AMERICAN AIRLINES GROUP INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American Airlines Group
American Airlines and American Eagle offer an average of nearly 6,700 flights
per day to nearly 350 destinations in more than 50 countries. American has hubs
in
Charlotte
,
Chicago
,
Dallas/Fort Worth
,
Los Angeles
,
Miami
,
New York
,
Philadelphia
,
Phoenix
and
Washington, D.C.
American is a founding member of the
oneworld alliance, whose members and members-elect serve nearly 1,000
destinations with 14,250 daily flights to 150 countries. In 2015, approximately
201 million passengers boarded our mainline and regional flights. As of
December 31, 2015, we operated 946 mainline aircraft and were supported by our
regional airline subsidiaries and third-party regional carriers, which operated
an additional 587 regional aircraft.
As previously discussed, our Merger was consummated on December 9, 2013. Since the Merger, we have made significant progress towards completing our integration. During 2015, we achieved the following:
• Adopted a single reservations system, which when completed, resulted in no
operational or customer disruption
• Reached ratified contracts with industry-leading pay rates for pilots,
flight attendants and customer service and reservation agents
• Received a single operating certificate from the Federal Aviation
Administration, allowing American to be regulated as one airline
• Merged loyalty programs by moving US Airways Dividend Miles members into
AAdvantage
• Opened the new state-of-the-art Robert W. Baker Integrated Operations Center
in
Fort Worth
• Optimized the airline's flight schedules at Chicago O'Hare International
Airport and Dallas/Fort Worth International Airport
• Substantially completed the co-location of our airport operations and
consolidated all mainline operations at Dallas/Fort Worth International
Airport into three terminals, gaining efficiencies in gate use and line
maintenance
• Announced plans to masterplan our
Fort Worth
campus and build a new
corporate headquarters building to begin the process of modernizing our
facilities and co-locate our headquarters staff with our training functions
and integrated operations support teams
Year in Review
The
U.S.
Airline Industry
In 2015, the
U.S.
airline industry benefited significantly from lower fuel prices. However, this benefit was offset in part by a decline in revenues driven by reduced yields.
Jet fuel prices closely follow the price of Brent crude oil. Oil prices declined
significantly throughout 2015, and in December, the price of Brent crude oil
fell below $40 a barrel for the first time since 2009. On average, the price of
Brent crude oil per barrel was approximately 47% lower in 2015 as compared to
2014. The average daily spot price for Brent crude oil during 2015 was $52 per
barrel as compared to an average daily spot price of $99 per barrel during 2014.
On a daily basis, Brent crude oil prices fluctuated during 2015 between a high
of $66 per barrel to a low of $35 per barrel, and closed the year on
December 31, 2015 at $37 per barrel.
With respect to revenue, in its most recent data available through the third
quarter of 2015, Airlines for America, the trade association for
U.S.
airlines,
reported
U.S.
industry passenger revenues and yields declined as compared to
2014. Additionally, domestic markets outperformed international markets
(Atlantic, Pacific and
Latin America
) in both yield and overall revenue
performance.
59
--------------------------------------------------------------------------------
Table of Contents
While jet fuel prices have declined year-over-year as described above,
uncertainty exists regarding the economic conditions driving these declines. See
Part I, 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
Driven by substantially lower fuel costs, we realized operating income of $6.2
billion and net income of $7.6 billion in 2015. This compares to operating
income of $4.2 billion and net income of $2.9 billion in 2014. As a result of
not hedging our fuel consumption, we fully benefited from the decline in fuel
prices.
Excluding the effects of net special charges (credits), we recognized operating
income of $7.3 billion and net income of $6.3 billion in 2015 as compared to
operating income of $5.1 billion and net income of $4.2 billion in 2014. This
represents improvements of 44% and 50%, respectively, in operating income and
net income in 2015.
Year Ended Percent
December 31, Increase
2015 2014 (Decrease)
(In millions, except percentage
changes)
Mainline and regional passenger revenues $ 35,512 $ 37,124 (4.3 )
Total operating revenues $ 40,990 $ 42,650 (3.9 )
Mainline and regional aircraft fuel and related taxes $ 7,456 $ 12,601 (40.8 )
Total operating expenses $ 34,786 $ 38,401 (9.4 )
Operating income $ 6,204 $ 4,249 46.0
Net income $ 7,610 $ 2,882 nm
Special items: (1)
Operating special charges, net $ 1,080 $
824
Nonoperating special charges, net 594
132
Income tax special charges (credits), net (3,015 )
346
Total net special charges (credits) $ (1,341 ) $ 1,302
(1) AAG's 2015 results were impacted by a net special credit of $1.3 billion,
consisting principally of a $3.0 billion non-cash tax benefit related to the
reversal of the Company's valuation allowance for its deferred tax assets.
This credit was offset in part by $1.1 billion of operating special charges,
consisting principally of merger integration expenses and a $592 million
charge related to a write off of the value of Venezuelan bolivars held. See
Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - "AAG's Results of Operations" of this report for
more information on net special items.
Revenue
In 2015, we reported operating revenues of $41.0 billion. Mainline and regional
passenger revenues were $35.5 billion, a decrease of $1.6 billion, or 4.3%, as
compared to 2014. The decline in revenues was driven by a 6.5% decrease in yield
due to competitive growth in certain domestic markets, including
Dallas/Fort Worth
and international weakness resulting from foreign currency devaluation
relative to the
U.S.
dollar, lower fuel surcharges, and continued economic
softness in
Latin America
, particularly in
Brazil
and
Venezuela
. Our mainline
and regional passenger revenue per available seat mile (PRASM) was 13.21 cents
in 2015, a 5.4% decrease, as compared to 13.97 cents in 2014.
60
--------------------------------------------------------------------------------
Table of Contents
Fuel
Mainline and regional fuel expense totaled $7.5 billion in 2015, which was $5.1
billion, or 40.8%, lower as compared to 2014. This decrease was driven by a
40.7% decrease in the average price per gallon of fuel to $1.72 in 2015 from
$2.91 in 2014.
As of December 31, 2015, we did not have any fuel hedging contracts outstanding
to hedge our fuel consumption. As such, and assuming we do not enter into any
future transactions to hedge our fuel consumption, we will continue to be fully
exposed to fluctuations in fuel prices. Our current policy is not to enter into
transactions to hedge our fuel consumption, although we review that policy from
time to time based on market conditions and other factors.
Cost Control
We remain committed to actively managing our 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 2015 mainline cost per available seat mile (CASM) excluding special items
and fuel was 8.99 cents, an increase of 4.2% as compared to 2014. The increase
was primarily due to higher salaries, wages and benefits driven by new merger
related labor contracts with industry-leading pay rates. 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. The table below
summarizes the operating statistics we reported to the DOT for our mainline
operations for the years ended December 31, 2015 and 2014. We are working to
improve these metrics by making investments in our operations, which include the
hiring of additional maintenance personnel to reduce the time aircraft are out
of service. We are also making capital investments in new baggage handling
technology.
December 31, Better
2015 2014 (Worse)
On-time performance (a) 80.1 77.9 2.2 pts
Completion factor (b) 98.4 98.4 - pts
Mishandled baggage (c) 3.97 3.77 (5.3 )%
Customer complaints (d) 3.22 2.12 (51.9 )%
(a) Percentage of reported flight operations arriving less than 15 minutes after
the scheduled arrival time.
(b) Percentage of scheduled flight operations completed.
(c) Rate of mishandled baggage reports per 1,000 passengers.
(d) Rate of customer complaints filed with the DOT per 100,000 enplanements.
Liquidity Position
As of December 31, 2015, AAG's total cash, short-term investments and restricted
cash and short-term investments were $6.9 billion, of which $695 million was
restricted. We also had $2.4 billion of undrawn revolving line of credit
facilities.
December 31,
2015 2014
(In millions)
Cash and short-term investments (1) $ 6,254 $ 7,303
Restricted cash and short-term investments (2) 695
774
Total cash, short-term investments and restricted cash and
short-term investments $ 6,949 $ 8,077
61
--------------------------------------------------------------------------------
Table of Contents
(1) In the fourth quarter of 2015, we recognized a $592 million special charge to
write off all of the value of Venezuelan bolivars held by us, due to
continued lack of repatriations and deterioration of economic conditions in
Venezuela
. During 2014, we significantly reduced capacity in the Venezuelan
market and we no longer accept bolivars as payment for airline tickets.
(2) Restricted cash and short-term investments primarily include cash collateral
to secure workers' compensation obligations.
In 2015, we utilized cash generated from operations to invest in our airline. We
continued our fleet renewal program by investing more than $5.3 billion in new
aircraft, which has provided us with the youngest and most modern fleet of the
U.S.
network airlines. In 2015, we took delivery of 75 new mainline aircraft
while retiring 112 aircraft. We also added 52 regional aircraft to our fleet and
removed 31 regional aircraft.
In 2015, we returned $3.9 billion to our shareholders through the payment of
$278 million in quarterly dividends and the repurchase of $3.6 billion of common
stock, or 85.1 million shares. In addition, in 2015 we elected to pay
approximately $306 million in satisfaction of certain tax withholding
obligations associated with equity awards, further reducing the share count by
7.0 million.
These cash outflows were offset in part by proceeds from financing transactions,
principally aircraft related. We ended the year with $8.7 billion in available
liquidity (including available lines of credit). We believe it is important to
retain liquidity levels above our network peers as we expect capital
expenditures of approximately $4.5 billion in each of 2016 and 2017 as we
continue our fleet renewal program. See Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - "Commitments"
for further discussion of 2015 financing transactions and our contractual
commitments.
2016 Outlook
We have taken significant actions to restore our competitiveness and to complete
our integration. Although it is difficult to predict the price of oil or the
strength of the economy, we believe that our 2015 financial results are evidence
of the substantial progress we have made and can continue to build on.
62
--------------------------------------------------------------------------------
Table of Contents
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.
Year Ended December 31,
2015 2014
(In millions, except per ASM amounts)
Total operating expenses $ 34,786 $ 38,401
Less: Regional expenses:
Fuel (1,230 ) (2,009 )
Other (4,753 ) (4,507 )
Total mainline operating expenses 28,803 31,885
Less: Special items, net (1,051 ) (800 )
Mainline operating expenses, excluding
special items 27,752 31,085
Less: Aircraft fuel and related taxes (6,226 ) (10,592 )
Mainline operating expenses, excluding
special items and fuel $ 21,526 $ 20,493
Available Seat Miles (ASM) 239,375 237,522
(In cents)
Mainline operating expenses per ASM 12.03 13.42
Less: Special items, net per ASM (0.44 ) (0.34 )
Mainline operating expenses per ASM,
excluding special items 11.59 13.09
Less: Aircraft fuel and related taxes per
ASM (2.60 ) (4.46 )
Mainline operating expenses per ASM,
excluding special items and fuel 8.99 8.63
AAG's Results of Operations
In 2015, we realized operating income of $6.2 billion and net income of $7.6
billion. Our 2015 net income included net special operating charges of $1.1
billion and total net special credits of $1.3 billion. Excluding the effects of
these special charges and credits, we realized operating income of $7.3 billion
and net income of $6.3 billion.
In 2014, we realized operating income of $4.2 billion and net income of $2.9
billion. Our 2014 net income included net special operating charges of $824
million and total net special charges of $1.3 billion. Excluding the effects of
these special charges, we realized operating income of $5.1 billion and net
income of $4.2 billion.
We completed the Merger on December 9, 2013. 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 period GAAP results are not comparable to the GAAP
results for 2013 as 2013 excludes the results of US Airways Group except for the
23 day post-Merger period from December 9, 2013 to December 31, 2013.
In 2013, we realized operating income of $1.4 billion and net loss of $1.8 billion. Our 2013 net income included net special operating charges of $536 million and total net special charges of $3.1 billion. Excluding the effects of these special charges, we realized operating income of $1.9 billion and net income of $1.2 billion.
63
--------------------------------------------------------------------------------
Table of Contents
The components of total net special charges (credits) in our accompanying consolidated statements of operations are as follows (in millions):
Year Ended December 31,
2015 2014 2013
Other revenue special item, net (1) $ - $ - $ (31 )
Mainline operating special items, net (2) 1,051 800 559
Regional operating special items, net (3) 29 24 8
Nonoperating special items, net (4) 594 132 211
Reorganization items, net (5) - -
2,655
Income tax special items, net (6) (3,015 ) 346
(324 )
Total $ (1,341 ) $ 1,302 $ 3,078
(1) In 2013, other revenue special item, net included a credit to other revenues
related to a change in accounting method resulting from the modification of
American's AAdvantage miles agreement with Citibank.
(2) In 2015, mainline operating special items, net principally included $1.0
billion of merger integration expenses related to information technology,
alignment of labor union contracts, professional fees, severance, share-based
compensation, fleet restructuring, re-branding of aircraft and airport
facilities, relocation and training.
In 2014, mainline operating special items, net principally included $810 million
of merger integration expenses related to information technology, alignment of
labor union contracts, professional fees, severance and retention, share-based
compensation, divestiture of London Heathrow slots, fleet restructuring,
re-branding of aircraft and airport facilities, relocation and training. In
addition, we recorded a net charge of $81 million for bankruptcy related items
principally consisting of fair value adjustments for bankruptcy settlement
obligations and an $81 million charge to revise prior estimates of certain
aircraft residual values and other spare parts asset impairments. These charges
were offset in part by a $309 million gain on the sale of slots at DCA.
In 2013, mainline operating special items, net included $443 million of merger
related expenses related to the alignment of labor union contracts, professional
fees, severance, share-based compensation and fees for US Airways to exit the
Star Alliance and its codeshare agreement with United Airlines. In addition, we
recorded a $107 million charge related to American's pilot long-term disability
obligation, a $43 million charge for workers' compensation claims and a $33
million aircraft impairment charge. These charges were offset in part by a $67
million gain on the sale of slots at LGA.
