ITEM 1B.
UNRESOLVED STAFF COMMENTS
The Company had no unresolved Securities and Exchange Commission staff comments at December 31, 2013.
Flight Equipment
As of December 31, 2013, American and US Airways operated a mainline fleet of 627 and 343 aircraft, respectively. During 2013, American took delivery of 59 new aircraft and retired 46 aircraft and US Airways took delivery of 23 new aircraft and retired 20 aircraft. We are supported by our regional airline subsidiaries and third-party regional carriers operating as American Eagle and US Airways Express under capacity purchase agreements. American Eagle operated 281 regional jets at December 31, 2013 and US Airways Express operated 238 regional jets and 40 turboprops at December 31, 2013.
Operating
As of December 31, 2013, American's and US Airways' combined mainline fleet consisted of the following aircraft:
(1)
Aircraft in temporary storage are included in the count of operating aircraft.
(2)
As of December 31, 2013, all non-operating aircraft are owned.
(3)
Included in the totals above, aircraft operated by US Airways consist of 93 A319s, 70 A320s, 91 A321s, 12 A330-200s, 9 A330-300s, 14 B737-400s, 24 B757-200s, 10 B767-200ERs and 20 ERJ 190s, of which 123 are owned and 220 are leased.
As of December 31, 2013, the fleet of our wholly-owned regional subsidiary and the wholly-owned regional subsidiaries of US Airways Group consisted of the following aircraft:
(1)
As of December 31, 2013, all non-operating aircraft are owned.
(2)
Included in the totals above, aircraft operated by wholly-owned regional subsidiaries of US Airways Group consist of 35 CRJ 200s, 14 CRJ 700s, 29 De Havilland Dash 8-100s, and 11 De Havilland Dash 8-300s, of which 48 are owned and 41 are leased.
Our committed mainline and regional aircraft orders and scheduled lease expirations, for the capital and operating leased flight equipment included in the table above, as of December 31, 2013, are presented in the table below.
(1) Includes orders for regional jets as follows: 15 in 2014, 39 in 2015, 24 in 2016, and 12 in 2017. 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.
See Note 8 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 7 to American's Consolidated Financial Statements in Part II, Item 8B for additional information on aircraft acquisition commitments, payments and options.
Third-Party Regional Carriers
As of December 31, 2013, aircraft contractually obligated to American and US Airways with third-party regional carriers included:
ExpressJet and Republic began service for American on February 14, 2013 and August 1, 2013, respectively. Of the aircraft listed above, one SkyWest aircraft was on operational reserve as of December 31, 2013.
See Note 8 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 7 to American's Consolidated Financial Statements in Part II, Item 8B, for additional information on our capacity purchase agreements with third-party regional carriers.
Other Information
We have agreements for 44 spare engines to be delivered in 2014 and beyond.
For information concerning the estimated useful lives and residual values for owned aircraft, lease terms for leased aircraft and amortization relating to aircraft under capital leases, see Note 5 and Note 8 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 4 and Note 7 to American's Consolidated Financial Statements in Part II, Item 8B.
Ground Properties
At each airport where we conduct flight operations, we lease passenger, operations and baggage handling space, generally from the airport operator, but in some cases on a subleased basis from other airlines. Our main operational facilities are associated with our hubs. At those locations and in other cities we serve, we maintain administrative offices, terminal, catering, cargo, training facilities, maintenance facilities and other facilities, in each case as necessary to support our operations in the particular city.
We lease, or have built as leasehold improvements on leased property, most of our airport and terminal facilities in the U.S. and overseas, US Airways' corporate office building in Tempe, Arizona, our training facilities in Fort Worth, Texas, our principal overhaul and maintenance base in Tulsa, Oklahoma, our regional reservation offices, and local ticket and administration offices throughout the system. Our US Airways Operations Control Center is located near Pittsburgh, Pennsylvania, in a facility leased from the Allegheny County Airport Authority.
We own our corporate headquarters building in Fort Worth, Texas.
For information concerning the estimated lives and residual values for owned ground properties, lease terms and amortization relating to ground properties under capital leases, and acquisitions of ground properties, see Note 5 and Note 8 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 4 and Note 7 to American's Consolidated Financial Statements in Part II, Item 8B.
Terminal Construction Projects
We use public airports for our flight operations under lease or use arrangements with the municipalities or governmental agencies that own or control them and lease certain other ground equipment for use at such facilities. From time to time, airports undertake projects to improve or construct new facilities, which are typically funded through proceeds from special or general purpose bond offerings made by the respective airport governmental entity. Our airport lease and operating agreements typically provide that any costs for these new or improved airport facilities are passed through to us in the form of higher occupancy costs based on our relative percentage of occupancy at the airport. In certain circumstances, we agree to manage these airport projects.
