9,540 Less regional expenses: Fuel (538 ) (270 ) (265 ) (535 ) Other (1,130 ) (515 ) (549 ) (1,064 ) Total mainline operating expenses 8,211 5,342 2,599 7,941 Less: Special items, net (221 ) (15 ) (40 ) (55 ) Mainline operating expenses, excluding special items 7,990 5,327 2,559 7,886 Less: Aircraft fuel and related taxes (2,829 ) (1,950 ) (915 ) (2,865 ) Mainline operating expenses, excluding special items and fuel $ 5,161 $ 3,377 $ 1,644 $ 5,021 Available Seat Miles (ASM) 61,851 40,082 20,513 60,595 (In cents) Mainline operating expenses per ASM $ 13.28 $ 13.11 Less: Special items, net per ASM (0.36 ) (0.09 ) Mainline operating expenses per ASM, excluding special items 12.92 13.02 Less: Aircraft fuel and related taxes per ASM (4.57 ) (4.73 ) Mainline operating expenses per ASM, excluding special items and fuel $ 8.35 $ 8.29 63-------------------------------------------------------------------------------- AAG's Results of Operations In the third quarter of 2014, we realized operating income of $1.3 billion and net income of $942 million. Our third quarter 2014 net income included net special operating charges of $223 million and total net special charges of $281 million. Excluding the effects of these special charges, we realized operating income of $1.5 billion and net income of $1.2 billion. In the first nine months of 2014, we realized operating income of $3.4 billion and net income of $2.3 billion. Our 2014 nine month period net income included net special operating charges of $342 million and total net special charges of $795 million. Excluding the effects of these special charges, we realized operating income of $3.7 billion and net income of $3.1 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 third quarter and nine month period GAAP results are not comparable to the GAAP results for the 2013 third quarter and nine month period as the 2013 periods exclude the results of US Airways Group. When compared to the combined separate company results of AAG and US Airways Group for the third quarter of 2013, our third quarter 2014 net income excluding net special charges improved $452 million. In the third quarter of 2013, on a standalone basis, AAG reported net income of $289 million and US Airways Group reported net income of $216 million. Excluding the effects of net special charges, AAG and US Airways Group reported net income of $530 million and $241 million, respectively. When compared to the combined separate company results of AAG and US Airways Group for the first nine months of 2013, our 2014 nine month period net income excluding net special charges improved $1.6 billion. In the first nine months of 2013, on a standalone basis, AAG reported net income of $167 million and US Airways Group reported net income of $547 million. Excluding the effects of net special charges, AAG and US Airways Group reported net income of $894 million and $619 million, respectively. The components of our net special charges included in our accompanying condensed consolidated statements of operations are as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 Mainline operating special items, net (1) $ 221 $ 15 $ 335 $ 98 Regional operating special items, net 2 - 7 3 Nonoperating special items, net (2) 50 75 101 191 Reorganization items, net (3) - 151 - 435 Income tax special items, net (4) 8 - 352 - Total $ 281 $ 241 $ 795 $ 727 (1) The 2014 third quarter mainline operating special items totaled a net charge of $221 million, which principally included $166 million of merger integration expenses related to information technology, alignment of labor union contracts, professional fees, severance and retention, share-based compensation expense, re-branding of aircraft and airport facilities, relocation and training, as well as $99 million in other charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other asset impairments. These charges were offset in part by a net $40 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. The 2014 nine month period mainline operating special items totaled a net charge of $335 million, which principally included $530 million of merger integration expenses as described above, $99 million in other charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other asset impairments, as well as $46 million in charges primarily relating to the buyout of certain aircraft leases. These charges were offset in part by a $309 million gain on the sale of slots at DCA and a net $35 million credit for bankruptcy related items as described above. The 2013 third quarter mainline operating special items primarily consisted of merger related expenses. The 2013 nine month period mainline operating special items totaled a net charge of $98 million, which included $55 million in merger related expenses and a $43 million charge for workers' compensation claims. (2) The 2014 third quarter nonoperating special items totaled a net charge of $50 million, which was primarily due to early debt extinguishment costs related to the prepayment of American's 7.50% senior secured notes and other indebtedness. The 2014 nine month period nonoperating special items totaled a net charge of $101 million, which primarily included $54 million of early debt extinguishment costs as described above and $33 million of non-cash interest accretion on the bankruptcy settlement obligations. 64-------------------------------------------------------------------------------- The 2013 third quarter nonoperating special items totaled a net charge of $75 million, which principally related to debt extinguishment costs incurred in connection with the repayment of existing high-interest aircraft financings. The 2013 nine month period nonoperating special items totaled a net charge of $191 million, which principally included interest charges of $116 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan and the $75 million in charges primarily related to debt extinguishment costs as described above. (3) In the 2013 third quarter and nine month periods, 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. (4) During the 2014 third quarter, we recorded a special $8 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. During the 2014 nine month period, 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 reversed 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, the 2014 nine month period included a special $22 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. As a result of the Merger, US Airways Group and its subsidiaries are included in the AAG consolidated federal and state income tax returns for the three and nine months ended September 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. We provide a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (primarily reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible. We consider many factors in evaluating the realizability of our deferred tax assets including risks associated with merger integration as well as other factors, which continue to be affected by conditions beyond our control, such as the condition of the economy, the level and volatility of fuel prices and travel demand. For the three and nine months ended September 30, 2014, we recorded a special $8 million and $22 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the 2014 nine month period, we recorded a special $330 million non-cash tax provision related to the settlement of fuel hedges discussed above and $8 million of tax expense principally related to certain states and countries where NOLs were limited or unavailable to be used. We did not record an income tax provision in the 2013 third quarter. For the nine months ended September 30, 2013, we recorded an income tax benefit of approximately $22 million as a result of the American Taxpayer Relief Act of 2012. 65-------------------------------------------------------------------------------- Operating Statistics The table below sets forth selected mainline and regional operating data for the three and nine months ended September 30, 2014 and 2013. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 Increase 2014 2013 Increase (Note 1) (Decrease) (Note 1) (Decrease) Mainline Revenue passenger miles (millions) (a) 51,895 51,887 - % 149,129 147,136 1.4 % Available seat miles (ASM) (millions) (b) 61,851 60,595 2.1 % 179,682 174,864 2.8 % (1.7) (1.1)Passenger load factor (percent) (c) 83.9 85.6 pts 83.0 84.1 pts Yield (cents) (d) 15.60 15.13 3.1 % 15.80 15.02 5.2 % Passenger revenue per ASM (cents) (e) 13.08 12.95 1.0 % 13.11 12.64 3.7 % Operating cost per ASM (cents) (f) 13.28 13.11 1.3 % 13.46 13.35 0.8 % Passenger enplanements (thousands) (g) 37,516 37,089 1.2 % 110,270 108,509 1.6 % Departures (thousands) 291 291 - % 862 859 0.3 % Aircraft at end of period 978 986 (0.8 )% 978 986 (0.8 )% Block hours (thousands) (h) 901 885 1.9 % 2,656 2,608 1.8 % Average stage length (miles) (i) 1,229 1,210 1.6 % 1,211 1,192 1.6 % Fuel consumption (gallons in millions) 952 947 0.6 % 2,763 2,726 1.4 % Average aircraft fuel price including related taxes ($/gallon) 2.97 3.03 (1.9 )% 3.03 3.09 (1.8 )% Full-time equivalent employees at end of period 93,424 91,564 2.0 % 93,424 91,564 2.0 % Regional (j) Revenue passenger miles (millions) (a) 5,755 5,562 3.5 % 16,601 16,148 2.8 % Available seat miles (millions) (b) 7,269 7,198 1.0 % 20,922 21,093 (0.8 )% Passenger load factor (percent) (c) 79.2 77.3 1.9 pts 79.3 76.6 2.7 pts Yield (cents) (d) 28.93 29.32 (1.3 )% 28.79 29.18 (1.4 )% Passenger revenue per ASM (cents) (e) 22.90 22.65 1.1 % 22.84 22.34 2.2 % Operating cost per ASM (cents) (f) 22.94 22.20 3.3 % 23.51 22.76 3.3 % Passenger enplanements (thousands) (g) 13,483 12,897 4.5 % 38,745 37,522 3.3 % Aircraft at end of period 557 554 0.5 % 557 554 0.5 % Fuel consumption (gallons in millions) 178 177 0.7 % 514 517 (0.7 )% Average aircraft fuel price including related taxes ($/gallon) 3.02 3.02 - % 3.06 3.08 (0.5 )% Full-time equivalent employees at end of period (k) 18,428 17,883 3.0 % 18,428 17,883 3.0 % Total Mainline and Regional Revenue passenger miles (millions) (a) 57,650 57,449 0.3 % 165,730 163,284 1.5 % Available seat miles (millions) (b) 69,120 67,793 2.0 % 200,604 195,957 2.4 % Cargo ton miles (millions) (l) 566 542 4.5 % 1,721 1,601 7.5 % (1.3) (0.7) Passenger load factor (percent) (c) 83.4 84.7 pts 82.6 83.3 pts Yield (cents) (d) 16.93 16.50 2.6 % 17.10 16.42 4.1 % Passenger revenue per ASM (cents) (e) 14.12 13.98 1.0 % 14.13 13.69 3.2 % Total revenue per ASM (cents) (m) 16.12 15.74 2.4 % 16.20 15.53 4.3 % Cargo yield per ton mile (cents) (n) 37.98 37.09 2.4 % 37.34 37.61 (0.7 )% Passenger enplanements (thousands) (g) 50,999 49,986 2.0 % 149,015 146,031 2.0 % Aircraft at end of period 1,535 1,540 (0.3 )% 1,535 1,540 (0.3 )% Fuel consumption (gallons in millions) 1,130 1,124 0.6 % 3,277 3,243 1.0 % Average aircraft fuel price including related taxes ($/gallon) 2.98 3.03 (1.6 )% 3.03 3.08 (1.6 )% Full-time equivalent employees at end of period (k) 111,852 109,447 2.2 % 111,852 109,447 2.2 % Note 1: Represents the combined historical operating statistics of American and US Airways Group. 66 --------------------------------------------------------------------------------(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. (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. (Envoy, formerly known as AMR Eagle Holding Corporation), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), 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) Regional full-time equivalent employees only include our wholly owned regional airline subsidiaries, Envoy, Piedmont and PSA. (l) Cargo ton miles - A basic measure of cargo transportation. One cargo ton mile represents one ton of cargo transported one mile. (m) Total revenue per available seat mile (RASM) - Total revenues divided by total mainline and regional ASMs. (n) Cargo yield per ton mile - Cargo revenues divided by total mainline and regional cargo ton miles. Three Months Ended September 30, 2014 Compared to Three Months Ended September 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 September 30, $ Change Due Change Excluding Merger Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Mainline passenger $ 8,093 $ 5,253 $ 2,840 $ 2,772 $ 68 1.3 Regional passenger 1,665 766 899 917 (18 ) (2.5 ) Cargo 215 164 51 40 11 6.1 Other 1,166 645 521 338 183 28.6 Total operating revenues $ 11,139 $ 6,828 $ 4,311 $ 4,067 $ 244 3.6 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 third quarter of 2014 increased $244 million, or 3.6%, 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 $68 million, or 1.3%, in the third quarter of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $11 million, or 6.1% in the third quarter of 2014 from the 2013 period driven primarily by an increase in transatlantic and pacific freight volumes. • Other revenues increased $183 million, or 28.6%, in the third quarter of 2014 from the 2013 period driven primarily by higher revenues associated with our frequent flyer programs. 67--------------------------------------------------------------------------------Operating Expenses Three Months Ended September 30, $ Change Due Change Excluding Merger Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Aircraft fuel and related taxes $ 2,829 $ 1,950 $ 879 $ 935 $ (56 ) (2.9 ) Salaries, wages and benefits 2,137 1,380 757 723 34 2.4 Maintenance, materials and repairs 529 289 240 176 64 22.1 Other rent and landing fees 431 279 152 152 - (0.2 ) Aircraft rent 306 192 114 95 19 9.7 Selling expenses 393 294 99 115 (16 ) (5.5 ) Depreciation and amortization 334 204 130 104 26 12.9 Special items, net 221 15 206 57 149 nm Other 1,031 739 292 296 (4 ) (0.5 )Total mainline operating expenses 8,211 5,342 2,869 2,653 216 4.0 Regional expenses: Fuel 538 270 268 274 (6 ) (2.1 ) Other 1,130 515 615 588 27 5.3 Total regional operating expenses 1,668 785 883 862 21 2.7 Total operating expenses $ 9,879 $ 6,127 $ 3,752 $ 3,515 $ 237 3.9 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 third quarter of 2014 increased $237 million, or 3.9%, 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 2.9% primarily due to a decrease in the average price per gallon of fuel. • Maintenance, materials and repairs increased 22.1% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 9.7% primarily as a result of new leased aircraft deliveries since the end of the 2013 third quarter as we continue our fleet renewal program. • Selling expenses decreased 5.5% primarily as a result of lower advertising expenditures in the 2014 period. • Depreciation and amortization increased 12.9% primarily as a result of new purchased aircraft deliveries since the end of the 2013 third quarter as we continue our fleet renewal program. Regional Operating Expenses: Total regional expenses, excluding the results of US Airways Group, increased $21 million, or 2.7%, in the third quarter of 2014 from the 2013 period. 68 --------------------------------------------------------------------------------Nonoperating Income (Expense) Change Excluding Merger Three Months Ended September 30, $ Change Due to Impact 2014 2013 $ Change Merger $ % (In millions, except percentage changes) Interest income $ 7 $ 5 $ 2 $ 2 $ - 3.5 Interest expense, net of capitalized interest (210 ) (226 ) 16 (76 ) 92 (41.1 ) Other, net (108 ) (40 ) (68 ) (11 ) (57 ) nmTotal nonoperating expense, net $ (311 ) $ (261 ) $ (50 ) $ (85 ) $ 35 (13.7 ) Interest income was $7 million and $5 million in the third quarter of 2014 and 2013, respectively. Our short-term investments in each period consisted of highly liquid investments which provided nominal returns. 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. Interest expense, net of capitalized interest decreased $92 million, or 41.1%, in the third quarter of 2014 from the 2013 period primarily due to special charges recognized in the third quarter of 2013 as further described below, as well as refinancing activities that resulted in lower interest expense recognized in the third quarter of 2014. In the third quarter of 2013, we recognized special charges of $46 million in debt extinguishment costs incurred as a result of the repayment of certain aircraft secured indebtedness, including cash interest charges and non-cash write offs of unamortized debt issuance costs. In addition, as a result of the 2013 refinancing activities and the early extinguishment of American's 7.50% senior secured notes in the 2014 third quarter, we recognized $30 million less interest expense in the 2014 third quarter as compared to the 2013 period. Other nonoperating expense, net increased $57 million in the third quarter of 2014 from the 2013 period primarily due to a $45 million increase in foreign currency losses driven by the strengthening of the U.S. dollar in foreign currency transactions, principally in Latin American markets, as well as a $21 million increase in special charges recognized as a result of early debt extinguishment. The third quarter of 2014 included $49 million in net foreign currency losses as compared to $4 million in net foreign currency losses in the comparable 2013 period. In addition, we recognized $50 million in special charges in the 2014 third quarter primarily related to the early extinguishment of American's 7.50% senior secured notes and other indebtedness as compared to $29 million in special charges recognized in the 2013 third quarter in conjunction with the repayment of certain aircraft related indebtedness. 