(3) The 2015 regional operating special items, net principally related to merger
integration expenses.
The 2014 regional operating special items, net consisted primarily of a $24 million charge due to a new pilot labor contract at our Envoy regional subsidiary as well as $7 million of merger integration expenses, offset in part by an $8 million gain on the sale of certain spare parts.
(4) In 2015, nonoperating special items, net principally included a $592 million
charge to write off all of the value of Venezuelan bolivars held by us due to
continued lack of repatriations and deterioration of economic conditions in
Venezuela
.
In 2014, nonoperating special items, net principally included a $43 million
charge for Venezuelan foreign currency losses, $56 million of early debt
extinguishment costs primarily related to the prepayment of 7.50% senior secured
notes and other indebtedness and $33 million of non-cash interest accretion on
bankruptcy settlement obligations.
In 2013, nonoperating special items, net consisted of interest charges of $138
million primarily to recognize post-petition interest expense on unsecured
obligations pursuant to the Plan and penalty interest related to 10.5% secured
notes and 7.50% senior secured notes, a $54 million charge related to the
premium on tender for existing EETC financings and the write-off of debt
issuance costs and $19 million in charges related to the repayment of existing
EETC financings.
64
--------------------------------------------------------------------------------
Table of Contents (5) In 2013, 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.
(6) In 2015, income tax special items totaled a net credit of $3.0 billion. In
connection with the preparation of our financial statements for the fourth
quarter of 2015, we determined that it was more likely than not that
substantially all of our deferred tax assets, which include our NOLs, would
be realized. Accordingly, we reversed $3.0 billion of the valuation allowance
as of December 31, 2015, which resulted in a special $3.0 billion non-cash
tax benefit recorded in the consolidated statement of operations for 2015.
In 2014, income tax special items, net were $346 million. During 2014, we sold
our portfolio of fuel hedging contracts that were scheduled to settle on or
after June 30, 2014. In connection with this sale, we recorded a special
non-cash tax provision of $330 million in the 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 2013, income tax special items, net included a $538 million non-cash income
tax benefit from continuing operations. We are required to consider all items
(including items recorded in OCI) in determining the amount of tax benefit that
results from a loss from continuing operations and that should be allocated to
continuing operations. As a result, we recorded a tax benefit on the loss from
continuing operations for the year, which was exactly offset by income tax
expense on OCI. However, while the income tax benefit from continuing operations
is reported on the income statement, the income tax expense on OCI is recorded
directly to accumulated other comprehensive income (loss), which is a component
of stockholders' equity. Because the income tax expense on OCI is equal to the
income tax benefit from continuing operations, our year-end net deferred tax
position is not impacted by this tax allocation. The 2013 tax benefit was offset
in part by a $214 million tax charge attributable to additional valuation
allowance required to reduce deferred tax assets to the amount we believed was
more likely than not to be realized.
Income Taxes
At December 31, 2015, we had approximately $8.0 billion of gross NOL
Carryforwards to reduce future federal taxable income, substantially all of
which are expected to be available for use in 2016. The federal NOL
Carryforwards will expire beginning in 2023 if unused. These NOL Carryforwards
include an unrealized tax benefit of $1.2 billion related to share-based
compensation that will be recorded in equity when realized. We also had
approximately $4.0 billion of NOL Carryforwards to reduce future state taxable
income at December 31, 2015, which will expire in years 2016 through 2034 if
unused. Our ability to deduct our NOL Carryforwards and to utilize certain other
available tax attributes can be substantially constrained under the general
annual limitation rules of Section 382 where an "ownership change" has occurred.
We experienced an ownership change in connection with our emergence from the
Chapter 11 Cases, and US Airways Group experienced an ownership change in
connection with the Merger. As a result of the Merger, US Airways Group is now
included in the AAG consolidated federal and state income tax returns. The
general limitation rules of Section 382 for a debtor in a bankruptcy case are
liberalized where the ownership change occurs upon emergence from bankruptcy. We
elected to be covered by certain special rules for federal income tax purposes
that permitted approximately $9.0 billion (with $6.6 billion of unlimited NOL
remaining at December 31, 2015) of our federal NOL Carryforwards to be utilized
without regard to the Section 382 annual limitation rules unless a second
ownership change occurred on or before December 9, 2015. No second ownership
change occurred within that period. Substantially all of our remaining federal
NOL Carryforwards (attributable to US Airways Group) are subject to limitation
under Section 382; however, our ability to utilize such NOL Carryforwards is not
anticipated to be effectively constrained as a result of such limitation.
Similar limitations may apply for state income tax purposes. Our ability to
utilize any new NOL Carryforwards arising after the ownership changes is not
affected by the annual limitation rules imposed by Section 382 unless another
ownership change occurs.
65
--------------------------------------------------------------------------------
Table of Contents
At December 31, 2015, we had an Alternative Minimum Tax (AMT) credit carryforward of approximately $341 million available for federal income tax purposes, which is available for an indefinite period.
In connection with the preparation of our financial statements for the fourth
quarter of 2015, we determined that it was more likely than not that
substantially all of our deferred tax assets, which include our NOLs, would be
realized. Accordingly, we reversed $3.0 billion of the valuation allowance as of
December 31, 2015, which resulted in a special $3.0 billion non-cash tax benefit
recorded in the consolidated statement of operations for 2015.
Beginning in 2016, we expect to record income tax expense with an effective rate
of approximately 38%, which will be substantially non-cash as we utilize the
NOLs described above to offset cash income taxes due.
For the year ended December 31, 2014, we recorded a $330 million tax provision, which included $346 million of special tax charges as described above.
For the year ended December 31, 2013, we recorded a $346 million tax benefit, which included $324 million of net special tax benefits as described above.
66
--------------------------------------------------------------------------------
Table of Contents
Operating Statistics
The table below sets forth selected mainline and regional operating data for the
years ended December 31, 2015 and 2014. Operating statistics for the year ended
December 31, 2013 have not been included because they would not be comparable to
the years ended December 31, 2015 or 2014 due to US Airways Group results only
being included for 23 days ended December 31, 2013.
Increase
Year Ended December 31, (Decrease)
2015 2014 2015-2014
Mainline
Revenue passenger miles (millions) (a) 199,467 195,651 2.0 %
Available seat miles (millions) (b) 239,375 237,522 0.8 %
Passenger load factor (percent) (c) 83.3 82.4 0.9 pts
Yield (cents) (d) 14.56 15.74 (7.5 )%
Passenger revenue per available seat mile
(cents) (e) 12.13 12.97 (6.5 )%
Operating cost per available seat mile
(cents) (f) 12.03 13.42 (10.4 )%
Passenger enplanements (thousands) (g) 146,814 145,574 0.9 %
Departures (thousands) 1,114 1,144 (2.6 )%
Aircraft at end of period 946 983 (3.8 )%
Block hours (thousands) (h) 3,494 3,514 (0.6 )%
Average stage length (miles) (i) 1,226 1,205 1.7 %
Fuel consumption (gallons in millions) 3,611 3,644 (0.9 )%
Average aircraft fuel price including
related taxes (dollars per gallon) 1.72 2.91 (40.7 )%
Full-time equivalent employees at end of
period 98,900 94,400 4.8 %
Regional (j)
Revenue passenger miles (millions) (a) 23,543 22,219 6.0 %
Available seat miles (millions) (b) 29,361 28,135 4.4 %
Passenger load factor (percent) (c) 80.2 79.0 1.2 pts
Yield (cents) (d) 27.50 28.46 (3.3 )%
Passenger revenue per available seat mile
(cents) (e) 22.05 22.47 (1.9 )%
Operating cost per available seat mile
(cents) (f) 20.38 23.16 (12.0 )%
Passenger enplanements (thousands) (g) 54,435 51,766 5.2 %
Aircraft at end of period 587 566 3.7 %
Fuel consumption (gallons in millions) 712 688 3.6 %
Average aircraft fuel price including
related taxes (dollars per gallon) 1.73 2.92 (40.9 )%
Full-time equivalent employees at end of
period (k) 19,600 18,900 3.7 %
Total Mainline and Regional
Revenue passenger miles (millions) (a) 223,010 217,870 2.4 %
Available seat miles (millions) (b) 268,736 265,657 1.2 %
Cargo ton miles (millions) (l) 2,314 2,333 (0.8 )%
Passenger load factor (percent) (c) 83.0 82.0 1.0 pts
Yield (cents) (d) 15.92 17.04 (6.5 )%
Passenger revenue per available seat mile
(cents) (e) 13.21 13.97 (5.4 )%
Total revenue per available seat mile
(cents) 15.25 16.05 (5.0 )%
Cargo yield per ton mile (cents) (m) 32.84 37.50 (12.4 )%
Passenger enplanements (thousands) (g) 201,249 197,340 2.0 %
Aircraft at end of period 1,533 1,549 (1.0 )%
Fuel consumption (gallons in millions) 4,323 4,332 (0.2 )%
Average aircraft fuel price including
related taxes (dollars per gallon) 1.72 2.91 (40.7 )%
Full-time equivalent employees at end of
period 118,500 113,300 4.6 %
(a) Revenue passenger mile (RPM) - A basic measure of sales volume. One RPM
represents one passenger flown one mile.
67
--------------------------------------------------------------------------------
Table of Contents (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), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), and
operating statistics from our capacity purchase agreements with Air Wisconsin
Airlines Corporation, Chautauqua Airlines, Inc., ExpressJet Airlines, Inc.,
Mesa Airlines, Inc., Republic Airline Inc., SkyWest Airlines, Inc., Compass
Airlines, LLC and Trans States 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) Cargo yield per ton mile - Cargo revenues divided by total mainline and
regional cargo ton miles.
2015 Compared to 2014
Operating Revenues
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In millions, except percentage changes)
Mainline passenger $ 29,037 $ 30,802 (5.7 )
Regional passenger 6,475 6,322 2.4
Cargo 760 875 (13.1 )
Other 4,718 4,651 1.4
Total operating revenues $ 40,990 $ 42,650
(3.9 )
Total operating revenues in 2015 decreased $1.7 billion, or 3.9%, from 2014
principally due to competitive growth and weaker international yields primarily
due to foreign currency devaluation relative to the
U.S.
dollar. Significant
changes in the components of operating revenues are as follows:
• Mainline passenger revenues were $29.0 billion in 2015 as compared to $30.8
billion in 2014. Mainline RPMs increased 2.0% as mainline capacity, as
measured by ASMs, increased 0.8%, resulting in a 0.9 point increase in load
factor to 83.3%. Mainline passenger yield decreased 7.5% to 14.56 cents in
2015 from 15.74 cents in 2014. Mainline PRASM decreased 6.5% to 12.13 cents
in 2015 from 12.97 cents in 2014.
• Regional passenger revenues were $6.5 billion in 2015 as compared to $6.3
billion in 2014. Regional RPMs increased 6.0% as regional capacity, as
measured by ASMs, increased 4.4%, resulting in a 1.2
68
--------------------------------------------------------------------------------
Table of Contents
point increase in load factor to 80.2%. Regional passenger yield decreased
3.3% to 27.50 cents in 2015 from 28.46 cents in 2014. Regional PRASM
decreased 1.9% to 22.05 cents in 2015 from 22.47 cents in 2014.
• Cargo revenue decreased $115 million, or 13.1%, in 2015 from 2014 driven
primarily by a decrease in international freight yields.
Operating Expenses
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In millions, except percentage changes)
Aircraft fuel and related taxes $ 6,226 $ 10,592
(41.2 )
Salaries, wages and benefits 9,524 8,508
11.9
Maintenance, materials and repairs 1,889 2,051 (7.9 )
Other rent and landing fees 1,731 1,727 0.2
Aircraft rent 1,250 1,250 -
Selling expenses 1,394 1,544 (9.8 )
Depreciation and amortization 1,364 1,295 5.4
Special items, net 1,051 800 31.3
Other 4,374 4,118 6.2
Total mainline operating expenses 28,803 31,885 (9.7 )
Regional expenses:
Fuel 1,230 2,009 (38.8 )
Other 4,753 4,507 5.4
Total regional operating expenses 5,983 6,516 (8.2 )
Total operating expenses $ 34,786 $ 38,401 (9.4 )
Total operating expenses were $34.8 billion in 2015, a decrease of $3.6 billion,
or 9.4%, from 2014. The decrease in operating expenses was primarily due to
substantially lower aircraft fuel costs, offset in part by higher salaries,
wages and benefits driven by new merger related labor contracts. See detailed
explanations below relating to changes in operating costs per ASM.
Mainline Operating Expenses per ASM
Our mainline CASM decreased 1.39 cents, or 10.4%, from 13.42 cents in 2014 to
12.03 cents in 2015 on 0.8% increase in capacity primarily due to lower fuel
prices. Excluding special items and aircraft fuel and related taxes, our
mainline CASM increased 0.36 cents, or 4.2%, from 8.63 cents in 2014 to 8.99
cents in 2015, primarily due to higher salaries, wages and benefits due to new
merger related labor contracts.