American has entered into agreements with the Tulsa Municipal Airport Trust; the Alliance Airport Authority, Fort Worth, Texas; the New York City Industrial Development Agency; and the Dallas/Fort Worth, Chicago O’Hare, Newark, San Juan, and Los Angeles airport authorities pursuant to which such entities issued special facility revenue bonds, the proceeds of which were used to pay a portion of the cost of constructing, improving and modifying facilities and acquiring equipment which are leased by us. Prior to the Chapter 11 Cases, we entered into agreements with certain airport authorities pursuant to which such entities issued special facility revenue bonds, the proceeds of which were used to pay a portion of the cost of constructing, improving and modifying facilities and acquiring equipment leased by the Company. The special facility revenue bonds are non-recourse to the issuer. Pursuant to the Plan, claims relating to special facility revenue bonds in connection with Alliance Airport, John F. Kennedy International Airport (certain bond issuances only), Dallas-Fort Worth International Airport, Chicago O’Hare, Newark Airport, and Luis Munoz Marin International Airport in San Juan, Puerto Rico were treated as general unsecured claims.
ITEM 3.
LEGAL PROCEEDINGS
Chapter 11 Cases. As previously disclosed, on the Petition Date, November 29, 2011, the Debtors filed voluntary petitions for relief under the Bankruptcy Code. On October 21, 2013, the Bankruptcy Court entered the Confirmation Order approving and confirming the Debtors' Plan. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by the Merger Agreement pursuant to which Merger Sub merged with and into US Airways Group, with US Airways Group surviving as a wholly-owned subsidiary of AAG. From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date, generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.
Pursuant to rulings of the Bankruptcy Court, the Plan has established a disputed claim reserve to hold shares of AAG Series A Preferred Stock and AAG Common Stock reserved for issuance to disputed claimholders that ultimately become allowed Single-Dip general unsecured claimholders after emergence. The shares provided for under the Plan are determined based upon a disputed claim reserve amount of approximately $755 million. As disputed claims are resolved, the claimants receive distributions of shares from the reserve on the same basis as if such distributions had been made on or about the Effective Date. To the extent that any of the reserved shares remain undistributed upon resolution of the remaining disputed claims, such shares will not be returned to AAG but rather will be distributed by priority first, if necessary, to satisfy unsecured claims or labor-related obligations, and then to former AMR shareholders as of the Effective Date. AAG is not required to distribute additional shares above the 756 million shares contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay all allowed unsecured claims. However, resolution of disputed claims could have a material effect on Single-Dip creditor recoveries under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.
There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, post-employee benefits are not vested benefits and thus may be terminated without liability to American. The Bankruptcy Court has not yet ruled on this matter and we cannot predict whether American will receive relief from any of these obligations.
Government Antitrust Actions. On August 13, 2013, the U.S. government, along with the States of Arizona, Florida, Tennessee and Texas, the Commonwealths of Pennsylvania and Virginia, and the District of Columbia (collectively, the plaintiff states), filed a complaint against US Airways Group and AMR in the U.S. District Court for the District of Columbia. The plaintiffs alleged, among other things, that the proposed Merger would substantially lessen competition in violation of Section 7 of the Clayton Act and sought to permanently enjoin the transaction. On September 5, 2013, the plaintiffs filed an amended complaint, adding the State of Michigan as a plaintiff. On October 1, 2013, the State of Texas entered into an agreement with US Airways Group and AMR that resolved that state’s objections to the Merger, and its claims were dismissed with prejudice on October 7, 2013. On November 11, 2013, US Airways and American entered into agreements with the U.S. government and the plaintiff states resolving all claims in the litigation. The agreement with the U.S. government requires the carriers to divest assets at certain airports and remains subject to public comment and court approval. In the agreement with the United States government, among other things, we agreed to divest and not reacquire for ten years certain rights and assets consisting of 52 Slot pairs at Washington Reagan National Airport, and 17 Slot pairs at LaGuardia, in each case together with and associated gates and related ground facilities necessary to operate those Slot pairs, and two gates at each of Boston Logan International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport and Miami International