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 September 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 66 Professional fees 48 Other 37 Total reorganization items, net $ 151 (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. 69-------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 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 Nine Months Ended Change Excluding September 30, $ Change Due Merger Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Mainline passenger $ 23,564 $ 14,755 $ 8,809 $ 7,985 $ 824 5.6 Regional passenger 4,779 2,197 2,582 2,577 5 0.2 Cargo 643 489 154 122 32 6.4 Other 3,504 1,934 1,570 1,082 488 25.3 Total operating revenues $ 32,490 $ 19,375 $ 13,115 $ 11,766 $ 1,349 7.0 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 nine months of 2014 increased $1.3 billion, or 7.0%, 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 $824 million, or 5.6%, in the first nine months of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $32 million, or 6.4%, in the first nine months of 2014 from the 2013 period driven primarily by an increase in transatlantic and pacific freight volumes. • Other revenues increased $488 million, or 25.3%, in the first nine months of 2014 from the 2013 period driven primarily by higher revenues associated with our frequent flyer programs. 70-------------------------------------------------------------------------------- Operating Expenses Nine Months Ended September 30, $ Change Due Change Excluding Merger Impact 2014 2013 $ Change to Merger $ % (In millions, except percentage changes) Aircraft fuel and related taxes $ 8,370 $ 5,764 $ 2,606 $ 2,708 $ (102 ) (1.8 ) Salaries, wages and benefits 6,419 3,931 2,488 2,162 326 8.3 Maintenance, materials and repairs 1,528 932 596 497 99 10.6 Other rent and landing fees 1,297 851 446 444 2 0.3 Aircraft rent 937 538 399 297 102 19.0 Selling expenses 1,196 857 339 352 (13 ) (1.5 ) Depreciation and amortization 960 615 345 296 49 8.0 Special items, net 335 98 237 186 51 52.0 Other 3,140 2,171 969 909 60 2.7Total mainline operating expenses 24,182 15,757 8,425 7,851 574 3.6 Regional expenses: Fuel 1,573 795 778 786 (8 ) (1.0 ) Other 3,346 1,539 1,807 1,729 78 5.1Total regional operating expenses 4,919 2,334 2,585 2,515 70 3.0 Total operating expenses $ 29,101 $ 18,091 $ 11,010 $ 10,366 $ 644 3.6 The following discussion of operating expenses excludes the results of US Airways Group in order to provide a more meaningful period-over-period comparison. Total operating expenses in the first nine months of 2014 increased $644 million, or 3.6%, 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 1.8% primarily due to a decrease in the average price per gallon of fuel. • Salaries, wages and benefits increased 8.3% primarily due to merger related labor contracts as well as increased costs from certain share-based compensation programs. • Maintenance, materials and repairs increased 10.6% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 19.0% primarily as a result of new leased aircraft deliveries since the end of the 2013 third quarter as we continue our fleet renewal program. • Depreciation and amortization increased 8.0% as a result of new purchased aircraft deliveries since the end of the 2013 third quarter as we continue our fleet renewal program. Regional Operating Expenses: Total regional expenses, excluding the results of US Airways Group, increased $70 million, or 3.0%, in the first nine months of 2014 from the 2013 period. 71 --------------------------------------------------------------------------------Nonoperating Income (Expense) Change Excluding Merger Nine Months Ended September 30, $ Change Due to Impact 2014 2013 $ Change Merger $ % (In millions, except percentage changes) Interest income $ 22 $ 14 $ 8 $ 4 $ 4 28.8 Interest expense, net of capitalized interest (667 ) (642 ) (25 ) (227 ) 202 (31.6 ) Other, net (99 ) (76 ) (23 ) (13 ) (10 ) 13.2Total nonoperating expense, net $ (744 ) $ (704 ) $ (40 ) $ (236 ) $ 196 (27.9 ) Interest income was $22 million and $14 million in the first nine months of 2014 and 2013, respectively. Our short-term investments in each period consisted of highly liquid investments which provided nominal returns. 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. Interest expense, net of capitalized interest decreased $202 million, or 31.6%, in the first nine months of 2014 from the 2013 period primarily due to a $129 million decrease in special charges recognized period-over-period as further described below as well as refinancing activities that resulted in $64 million less interest expense recognized. In the first nine months of 2014, we recognized $33 million of special charges relating to non-cash interest accretion on bankruptcy settlement obligations. In the first nine months of 2013, we recognized $116 million of special charges relating to post-petition interest expense on unsecured obligations pursuant to the Plan and special charges of $46 million in debt extinguishment costs incurred as a result of the repayment of certain aircraft secured indebtedness, including cash interest charges and non-cash write offs of unamortized debt issuance costs. In addition, as a result of the 2013 refinancing activities and the early extinguishment of American's 7.50% senior secured notes in the 2014 third quarter, we recognized $64 million less interest expense in the 2014 nine month period as compared to the 2013 period. Other nonoperating expense, net increased $10 million during the first nine months of 2014 primarily due to a $17 million increase in special charges recognized as a result of early debt extinguishment, offset in part by a $12 million decrease in foreign currency losses. We recognized $46 million in special charges in the 2014 nine month period primarily related to the early extinguishment of American's 7.50% senior secured notes and other indebtedness as compared to $29 million in special charges recognized in the 2013 nine month period in conjunction with the repayment of certain aircraft related indebtedness. In addition, the 2014 nine month period included $34 million in net foreign currency losses as compared to $46 million in net foreign currency losses in the comparable 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 nine months ended September 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 285 Professional fees 126 Other 24 Total reorganization items, net $ 435 (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. 72-------------------------------------------------------------------------------- American's Results of Operations In the third quarter of 2014, American realized operating income of $698 million and net income of $465 million. American's third quarter 2014 net income included net special operating charges of $166 million and total net special charges of $221 million. Excluding the effects of these special charges, American realized operating income of $864 million and net income of $686 million. In the first nine months of 2014, American realized operating income of $2.0 billion and net income of $1.1 billion. American's 2014 nine month period net income included net special operating charges of $131 million and total net special charges of $569 million. Excluding the effects of these special charges, American realized operating income of $2.1 billion and net income of $1.7 billion. The components of American's net special charges included in the accompanying condensed consolidated statements of operations are as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Mainline operating special items, net (1) $ 164 $ 15 $ 127 $ 98 Regional operating special items, net 2 - 4 - Nonoperating special items, net (2) 48 75 89 102 Reorganization items, net (3) - 151 - 434 Income tax special items, net (4) 7 - 349 - Total $ 221 $ 241 $ 569 $ 634 (1) The 2014 third quarter mainline operating special items totaled a net charge of $164 million, which principally included $103 million of merger integration expenses related to information technology, alignment of labor union contracts, professional fees, severance and retention, share-based compensation expense, re-branding of aircraft and airport facilities, relocation and training, as well as $99 million in other charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other asset impairments. These charges were offset in part by a net $40 million credit for bankruptcy related items primarily consisting