69
--------------------------------------------------------------------------------
Table of Contents
The table below sets forth the major components of our total mainline CASM and
our mainline CASM excluding special items and aircraft fuel and related taxes
for the year ended December 31, 2015 and 2014:
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In cents, except percentage changes)
Mainline CASM:
Aircraft fuel and related taxes 2.60 4.46 (41.7 )
Salaries, wages and benefits 3.98 3.58 11.1
Maintenance, materials and repairs 0.79 0.86 (8.6 )
Other rent and landing fees 0.72 0.73 (0.5 )
Aircraft rent 0.52 0.53 (0.8 )
Selling expenses 0.58 0.65 (10.5 )
Depreciation and amortization 0.57 0.55 4.6
Special items, net 0.44 0.34 30.3
Other 1.83 1.73 5.4
Total mainline CASM 12.03 13.42 (10.4 )
Special items, net (0.44 ) (0.34 ) 30.3
Aircraft fuel and related taxes (2.60 ) (4.46 ) (41.7 )
Mainline operating expenses per ASM,
excluding special items and aircraft fuel
and related taxes (1) 8.99 8.63 4.2
(1) We believe that the presentation of mainline CASM excluding fuel is useful to
investors because 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 that 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.
Significant changes in the components of mainline operating expense per ASM are as follows:
• Aircraft fuel and related taxes per ASM decreased 41.7% primarily due to a
40.7% decrease in the average price per gallon of fuel to $1.72 in 2015 from
an average price per gallon of $2.91 in 2014.
• Salaries, wages and benefits per ASM increased 11.1% primarily due to
increased costs associated with the new, merger related pilot, flight
attendant and customer service and reservation agent joint collective
bargaining agreements.
• Maintenance, materials and repairs per ASM decreased 8.6% primarily due to
fewer engine overhauls in 2015, driven by our fleet renewal program.
• Selling expenses per ASM decreased 10.5% primarily due to lower
contractually negotiated rates for certain commissions and booking fees as
well as lower revenues in 2015.
• Other operating expenses per ASM increased 5.4% in 2015 as compared to 2014
primarily due to increases in crew travel and certain information technology
projects, as well as enhancements to our aircraft food and catering
offerings.
Regional Operating Expenses
Total regional expenses decreased $533 million, or 8.2%, in 2015 to $6.0 billion
from $6.5 billion in 2014. The year-over-year decrease was primarily due to a
$779 million, or 38.8%, decrease in fuel costs, offset in part by a $246
million, or 5.4%, increase in other regional operating expenses. The average
price per gallon of fuel decreased 40.9% to $1.73 in 2015 from $2.92 in 2014.
The increase in other regional operating expenses was principally due to
increased flying under capacity purchase agreements.
70
--------------------------------------------------------------------------------
Table of Contents
Nonoperating Income (Expense)
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In millions, except percentage changes)
Interest income $ 39 $ 31 26.0
Interest expense, net of capitalized interest (880 ) (887 ) (0.8 )
Other, net (747 ) (181 ) nm
Total nonoperating expense, net $ (1,588 ) $ (1,037 ) 53.1
Our short-term investments in each period consisted of highly liquid investments that provided nominal returns.
The following table provides the components of interest expense:
Year Ended December 31, Increase
2015 2014 (Decrease)
(In millions)
Special items, net $ - $ 33 $ (33 )
Amortization of debt issuance costs and
debt discounts 42 39 3
Interest expense on debt and capital lease
obligations 890 876 14
Total interest expense 932 948 (16 )
Less: capitalized interest (52 ) (61 ) 9
Total interest expense, net of capitalized
interest $ 880 $ 887 $ (7 )
Other nonoperating expense, net in 2015 included a net $594 million in other
nonoperating special charges and $159 million of foreign currency losses. The
other nonoperating special charges were primarily due to a $592 million write
off of all of the value of Venezuelan bolivars held by us due to continued lack
of repatriations and deterioration of economic conditions in
Venezuela
and $41
million in charges principally related to non-cash write offs of unamortized
debt discount and debt issuance costs associated with refinancing certain of our
secured term loan facilities, prepayments of certain aircraft financings and the
purchase and subsequent remarketing of certain special facility revenue bonds.
These charges were offset in part by a $22 million gain associated with the sale
of an investment and a $17 million early debt extinguishment gain associated
with the repayment of American's AAdvantage loan with Citibank. The foreign
currency losses were driven primarily by the strengthening of the
U.S.
dollar
relative to other currencies during 2015, principally in Latin American and
European markets, including a 34% decrease in the value of the Argentinian peso,
a 30% decrease in the value of the Brazilian real, a 14% decrease in the value
of the Mexican peso, a 10% decrease in the value of the Euro and a 5% decrease
in the value of the British pound.
Other nonoperating expense, net in 2014 consisted of $114 million of net foreign
currency losses, including a $43 million special charge for Venezuelan foreign
currency losses, and $56 million in other nonoperating special charges primarily
due to early debt extinguishment costs related to the prepayment of our 7.50%
senior secured notes and other indebtedness. The foreign currency losses were
driven primarily by the strengthening of the
U.S.
dollar relative to other
currencies during 2014, principally in the Latin American market, including a
48% decrease in the value of the Venezuelan bolivar and a 14% decrease in the
value of the Brazilian real.
71
--------------------------------------------------------------------------------
Table of Contents
2014 Compared to 2013
Operating Revenues
$ Change Change Excluding
Year Ended December 31, due to Merger Impact
2014 2013 $ Change Merger $ %
(In millions, except percentage changes)
Mainline passenger $ 30,802 $ 20,218 $ 10,584 $ 9,833 $ 751 3.8
Regional passenger 6,322 3,131 3,191 3,207 (16 ) (0.5 )
Cargo 875 685 190 149 41 6.1
Other 4,651 2,709 1,942 1,318 624 23.9
Total operating revenues $ 42,650 $ 26,743 $
15,907 $ 14,507 $ 1,400 5.4
The following discussion of operating revenues excludes the results of the Merger in order to provide a more meaningful year-over-year comparison.
Total operating revenues in 2014 increased $1.4 billion, or 5.4%, from 2013,
which was driven by strong demand for air travel. Significant changes in the
components of operating revenues, excluding the results of the Merger, are as
follows:
• Mainline passenger revenues increased $751 million, or 3.8%, in 2014 from
2013 due to higher yields and ASMs, offset in part by slightly lower load
factors.
• Cargo revenues increased $41 million, or 6.1%, in 2014 from 2013 driven
primarily by an increase in international freight volumes.
• Other revenues increased $624 million, or 23.9%, in 2014 from 2013 driven
primarily by higher revenues associated with our loyalty programs driven by
our affinity card agreement with Citibank.
Operating Expenses
$ Change Change Excluding
Year Ended December 31, due to Merger Impact
2014 2013 $ Change Merger $ %
(In millions, except percentage changes)
Aircraft fuel and related taxes $ 10,592 $ 7,839 $ 2,753 $ 3,190 $ (437 ) (5.7 )
Salaries, wages and benefits 8,508 5,460 3,048 2,653 395 7.5
Maintenance, materials and repairs 2,051 1,260 791 679 112 9.2
Other rent and landing fees 1,727 1,152 575 547 28 2.5
Aircraft rent 1,250 768 482 365 117 15.7
Selling expenses 1,544 1,158 386 424 (38 ) (3.3 )
Depreciation and amortization 1,295 853 442 375 67 7.9
Special items, net 800 559 241 (1 ) 242 86.2
Other 4,118 2,969 1,149 1,079 70 2.4
Total mainline operating expenses $ 31,885 $ 22,018 $ 9,867 $ 9,311 $ 556 2.6
Regional expenses:
Fuel 2,009 1,120 889 947 (58 ) (5.4 )
Other 4,507 2,206 2,301 2,158 143 7.0
Total regional operating expenses 6,516 3,326 3,190 3,105 85 2.8
Total operating expenses $ 38,401 $ 25,344 $ 13,057 $ 12,416 $ 641 2.6
72
--------------------------------------------------------------------------------
Table of Contents
The following discussion of operating expenses excludes the results of the Merger in order to provide a more meaningful year-over-year comparison.
Total operating expenses in 2014 increased $641 million, or 2.6%, from 2013.
Significant changes in the components of mainline operating expenses, excluding
the results of the Merger, are as follows:
• Aircraft fuel and related taxes decreased $437 million, or 5.7%, in 2014
from 2013 primarily due to a decrease in the average price per gallon of
fuel.
• Salaries, wages and benefits increased $395 million, or 7.5%, in 2014 from
2013 primarily due to increased costs associated with merger related labor
contracts.
• Maintenance, materials and repairs increased $112 million, or 9.2%, in 2014
from 2013 primarily due to an increase in the rate per engine overhaul.
• Aircraft rent increased $117 million, or 15.7%, in 2014 from 2013 primarily
as a result of new leased aircraft deliveries in 2014 as we continued our
fleet renewal program.
• Depreciation and amortization increased $67 million, or 7.9%, in 2014 from
2013 primarily as a result of new purchased aircraft deliveries since the
end of 2013 as we continued our fleet renewal program.
Regional Operating Expenses
Total regional expenses, excluding the results of the Merger, increased $85
million, or 2.8%, in 2014 from 2013. Other regional operating expenses increased
$143 million, or 7.0%, primarily due to higher expenses associated with certain
capacity purchase agreements, offset by a $58 million, or 5.4%, decrease in fuel
costs as a result of a decrease in the average price per gallon of fuel.
Nonoperating Income (Expense)
$ Change Change Excluding
Year Ended December 31, due to Merger Impact
2014 2013 $ Change Merger $ %
(In millions, except percentage changes)
Interest income $ 31 $ 20 $ 11 $ 6 $ 5 25.2
Interest expense, net of
capitalized interest (887 ) (856 ) (31 ) (280 ) 249 (29.8 )
Other, net (181 ) (88 ) (93 ) (29 ) (64 ) 73.1
Total nonoperating expense, net $ (1,037 ) $ (924 ) $
(113 ) $ (303 ) $ 190 (21.0 )
Interest income was $31 million and $20 million in 2014 and 2013, respectively. Our short-term investments in each period consisted of highly liquid investments, which provided nominal returns.
The following table provides the components of interest expense:
Year Ended December 31, Increase
2014 2013 (Decrease)
(In millions)
Special items (1) $ 33 $ 182 $ (149 )
Amortization of debt issuance costs and
debt discounts 38 33 5
Interest expense on debt and capital lease
obligations (2) 568 668 (100 )
Total interest expense 639 883 (244 )
Less: capitalized interest (53 ) (48 ) (5 )
Total interest expense, net of capitalized
interest 586 835 (249 )
US Airways Group total interest expense,
net of capitalized interest 301 21 280
Total AAG interest expense, net of
capitalized interest $ 887 $ 856 $ 31
73
--------------------------------------------------------------------------------
Table of Contents
The following discussion of nonoperating income and expense excludes the results of the Merger in order to provide a more meaningful year-over-year comparison.
Interest expense, net of capitalized interest decreased $249 million in 2014
from 2013 primarily due to a $149 million decrease in special charges recognized
year-over-year as further described below, as well as refinancing activities
that resulted in $100 million less interest expense recognized in 2014.
(1) In 2014, we recognized $33 million of special charges relating to non-cash
interest accretion on bankruptcy settlement obligations. In 2013, we
recognized $138 million of special charges relating to post-petition interest
expense on unsecured obligations pursuant to the Plan and penalty interest
related to American's 10.5% secured notes and 7.50% senior secured notes. In
addition, in 2013 we recorded special charges of $44 million for 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.
(2) As a result of the 2013 refinancing activities and the early extinguishment
of American's 7.50% senior secured notes in 2014, we recognized $100 million
less interest expense in 2014 as compared to 2013.
Other nonoperating expense, net in 2014 consisted of $114 million of net foreign
currency losses, including a $43 million special charge for Venezuelan foreign
currency losses, and $56 million in other nonoperating special charges primarily
due to early debt extinguishment costs related to the prepayment of our 7.50%
senior secured notes and other indebtedness. The foreign currency losses were
driven primarily by the strengthening of the
U.S.
dollar relative to other
currencies during 2014, principally in the Latin American market, including a
48% decrease in the value of the Venezuelan bolivar and a 14% decrease in the
value of the Brazilian real.
Other nonoperating expense, net in 2013 consisted principally of net foreign currency losses of $56 million and early debt extinguishment charges of $29 million.
Reorganization Items, Net
Reorganization items refer to revenues, expenses (including professional fees),
realized gains and losses and provisions for losses that are realized or
incurred as a direct result of the Chapter 11 Cases. The following table
summarizes the components included in reorganization items, net on AAG's
consolidated statement of operations for the year ended December 31, 2013 (in
millions):
2013
Labor-related deemed claim (1) $
1,733
Aircraft and facility financing renegotiations and rejections (2), (3)
325
Fair value of conversion discount (4) 218
Professional fees 199
Other 180
Total reorganization items, net $ 2,655
(1) In exchange for employees' contributions to the successful reorganization,
including agreeing to reductions in pay and benefits, we agreed in the Plan
to provide each employee group a deemed claim, which was used to provide a
distribution of a portion of the equity of the reorganized entity to those
employees. Each employee group received a deemed claim amount based upon a
portion of the value of cost savings provided by that group through
reductions to pay and benefits as well as through certain work rule changes.
The total value of this deemed claim was approximately $1.7 billion.
(2) 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
74
--------------------------------------------------------------------------------
Table of Contents
or facility agreement when the applicable motion was filed with the
Bankruptcy Court to reject or modify such financing or facility agreement and
the Debtors believed that it was probable the motion would be approved, and
there was sufficient information to estimate the claim. See Note 2 to AAG's
Consolidated Financial Statements in Part II, Item 8A for further
information.
(3) Pursuant to the Plan, the Debtors agreed to allow certain post-petition
unsecured claims on obligations. As a result, during the year ended
December 31, 2013, we recorded reorganization charges to adjust estimated
allowed claim amounts previously recorded on rejected special facility
revenue bonds of $180 million, allowed general unsecured claims related to
the 1990 and 1994 series of special facility revenue bonds that financed
certain improvements at JFK, and rejected bonds that financed certain
improvements at ORD, which are included in the table above.
(4) The Plan allowed unsecured creditors receiving AAG Series A Preferred Stock a
conversion discount of 3.5%. Accordingly, we recorded the fair value of such
discount upon the confirmation of the Plan by the Bankruptcy Court.
American's Results of Operations
On December 30, 2015, in order to simplify AAG's internal corporate structure
and as part of the integration efforts following the business combination of AAG
and US Airways Group, US Airways merged with and into American, with American as
the surviving corporation. As a result of the merger of US Airways and American,
US Airways transferred all of its assets, liabilities and off-balance sheet
commitments to American. For financial reporting purposes, this transaction
constituted a transfer of assets between entities under common control and was
accounted for at historical cost. As a result, American's consolidated financial
statements as well as this management's discussion and analysis of financial
condition and results of operations in this Annual Report on Form 10-K (unless
otherwise indicated) are presented as though the transaction had occurred on
December 9, 2013, when a subsidiary of AMR merged with and into US Airways
Group, which represents the earliest date that American and US Airways were
under common control. Thus, the full years of 2015 and 2014 and the period from
December 9, 2013 to December 31, 2013 are comprised of the financial data of
American and US Airways. The periods prior to December 9, 2013 are comprised of
the financial data of American only.
In 2015, American realized operating income of $6.2 billion and net income of
$8.1 billion. American's 2015 net income included net special operating charges
of $1.1 billion and total net special credits of $1.8 billion. Excluding the
effects of these special charges and credits, American realized operating income
of $7.3 billion and net income of $6.3 billion.
In 2014, American realized operating income of $4.3 billion and net income of
$2.9 billion. American's 2014 net income included net special operating charges
of $788 million and total net special charges of $1.3 billion. Excluding the
effects of these special charges, American realized operating income of $5.1
billion and net income of $4.2 billion.
In 2013, American realized operating income of $1.4 billion and a net loss of
$1.7 billion. American's 2013 net loss included net special operating charges of
$528 million and total net special charges of $3.0 billion. Excluding the
effects of these charges, American realized operating income of $1.9 billion and
net income of $1.2 billion.
75
--------------------------------------------------------------------------------
Table of Contents
The components of American's total net special charges (credits) included in
American's accompanying consolidated statements of operations are as follows (in
millions):
Year Ended December 31,
2015 2014 2013
Other revenue special item, net (1) $ - $ - $ (31 )
Mainline operating special items, net (2) 1,051 783 559
Regional operating special items, net (3) 18 5 -
Nonoperating special items, net (4) 616 128 121
Reorganization items, net (5) - -
2,640
Income tax special items, net (6) (3,468 ) 344
(324 )
Total $ (1,783 ) $ 1,260 $ 2,965
(1) In 2013, other revenue special item, net included a credit to other revenues
related to a change in accounting method resulting from the modification of
American's AAdvantage miles agreement with Citibank.
(2) In 2015, mainline operating special items, net principally included $1.0
billion of merger integration expenses related to information technology,
alignment of labor union contracts, professional fees, severance, share-based
compensation, fleet restructuring, re-branding of aircraft and airport
facilities, relocation and training.
In 2014, mainline operating special items, net principally included $803 million
of merger integration expenses related to information technology, alignment of
labor union contracts, professional fees, severance and retention, share-based
compensation, divestiture of London Heathrow slots, fleet restructuring,
re-branding of aircraft and airport facilities, relocation and training. In
addition, American recorded a net charge of $60 million for bankruptcy related
items principally consisting of fair value adjustments for bankruptcy settlement
obligations and an $81 million charge to revise prior estimates of certain
aircraft residual values and other spare parts asset impairments. These charges
were offset in part by a $309 million gain on the sale of slots at DCA.
In 2013, mainline operating special items, net principally included $443 million
of merger related expenses related to the alignment of labor union contracts,
professional fees, severance, share-based compensation and fees for US Airways
to exit the Star Alliance and its codeshare agreement with United Airlines. In
addition, American recorded a $107 million charge related to American's pilot
long-term disability obligation, a $43 million charge for workers' compensation
claims and a $33 million aircraft impairment charge. These charges were offset
in part by a $67 million gain on the sale of slots at LGA.
(3) The 2015 and 2014 regional operating special items, net principally related
to merger integration expenses.
(4) In 2015, nonoperating special items, net principally included a $592 million
charge to write off all of the value of Venezuelan bolivars held by American
due to continued lack of repatriations and deterioration of economic
conditions in
Venezuela
.
In 2014, nonoperating special items, net principally included a $43 million
charge for Venezuelan foreign currency losses, $56 million of early debt
extinguishment costs primarily related to the prepayment of 7.50% senior secured
notes and other indebtedness and $29 million of non-cash interest accretion on
bankruptcy settlement obligations.
In 2013, nonoperating special items, net consisted of interest charges of $48
million primarily to recognize post-petition interest expense on unsecured
obligations pursuant to the Plan and penalty interest related to 10.5% secured
notes and 7.50% senior secured notes, a $54 million charge related to the
premium on tender for existing EETC financings and the write-off of debt
issuance costs and $19 million in charges related to the repayment of existing
EETC financings.
(5) In 2013, 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.
76
--------------------------------------------------------------------------------
Table of Contents (6) In 2015, income tax special items totaled a net credit of $3.5 billion. In
connection with the preparation of American's financial statements for the
fourth quarter of 2015, management determined that it was more likely than
not that substantially all of its deferred tax assets, which include its
NOLs, would be realized. Accordingly, American reversed $3.5 billion of the
valuation allowance as of December 31, 2015, which resulted in a special $3.5
billion non-cash tax benefit recorded in the consolidated statement of
operations for 2015.
In 2014, income tax special items, net were $344 million. During 2014, American
sold its portfolio of fuel hedging contracts that were scheduled to settle on or
after June 30, 2014. In connection with this sale, American recorded a special
non-cash tax provision of $328 million in the second quarter of 2014 that
reversed the non-cash tax provision which was recorded in OCI, a subset of
stockholder's 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 2013, income tax special items, net included a $538 million non-cash income
tax benefit from continuing operations. American is required to consider all
items (including items recorded in OCI) in determining the amount of tax benefit
that results from a loss from continuing operations and that should be allocated
to continuing operations. As a result, American recorded a tax benefit on the
loss from continuing operations for the year, which was exactly offset by income
tax expense on OCI. However, while the income tax benefit from continuing
operations is reported on the income statement, the income tax expense on OCI is
recorded directly to accumulated other comprehensive income (loss), which is a
component of stockholder's equity. Because the income tax expense on OCI is
equal to the income tax benefit from continuing operations, American's year-end
net deferred tax position is not impacted by this tax allocation. The 2013 tax
benefit was offset in part by a $214 million tax charge attributable to
additional valuation allowance required to reduce deferred tax assets to the
amount American believed was more likely than not to be realized.
Income Taxes
At December 31, 2015, American had approximately $8.8 billion of gross NOL
Carryforwards to reduce future federal taxable income, substantially all of
which are expected to be available for use in 2016. American is a member of
AAG's consolidated federal and certain state income tax returns. The amount of
federal NOL Carryforwards available in those returns is $8.0 billion,
substantially all of which is expected to be available for use in 2016. The
federal NOL Carryforwards will expire beginning in 2023 if unused. These NOL
Carryforwards include an unrealized tax benefit of $1.2 billion related to
share-based compensation that will be recorded in equity when realized. American
had approximately $3.7 billion of NOL Carryforwards to reduce future state
taxable income at December 31, 2015, which will expire in years 2016 through
2034 if unused. American's ability to deduct its NOL Carryforwards and to
utilize certain other available tax attributes can be substantially constrained
under the general annual limitation rules of Section 382 where an "ownership
change" has occurred. American experienced an ownership change in connection
with its emergence from the Chapter 11 Cases, and US Airways Group experienced
an ownership change in connection with the Merger. As a result of the Merger, US
Airways Group is now included in the AAG consolidated federal and state income
tax returns. The general limitation rules of Section 382 for a debtor in a
bankruptcy case are liberalized where the ownership change occurs upon emergence
from bankruptcy. American elected to be covered by certain special rules for
federal income tax purposes that permitted approximately $9.5 billion (with $7.3
billion of unlimited NOL remaining at December 31, 2015) of its federal NOL
Carryforwards to be utilized without regard to the Section 382 annual limitation
rules unless a second ownership change occurred on or before December 9, 2015.
No second ownership change occurred within that period. Substantially all of
American's remaining federal NOL Carryforwards (attributable to US Airways
Group) are subject to limitation under Section 382; however, American's ability
to utilize such NOL Carryforwards is not anticipated to be effectively
constrained as a result of such limitation. Similar limitations may apply for
state income tax purposes. American's ability to utilize any new NOL
Carryforwards arising after the ownership changes is not affected by the annual
limitation rules imposed by Section 382 unless another ownership change occurs.
77
--------------------------------------------------------------------------------
Table of Contents
At December 31, 2015, American had an Alternative Minimum Tax (AMT) credit carryforward of approximately $458 million available for federal income tax purposes, which is available for an indefinite period.
In connection with the preparation of American's financial statements for the
fourth quarter of 2015, management determined that it was more likely than not
that substantially all of its deferred tax assets, which include its NOLs, would
be realized. Accordingly, American reversed $3.5 billion of the valuation
allowance as of December 31, 2015, which resulted in a special $3.5 billion
non-cash tax benefit recorded in the consolidated statement of operations for
2015.
Beginning in 2016, American expects to record income tax expense with an effective rate of approximately 38%, which will be substantially non-cash as American utilizes the NOLs described above to offset cash income taxes due.
For the year ended December 31, 2014, American recorded a $320 million tax provision, which included $344 million of special tax charges as described above.
For the year ended December 31, 2013, American recorded a $354 million tax
benefit, which included $324 million of net special tax benefits as described
above.
2015 Compared to 2014
Operating Revenues
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In millions, except percentage changes)
Mainline passenger $ 29,037 $ 30,802 (5.7 )
Regional passenger 6,475 6,322 2.4
Cargo 760 875 (13.1 )
Other 4,812 4,764 1.0
Total operating revenues $ 41,084 $ 42,763
(3.9 )
Total operating revenues in 2015 decreased $1.7 billion, or 3.9%, from 2014
principally due to competitive growth and weaker international yields primarily
due to foreign currency devaluation relative to the
U.S.
dollar. Significant
changes in the components of operating revenues are as follows:
• Mainline passenger revenues decreased $1.8 billion, or 5.7%, in 2015 from
2014 driven primarily by a decrease in yield.
• Regional passenger revenues increased $153 million, or 2.4%, in 2015 from
2014 due primarily to higher ASMs, offset in part by a decrease in yield.
• Cargo revenue decreased $115 million, or 13.1%, in 2015 from 2014 driven
primarily by a decrease in international freight yields.
78
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In millions, except percentage changes)
Aircraft fuel and related taxes $ 6,226 $ 10,592
(41.2 )
Salaries, wages and benefits 9,514 8,499
11.9
Maintenance, materials and repairs 1,889 2,051 (7.9 )
Other rent and landing fees 1,731 1,727 0.2
Aircraft rent 1,250 1,250 -
Selling expenses 1,394 1,544 (9.7 )
Depreciation and amortization 1,364 1,301 4.8
Special items, net 1,051 783 34.2
Other 4,378 4,186 4.6
Total mainline operating expenses 28,797 31,933 (9.8 )
Regional expenses:
Fuel 1,230 2,009 (38.8 )
Other 4,868 4,555 6.9
Total regional operating expenses 6,098 6,564 (7.1 )
Total operating expenses $ 34,895 $ 38,497 (9.4 )
Total operating expenses in 2015 decreased $3.6 billion, or 9.4%, from 2014. Significant changes in the components of mainline operating expenses are as follows:
• Aircraft fuel and related taxes decreased $4.4 billion, or 41.2%, in 2015
from 2014 primarily due to a 40.7% decrease in the average price per gallon
of fuel to $1.72 in 2015 from an average price per gallon of $2.91 in 2014.
• Salaries, wages and benefits increased $1.0 billion, or 11.9%, in 2015 from
2014 primarily due to increased costs associated with the new, merger
related pilot, flight attendant and customer service and reservation agent
collective bargaining agreements.
• Maintenance, materials and repairs decreased $162 million, or 7.9%, in 2015
from 2014 primarily due to fewer engine overhauls in 2015, driven by
American's fleet renewal program.
• Selling expenses decreased $150 million, or 9.7%, in 2015 from 2014
primarily due to lower contractually negotiated rates for certain
commissions and booking fees as well as lower revenues in 2015.
Regional Operating Expenses
Total regional expenses decreased $466 million, or 7.1%, in 2015 to $6.1 billion
from $6.6 billion in 2014. The year-over-year decrease was primarily due to a
$779 million, or 38.8%, decrease in fuel costs, offset in part by a $313
million, or 6.9%, increase in other regional operating expenses. The average
price per gallon of fuel decreased 40.9% to $1.73 in 2015 from $2.92 in 2014.
The increase in other regional operating expenses was principally due to
increased flying under capacity purchase agreements.
79
--------------------------------------------------------------------------------
Table of Contents
Nonoperating Income (Expense)
Year Ended December 31, Percent
Increase
2015 2014 (Decrease)
(In millions, except percentage changes)
Interest income $ 49 $ 32 53.1
Interest expense, net of capitalized interest (796 ) (847 ) (6.0 )
Other, net (774 ) (183 ) nm
Total nonoperating expense, net $ (1,521 ) $ (998 ) 52.4
American's short-term investments in each period consisted of highly liquid investments that provided nominal returns.