of fair value adjustments for bankruptcy settlement obligations. The 2014 nine month period mainline operating special items totaled a net charge of $127 million, which principally included $337 million of merger integration expenses as described above, $99 million in other charges, including an $81 million charge to revise prior estimates of certain aircraft residual values, and other asset impairments, as well as $35 million in charges primarily relating to the buyout of certain aircraft leases. These charges were offset in part by a $305 million gain on the sale of slots at DCA and a net $57 million credit for bankruptcy related items as described above. The 2013 third quarter mainline operating special items primarily consisted of merger related expenses. The 2013 nine month period mainline operating special items totaled a net charge of $98 million, which included $55 million in merger related expenses and a $43 million charge for workers' compensation claims. (2) The 2014 third quarter nonoperating special items totaled a net charge of $48 million, which was primarily due to early debt extinguishment costs related to the prepayment of American's 7.50% senior secured notes and other indebtedness. The 2014 nine month period nonoperating special items totaled a net charge of $89 million, which primarily included $46 million of early debt extinguishment costs as described above and $29 million of non-cash interest accretion on the bankruptcy settlement obligations. The 2013 third quarter nonoperating special items totaled a net charge of $75 million, which principally related to debt extinguishment costs incurred in connection with the repayment of existing high-interest aircraft financings. The 2013 nine month period nonoperating special items totaled a net charge of $102 million, which principally included interest charges of $27 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan and the $75 million in charges primarily related to debt extinguishment costs as described above. (3) In the 2013 third quarter and nine month periods, 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 2014 third quarter, American recorded a special $7 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. During the 2014 nine month period, 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 reversed the non-cas 73-------------------------------------------------------------------------------- h 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, the 2014 nine month period included a special $21 million non-cash deferred income tax provision related to certain indefinite-lived intangible assets. 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. American provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (primarily reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible. American considers many factors in evaluating the realizability of its deferred tax assets including risks associated with merger integration as well as other factors, which continue to be affected by conditions beyond American's control, such as the condition of the economy, the level and volatility of fuel prices and travel demand. For the three and nine months ended September 30, 2014, American recorded a special $7 million and $21 million, respectively, non-cash deferred income tax provision related to certain indefinite-lived intangible assets. In addition, for the 2014 nine month period, American recorded a special $328 million non-cash tax provision related to the settlement of fuel hedges discussed above and $3 million of tax expense principally 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 third quarter. For the nine months ended September 30, 2013, American recorded an income tax benefit of approximately $30 million as a result of the American Taxpayer Relief Act of 2012. 74 -------------------------------------------------------------------------------- Three Months Ended September 30, 2014 Compared to Three Months Ended September 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 September 30, Percent Increase 2014 2013 (Decrease) (In millions) Mainline passenger $ 5,321 $ 5,253 1.3 Regional passenger 748 766 (2.5 ) Cargo 175 164 6.1 Other 811 633 28.3 Total operating revenues $ 7,055 $ 6,816 3.5 Total operating revenues in the third quarter of 2014 increased $239 million, or 3.5%, 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 $68 million, or 1.3%, in the third quarter of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $11 million, or 6.1%, in the third quarter of 2014 from the 2013 period driven primarily by an increase in transatlantic and pacific freight volumes. • Other revenues increased $178 million, or 28.3%, in the third quarter of 2014 from the 2013 period driven primarily by higher revenues associated with American's frequent flyer program. 75--------------------------------------------------------------------------------Operating Expenses Three Months Ended September 30, Percent Increase 2014 2013 (Decrease) (In millions) Aircraft fuel and related taxes $ 1,894 $ 1,951 (2.9 ) Salaries, wages and benefits 1,412 1,379 2.4 Maintenance, materials and repairs 353 288 22.1 Other rent and landing fees 279 280 (0.2 ) Aircraft rent 211 192 9.7 Selling expenses 278 294 (5.5 ) Depreciation and amortization 230 204 12.9 Special items, net 164 15 nm Other 746 748 (0.4 ) Total mainline operating expenses 5,567 5,351 4.0 Regional expenses: Fuel 264 269 (2.1 ) Other 526 510 3.4 Total regional operating expenses 790 779 1.5 Total operating expenses $ 6,357 $ 6,130 3.7 Total operating expenses in the third quarter of 2014 increased $227 million, or 3.7%, from the 2013 period. Significant changes in the components of mainline operating expenses are as follows: • Aircraft fuel and related taxes decreased 2.9% primarily due to a decrease in the average price per gallon of fuel. • Maintenance, materials and repairs increased 22.1% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 9.7% primarily as a result of new leased aircraft deliveries since the end of the 2013 third quarter as American continues its fleet renewal program. • Selling expenses decreased 5.5% primarily as a result of lower advertising expenditures in the 2014 period. • Depreciation and amortization increased 12.9% primarily as a result of new purchased aircraft deliveries since the end of the 2013 third quarter as American continues its fleet renewal program. Regional Operating Expenses Total regional expenses increased $11 million, or 1.5%, in the third quarter of 2014 from the 2013 period. 76 --------------------------------------------------------------------------------Nonoperating Income (Expense) Three Months Ended September 30, Percent Increase 2014 2013 (Decrease) (In millions) Interest income $ 5 $ 5 5.1 Interest expense, net of capitalized interest (136 ) (212 ) (35.8 ) Other, net (97 ) (38 ) nm Total nonoperating expense, net $ (228 ) $ (245 ) (7.6 ) Interest income was $5 million in each of the third quarters of 2014 and 2013. American's short-term investments in each period consisted of highly liquid investments which provided nominal returns. Interest expense, net of capitalized interest decreased $76 million, or 35.8%, in the third quarter of 2014 from the 2013 period primarily due to special charges recognized in the third quarter of 2013 as further described below, as well as refinancing activities that resulted in lower interest expense recognized in the third quarter of 2014. In the third quarter of 2013, American recognized special charges of $46 million in debt extinguishment costs incurred as a result of the repayment of certain aircraft secured indebtedness, including cash interest charges and non-cash write offs of unamortized debt issuance costs. In addition, as a result of the 2013 refinancing activities and the early extinguishment of American's 7.50% senior secured notes in the 2014 third quarter, American recognized $30 million less interest expense in the 2014 third quarter as compared to the 2013 period. Other nonoperating expense, net increased $59 million in the third quarter of 2014 from the 2013 period primarily due to a $44 million increase in foreign currency losses driven by the strengthening of the U.S. dollar in foreign currency transactions, principally in Latin American markets, as well as a $19 million increase in special charges recognized as a result of early debt extinguishment. The third quarter of 2014 included $48 million in net foreign currency losses as compared to $4 million in net foreign currency losses in the comparable 2013 period. In addition, American recognized $48 million in special charges in the 2014 third quarter primarily related to the early extinguishment of its 7.50% senior secured notes and other indebtedness as compared to $29 million in special charges recognized in the 2013 third quarter in conjunction with the repayment of certain aircraft related indebtedness. 