The following table provides the components of interest expense:
Year Ended December 31, Increase
2015 2014 (Decrease)
(In millions)
Special items, net $ - $ 29 $ (29 )
Amortization of debt issuance costs and
debt discounts 38 37 1
Interest expense on debt and capital lease
obligations 810 842 (32 )
Total interest expense 848 908 (60 )
Less: capitalized interest (52 ) (61 ) 9
Total interest expense, net of capitalized
interest $ 796 $ 847 $ (51 )
Other nonoperating expense, net in 2015 included a net $616 million in other
nonoperating special charges and $159 million of foreign currency losses. The
other nonoperating special charges consisted of a $592 million write off of all
of the value of Venezuelan bolivars held by American due to continued lack of
repatriations and deterioration of economic conditions in
Venezuela
and $41
million in charges principally related to non-cash write offs of unamortized
debt discount and debt issuance costs associated with refinancing certain of our
secured term loan facilities, prepayments of certain aircraft financings and the
purchase and subsequent remarketing of certain special facility revenue bonds.
These charges were offset in part by a $17 million early debt extinguishment
gain associated with the repayment of American's AAdvantage loan with Citibank.
The foreign currency losses were driven primarily by the strengthening of the
U.S.
dollar relative to other currencies during 2015, principally in Latin
American and European markets, including a 34% decrease in the value of the
Argentinian peso, a 30% decrease in the value of the Brazilian real, a 14%
decrease in the value of the Mexican peso, a 10% decrease in the value of the
Euro and a 5% decrease in the value of the British pound.
Other nonoperating expense, net in 2014 consisted of $114 million of net foreign
currency losses, including a $43 million special charge for Venezuelan foreign
currency losses, and $56 million in other nonoperating special charges primarily
due to early debt extinguishment costs related to the prepayment of our 7.50%
senior secured notes and other indebtedness. The foreign currency losses were
driven primarily by the strengthening of the
U.S.
dollar relative to other
currencies during 2014, principally in the Latin American market, including a
48% decrease in the value of the Venezuelan bolivar and a 14% decrease in the
value of the Brazilian real.
80
--------------------------------------------------------------------------------
Table of Contents
2014 Compared to 2013
Operating Revenues
$ Change Change Excluding
Year Ended December 31, due to Merger Impact
2014 2013 $ Change Merger $ %
(In millions, except percentage changes)
Mainline passenger $ 30,802 $ 20,218 $ 10,584 $ 9,833 $ 751 3.8
Regional passenger 6,322 3,131 3,191 3,207 (16 ) (0.5 )
Cargo 875 685 190 149 41 6.1
Other 4,764 2,667 2,097 1,492 605 23.6
Total operating revenues $ 42,763 $ 26,701 $
16,062 $ 14,681 $ 1,381 5.4
The following discussion of operating revenues excludes the results of US Airways in order to provide a more meaningful year-over-year comparison.
Total operating revenues in 2014 increased $1.4 billion or 5.4%, which was driven by strong demand for air travel. Significant changes in the components of operating revenues, excluding the results of US Airways, are as follows:
• Mainline passenger revenues increased $751 million, or 3.8%, in 2014 from
2013 primarily due to higher yields and ASMs, offset in part by slightly
lower load factors.
• Cargo revenues increased $41 million, or 6.1%, in 2014 from 2013 driven
primarily by an increase in international freight volumes.
• Other revenues increased $605 million, or 23.6%, in 2014 from 2013 driven
primarily by higher revenues associated with American's loyalty program
driven by American's affinity card agreement with Citibank.
Operating Expenses
$ Change Change Excluding
Year Ended December 31, due to Merger Impact
2014 2013 $ Change Merger $ %
(In millions, except percentage changes)
Aircraft fuel and related taxes $ 10,592 $ 7,839 $ 2,753 $ 3,190 $ (437 ) (5.7 )
Salaries, wages and benefits 8,499 5,452 3,047 2,652 395 7.5
Maintenance, materials and repairs 2,051 1,260 791 679 112 9.2
Other rent and landing fees 1,727 1,152 575 547 28 2.5
Aircraft rent 1,250 768 482 365 117 15.7
Selling expenses 1,544 1,158 386 423 (37 ) (3.3 )
Depreciation and amortization 1,301 853 448 382 66 7.9
Special items, net 783 559 224 (1 ) 225 80.0
Other 4,186 3,007 1,179 1,109 70 2.4
Total mainline operating expenses $ 31,933 $ 22,048 $ 9,885 $ 9,346 $ 539 2.5
Regional expenses:
Fuel 2,009 1,119 890 947 (57 ) (5.3 )
Other 4,555 2,174 2,381 2,286 95 4.7
Total regional operating expenses 6,564 3,293 3,271 3,233 38 1.3
Total operating expenses $ 38,497 $ 25,341 $ 13,156 $ 12,579 $ 577 2.4
81
--------------------------------------------------------------------------------
Table of Contents
The following discussion of operating expenses excludes the results of US Airways in order to provide a more meaningful year-over-year comparison.
Total operating expenses in 2014 increased $577 million, or 2.4%, from 2013.
Significant changes in the components of mainline operating expenses, excluding
the results of US Airways, are as follows:
• Aircraft fuel and related taxes decreased $437 million, or 5.7%, in 2014
from 2013 primarily due to a decrease in the average price per gallon of
fuel.
• Salaries, wages and benefits increased $395 million, or 7.5%, in 2014 from
2013 primarily due to increased costs associated with merger related labor
contracts.
• Maintenance, materials and repairs increased $112 million, or 9.2%, in 2014
from 2013 primarily due to an increase in the rate per engine overhaul.
• Aircraft rent increased $117 million, or 15.7%, in 2014 from 2013 primarily
as a result of new leased aircraft deliveries in 2014 as American continued
its fleet renewal program.
• Depreciation and amortization increased $66 million, or 7.9%, in 2014 from
2013 primarily as a result of new purchased aircraft deliveries since the
end of 2013 as American continues its fleet renewal program.
Regional Operating Expenses
Total regional expenses increased $38 million, or 1.3%, in 2014 from 2013. Other
regional operating expenses increased $95 million, or 4.7%, primarily due to
higher expenses associated with certain capacity purchase agreements, offset by
a $57 million, or 5.3%, decrease in fuel costs as a result of a decrease in the
average price per gallon of fuel.
Nonoperating Income (Expense)
$ Change Change Excluding
Year Ended December 31, due to Merger Impact
2014 2013 $ Change Merger $ %
(In millions, except percentage changes)
Interest income $ 32 $ 20 $ 12 $ 7 $ 5 27.7
Interest expense, net of
capitalized interest (847 ) (727 ) (120 ) (249 ) 129 (18.1 )
Other, net (183 ) (84 ) (99 ) (30 ) (69 ) 81.0
Total nonoperating expense, net $ (998 ) $ (791 ) $
(207 ) $ (272 ) $ 65 (8.4 )
Interest income was $32 million and $20 million in 2014 and 2013, respectively. American's short-term investments in each period consisted of highly liquid investments which provided nominal returns.
The following table provides the components of interest expense:
Year Ended December 31, Increase
2014 2013 (Decrease)
(In millions)
Special items (1) $ 29 $ 92 $ (63 )
Amortization of debt issuance costs and
debt discounts 38 33 5
Interest expense on debt and capital lease
obligations (2) 567 632 (65 )
Total interest expense 634 757 (123 )
Less: capitalized interest (53 ) (47 ) (6 )
Total interest expense, net of capitalized
interest 581 710 (129 )
US Airways total interest expense, net of
capitalized interest 266 17 249
Total American interest expense, net of
capitalized interest $ 847 $ 727 $ 120
82
--------------------------------------------------------------------------------
Table of Contents
The following discussion of nonoperating income and expense excludes the results of US Airways in order to provide a more meaningful year-over-year comparison.
Interest expense, net of capitalized interest decreased $129 million in 2014
from 2013 primarily due to a $63 million decrease in special charges recognized
year-over-year as further described below, as well as refinancing activities
that resulted in $65 million less interest expense recognized in 2014.
(1) In 2014, American recognized $29 million of special charges relating to
non-cash interest accretion on bankruptcy settlement obligations. In 2013,
American recognized $48 million of special charges relating to post-petition
interest expense on unsecured obligations pursuant to the Plan and penalty
interest related to American's 10.5% secured notes and 7.50% senior secured
notes. In addition, in 2013 American recorded special charges of $44 million
for 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.
(2) As a result of the 2013 refinancing activities and the early extinguishment
of American's 7.50% senior secured notes in 2014, American incurred $65
million less interest expense in 2014 as compared to 2013.
Other nonoperating expense, net in 2014 consisted of $92 million of net foreign
currency losses, including a $43 million special charge for Venezuelan foreign
currency losses, and $48 million of early debt extinguishment costs related to
the prepayment of American's 7.50% senior secured notes and other indebtedness.
The foreign currency losses were driven primarily by the strengthening of the
U.S.
dollar relative to other currencies during 2014, principally in the Latin
American market, including a 48% decrease in the value of the Venezuelan bolivar
and a 14% decrease in the value of the Brazilian real.
Other nonoperating expense, net in 2013 consisted principally of net foreign currency losses of $55 million and early debt extinguishment charges of $29 million.
Reorganization Items, Net
Reorganization items refer to revenues, expenses (including professional fees),
realized gains and losses and provisions for losses that are realized or
incurred as a direct result of the Chapter 11 Cases. The following table
summarizes the components included in reorganization items, net on American's
consolidated statement of operations for the year ended December 31, 2013 (in
millions):
2013
Labor-related deemed claim (1) $
1,733
Aircraft and facility financing renegotiations and rejections (2), (3)
320
Fair value of conversion discount (4) 218
Professional fees 199
Other 170
Total reorganization items, net $ 2,640
(1) In exchange for employees' contributions to the successful reorganization,
including agreeing to reductions in pay and benefits, American agreed in the
Plan to provide each employee group a deemed claim, which was used to provide
a distribution of a portion of the equity of the reorganized entity to those
employees. Each employee group received a deemed claim amount based upon a
portion of the value of cost savings provided by that group through
reductions to pay and benefits as well as through certain work rule changes.
The total value of this deemed claim was approximately $1.7 billion.
(2) 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
83
--------------------------------------------------------------------------------
Table of Contents
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
or facility agreement and the Debtors believed that it was probable the
motion would be approved, and there was sufficient information to estimate
the claim. See Note 2 to American's Consolidated Financial Statements in Part
II, Item 8B for further information.
(3) Pursuant to the Plan, the Debtors agreed to allow certain post-petition
unsecured claims on obligations. As a result, during the year ended
December 31, 2013, American recorded reorganization charges to adjust
estimated allowed claim amounts previously recorded on rejected special
facility revenue bonds of $180 million, allowed general unsecured claims
related to the 1990 and 1994 series of special facility revenue bonds that
financed certain improvements at JFK, and rejected bonds that financed
certain improvements at ORD, which are included in the table above.
(4) The Plan allowed unsecured creditors receiving AAG Series A Preferred Stock a
conversion discount of 3.5%. Accordingly, American recorded the fair value of
such discount upon the confirmation of the Plan by the Bankruptcy Court.
Liquidity and Capital Resources
Cash, Short-Term Investments and Restricted Cash
As of December 31, 2015, AAG's total cash, short-term investments and restricted cash and short-term investments was $6.9 billion, of which $695 million was restricted. Additional detail is provided in the table below (in millions):
AAG American
December 31, December 31,
2015 2014 2015 2014
Cash $ 390 $ 994 $ 364 $ 984
Short-term investments. 5,864 6,309 5,862 6,306
Restricted cash and short-term investments (1) 695 774
695 774
Total cash, short-term investments and restricted
cash and short-term investments $ 6,949 $ 8,077 $ 6,921 $ 8,064
(1) Our restricted cash and short-term investments related primarily to
collateral held to support workers' compensation obligations.
As of December 31, 2015, $150 million of our cash and short-term investment
balances were held as foreign currency in foreign bank accounts. In the fourth
quarter of 2015, we recognized a $592 million special charge to write off all of
the value of Venezuelan bolivars held by us, due to continued lack of
repatriations and deterioration of economic conditions in
Venezuela
. During
2014, we significantly reduced capacity in the Venezuelan market and we no
longer accept bolivars as payment for airline tickets.
As of December 31, 2014, $804 million of our cash and short-term investment balances were held as foreign currency in foreign bank accounts, of which approximately $656 million was held in Venezuelan bolivars. This balance included approximately $621 million valued at 6.3 bolivars and approximately $35 million valued at 12.0 bolivars, with the rate depending on the date we submitted our repatriation request to the Venezuelan government.
Generally, fluctuations in foreign currencies, including devaluations, cannot be
predicted by us and can significantly affect the value of our cash and
short-term investments located outside
the United States
. These conditions, as
well as any further delays, devaluations or imposition of more stringent
repatriation restrictions, may materially adversely affect our business, results
of operations and financial condition. See Part I, Item 1A.
84
--------------------------------------------------------------------------------
Table of Contents
Risk Factors - "We operate a global business with international operations that
are subject to economic and political instability and have been, and in the
future may continue to be, adversely affected by numerous events, circumstances
or government actions beyond our control" for additional discussion of this and
other currency risks.
Sources and Uses of Cash
AAG
2015 Compared to 2014
Operating Activities
Net cash provided by operating activities was $6.2 billion and $3.1 billion in
2015 and 2014, respectively, a year-over-year increase of $3.2 billion. The
increase was primarily due to increased profitability driven by substantially
lower fuel costs. In addition, a decrease in pension contributions from $810
million in 2014 to $6 million in 2015 contributed to increased operating cash
flows. Our 2015 profitability was negatively affected by a $592 million charge
to write off all of the value of Venezuelan bolivars held by us due to continued
lack of repatriations and deterioration of economic conditions in
Venezuela
.
Investing Activities
Net cash used in investing activities was $5.6 billion and $2.9 billion in 2015 and 2014, respectively.
Principal investing activities in 2015 included expenditures of $6.2 billion for
property and equipment, consisting primarily of the purchase of 114 newly
delivered aircraft and eight spare engines, including 31 Airbus A321 family
aircraft, 24 Embraer 175 aircraft, 20 Bombardier CRJ900 aircraft, 17 Boeing
737-800 aircraft, 13 Boeing 787 aircraft, seven Airbus A319 aircraft and two
Boeing 777 aircraft and the purchase of five Boeing 757 aircraft previously
being leased. These cash outflows were offset in part by $391 million in net
sales of short-term investments and a $79 million decrease in restricted cash
and short-term investments primarily due to lower collateral requirements with
respect to workers' compensation obligations.
Principal investing activities in 2014 included expenditures of $5.3 billion for
property and equipment, consisting primarily of the purchase of 70 newly
delivered aircraft, including 25 Airbus A320 family aircraft, 20 Boeing 737-800
aircraft, 16 Bombardier CRJ900 aircraft, six Boeing 777 aircraft, and three
Airbus A330 family aircraft, the purchase of aircraft previously leased,
including nine Airbus A320 family aircraft, three Airbus A330 family aircraft
and three Boeing 777 aircraft, as well as pre-delivery deposits for certain
aircraft on order. These cash outflows were offset in part by $1.8 billion in
net sales of short-term investments, $307 million in proceeds from the sale of
DCA slots and a $261 million decrease in restricted cash and short-term
investments primarily due to lower collateral requirements with respect to
workers' compensation obligations.
Financing Activities
Net cash used in financing activities was $1.3 billion and $315 million in 2015 and 2014, respectively.
Principal financing activities in 2015 included share repurchases of $3.6
billion, debt repayments of $2.2 billion, including the $400 million repayment
of American's AAdvantage loan with Citibank, and $278 million in dividend
payments. These cash outflows were offset in part by proceeds from the issuance
of $5.0 billion of debt primarily including $4.2 billion of EETC equipment notes
and other aircraft related financings and $500 million principal amount of
4.625% senior notes.
Principal financing activities in 2014 included $1.0 billion in stock repurchases and debt repayments of $3.1 billion, including the $1.0 billion prepayment of American's 7.50% senior secured notes and the $366 million
85
--------------------------------------------------------------------------------
Table of Contents
prepayment of certain airport facility revenue bonds. These cash outflows were
offset in part by proceeds from the issuance of $3.3 billion of debt, primarily
including $1.8 billion of proceeds from EETC equipment notes and other aircraft
related financings, $1.5 billion of proceeds from the issuance of the 5.50%
senior notes and the term loan under the 2014 Credit Facilities, as well as $811
million of proceeds from sale-leaseback transactions related to the financing of
20 Boeing 737-800 aircraft.
2014 Compared to 2013
Operating Activities
Net cash provided by operating activities was $3.1 billion and $675 million in
2014 and 2013, respectively, a year-over-year increase of $2.4 billion. This
year-over-year increase is principally due to increased profitability and the
inclusion of a full year of US Airways Group's net cash provided by operating
activities for the year ended December 31, 2014. These increases were offset in
part by higher pension contributions made during 2014. During the years ended
December 31, 2014 and 2013, we contributed $810 million and $494 million,
respectively, to fund our defined benefit pension plans, representing a $316
million year-over-year increase in contributions.
Investing Activities
Net cash used in investing activities was $2.9 billion and $3.8 billion in 2014 and 2013, respectively.
Principal investing activities in 2014 included expenditures of $5.3 billion for
property and equipment, consisting primarily of the purchase of 70 newly
delivered aircraft, including 25 Airbus A320 family aircraft, 20 Boeing 737-800
aircraft, 16 Bombardier CRJ900 aircraft, six Boeing 777 aircraft, and three
Airbus A330 family aircraft, the purchase of aircraft previously leased,
including nine Airbus A320 family aircraft, three Airbus A330 family aircraft
and three Boeing 777 aircraft, as well as pre-delivery deposits for certain
aircraft on order. These cash outflows were offset in part by $1.8 billion in
net sales of short-term investments, $307 million in proceeds from the sale of
DCA slots and a $261 million decrease in restricted cash and short-term
investments primarily due to lower collateral requirements with respect to
workers' compensation obligations.
Principal investing activities in 2013 included expenditures of $3.1 billion for
property and equipment, consisting primarily of the purchase of 39 newly
delivered aircraft, including 31 Boeing 737-800 aircraft and eight Boeing 777
aircraft as well as pre-delivery deposits for certain aircraft on order and $1.2
billion in net purchases of short-term investments. These cash outflows were
offset in part by a $147 million decrease in restricted cash and short-term
investments primarily due to lower collateral requirements with respect to
workers' compensation obligations and $128 million in proceeds from the sale of
certain property and equipment. Additionally, in connection with the Merger, we
acquired the $206 million cash balance of US Airways Group.
Financing Activities
Net cash used in financing activities was $315 million in 2014 as compared to net cash provided by financing activities of $3.8 billion in 2013.
Principal financing activities in 2014 included $1.0 billion in stock
repurchases and debt repayments of $3.1 billion, including the $1.0 billion
prepayment of American's 7.50% senior secured notes and the $366 million
prepayment of certain airport facility revenue bonds. These cash outflows were
offset in part by proceeds from the issuance of $3.3 billion of debt, primarily
including $1.8 billion of proceeds from EETC equipment notes and other aircraft
related financings, $1.5 billion of proceeds from the issuance of the 5.50%
senior notes and the term loan under the 2014 Credit Facilities, as well as $811
million of proceeds from sale-leaseback transactions related to the financing of
20 Boeing 737-800 aircraft.
86
--------------------------------------------------------------------------------
Table of Contents
Principal financing activities in 2013 included proceeds from the issuance of
debt of $5.1 billion, including the $1.9 billion 2013 Term Loan Facility and
several EETC financings, and proceeds from sale-leaseback transactions of $1.7
billion. These cash inflows were offset in part by debt repayments of $2.9
billion.
American
2015 Compared to 2014
Operating Activities
Net cash provided by operating activities was flat at $2.6 billion in each of
2015 and 2014. Cash flows were generated from increased profitability, driven by
substantially lower fuel costs and a decrease in pension contributions, which
were offset in part by American's funding of share repurchase activities
performed at the AAG parent company level. American's 2015 profitability was
negatively affected by a $592 million charge to write off all of the value of
Venezuelan bolivars held by American due to continued lack of repatriations and
deterioration of economic conditions in
Venezuela
.
Investing Activities
Net cash used in investing activities was $5.6 billion and $2.9 billion in 2015 and 2014, respectively.
Principal investing activities in 2015 included expenditures of $6.1 billion for
property and equipment, consisting primarily of the purchase of 114 newly
delivered aircraft and eight spare engines, including 31 Airbus A321 family
aircraft, 24 Embraer 175 aircraft, 20 Bombardier CRJ900 aircraft, 17 Boeing
737-800 aircraft, 13 Boeing 787 aircraft, seven Airbus A319 aircraft and two
Boeing 777 aircraft and the purchase of five Boeing 757 aircraft previously
being leased. These cash outflows were offset in part by $391 million in net
sales of short-term investments and a $79 million decrease in restricted cash
and short-term investments primarily due to lower collateral requirements with
respect to workers' compensation obligations.
Principal investing activities in 2014 included expenditures of $5.3 billion for
property and equipment, consisting primarily of the purchase of 70 newly
delivered aircraft, including 25 Airbus A320 family aircraft, 20 Boeing 737-800
aircraft, 16 Bombardier CRJ900 aircraft, six Boeing 777 aircraft and three
Airbus A330 family aircraft, the purchase of aircraft previously leased,
including nine Airbus A320 family aircraft, three Airbus A330 family aircraft
and three Boeing 777 aircraft, as well as pre-delivery deposits for certain
aircraft on order. These cash outflows were offset in part by $1.8 billion in
net sales of short-term investments, $307 million in proceeds from the sale of
DCA slots and a $261 million decrease in restricted cash and short-term
investments primarily due to lower collateral requirements with respect to
workers' compensation obligations.
Financing Activities
Net cash provided by financing activities was $2.4 billion and $143 million in 2015 and 2014, respectively.
Principal financing activities in 2015 included proceeds from the issuance of
$4.5 billion of debt primarily including $4.2 billion of EETC equipment notes
and other aircraft related financings. These cash inflows were offset in part by
debt repayments of $2.2 billion, including the $400 million repayment of
American's AAdvantage loan with Citibank.
Principal financing activities in 2014 included proceeds from the issuance of
$2.6 billion of debt, primarily including $1.8 billion of EETC equipment notes
and other aircraft related financings and $750 million of proceeds from issuance
of the term loan under the 2014 Credit Facilities, as well as $811 million of
proceeds from sale-leaseback transactions related to the financing of 20 Boeing
737-800 aircraft. These cash inflows were offset in part by debt repayments of
$3.0 billion, including the $1.0 billion prepayment of American's 7.50% senior
secured notes and the $366 million prepayment of certain airport facility
revenue bonds.
87
--------------------------------------------------------------------------------
Table of Contents
2014 Compared to 2013
Operating Activities
Net cash provided by operating activities was $2.6 billion and $627 million in
2014 and 2013, respectively, a year-over-year increase of $2.0 billion. This
year-over-year increase is principally due to increased profitability and the
inclusion of a full year of US Airways' net cash provided by operating
activities for the year ended December 31, 2014. These increases were offset in
part by higher pension contributions made during 2014. During the years ended
December 31, 2014 and 2013, American contributed $809 million and $494 million,
respectively, to fund its defined benefit pension plans, representing a $315
million year-over-year increase in contributions.
Investing Activities
Net cash used in investing activities was $2.9 billion and $3.8 billion in 2014 and 2013, respectively.
Principal investing activities in 2014 included expenditures of $5.3 billion for
property and equipment, consisting primarily of the purchase of 70 newly
delivered aircraft, including 25 Airbus A320 family aircraft, 20 Boeing 737-800
aircraft, 16 Bombardier CRJ900 aircraft, six Boeing 777 aircraft and three
Airbus A330 family aircraft, the purchase of aircraft previously leased,
including nine Airbus A320 family aircraft, three Airbus A330 family aircraft
and three Boeing 777 aircraft, as well as pre-delivery deposits for certain
aircraft on order. These cash outflows were offset in part by $1.8 billion in
net sales of short-term investments, $307 million in proceeds from the sale of
DCA slots and a $261 million decrease in restricted cash and short-term
investments primarily due to lower collateral requirements with respect to
workers' compensation obligations.
Principal investing activities in 2013 included expenditures of $3.1 billion for
property and equipment, consisting primarily of the purchase of 39 newly
delivered aircraft, including 31 Boeing 737-800 aircraft and eight Boeing 777
aircraft as well as pre-delivery deposits for certain aircraft on order and $1.2
billion in net purchases of short-term investments. These cash outflows were
offset in part by a $147 million decrease in restricted cash and short-term
investments primarily due to lower collateral requirements with respect to
workers' compensation obligations and $115 million in proceeds from the sale of
certain property and equipment. Additionally, in connection with the Merger,
American acquired the $200 million cash balance of US Airways.
Financing Activities
Net cash provided by financing activities was $143 million and $3.9 billion in 2014 and 2013, respectively.
Principal financing activities in 2014 included proceeds from the issuance of
$2.6 billion of debt, primarily including $1.8 billion of EETC equipment notes
and other aircraft related financings and $750 million of proceeds from issuance
of the term loan under the 2014 Credit Facilities, as well as $811 million of
proceeds from sale-leaseback transactions related to the financing of 20 Boeing
737-800 aircraft. These cash inflows were offset in part by debt repayments of
$3.0 billion, including the $1.0 billion prepayment of American's 7.50% senior
secured notes and the $366 million prepayment of certain airport facility
revenue bonds.
Principal financing activities in 2013 included proceeds from the issuance of
debt of $5.1 billion, including the $1.9 billion 2013 Term Loan Facility and
several EETC financings, and proceeds from sale-leaseback transactions of $1.7
billion. These cash inflows were offset in part by debt repayments of $2.9
billion.
Commitments
Significant Indebtedness
As of December 31, 2015, AAG and American had $20.8 billion and $19.1 billion,
respectively, in long-term debt and capital leases (including current maturities
of $2.2 billion each). See Note 9 and 22 to AAG's
88
--------------------------------------------------------------------------------
Table of Contents
Consolidated Financial Statements in Part II, Item 8A and Note 7 and 20 to
American's Consolidated Financial Statements in Part II, Item 8B for further
information on all indebtedness as of December 31, 2015, as well as the 2016-1
EETC financing disclosed as a subsequent event.
Credit Ratings
The following table details our credit ratings as of December 31, 2015:
S&P Fitch Moody's
Local Issuer Issuer Default Corporate
Credit Rating Credit Rating Family Rating
American Airlines Group BB- BB- Ba3
American Airlines, Inc. BB- BB- *
* The credit agency does not rate this category for this 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.
Aircraft and Engine Purchase Commitments
As of December 31, 2015, we had definitive purchase agreements with Airbus,
Boeing and other manufacturers for the acquisition of the following mainline and
regional aircraft:
2021 and
2016 2017 2018 2019 2020 Thereafter Total
Airbus
A320 Family 25 20 - - - - 45
A320neo Family - - - 25 25 50 100
A350 XWB - 4 10 6 2 - 22
Boeing
737-800 20 20 - - - - 40
737 MAX Family - 3 17 20 20 40 100
777-300 ER 2 - - - - - 2
787 Family 8 13 8 - - - 29
Bombardier
CRJ900 (1) 18 - - - - - 18
Embraer
ERJ175 (1) 24 12 - - - - 36
Total 97 72 35 51 47 90 392
(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.