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 September 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 66 Professional fees 48 Other 37 Total reorganization items, net $ 151 (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. 77-------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 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 Nine Months Ended September 30, Percent Increase 2014 2013 (Decrease) (In millions) Mainline passenger $ 15,579 $ 14,755 5.6 Regional passenger 2,202 2,197 0.2 Cargo 521 489 6.4 Other 2,374 1,897 25.2 Total operating revenues $ 20,676 $ 19,338 6.9 Total operating revenues in the first nine months of 2014 increased $1.3 billion, or 6.9%, 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 $824 million or 5.6%, in the first nine months of 2014 from the 2013 period due to higher yields and ASMs, offset in part by slightly lower load factors. • Cargo revenues increased $32 million, or 6.4%, in the first nine months of 2014 from the 2013 period driven primarily by an increase in transatlantic and pacific freight volumes. • Other revenues increased $477 million, or 25.2%, in the first nine months of 2014 from the 2013 period driven primarily by higher revenues associated with American's frequent flyer program. 78--------------------------------------------------------------------------------Operating Expenses Nine Months Ended September 30, Percent Increase 2014 2013 (Decrease) (In millions) Aircraft fuel and related taxes $ 5,662 $ 5,764 (1.8 ) Salaries, wages and benefits 4,251 3,925 8.3 Maintenance, materials and repairs 1,031 932 10.6 Other rent and landing fees 853 851 0.3 Aircraft rent 641 538 19.0 Selling expenses 844 857 (1.5 ) Depreciation and amortization 664 615 8.0 Special items, net 127 98 29.6 Other 2,258 2,198 2.7 Total mainline operating expenses 16,331 15,778 3.5 Regional expenses: Fuel 787 794 (0.9 ) Other 1,565 1,512 3.5 Total regional operating expenses 2,352 2,306 2.0 Total operating expenses $ 18,683 $ 18,084 3.3 Total operating expenses in the first nine months of 2014 increased $599 million, or 3.3%, from the 2013 period. Significant changes in the components of mainline operating expenses are as follows: • Aircraft fuel and related taxes decreased 1.8% primarily due to a decrease in the average price per gallon of fuel. • Salaries, wages and benefits increased 8.3% primarily due to merger related labor contracts as well as increased costs from certain share-based compensation programs. • Maintenance, materials and repairs increased 10.6% primarily due to an increase in the volume of engine overhauls. • Aircraft rent increased 19.0% primarily as a result of new leased aircraft deliveries since the end of the 2013 third quarter as American continues its fleet renewal program. • Depreciation and amortization increased 8.0% primarily as a result of new purchased aircraft deliveries since the end of the 2013 third quarter as American continues its fleet renewal program. Regional Operating Expenses Total regional expenses increased $46 million, or 2.0%, in the first nine months of 2014 from the 2013 period. 79 --------------------------------------------------------------------------------Nonoperating Income (Expense) Nine Months Ended September 30, Percent Increase 2014 2013 (Decrease) (In millions) Interest income $ 18 $ 14 32.0 Interest expense, net of capitalized interest (443 ) (527 ) (16.0 ) Other, net (85 ) (72 ) 19.3 Total nonoperating expense, net $ (510 ) $ (585 ) (12.8 ) Interest income was $18 million and $14 million in the first nine months of 2014 and 2013, respectively. American's short-term investments in each period consisted of highly liquid investments which provided nominal returns. Interest expense, net of capitalized interest decreased $84 million, or 16.0%, in the first nine months of 2014 from the 2013 period primarily due to refinancing activities that resulted in $64 million less interest expense recognized as well as a $40 million decrease in special charges recognized period-over-period as further described below. As a result of the 2013 refinancing activities and the early extinguishment of American's 7.50% senior secured notes in the 2014 third quarter, American recognized $64 million less interest expense in the 2014 nine month period as compared to the 2013 period, which was offset in part by additional interest expense on new indebtedness. In the first nine months of 2014, American recognized $29 million of special charges relating to non-cash interest accretion on bankruptcy settlement obligations. In the first nine months of 2013, American recognized special charges of $46 million in debt extinguishment costs incurred as a result of the repayment of certain aircraft secured indebtedness, including cash interest charges and non-cash write offs of unamortized debt issuance costs, and $27 million of special charges relating to post-petition interest expense on unsecured obligations pursuant to the Plan. Other nonoperating expense, net increased $13 million in the first nine months of 2014 primarily due to a $17 million increase in special charges recognized as a result of early debt extinguishment, offset in part by a $13 million decrease in foreign currency losses. American recognized $46 million in special charges in the 2014 nine month period primarily related to the early extinguishment of its 7.50% senior secured notes and other indebtedness as compared to $29 million in special charges recognized in the 2013 nine month period in conjunction with the repayment of certain aircraft related indebtedness. In addition, the 2014 nine month period included $33 million in net foreign currency losses as compared to $46 million in net foreign currency losses in the comparable 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 nine months ended September 30, 2013 (in millions): Aircraft and facility financing renegotiations and rejections (1) $ 285 Professional fees 126 Other 23 Total reorganization items, net $ 434 (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. 80-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash, Short-Term Investments and Restricted Cash As of September 30, 2014, AAG's total cash, short-term investments and restricted cash and short-term investments was $8.8 billion, of which $875 million was restricted. Additional detail is provided in the table below (in millions): AAG American September 30, December 31, September 30, December 31, 2014 2013 2014 2013 Cash $ 1,178 $ 1,140 $ 1,008 $ 829 Short-term investments 6,721 8,111 3,799 5,162 Restricted cash and short-term investments (1) 875 1,035 652 702 Total cash, short-term investments and restricted cash and short-term investments $ 8,774 $ 10,286 $ 5,459 $ 6,693 (1) Restricted cash and investments primarily include cash collateral to secure workers' compensation claims. As of September 30, 2014, $829 million of our cash and short-term investments balances were held in foreign bank accounts, of which approximately $721 million is held in Venezuelan bolivars. The Venezuelan bolivars are valued at the weighted average applicable exchange rate of 6.41 bolivars to the dollar. Our cash balance held in Venezuelan bolivars decreased $70 million from the June 30, 2014 balance of $791 million, due primarily to $48 million in repatriations in the third quarter of 2014 ($31 million valued at 6.3 bolivars to the dollar and $17 million valued at 10.6 bolivars to the dollar). This balance also reflects our significant reduction in capacity in this market, pending further repatriation of funds and due to a decrease in demand for air travel resulting from the effective devaluation of the bolivar. Our September 30, 2014 cash balance includes approximately $94 million valued at 4.3 bolivars, approximately $580 million valued at 6.3 bolivars, and approximately $47 million valued at 12.0 bolivars, with the rate depending on the date we submitted our repatriation request to the Venezuelan government. We are continuing to work with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local currency. 