89
--------------------------------------------------------------------------------
Table of Contents
We also have agreements for 49 spare engines to be delivered in 2016 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2015 are expected to be as follows (in millions):
2021 and
2016 2017 2018 2019 2020 Thereafter Total
Payments for the above aircraft
commitments and certain engines
(1) $ 4,505 $ 4,591 $ 2,916 $ 3,156 $ 2,793 $ 4,537 $ 22,498
(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 held by all manufacturers totaled $1.1 billion as of
December 31, 2015.
In April 2015, we amended our delivery agreement with Boeing to defer four 787
aircraft from 2016 to 2017 and one 787 aircraft from 2017 to 2018. In June 2015,
we amended our delivery agreement with Airbus to defer delivery of 10 A320neo
family aircraft in 2017 and 25 A320neo family aircraft in 2018 to years 2021
through 2023. In December 2015, we amended our delivery agreement with Airbus to
defer two A350 XWB from 2017 to 2020. These deferrals are reflected in the table
above.
As of December 31, 2015, we did not have financing commitments for the following
aircraft currently on order and scheduled to be delivered through 2017: 25
Airbus A320 family aircraft in 2016 and 20 Airbus A320 family aircraft in 2017,
8 Boeing 787 family aircraft in 2016 and 13 Boeing 787 family aircraft in 2017,
15 Boeing 737-800 aircraft in 2016, three Boeing 737 MAX family aircraft in 2017
and two Boeing 777-300ER aircraft in 2016. In addition, we do not have financing
commitments in place for substantially all aircraft currently on order and
scheduled to be delivered in 2018 and beyond. See Part I, Item 1A. Risk Factors
- "We will need to obtain sufficient financing or other capital to operate
successfully."
Credit Card Processing Agreements
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 or services according to our fare rules. Our agreements allow these
processing companies, under certain conditions, to hold an amount of our cash
(referred to as a "holdback") equal to a portion of advance ticket sales that
have been processed by that company, but for which we have not yet provided the
air transportation. We are not currently required to maintain any holdbacks
pursuant to these requirements. Certain of our agreements provide that these
holdback requirements can be modified at the discretion of the processing
companies, up to the estimated liability for future air travel purchased with
the respective credit cards, upon the occurrence of specified events, including
material adverse changes in our financial condition. The amount that the
processing companies may withhold also varies as a result of changes in
financial risk due to seasonal fluctuations in ticket volume. Additional
holdback requirements will reduce our liquidity in the form of unrestricted cash
by the amount of the holdbacks.
Pension Funding Obligation
We are required to make minimum contributions to our defined benefit pension plans under the minimum funding requirements of Employee Retirement Income Security Act of 1974 and various other laws.
Based on our current funding assumptions, we have no minimum required contributions until 2018. 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. Our pension funding obligations are likely to increase materially following expiration of the temporary funding rules, when we will be required to make contributions relating to the 2018
90
--------------------------------------------------------------------------------
Table of Contents
fiscal year. 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. See Note 13 to AAG's
Consolidated Financial Statements in Part II, Item 8A and Note 11 to American's
Consolidated Financial Statements in Part II, Item 8B for further information on
retirement benefits as of December 31, 2015.
Labor Agreements
In 2014 and 2015, we reached agreements with several labor unions. On
December 18, 2014, we reached a JCBA with the APFA. The new agreement did not
require ratification and was effective immediately with the wage increases under
the JCBA becoming effective January 1, 2015.
On January 3, 2015, we reached a tentative agreement with the APA on a five-year
JCBA, which was ratified on January 30, 2015. The new, higher pay rates were
implemented retroactive to December 2, 2014.
In September 2015, we reached an agreement with the CWA-IBT for a new JCBA
applicable to passenger service employees, which was ratified in November 2015
and provided significant pay increases for combined passenger service employees,
effective immediately.
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.
We have no off-balance sheet arrangements of the types described in the first
three categories above that we believe may have a material current or future
effect on financial condition, liquidity or results of operations. Certain
guarantees that we do not expect to have a material current or future effect on
our financial condition, liquidity or results of operations are disclosed in
Note 15 to AAG's Consolidated Financial Statements included in Part II, Item 8A
and Note 13 to American's Consolidated Financial Statements in Part II, Item 8B.
Special Facility Revenue Bonds
We guarantee the payment of principal and interest of certain special facility
revenue bonds issued by municipalities primarily to build or improve airport
facilities and purchase equipment which is leased to us. Under such leases, we
are required to make rental payments through 2035, sufficient to pay maturing
principal and interest payments on the related bonds. As of December 31, 2015,
the remaining lease payments guaranteeing the principal and interest on these
bonds are $617 million, which are accounted for as operating leases.
Pass-Through Trusts
We have financed certain aircraft and engines with pass-through trust
certificates, or EETCs, issued by pass-through trusts. These trusts are
off-balance sheet entities, the primary purpose of which is to finance our
acquisition of flight equipment. Rather than finance each aircraft separately
when such aircraft is purchased, delivered or refinanced, these trusts allow
American to raise the financing for several aircraft at one time and, if
applicable, place such funds in escrow pending a future purchase, delivery or
refinancing of the relevant aircraft. The trusts were also structured to provide
for certain credit enhancements, such as liquidity facilities to cover certain
interest payments, that reduce the risks to the purchasers of the trust
certificates and, as a result, reduce the cost of aircraft financing to
American.
91
--------------------------------------------------------------------------------
Table of Contents
Each trust covered a set amount of aircraft scheduled to be delivered or
refinanced upon the issuance of the EETC or within a specific period of time
thereafter. At the time of each covered aircraft financing, the relevant trust
used the proceeds of the issuance of the EETC (which may have been available at
the time of issuance thereof or held in escrow until the date of delivery of the
applicable aircraft) to purchase equipment notes relating to the financed
aircraft. The equipment notes were issued, at American or, in the case of
equipment notes issued by US Airways prior to its merger with and into American,
at US Airways' election, in connection with a mortgage financing of the aircraft
or, in certain cases, by a separate owner trust in connection with a leveraged
lease financing of the aircraft. In the case of a leveraged lease financing, the
owner trust then leased the aircraft to American or US Airways. In both cases,
the equipment notes are secured by a security interest in the aircraft. On
December 30, 2015, American assumed all of US Airways' obligations under all
outstanding equipment notes previously issued by US Airways. The pass-through
trust certificates are not direct obligations of, nor are they guaranteed by,
AAG or American. However, in the case of mortgage financings, the equipment
notes issued to the trusts are direct obligations of American and, in certain
instances, are guaranteed by AAG. As of December 31, 2015, $8.7 billion
associated with these mortgage financings is reflected as debt in the
accompanying consolidated balance sheet.
With respect to leveraged leases, American evaluated whether the leases had
characteristics of a variable interest entity. American concluded the leasing
entities met the criteria for variable interest entities. American generally is
not the primary beneficiary of the leasing entities if the lease terms are
consistent with market terms at the inception of the lease and do not include a
residual value guarantee, fixed-price purchase option or similar feature that
obligates American to absorb decreases in value or entitles American to
participate in increases in the value of the aircraft. American does not provide
residual value guarantees to the bondholders or equity participants in the
trusts. Some leases have a fair market value or a fixed price purchase option
that allows American to purchase the aircraft at or near the end of the lease
term. However, the option price approximates an estimate of the aircraft's fair
value at the option date. Under this feature, American does not participate in
any increases in the value of the aircraft. American concluded it is not the
primary beneficiary under these arrangements. Therefore, American accounts for
its EETC leveraged lease financings as operating leases. American's total future
obligations under these leveraged lease financings are $1.8 billion as of
December 31, 2015.
92
--------------------------------------------------------------------------------
Table of Contents
AAG Contractual Obligations
The following table provides details of our future cash contractual obligations
as of December 31, 2015. The table does not include commitments that are
contingent on events or other factors that are uncertain or unknown at this
time.
Payments Due by Period
2021 and
2016 2017 2018 2019 2020 Thereafter Total
American
Debt and capital lease
obligations (1), (3) $ 2,266 $ 1,598 $ 1,634 $ 2,628 $ 3,081 $ 7,820 $ 19,027
Interest obligations (2), (3) 796 742 698 601 472 1,314 4,623
Commitments for aircraft and
engine purchases (4) 4,505 4,591 2,916 3,156 2,793 4,537 22,498
Operating lease commitments (5) 2,187 2,069 1,824 1,642 1,493
4,704 13,919
Regional capacity purchase
agreements (6) 1,672 1,553 1,249 1,075 881 2,393 8,823
Minimum pension obligations (7) - - 164 1,205 902 4,199 6,470
Retiree medical and other
purchase obligations (7) 435 241 206 178 90 355 1,505
Total American Contractual
Obligations $ 11,861 $ 10,794 $ 8,691 $ 10,485 $ 9,712 $ 25,322 $ 76,865
AAG Parent and Other AAG
Subsidiaries
Debt and capital lease
obligations (1) $ - $ - $ 500 $ 750 $ 506 $ 24 $ 1,780
Interest obligations (2) 97 97 82 67 14 9 366
Operating lease commitments 11 9 5 1 - - 26
Total AAG Contractual
Obligations $ 11,969 $ 10,900 $ 9,278 $ 11,303 $ 10,232 $ 25,355 $ 79,037
(1) Amounts represent contractual amounts due. For American, excludes $228
million and for AAG Parent and other AAG subsidiaries, excludes $18 million
of unamortized debt discount and debt issuance costs as of December 31, 2015.
(2) For variable-rate debt, future interest obligations are estimated using the
current forward rates at December 31, 2015.
(3) Includes $8.7 billion of future principal payments and $2.3 billion of future
interest payments, respectively, as of December 31, 2015, related to EETCs
associated with mortgage financings for the purchase of certain aircraft.
(4) See Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Liquidity and Capital Resources" for
additional information about these obligations.
(5) Includes $1.8 billion of future minimum lease payments related to EETC
leverage leased financings of certain aircraft as of December 31, 2015.
(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 2025. See Note 11 to American's Consolidated Financial
Statements in Part II, Item 8B.
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
93
--------------------------------------------------------------------------------
Table of Contents
consider, and enter into negotiations related to, capital raising activity,
which may include the entry into leasing transactions and future issuances of
secured or unsecured debt obligations or additional equity securities in public
or private offerings or otherwise. The cash available from operations and these
sources, however, may not be sufficient to cover cash contractual obligations
because economic factors may reduce the amount of cash generated by operations
or increase costs. For instance, an economic downturn or general global
instability caused by military actions, terrorism, disease outbreaks or natural
disasters could reduce the demand for air travel, which would reduce the amount
of cash generated by operations. An increase in costs, either due to an increase
in borrowing costs caused by a reduction in credit ratings or a general increase
in interest rates, or due to an increase in the cost 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.
OTHER INFORMATION
Basis of Presentation
See Note 5 to AAG's Consolidated Financial Statements in Part II, Item 8A and
Note 5 to American's Consolidated Financial Statements in Part II, Item 8B for
information regarding the basis of presentation.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
the United States
requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities at the date of the financial statements. We believe our estimates
and assumptions are reasonable; however, actual results could differ from those
estimates. Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. We have identified
the following critical accounting policies that impact the preparation of our
Consolidated Financial Statements. See the summary of significant accounting
policies included in Note 5 to AAG's Consolidated Financial Statements in Part
II, Item 8A and Note 5 to American's Consolidated Financial Statements in Part
II, Item 8B for additional discussion of the application of these estimates and
other accounting policies.
Passenger Revenue
Passenger revenue is recognized when transportation is provided. Ticket sales
for transportation that has not yet been provided are initially deferred and
recorded as air traffic liability on the consolidated balance sheets. The air
traffic liability represents tickets sold for future travel dates and estimated
future refunds and exchanges of tickets sold for past travel dates. The balance
in the air traffic liability fluctuates throughout the year based on seasonal
travel patterns and fare sale activity. Our air traffic liability was $3.7
billion and $4.3 billion as of December 31, 2015 and 2014, respectively.
The majority of tickets sold are nonrefundable. A small percentage of tickets,
some of which are partially used tickets, expire unused. Due to complex pricing
structures, refund and exchange policies, and interline agreements with other
airlines, certain amounts are recognized in revenue using estimates regarding
both the timing of the
94
--------------------------------------------------------------------------------
Table of Contents
revenue recognition and the amount of revenue to be recognized. These estimates
are generally based on the analysis of our historical data. We and other airline
industry participants have consistently applied this accounting method to
estimate revenue from forfeited tickets at the date of travel. Estimated future
refunds and exchanges included in the air traffic liability are routinely
evaluated based on subsequent activity to validate the accuracy of our
estimates. Any adjustments resulting from periodic evaluations of the estimated
air traffic liability are included in results of operations during the period in
which the evaluations are completed.
Long-lived Assets
Long-lived assets consist of flight equipment along with other fixed assets and
amortizing intangible assets such as certain slots, customer relationships,
marketing agreements and tradenames. In addition to the original cost, the
recorded value of our fixed assets is impacted by a number of estimates made,
including estimated useful lives, salvage values and our determination as to
whether aircraft are temporarily or permanently grounded. Amortizing intangible
assets are originally recorded at their acquired fair values and are
subsequently amortized over their estimated useful lives. See Note 5 to AAG's
Consolidated Financial Statements in Part II, Item 8A and Note 5 to American's
Consolidated Financial Statements in Part II, Item 8B for further information.
We record impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired. An asset or group of
assets is considered impaired when the undiscounted cash flows estimated to be
generated by the assets are less than the carrying amount of the assets and the
net book value of the assets exceeds their estimated fair value. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Cash flow estimates are based on historical results adjusted to
reflect management's best estimate of future market and operating conditions,
including our current fleet plan and considerations of any modifications
thereto. Estimates of fair value represent management's best estimate based on
appraisals, industry trends and reference to market rates and transactions.
The majority of American's fleet types are depreciated over 25-30 years. It is
possible that the ultimate lives of our aircraft will be significantly different
than the current estimate due to unforeseen events in the future that impact our
fleet plan, including positive or negative developments in the areas described
above. For example, operating the aircraft for a longer period will result in
higher maintenance, fuel and other operating costs than if we replaced the
aircraft.
Goodwill and Indefinite-lived Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and liabilities assumed. Goodwill is not amortized but
tested for impairment annually on October 1st or more frequently if events or
circumstances indicate that goodwill may be impaired. We have one consolidated
reporting unit.
Our indefinite-lived intangible assets other than goodwill include certain
international slots and route authorities and domestic airport slots.
Indefinite-lived intangible assets are not amortized but tested for impairment
annually on October 1st or more frequently if events or circumstances indicate
that the asset may be impaired.
Goodwill and indefinite-lived intangible assets are measured for impairment by
initially performing a qualitative screen. Under the qualitative approach, we
analyze the following factors to determine if events and circumstances have
affected the fair value of goodwill and indefinite-lived intangible assets:
(1) negative trends in our market capitalization, (2) an increase in fuel
prices, (3) declining per mile passenger yields, (4) lower passenger demand as a
result of a weakened
U.S.
and global economy and (5) changes to the regulatory
environment.
If we determine that it is more likely than not that the asset value may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under the quantitative approach, we
95
--------------------------------------------------------------------------------
Table of Contents
calculate the fair value of the asset using the following assumptions: (1) our
projected revenues, expenses and cash flows, (2) an estimated weighted average
cost of capital, (3) assumed discount rates depending on the asset (4) a tax
rate and (5) market prices for comparable assets. These assumptions are
consistent with those which hypothetical market participants would use. If the
asset's carrying value exceeds its fair value calculated using the quantitative
approach, we will record an impairment charge for the difference in fair value
and carrying value.
Based upon our annual testing, there were no impairments of our goodwill and indefinite-lived assets in 2015.
Business Combination Measurements
In accordance with applicable accounting standards, we estimated the fair value
of US Airways' assets and liabilities as of the closing date of the Merger,
December 9, 2013. These fair value adjustments did not result in gains or
losses, but were instead an input to the calculation of goodwill related to the
excess of the purchase price over the fair value of the tangible and
identifiable intangible assets acquired and liabilities assumed by us in the
Merger.
The fair values of the assets acquired and liabilities assumed were determined
using the market, income and cost approaches. The fair value measurements were
primarily based on significant inputs that are not observable in the market,
other than certain long-term debt assumed in the Merger. The market approach,
which indicates value for a subject asset based on available market pricing for
comparable assets, was utilized to estimate the fair value of US Airways'
aircraft and operating leases. The market approach used included prices and
other relevant information generated by market transactions involving comparable
assets, as well as pricing guides and other sources. We considered the current
market for the aircraft, the maintenance condition of the aircraft and the
expected proceeds from the sale of the assets, among other factors. We also
utilized the market approach to value certain intangible assets such as airport
take off and landing slots when sufficient market information was available. The
income approach was primarily used to value intangible assets, including
customer relationships, marketing agreements, certain international route
authorities, and the US Airways tradename. The income approach indicates value
for a subject asset based on the present value of cash flows projected to be
generated by the asset. Projected cash flows are discounted at a required market
rate of return that reflects the relative risk of achieving the cash flows and
the time value of money. The cost approach, which estimates value by determining
the current cost of replacing an asset with another of equivalent economic
utility, was used, as appropriate, for certain assets for which the market and
income approaches could not be applied due to the nature of the asset. The cost
to replace a given asset reflects the estimated reproduction or replacement cost
for the asset, less an allowance for loss in value due to depreciation. The fair
value of the US Airways Dividend Miles loyalty program liability was determined
based on the weighted average equivalent ticket value of outstanding miles which
were expected to be redeemed for future travel at December 9, 2013. The weighted
average equivalent ticket value contemplates differing classes of service,
domestic and international itineraries and the carrier providing the award
travel.
Loyalty Program
We currently operate the loyalty program, AAdvantage. This program awards
mileage credits to passengers who fly on American and oneworld carriers, as well
as certain other partner airlines that participate in the program. Mileage
credits can also be earned through purchases from other non-airline partners
that participate in our loyalty program. Mileage credits can be redeemed for
travel on American or other participating partner airlines, in which case we pay
a fee.
We use the incremental cost method to account for the portion of our loyalty
program liability incurred when AAdvantage members earn mileage credits by
flying on American or our regional affiliates. We have an obligation to provide
future travel when these mileage credits are redeemed and therefore have
recorded a liability for mileage credits outstanding.
96
--------------------------------------------------------------------------------
Table of Contents
The incremental cost liability includes all mileage credits that are expected to
be redeemed, including mileage credits earned by members whose mileage account
balances have not yet reached the minimum mileage credit level required to
redeem an award. Additionally, outstanding mileage credits are subject to
expiration if unused. In calculating the liability, we estimate how many mileage
credits will never be redeemed for travel and exclude those mileage credits from
the estimate of the liability. Estimates are also made for the number of miles
that will be used per award redemption and the number of travel awards that will
be redeemed on partner airlines. These estimates are based on historical program
experience as well as consideration of enacted program changes, as applicable.
Changes in the liability resulting from members earning additional mileage
credits or changes in estimates are recorded in the consolidated statements of
operations as a part of passenger revenue.
The liability for outstanding mileage credits is valued based on the estimated
incremental cost of carrying one additional passenger. Incremental cost
primarily includes unit costs incurred for fuel, food, and insurance as well as
fees incurred when travel awards are redeemed on partner airlines. No profit or
overhead margin is included in the accrual of incremental cost. These estimates
are generally updated based upon our 12-month historical average of such costs.
As of December 31, 2015 and 2014, the liability for outstanding mileage credits
for the AAdvantage program accounted for under the incremental cost method was
$657 million and $674 million, respectively, and is included on the consolidated
balance sheets within loyalty program liability.
In addition, we applied the acquisition method of accounting in connection with
the Merger and therefore recorded the liability for outstanding US Airways'
mileage credits at fair value, an amount significantly in excess of incremental
cost. As of December 31, 2015 and 2014, the liability for these outstanding
mileage credits expected to be redeemed for future travel awards was $296
million and $611 million, respectively, and is included on the consolidated
balance sheets within loyalty program liability. This liability is amortized
into passenger revenue on a straight-line basis over the period in which the
mileage credits are expected to be redeemed for travel. All new miles earned
will be recorded as a liability based on the incremental cost method discussed
above.
American also sells loyalty program mileage credits to participating airline
partners and non-airline business partners. Sales of mileage credits to
non-airline business partners is comprised of two components, transportation and
marketing. Historically, we have used the residual method of accounting to
determine the values of each component as there had not been a material
modification to any significant agreements since the adoption of Accounting
Standards Update (ASU) No. 2009-13, "Revenue Recognition (Topic 605) -
Multiple-Deliverable Revenue Arrangements" on January 1, 2011.
In 2013, American and Citibank amended their AAdvantage co-branded credit card
agreement, which resulted in a material modification of the terms of the
arrangement. Also, in connection with the acquisition of US Airways on
December 9, 2013, a material modification occurred on all of US Airways'
agreements in connection with the Merger. Therefore, subsequent to the
amendments of these arrangements, we have applied the relative selling price
method to determine the values of each deliverable. Under the relative selling
price approach, we identified five revenue elements for the co-branded credit
card agreements with Citibank and Barclays: the transportation component; use of
the American brand including access to loyalty program member lists;
advertising; lounge access; and baggage services (together excluding the
transportation component, the marketing component).
The transportation component represents the estimated selling price of future
travel awards and is determined using historical transaction information,
including information related to customer redemption patterns. The
transportation component is deferred based on its relative selling price and is
amortized into passenger revenue on a straight-line basis over the period in
which the mileage credits are expected to be redeemed for travel.
The marketing component represents services provided to our business partners and relates primarily to the use of the American brand including access to loyalty program member lists. The marketing services are provided
97
--------------------------------------------------------------------------------
Table of Contents
periodically, but no less than monthly. Accordingly, the marketing component is
considered earned and recognized in other revenues in the period of the mileage
sale.
Upon application of the relative selling price method in 2013 for American's
Citibank modification, we reduced our travel component liability and recorded
other revenue of approximately $31 million. As a result of the change in the
marketing component value when the relative selling price method is applied, we
now defer less revenue per mile sold.
As of December 31, 2015 and 2014, American had $1.5 billion in deferred revenue
from the sale of mileage credits (recorded within loyalty program liability on
the consolidated balance sheets). For the years ended December 31, 2015, 2014
and 2013, the marketing component of mileage sales recognized at the time of
sale in other revenues was approximately $1.5 billion, $1.4 billion and $834
million, respectively.
A change to certain estimates used in the calculation of incremental cost could
have a material impact on the liability. A one percentage point increase or
decrease in the percentage of travel awards redeemed on partner airlines would
have an approximate $35 million impact on the liability as of December 31, 2015.
A 10% increase or decrease in the assumed price per gallon of fuel would have an
approximate $12 million impact on the liability as of December 31, 2015.
A change to the estimated fair value of the transportation component could have
a significant impact on revenue. A 10% increase or decrease in the estimated
fair value of the transportation component would have an approximately $75
million impact on revenue recognized in 2015.
The number of one way travel award redemptions during the year ended
December 31, 2015, was 8.3 million representing 6.5% of our total mainline and
regional RPMs during that period. We believe displacement of revenue passengers
is minimal given our load factors and our ability to manage loyalty program seat
inventory.
Pensions and Retiree Medical and Other Postretirement Benefits
We recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension and other postretirement plans in the consolidated balance sheet with a corresponding adjustment to accumulated other comprehensive income (loss).
Our pension and other postretirement benefit costs and liabilities are
calculated using various actuarial assumptions and methodologies. We use certain
assumptions including, but not limited to, the selection of the: (i) discount
rate; (ii) expected return on plan assets; (iii) expected health care cost trend
rate and (iv) the estimated age of pilot retirement (as discussed below). These
assumptions as of December 31 were:
2015 2014
Pension discount rate (1) 4.70 % 4.30 %
Other postretirement benefits discount rate (1) 4.42 % 4.00 %
Expected return on plan assets (2) 8.00 % 8.00 %
Expected health care cost trend rate (3):
Pre-65 individuals
Initial 5.21 % 5.25 %
Ultimate (2024) 4.56 % 4.55 %
Post-65 individuals
Initial 5.21 % 5.25 %
Ultimate (2024) 4.56 % 4.55 %
Pilot Retirement Age 62 62
(1) When establishing our discount rate to measure our obligations, we match high
quality corporate bonds available in the marketplace whose cash flows
approximate our projected benefit disbursements. Lowering
98
--------------------------------------------------------------------------------
Table of Contents
the discount rate by 50 basis points as of December 31, 2015 would increase
our pension and other postretirement benefits obligations by approximately
$1.2 billion and $52 million, respectively, and increase estimated 2016
pension expense by $7 million and decrease estimated 2016 other
postretirement benefit expense by less than $1 million.
(2) The expected return on plan assets is based upon an evaluation of our
historical trends and experience taking into account current and expected
market conditions and our target asset allocation of 31% longer duration
corporate and
U.S.
government/agency bonds, 32%
U.S.
value stocks, 19%
developed international stocks, 10% emerging markets stocks and bonds and 8%
alternative (private) investments. The expected return on plan assets
component of our net periodic benefit cost is calculated based on the fair
value of plan assets and our target asset allocation. Lowering the expected
long-term rate of return on plan assets by 50 basis points as of December 31,
2015 would increase estimated 2016 pension expense and other postretirement
benefit expense by approximately $47 million and $1 million, respectively.
(3) The health care cost trend rate is based upon an evaluation of our historical
trends and experience taking into account current and expected market
conditions. Increasing the assumed health care cost trend rate by 100 basis
points would increase estimated 2016 other postretirement benefits expense by
$3 million.
During 2015, we revised our mortality assumptions to incorporate the new
mortality improvement scale issued by the Society of Actuaries. This resulted in
a decrease in the projected benefit obligations of our pension and retiree
medical programs of $161 million and $9 million, respectively. We also reviewed
and revised certain other economic and demographic assumptions including the
pension and retiree medical discount rates and health care cost and trend rates.
The net effect of changing these assumptions for the pension and retiree medical
plans resulted in a decrease of $940 million and $119 million, respectively, in
the projected benefit obligation at December 31, 2015 primarily due to the
increase in the pension discount rate.
See Note 13 to AAG's Consolidated Financial Statements in Part II, Item 8A and
Note 11 to American's Consolidated Financial Statements in Part II, Item 8B for
additional information regarding our retirement benefits.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. A valuation allowance is established, if
necessary, for the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
Recent Accounting Pronouncements
See Note 5 to AAG's Consolidated Financial Statements in Part II, Item 8A and
Note 5 to American's Consolidated Financial Statements in Part II, Item 8B for
further information on recent accounting pronouncements.
99
--------------------------------------------------------------------------------
Table of Contents
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer