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 these and other currency risks. Stock Repurchase Plan On July 23, 2014, as part of a capital deployment program, our Board of Directors authorized a $1.0 billion share repurchase program to be completed no later than December 31, 2015. Share repurchases under the share repurchase 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. This share repurchase program does not obligate us to repurchase any specific number of shares for any fixed period, and may be suspended at any time at management's discretion. During the three and nine months ended September 30, 2014, we repurchased 2.9 million shares of AAG Common Stock for $113 million at a weighted average cost per share of $39.30. Cash Dividends Paid Also on July 23, 2014, as part of our capital deployment program, our Board of Directors declared a $0.10 per share cash dividend for shareholders of record as of August 4, 2014, payable on August 18, 2014. The total cash payment for dividends during the three and nine months ended September 30, 2014 was $72 million. Any future dividends that may be declared and paid from time to time under our capital deployment program will be subject to market and economic conditions, applicable legal requirements and other relevant factors. Our capital deployment program does not obligate us to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at management's discretion. On October 22, 2014, our Board of Directors declared a $0.10 per share dividend for stockholders of record on November 3, 2014, and payable on November 17, 2014. 81-------------------------------------------------------------------------------- Table of Contents Sources and Uses of Cash AAG Operating Activities Net cash provided by operating activities was $2.3 billion and $1.9 billion for the first nine months of 2014 and 2013, respectively, a period-over-period increase of $389 million. This period-over-period improvement in cash flow generated from operating activities is principally due to increased earnings and the inclusion of US Airways Group's net cash provided by operating activities totaling $749 million for the nine months ended September 30, 2014. These increases were offset in part by higher pension contributions that were above and beyond the minimum required contributions made during the first nine months of 2014. During the nine months ended September 30, 2014 and 2013, we contributed $781 million and $88 million, respectively, to fund our defined benefit pension plans, representing a $693 million period-over-period increase in contributions. Investing Activities Net cash used in investing activities was $2.1 billion and $5.1 billion for the first nine months of 2014 and 2013, respectively. Principal investing activities in the 2014 period included expenditures of $4.0 billion for property and equipment, consisting primarily of the purchase of newly delivered aircraft including 13 Boeing 737 family aircraft, four Boeing 777 aircraft, 23 Airbus A320 family aircraft, three Airbus A330 aircraft and eight Bombardier CRJ-900 aircraft, the purchase of aircraft previously leased including three Airbus A330 aircraft, three Boeing 777 aircraft and five Airbus A320 family aircraft, as well as pre-delivery deposits for certain aircraft on order. These cash outflows were offset in part by $1.4 billion in net sales of short-term investments, $307 million in proceeds from the sale of DCA slots and a $160 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 $2.6 billion in net purchases of short-term investments and expenditures of $2.4 billion for property and equipment, consisting primarily of the purchase of 26 Boeing 737 family aircraft and seven Boeing 777 aircraft, as well as pre-delivery deposits for certain aircraft on order. Financing Activities Net cash used in financing activities was $113 million for the first nine months of 2014 as compared to net cash provided by financing activities of $3.4 billion for the first nine months of 2013. Principal financing activities in the 2014 period included debt repayments of $2.8 billion including the $1.0 billion prepayment of American's 7.50% senior secured notes, $175 million cash settlement of US Airways Group's 7.25% convertible notes, $113 million prepayment of outstanding debt secured by certain aircraft and $355 million prepayment of certain airport facility revenue bonds. These cash outflows were offset in part by proceeds from the issuance of debt of $2.4 billion primarily from the 5.50% senior notes, certain EETC equipment notes and other aircraft related financings, as well as $531 million of proceeds from sale-leaseback transactions related to the financing of 13 Boeing 737 family aircraft. Principal financing activities in the 2013 period included proceeds from issuance of debt of $4.1 billion consisting of EETC equipment notes and a senior secured credit facility, as well as $1.5 billion of proceeds from sale-leaseback transactions related to the financing of 26 Boeing 737 family aircraft and three Boeing 777 aircraft. These proceeds were offset in part by debt repayments of $2.1 billion. 82-------------------------------------------------------------------------------- Table of Contents American Operating Activities Net cash provided by operating activities was $2.0 billion and $1.8 billion for the first nine months of 2014 and 2013, respectively, a period-over-period increase of $192 million. This period-over-period improvement in cash flow generated from operating activities is principally due to increased earnings offset in part by higher pension contributions that were above and beyond the minimum required contributions made during the first nine months of 2014. During the nine months ended September 30, 2014 and 2013, American contributed $781 million and $88 million, respectively, to fund its defined benefit pension plans, representing a $693 million period-over-period increase in contributions. Investing Activities Net cash used in investing activities was $1.2 billion and $5.1 billion for the first nine 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 13 Boeing 737 family aircraft, four Boeing 777 aircraft, seven Airbus A320 family aircraft and eight Bombardier CRJ-900 aircraft, the purchase of aircraft previously being leased including three Boeing 777 aircraft and five Airbus A320 family, 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 $1.4 billion in net sales of short-term investments, $299 million in proceeds from the sale of DCA slots and a $50 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 $2.6 billion in net purchases of short-term investments and expenditures of $2.4 billion for property and equipment, consisting primarily of the purchase of 26 Boeing 737 family aircraft and seven Boeing 777 aircraft, as well as pre-delivery deposits for certain aircraft on order. Financing Activities Net cash used in financing activities was $628 million for the first nine months of 2014 as compared to net cash provided by financing activities of $3.5 billion for the first nine months of 2013. Principal financing activities in the 2014 period included debt repayments of $2.2 billion including the $1.0 billion prepayment of American's 7.50% senior secured notes, $282 million prepayment of certain airport facility revenue bonds and $61 million prepayment of outstanding debt secured by certain aircraft. These cash outflows were offset in part by proceeds from the issuance of debt of $1.1 billion primarily from the issuance of certain EETC equipment notes and other aircraft related financings, as well as $531 million of proceeds from sale-leaseback transactions related to the financing of 13 Boeing 737 family aircraft. Principal financing activities in the 2013 period included proceeds from the issuance of debt of $4.1 billion consisting of EETC equipment notes and a senior secured credit facility, as well as $1.5 billion of proceeds from sale-leaseback transactions related to the financing of 26 Boeing 737 family aircraft and three Boeing 777 aircraft. These proceeds were offset in part by debt repayments of $2.1 billion. 83-------------------------------------------------------------------------------- Table of Contents Commitments Significant Indebtedness As of September 30, 2014, AAG and American had $17.2 billion and $10.3 billion, respectively, in long-term debt and capital leases (including current maturities and before debt discount). See Note 8 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 September 30, 2014. Our significant indebtedness includes the following credit facilities: 2013 Credit Facilities On June 27, 2013, American and AAG entered into a Credit and Guaranty Agreement (as amended, the 2013 Credit Agreement) with certain lenders. The 2013 Credit Agreement provides for a $1.9 billion term loan facility (the 2013 Term Loan Facility) that is scheduled to mature on June 27, 2019, unless otherwise extended by the applicable parties. As of September 30, 2014, American had borrowed $1.9 billion under the 2013 Term Loan Facility. The 2013 Credit Agreement originally provided for a $1.0 billion revolving credit facility (the 2013 Revolving Facility and, together with the 2013 Term Loan Facility, the 2013 Credit Facilities) scheduled to mature on June 27, 2018, unless otherwise extended by the applicable parties. The 2013 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 2013 Term Loan Facility. The 2013 Revolving Facility provided 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. On October 10, 2014, American and AAG amended the 2013 Credit Agreement to extend the maturity date of the 2013 Revolving Facility to October 10, 2019 and increase the commitments thereunder to an aggregate amount of $1.4 billion while reducing the letter of credit commitments thereunder to $300 million. As of September 30, 2014, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility. The 2013 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 2013 Term Loan Facility) plus an applicable LIBOR margin. The applicable LIBOR margin is 3.00% for borrowings under both the 2013 Term Loan Facility and the 2013 Revolving Facility. Upon consummation of the Merger, US Airways Group and US Airways joined the 2013 Credit Facilities as guarantors. Following the joinder, certain minimum dollar-thresholds under the negative and financial covenants in the 2013 Credit Facilities were automatically increased. Subject to certain limitations and exceptions, the 2013 Credit Facilities are secured by certain collateral, including certain route authorities and certain take-off and landing rights and gate leaseholds at certain airports. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2013 Credit Facilities as more fully described below in "Collateral Related Covenants." The 2013 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 2013 Credit Facilities may be accelerated and become due and payable immediately. In addition, if a "change of control" (as defined in the 2013 Credit Agreement) occurs, American will, absent an amendment or waiver, be required to repay at par the loans outstanding under the 2013 Credit Facilities and terminate the 2013 Revolving Facility. The 2013 Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the 2013 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. 2013 Citicorp Credit Facility 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 84-------------------------------------------------------------------------------- Table of Contents 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 September 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. Current Developments 2014-1 EETCs In September 2014, American created two pass-through trusts which issued approximately $957 million aggregate face amount of Series 2014-1 Class A and Class B EETCs in connection with the financing of 17 aircraft recently delivered to, and owned by, American (the 2014 EETC Aircraft). As of September 30, 2014, the full $957 million of the escrowed proceeds from the 2014-1 EETCs have been used to purchase equipment notes issued by American in two series: Series A equipment notes in the amount of $742 million bearing interest at 3.70% per annum and Series B equipment notes in the amount of $215 million bearing interest at 4.375% per annum. Interest and principal payments on the equipment notes are scheduled to be made in April and October of each year, beginning in April 2015. The final payments on the Series A and Series B equipment notes will be due in October 2026 and October 2022, respectively. The equipment notes are secured by liens on the 2014 EETC Aircraft. 2013-1 EETCs In the first nine months of 2014, US Airways issued $559 million of equipment notes in two series under its 2013-1 EETCs completed in April 2013: Series A equipment notes in the amount of $423 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $136 million bearing interest at 5.375% per annum. As of September 30, 2014, the full $820 million of the escrowed proceeds from US Airways' 2013-1 EETCs have been used to purchase Series A and Series B equipment notes issued by US Airways. The equipment notes are secured by liens on aircraft. Other Aircraft Financing Transactions In May 2014, we prepaid $113 million principal amount of outstanding debt secured by certain aircraft. During the second and third quarters of 2014, American entered into loan agreements to borrow $141 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. 85-------------------------------------------------------------------------------- Table of Contents Senior Secured Notes 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. In July 2014, American prepaid the remaining outstanding principal balance of $900 million at a redemption price of 103.75% of outstanding principal amount plus accrued and unpaid interest. In connection with the prepayment of the outstanding 7.50% senior secured notes, during the nine months ended September 30, 2014, American paid $37 million of cash premiums and recorded a $5 million non-cash write off of unamortized deferred issuance costs. Obligations Associated with Special Facility Revenue Bonds In the first nine months of 2014, we prepaid $312 million of obligations, of which $135 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. The off-balance sheet portion of these obligations was accounted for as an operating lease. In addition, in August 2014, American elected to exercise its option to reset the interest rate on approximately $220 million aggregate principal amount of special facility revenue bonds reflected as debt on its balance sheet, related to the Los Angeles International Airport, resulting in the repurchase of these bonds by American in September 2014. American has the option to remarket these bonds in the future. In connection with the repurchase of these bonds, American paid $2 million in cash premiums and recorded a $5 million non-cash write off of unamortized debt discount and issuance costs. 5.50% Senior Notes In September 2014, we issued $750 million aggregate principal amount of 5.50% Senior Notes due 2019 (the 5.50% senior notes), the net proceeds of which will be used for general corporate purposes. These notes bear interest at a rate of 5.50% per annum, which is payable semi-annually in arrears on each April 1 and October 1, beginning April 1, 2015. The 5.50% senior notes mature on October 1, 2019 and are fully and unconditionally guaranteed by American, US Airways Group and US Airways. The 5.50% senior notes are senior unsecured obligations of AAG. In addition, if we experience specific kinds of changes of control, we must offer to repurchase the 5.50% senior notes at a price of 101% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date. The indenture for the 5.50% senior notes contains covenants and events of default generally customary for similar financings. Upon the occurrence of certain events of default, the 5.50% senior notes may be accelerated and become due and payable. 7.25% Convertible Notes 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, we settled all outstanding 7.25% convertible notes in cash for approximately $175 million. 2014 Credit Facilities On October 10, 2014, American and AAG entered into a Credit and Guaranty Agreement (the 2014 Credit Agreement), with certain lenders. The 2014 Credit Agreement provides for a $750 million term loan facility (the 2014 Term Loan Facility), which was fully drawn on October 10, 2014, and a $400 million revolving credit facility (the 2014 Revolving Facility and, together with the 2014 Term Loan Facility, the 2014 Credit Facilities). The 2014 Revolving Facility provides that American may from time to time borrow, repay and reborrow loans thereunder. American may have letters of credit issued under the 2014 Revolving Facility in an aggregate amount outstanding at any time up to $300 million. There are currently no borrowings or letters of credit outstanding under the 2014 Revolving Facility. Subject to certain limitations and exceptions, the 2014 Credit Facilities are secured by certain collateral, including certain route authorities and certain take-off and landing rights and gate leaseholds at certain airports. The obligations of American under the 2014 Credit Facilities are guaranteed by AAG, US Airways Group and US Airways. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2014 Credit Facilities as more fully described below in "Collateral Related Covenants." Mandatory prepayments at par of term loans and revolving loans may be required to the extent necessary to comply with American's covenants regarding the collateral coverage ratio. The 2014 Term Loan Facility and 2014 Revolving Facility mature on October 10, 2021 and October 10, 2019, respectively, unless otherwise extended by the applicable parties. The 2014 Term Loan Facility is repayable in annual installments in an amount equal to 1.00% of the original principal balance with any unpaid balance due on the maturity date of the 2014 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 October 10, 2014. In addition, if a "change of control" (as defined in the 2014 Credit 86-------------------------------------------------------------------------------- Table of Contents Agreement) occurs with respect to AAG, American will, absent an amendment or waiver, be required to repay at par the loans outstanding under the 2014 Credit Facilities and terminate the 2014 Revolving Facility. The 2014 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% in the case of the 2014 Term Loan Facility) plus an applicable LIBOR margin. The applicable LIBOR margins are 3.50% and 3.00% for borrowings under the 2014 Term Loan Facility and the 2014 Revolving Facility, respectively. If American has a corporate credit rating of Ba3 or higher from Moody's and BB- or higher from S&P, the applicable LIBOR margin is 3.25% under the 2014 Term Loan Facility. The 2014 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 2014 Credit Facilities may be accelerated and become due and payable immediately. The 2014 Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the 2014 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 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. 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 collateral coverage tests on a periodic basis on the 2013 Credit Facilities and the 2014 Credit Facilities, and US Airways is required to meet such tests on the 2013 Citicorp Credit Facility. We were in compliance with the collateral coverage tests for the 2013 Credit Facilities and the 2013 Citicorp Credit Facility as of the most recent measurement dates (no measurement date has occurred yet for the 2014 Credit Facilities). Credit Ratings The following table details our credit ratings as of September 30, 2014: Fitch S&P Local Issuer Moody's Issuer Default Corporate Credit Credit Family Rating Rating Rating American Airlines Group B B+ B1 American Airlines B B+ * * The credit agency does not rate this category for the respective entity. A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness. 87-------------------------------------------------------------------------------- Table of Contents Aircraft and Engine Purchase Commitments As of September 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 11 42 25 20 - - 98 A320 Neo - - - 10 25 65 100 A350 XWB - - - 6 10 6 22 Boeing 737 Family 7 18 20 20 - - 65 737 MAX - - - 3 17 80 100 777-300 ER 2 2 2 - - - 6 787 Family 2 11 13 9 7 - 42 Bombardier CRJ900 (1) 7 15 - - - - 22 Embraer ERJ175 (1) - 24 24 12 - - 60 Total 29 112 84 80 59 151 515 (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 48 spare engines to be delivered in 2014 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of September 30, 2014 are expected to be as follows (approximately, in millions): Remainder of 2019 and 2014 2015 2016 2017 2018 Thereafter Total Payments for American aircraft commitments and certain engines (1) $ 955 $ 4,086 $ 3,880 $ 3,632 $ 3,568 $ 10,938 $ 27,059 Payments for US Airways aircraft commitments and certain engines $ 89 $ 522 $ 108 $ 766 $ 1,061 $ 600 $ 3,146 (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 $1.2 billion as of September 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: 65 Airbus 320 family aircraft, 10 Boeing 737 family aircraft, 6 Boeing 777-300ER aircraft and 26 Boeing 787 family aircraft. In addition, we have financing commitments in place for only a small number of aircraft currently on order and scheduled to be delivered in 2017 and beyond. See Part II, Item 1A - Risk Factors - "We will need to obtain sufficient financing or other capital to operate successfully." Credit Card Processing and Other Reserves We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Credit card processors have financial risk associated with tickets purchased for travel because, although the processor generally forwards the cash related to the purchase to us soon after the purchase is completed, the air travel generally occurs after that time, and the processor may have liability if we do not ultimately provide the air travel. Our agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a "holdback") equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. We are not currently required to maintain any holdbacks pursuant to these requirements. Certain of our agreements provide that these holdback 88-------------------------------------------------------------------------------- Table of Contents 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 Employee Retirement Income Security Act of 1974 (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. In the first nine months of 2014, we have made our aggregate minimum required contributions for 2014 of $168 million, and have made $613 million in supplemental contributions to our pension plans, above and beyond the $168 million of minimum required contributions. 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. The amount of these obligations will depend on the performance of our investments held in trust by the pension plans, interest rates for determining liabilities and our actuarial experience. 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. In September 2014, we reached a tentative agreement with the Association of Professional Flight Attendants (APFA) on a joint collective bargaining agreement covering more than 24,000 flight attendants. This tentative agreement is subject to ratification by the APFA membership. 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. 89 -------------------------------------------------------------------------------- AAG Contractual Obligations The following table provides details of our future cash contractual obligations as of September 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) $ 137 $ 959 $ 879 $ 924 $ 805 $ 6,523 $ 10,227 Interest obligations (2), (3) 57 496 434 424 429 1,257 3,097 Commitments for aircraft and engine purchases (4) 955 4,086 3,880 3,632 3,568 10,938 27,059 Operating lease commitments (5) 883 1,392 1,237 1,172 1,063 5,493 11,240 Regional capacity purchase agreements (6) 144 680 771 622 616 3,750 6,583 Minimum pension contribution and other purchase obligations (7) 111 425 270 235 220 3,542 4,803 Total AA Contractual Obligations $ 2,287 $ 8,038 $ 7,471 $ 7,009 $ 6,701 $ 31,503 $ 63,009 AAG Parent, US Airways Group and Other AAG subsidiaries Debt and capital lease obligations (1), (3) $ 210 $ 477 $ 964 $ 396 $ 1,036 $ 3,840 $ 6,923 Interest obligations (2), (3) 122 317 306 280 245 442 1,712 Commitments for aircraft and engine purchases (4) 89 522 108 766 1,061 600 3,146 Operating lease commitments (5) 144 708 615 563 411 1,107 3,548 Regional capacity purchase agreements (6) 292 1,032 888 755 578 1,288 4,833 Total AAG Contractual Obligations $ 3,144 $ 11,094 $ 10,352 $ 9,769 $ 10,032 $ 38,780 $ 83,171 (1) Amounts represent contractual amounts due. For American, excludes $43 million and for US Airways Group, excludes $17 million of unamortized debt discount as of September 30, 2014. (2) For variable-rate debt, future interest obligations are estimated using the current forward rates at September 30, 2014. (3) For American, includes $4.3 billion of future principal payments and $1.1 billion of future interest payments, respectively, and for US Airways Group, includes $2.9 billion of future principal payments and $945 million of future interest payments, respectively, as of September 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 $1.8 billion of future minimum lease payments related to EETC leverage leased financings of certain aircraft as of September 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 90 -------------------------------------------------------------------------------- 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 of fuel, maintenance, or aircraft, aircraft engines or parts, could decrease the amount of cash available to cover cash contractual obligations. Moreover, the 2013 Credit Facilities, the 2014 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 third 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. 91-------------------------------------------------------------------------------- |