Airport. The agreement with the plaintiff states, which was entered by the court on November 12, 2013, requires our airlines, subject to certain conditions and exceptions, to maintain certain hub operations in a manner generally consistent with historical operations and to continue to provide scheduled daily service to certain specified communities, both for limited periods of time. In addition, we entered into a related settlement with the DOT related to small community service from Washington Reagan National Airport
Merger Class Action. On March 1, 2013, a complaint captioned Plumbers & Steamfitters Local Union No. 248 Pension Fund v. US Airways Group, Inc., et al., No. CV2013-051605, was filed as a putative class action on behalf of the stockholders of US Airways Group in the Superior Court for Maricopa County, Arizona. On July 3, 2013, an amended complaint, captioned Dennis Palkon, et al. v. US Airways Group, Inc., et al., No. CV2013-051605, was filed with the same court. The amended complaint names as defendants US Airways Group and the members of its board of directors, and alleges that the directors failed to maximize the value of US Airways Group in connection with the Merger and that US Airways Group aided and abetted those breaches of fiduciary duty. The relief sought in the amended complaint includes an injunction against the Merger, or rescission in the event it has been consummated. The court in the above-referenced action denied the plaintiff’s motion for a temporary restraining order that had sought to enjoin the US Airways Group Annual Meeting of Stockholders. The above-referenced action was stayed pending the outcome of the antitrust lawsuit filed by the U.S. government and various states on August 13, 2013 (described above). This stay has now been lifted and a motion to dismiss this action filed by US Airways Group is pending before the court. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
Private Party Antitrust Action. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint names as defendants US Airways Group and US Airways, and alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants, and on October 2, 2013, dismissed the initial California action. The Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On January 10, 2014, the Plaintiffs moved to amend their complaint to add a claim for money damages and to request injunctive relief requiring the carriers to hold separate their assets. Trial is set for June 2014. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
US Airways Sabre Matter. On April 21, 2011, US Airways Inc. filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, Sabre) in Federal District Court for the Southern District of New York. The lawsuit, as amended to date, alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its market power by restricting our ability to distribute our products to our customers. The lawsuit also alleges that these actions have permitted Sabre to charge supracompetitive booking fees and to use technologies that are not as robust and as efficient as alternatives in a competitive market. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. We intend to pursue our claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.
General. The Company and its subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within the control of the Company. Therefore, although the Company will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on the Company are uncertain.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
PART II
____________________________________________________________________________________________________
ITEM 5.
MARKET FOR AMERICAN AIRLINES GROUP'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Pursuant to the Plan and in accordance with the Merger Agreement, effective December 9, 2013, all existing shares of AMR Corporation common stock (OTCQB: AAMRQ) were canceled and ceased trading on the OTCQB market. The newly authorized and issued common stock of AAG began trading on the NASDAQ Global Select Market (NASDAQ) on December 9, 2013 under the symbol "AAL." There is no trading market for the common stock of American, which is a wholly-owned subsidiary of AAG.
As of February 21, 2014, the closing price of AAG Common Stock on NASDAQ was $36.17. As of February 21, 2014, there were 13,277 holders of record of the AAG Common Stock.
In the past three years, no cash or other dividends have been declared on the AAG Common Stock. Under the provisions of certain debt agreements our ability to pay dividends on or repurchase our common stock is restricted. Any future determination to pay cash dividends will be at the discretion of our board of directors, subject to applicable limitations under Delaware law, and will depend upon our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our board of directors. See Part I, Item 1A. Risk Factors - "Our indebtedness and other obligations are substantial and could adversely affect our business and liquidity" and "Any failure to comply with the covenants contained in our financing arrangements may have a material adverse effect on our business, results of operations and financial condition," Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and Capital Resources" and See Note 9 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 9 to American's Consolidated Financial Statements in Part II.
Information on securities authorized for issuance under our equity compensation plans the information required by this Item will be set forth in the Proxy Statement under the caption "Equity Compensation Plan Information" and is incorporated by reference into this Annual Report on Form 10-K.
Ownership Restrictions
AAG's Certificate of Incorporation and Bylaws provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended, or as the same may be from time to time amended (the Aviation Act), any persons or entities who are not a "citizen of the United States" (as defined under the Aviation Act and administrative interpretations issued by the DOT, its predecessors and successors, from time to time), including any agent, trustee or representative of such persons or entities (a non-citizen), shall not, in the aggregate, own (beneficially or of record) and/or control more than (a) 24.9% of the aggregate votes of all of our outstanding equity securities (as defined, which definition includes our capital stock, securities convertible into or exchangeable for shares of our capital stock, including our outstanding convertible notes, and any options, warrants or other rights to acquire capital stock) (the voting cap amount) or (b) 49.0% of our outstanding equity securities (the absolute cap amount). If non-citizens nonetheless at any time own and/or control more than the voting cap amount, the voting rights of the equity securities in excess of the voting cap amount shall be automatically suspended in accordance with the provisions of our Certificate of Incorporation and Bylaws. Voting rights of equity securities, if any, owned (beneficially or of record) by non-citizens shall be suspended in reverse chronological order based upon the date of registration in the foreign stock record. Further, if at any time a transfer of equity securities to a non-citizen would result in non-citizens owning more than the absolute cap amount, such transfer shall be void and of no effect, in accordance with provisions of AAG's Certificate of Incorporation and Bylaws. In the event that we determine that the equity securities registered on the foreign stock record or the stock records of the Company exceed the absolute cap amount, sufficient shares shall be removed from the foreign stock record and the stock records of the Company so that the number of shares entered therein does not exceed the absolute cap amount. Shares of equity securities shall be removed from the foreign stock record and the stock records of the Company in reverse chronological order based on the date of registration in the foreign stock record and the stock records of the Company (subject to Article XIII, Section 6 of our Bylaws, which provides special rules applicable to equity securities issued upon effectiveness of our plan of reorganization and consummation of the Merger). Certificates for AAG's equity securities must bear a legend set forth in our Certificate of Incorporation stating that such equity securities are subject to the foregoing restrictions. Under our Bylaws, it is the duty of each stockholder who is a non-citizen to register his, her or its equity securities on our foreign stock record. In addition, our Bylaws provide that in the event that non-citizens shall own (beneficially or of record) or have voting control over any equity securities, the voting rights of such persons shall be subject to automatic suspension to the extent required
to ensure that we are in compliance with applicable provisions of law and regulations relating to ownership or control of a U.S. air carrier. See AAG’s Restated Certificate of Incorporation and Amended and Restated Bylaws, which are filed at Exhibits 3.1 and 3.2 hereto.
In addition, to reduce the risk of a potential adverse effect on our ability to use our NOL Carryforwards and certain other tax attributes for federal income tax purposes, our Certificate of Incorporation contains certain restrictions on the acquisition and disposition of our common stock by substantial stockholders (generally holders of more than 4.75%).
See Part I, Item 1A. Risk Factors - "AAG's Certificate of Incorporation and Bylaws include provisions limiting voting and acquisition and disposition of our equity interests", and "In order to protect our NOL carryforwards and certain other tax attributes, our Certificate of Incorporation includes certain limitations on acquisitions and dispositions of our common stock, which may limit the liquidity of our common stock."
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
Selected Consolidated Financial Data of AAG
The selected consolidated financial data presented below under the captions "Consolidated Statements of Operations data" and "Consolidated Balance Sheet data" for the years ended December 31, 2013, 2012 and 2011 and as of December 31, 2013 and 2012 are derived from AAG's Consolidated Financial Statements included elsewhere in this report. The selected consolidated financial data for the years ended December 31, 2010 and 2009 and as of December 31, 2011, 2010 and 2009 are derived from AAG's audited Consolidated Financial Statements not included in this report. To conform to current year presentation, certain operating revenue and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 4 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information. The selected consolidated financial data should be read in conjunction with AAG's Consolidated Financial Statements for the respective periods, the related notes and the related reports of Ernst & Young LLP, an independent registered public accounting firm. AAG's Consolidated Financial Statements and statistical data provided in the tables below include the results of US Airways Group for the post-merger period from December 9, 2013 to December 31, 2013.
(1)
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. See Note 2 in Part II, Item 8A to AAG's Consolidated Financial Statements for further information on reorganization items.
(2)
American's defined benefit pension plans were frozen effective November 1, 2012 and the Pilot B Plan, a defined contribution plan, was terminated on November 30, 2012. Further, American significantly modified its retiree medical plans in 2012 resulting in the recognition of a negative plan amendment. See Note 13 in Part II, Item 8A to AAG's Consolidated Financial Statements for further information on retirement benefits, including the financial impact of these plan changes.
(3)
See reconciliation of GAAP to non-GAAP financial measures below.
No cash dividends on common stock were declared for any period presented above.
A number of factors render AAG’s historical consolidated financial information not directly comparable to our financial information for prior or future periods. See Part I, Item 1A. Risk Factors - "The historical consolidated financial information contained in this report is not directly comparable to our financial information for prior or future periods," and Item 7. Management’s Discussion and Analysis and the notes to AAG's Consolidated Financial Statements in Part II, Item 8A.
Reconciliation of GAAP to Non-GAAP Financial Measures
We are providing disclosure of the reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis. We believe that the non-GAAP financial measures provide investors the ability to measure financial performance excluding special items, which is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines.
(1) Includes the following operating special charges (credits):
•
In 2013, special charges consisted primarily of a $192 million charge related to US Airways' pilot MOU that became effective upon the close of the Merger, $96 million related to professional fees and fees for US Airways to exit the Star Alliance, a $107 million charge related to the American's pilot long-term disability obligation, $58 million in severance, $56 million related to employee awards granted in connection with the Merger, a $43 million charge for workers' compensation claims, and a $33 million impairment charge associated with certain Boeing 757 aircraft held for sale. These charges were offset in part by a $31 million special credit related to a change in accounting method resulting from the modification of American's AAdvantage miles agreement with Citibank, a $67 million gain on the sale of slots at LaGuardia Airport as a result of the settlement reached with the DOJ and the cancellation of equity awards in connection with the Merger.
•
In 2012, special charges consisted of $387 million of severance and related charges and write-off of leasehold improvements on aircraft and airport facilities that were rejected during the Chapter 11 process.
•
In 2011, special charges consisted primarily of $725 million related to the impairment of certain aircraft and gates, $31 million of non-recurring non-cash charges related to certain sale/leaseback transactions, and a $43 million revenue reduction as a result of a decrease in the breakage assumption related to the AAdvantage frequent flyer liability.
•
In 2010, special charges consisted primarily of the impairment of certain route authorities in Latin America and losses on Venezuelan currency remeasurement.
•
In 2009, special charges consisted of restructuring charges of $171 million primarily consisted of the grounding of the Airbus A300 fleet and the impairment of Embraer RJ-135 aircraft. Special items in 2009 consisted of $184 million and include the impairment of certain route and slot authorities, primarily in Latin America, and losses on certain sale-leaseback transactions.
(2) Includes the following nonoperating special charges (credits):
•
In 2013, special charges consisted of interest charges of $157 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan, a $54 million charge related to the premium on tender for existing enhanced equipment trust certificates (EETCs) financings and the write-off of debt issuance costs and $19 million in charges related to the repayment of existing EETC financings.
•
In 2012, special charges consisted of a $280 million benefit resulting from a settlement of a commercial dispute.
(3) Includes the following reorganization items, net resulting from the filing of voluntary petitions for reorganization under Chapter 11 by certain of the Company's direct and indirect U.S. subsidiaries on November 29, 2011:
•
In 2013, special charges consisted primarily of a $1.7 billion deemed claim to employees pursuant to the Plan as well as professional fees and estimated allowed claim amounts.
•
In 2012, and 2011 special charges consisted primarily of estimated claims associated with restructuring the financing arrangements for certain debt, aircraft leases, and rejecting certain special facility revenue bonds, as well as professional fees.
(4) Includes the following income tax special charges (credits):
•
In 2013, special charges consisted of a $538 million non-cash income tax benefit resulting from gains recorded in Other Comprehensive Income, which was offset by a $214 million non-cash charge related to additional valuation allowance required to reduce deferred tax assets to the amount we believe is more likely than not to be realized.
•
In 2012, special charges consisted of a $569 million non-cash income tax benefit resulting from gains recorded in Other Comprehensive Income.
•
In 2009, special charges consisted of a $248 million non-cash income tax benefit resulting from gains recorded in Other Comprehensive Income.
Selected Consolidated Financial Data of American
The selected consolidated financial data presented below under the captions "Consolidated Statements of Operations data" and "Consolidated Balance Sheet data" for the years ended December 31, 2013, 2012 and 2011 and as of December 31, 2013 and 2012 are derived from American's Consolidated Financial Statements included elsewhere in this report. The selected consolidated financial data for the years ended December 31, 2010 and 2009 and as of December 31, 2011, 2010 and 2009 are derived from American's audited Consolidated Financial Statements not included in this report. To conform to current year presentation, certain operating revenue and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 4 to American's Consolidated Financial Statements in Part II, Item 8B for additional information. The selected consolidated financial data should be read in conjunction with American's Consolidated Financial Statements for the respective periods, the related notes and the related reports of Ernst & Young LLP, an independent registered public accounting firm.
(1) Includes special charges and other items, as follows:
•
In 2013, special charges consisted primarily of a $107 million charge related to American's pilot long-term disability obligation, $47 million in severance and professional fees, $56 million related to employee equity awards granted in connection with the merger, a $43 million charge for workers' compensation claims, and a $33 million impairment charge associated with certain Boeing 757 aircraft held for sale. These charges were offset in part by a $31 million special credit related to a change in accounting method resulting from the modification of American's AAdvantage
miles agreement with Citibank and a $67 million gain on the sale of slots at LaGuardia Airport as a result of the settlement reached with the DOJ and the cancellation of equity awards in connection with the Merger.
•
In 2012, special charges consisted of $386 million of severance and related charges and write-off of leasehold improvements on aircraft and airport facilities that were rejected during the Chapter 11 process. American's 2012 results also include a $280 million benefit from a settlement of a commercial dispute.
•
In 2011, special charges and other items consisted primarily of $725 million related to the impairment of certain aircraft and gates, $31 million of non-recurring non-cash charges related to certain sale/leaseback transactions, and a $43 million revenue reduction as a result of a decrease in the breakage assumption related to the AAdvantage frequent flyer liability.
•
In 2010, special items consisted of $81 million and include the impairment of certain route authorities in Latin America and losses on Venezuelan currency remeasurement.
•
In 2009, restructuring charges of $171 million primarily consisted of the grounding of the Airbus A300 fleet and the impairment of Embraer RJ-135 aircraft. Special items in 2009 consisted of $184 million and include the impairment of certain route and slot authorities, primarily in Latin America, and losses on certain sale-leaseback transactions.
(2) 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. See Note 2 to American's Consolidated Financial Statements in Part II, Item 8B for further information on reorganization items.
(3) American's defined benefit pension plans were frozen effective November 1, 2012 and the Pilot B Plan, a defined contribution plan, was terminated on November 30, 2012. Further, American significantly modified its retiree medical plans in 2012 resulting in the recognition of a negative plan amendment. See Note 12 to American's Consolidated Financial Statements in Part II, Item 8B for further information on retirement benefits, including the financial impact of these plan changes.
(4) Includes the impact of a $569 million and $248 million tax benefit related to the allocation of tax expense to other comprehensive income items recognized in 2012 and 2009, respectively.
(5) As a result of actuarial changes in the discount rate, the Company recorded a $1.3 billion increase in pension and retiree medical and other benefits obligations and a corresponding decrease in stockholder's equity in 2011.
No cash dividends on common stock were declared for any period presented above.
A number of factors render American’s historical consolidated financial information not directly comparable to our financial information for prior or future periods. See Part I, Item 1A. Risk Factors - "The historical consolidated financial information contained in this report is not directly comparable to our financial information for prior or future periods," and Part II, Item 7. Management’s Discussion and Analysis and the notes to American's Consolidated Financial Statements in Part II, Item 8B.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
American Airlines Group
Background
As previously discussed, the Merger was consummated on December 9, 2013. Accordingly, the Company’s consolidated results include American and American Eagle for the year ended December 31, 2013 and the results of US Airways Group for the 23 days ended December 31, 2013.
Following the Merger, AAG began moving toward operating under the single brand name of "American Airlines" through its mainline operations, American and US Airways. Until a single operating certificate is issued by the Federal Aviation Administration (FAA) and the operational integration is complete, American and US Airways will continue to operate as separate airlines. This process is expected to take 18-24 months. Through its operating subsidiaries, including the operating subsidiaries of US Airways Group, AAG is the largest airline in the world as measured by revenue passenger miles (RPMs) and available seat miles (ASMs). The Company has primary hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York City, Philadelphia, Phoenix and Washington, D.C. As of December 31, 2013, the combined airline operated nearly 6,700 daily flights to 339 destinations in 54 countries. As of December 31, 2013, American and US Airways operated 965 mainline jets. American continues to be provided with regional feed by American Eagle and third-party regional carriers and US Airways continues to be provided with regional feed by Piedmont, PSA and third-party regional carriers. As of December 31, 2013, the Company’s regional subsidiaries and the third-party regional carriers that provide it with regional feed operated approximately 519 regional jets and approximately 40 turboprops.
See Part I, Item 1. Business - "Chapter 11 Reorganization" and "Merger" for more information related to our emergence from Chapter 11 and Merger.
Year in Review
The U.S. Airline Industry
In 2013, the U.S. airline industry experienced year-over-year growth in passenger revenues driven by strong demand for air travel.
In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported that annual U.S. industry passenger revenues and yields increased 3.8% and 2.0%, respectively, as compared to 2012. With respect to international versus domestic performance, Airlines for America reported that the Atlantic and Latin America markets outperformed domestic markets in year-over-year growth in passenger revenues while the Pacific market experienced year-over-year declines in passenger revenues.
Throughout 2013, jet fuel prices continued to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On average, fuel costs were down slightly in 2013 as compared to 2012. The Brent crude oil average daily spot price was $109 in 2013 which approximates the average daily spot price in 2012. However, on a daily basis, prices continued to be volatile. Throughout 2013, daily spot prices fluctuated between a high of $119 per barrel in February to a low of $97 per barrel in April and closed the year at $110 per barrel on December 31, 2013.
While the U.S. airline industry is currently benefiting from a favorable revenue environment and moderating fuel prices as described above, uncertainty exists regarding the economic conditions driving these factors. See Part 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
In 2013, we realized operating income of $1.4 billion and a net loss of $1.8 billion. We completed our merger with US Airways Group on December 9, 2013, and accordingly these results include results of US Airways Group for the 23 day post-merger period, December 9, 2013, to December 31, 2013. The information in the following paragraph and under "Revenue", "Fuel", "Capacity" and "Cost Control" excludes the post-merger results of US Airways Group.
Excluding the results of US Airways Group, we recognized operating income of $1.6 billion in 2013 which compares to operating income of $148 million in 2012, a $1.4 billion improvement. This year-over-year improvement was driven by growth in operating revenues of $957 million resulting from strong demand for air travel and a $471 million reduction in operating expenses primarily as a result of steps taken in our Chapter 11 restructuring. Our standalone net loss was $1.6 billion in 2013 which compares to a net loss of $1.9 billion in 2012. Our net loss was impacted by the recognition of net special charges of $2.8 billion and $1.7 billion in 2013 and 2012, respectively, principally the result of reorganization expenses related to the recognition of allowed claims. See "AAG's Results of Operations" below for a reconciliation of the impact on American Airlines Group of the post-merger results of US Airways Group and net special charges.
Revenue
Mainline and regional passenger revenues increased $864 million, or 4.0%, as compared to 2012. The growth in revenues was driven by a 1.7% increase in revenue passenger miles and a 2.3% increase in yield, as total capacity increased 1.3% as compared to 2012. Our mainline and regional passenger revenue per available seat mile (PRASM) was 13.38 cents in 2013, a 2.7% increase, as compared to 13.03 cents in 2012.
Fuel
Mainline and regional fuel expense was relatively flat at $8.7 billion in each of 2013 and 2012. The average mainline and regional price per gallon of fuel was $3.09 in 2013 as compared to an average price per gallon of $3.20 in 2012, a decrease of 3.3%. The decrease in fuel price per gallon was offset by a 3.1% increase in consumption due in part to increased capacity and a shift from turboprop to regional jet aircraft.
Capacity
Total system capacity for 2013 increased 1.3% primarily due to our ongoing fleet replacement programs where we are replacing older aircraft with larger gauge, more modern aircraft.
Cost Control
AAG is committed to maintaining a low cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our mainline costs per available seat mile (CASM) excluding special items, fuel and profit sharing decreased 0.40 cents or 4.5% from 8.90 cents in 2012 to 8.50 cents in 2013. This decrease was primarily due to cost reductions achieved in our Chapter 11 restructuring to become more cost competitive.
The table below details our mainline CASM excluding special items, fuel and profit sharing for the years ended December 31, 2013 and 2012:
(1)
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 excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Customer Service
We are committed to consistently deliver safe, reliable and convenient service to our customers in every aspect of our operation. Our 2013 operating performance was negatively impacted by more severe summer weather conditions as compared to 2012. We reported the following operating statistics to the DOT for American's mainline operations for the years ended December 31, 2013 and 2012:
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
(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, 2013, AAG's total cash and short-term investments was $10.3 billion, of which $1.0 billion was restricted. Additional detail is provided in the table below (in millions):
(1)
Our restricted cash and short-term investments related primarily to collateral held to support projected workers' compensation obligations.
The improvement in our liquidity is due primarily to the acquisition of US Airways Group which had a cash and short-term investments balance of $3.3 billion at December 31, 2013 as well as proceeds from our $1.9 billion Term Loan Facility, which we entered into in June 2013. We also obtained a $1.0 billion revolving credit facility. To date, we have not drawn any amounts under the revolving credit facility.
Pursuant to the Plan of Reorganization and the related Merger Agreement, the Company issued a portion of its shares of common stock at emergence to certain employees. In December of 2013, the Company withheld the issuance of a portion of these shares and instead used approximately $300 million of cash in satisfaction of employee tax obligations.
As of December 31, 2013, approximately $783 million of our cash and short-term investments balances were held in foreign bank accounts, of which $710 million was held as Venezuela bolivars.
The business environment in Venezuela has been challenging, with economic uncertainty fueled by currency devaluation, high inflation and governmental restrictions, including currency exchange and payment controls, price controls and the possibility of expropriation of property or other resources. As of December 31, 2013, approximately $710 million of our unrestricted cash balance was held as Venezuelan bolivars, valued at a weighted average rate of 6.04 bolivars to the dollar. The period of time to exchange those funds into dollars and repatriate them has been increasing and is presently more than a year. On January 23, 2014, the Venezuelan government issued a regulation to implement a new system for determining the exchange rate based on the result of limited periodic sales of dollars known as Sicad auctions (currently 11.80 to the dollar based on the February 21, 2014 Sicad auction) for repatriation of income from future ticket sales, and introduced new procedures for approval of conversion and repatriation of local currency. The government also enacted a new law effective February 19, 2014 that authorizes additional methods of exchanging Venezuelan bolivars at rates other than the controlled base rate of 6.3 to the dollar or the existing Sicad auction rate, but the regulations necessary to implement the law are still pending and it is not clear at this point whether or how the new methods may impact the pending balances of Venezuelan bolivars held by airlines. We are working with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local
currency. Further, the current, devalued rates may have an ongoing adverse effect on our reported results if we are unable to fully adjust prices on flights to and from Venezuela, of which there can be no assurance. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by the Company and can significantly affect the value of our assets 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. 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 on currency risks.
2014 Outlook
We have taken significant actions in the last year, including the completion of our restructuring and merger with US Airways Group, to restore our competitiveness. Although it is difficult to predict the price of oil or the strength of the economy, we believe that our 2013 financial results are evidence of the strong foundation we have in place and can build on.
AAG's Results of Operations
In 2013, we realized operating income of $1.4 billion and a net loss of $1.8 billion. We completed our merger with US Airways Group on December 9, 2013, and accordingly the results of US Airways Group are included for the 23 day post-merger period from December 9, 2013 to December 31, 2013. Excluding the results of US Airways Group, we recognized operating income of $1.6 billion and a net loss of $1.6 billion. Excluding the effects of net special items we recognized standalone net income of $1.2 billion. In 2013 we experienced growth in revenues due to the strong demand for air travel and a reduction in operating costs as a result of steps taken in our Chapter 11 restructuring.
In 2012, we realized operating income of $148 million and a net loss of $1.9 billion. Excluding the effects of net special items we recognized a net loss of $130 million.
In 2011, we realized an operating loss of $1.0 billion and a net loss of $2.0 billion. Excluding the effects of net special items we recognized a net loss of $1.1 billion. We filed for Chapter 11 on November 29, 2011.
The following table presents our 2013 standalone Operating income (loss), Net loss, net special charges and net income excluding special charges:
(1)
To conform to current year presentation, certain operating revenue and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 5 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information.
(2)
We are providing disclosure of the reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis. We believe that the non-GAAP financial measures provide investors the ability to measure financial performance excluding special items, which is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines.
The components of our net special charges, excluding the results of US Airways Group for the 23 day post-merger period, are as follows (in millions):
(1)
In 2013, special charges consisted primarily of a $107 million charge related to the American's pilot long-term disability obligation, $58 million in severance and professional fees, $56 million related to employee awards granted in connection with the Merger, a $43 million charge for workers' compensation claims, and a $33 million impairment charge associated with certain Boeing 757 aircraft held for sale. These charges were offset in part by a $67 million gain on the sale of slots at LaGuardia Airport as a result of the settlement reached with the DOJ and a $31 million credit resulting from the modification of American's AAdvantage miles agreement with Citibank.
In 2012, special charges consisted of $387 million of severance and related charges and write-off of leasehold improvements on aircraft and airport facilities that were rejected during the Chapter 11 process.
In 2011, special charges consisted primarily of $725 million related to the impairment of certain aircraft and gates, $31 million of non-cash charges related to certain sale/leaseback transactions, and a $43 million revenue reduction as a result of a decrease in the breakage assumption related to the AAdvantage frequent flyer liability.
(2)
In 2013, special charges consisted of interest charges of $157 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan, a $54 million charge related to the premium on tender for existing secured notes and EETC financings and the write-off of debt issuance costs and $19 million in charges related to the repayment of existing secured notes and EETC financings.
In 2012, special charges consisted of a $280 million benefit resulting from a settlement of a commercial dispute.
(3)
In 2013 and 2012, special charges included, respectively, a $538 million and a $569 million non-cash income tax benefit from continuing operations. The Company is required to consider all items (including items recorded in other comprehensive income) 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, the Company recorded a tax benefit on the loss from continuing operations for the year, which was exactly offset by income tax expense on other comprehensive income. However, while the income tax benefit from continuing operations is reported on the income statement, the income tax expense on other comprehensive income is recorded directly to Accumulated other comprehensive income (loss), which is a component of stockholders' equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations, the Company'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 the Company believes is more likely than not to be realized.
Operating Statistics
The table below sets forth selected mainline and regional operating data for the years ended December 31, 2013, 2012 and 2011. The 2013 operating data does not include the results of US Airways Group for the 23 day post-merger period from December 9, 2013 to December 31, 2013.
(a)
Revenue passenger mile (RPM) - A basic measure of sales volume. One RPM represents one passenger flown one mile.
(b)
Available seat mile (ASM) - A basic measure of production. One ASM represents one seat flown one mile.
(c)
Passenger load factor - The percentage of available seats that are filled with revenue passengers.
(d)
Yield - A measure of airline revenue derived by dividing passenger revenue by RPMs.
(e)
Passenger revenue per available seat mile (PRASM) - Passenger revenues divided by ASMs.
(f)
Operating cost per available seat mile (CASM) - Operating expenses divided by ASMs.
(g)
Passenger enplanements - The number of passengers on board an aircraft, including local, connecting and through passengers.
(h)
Block hours - The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.
(i)
Average stage length - The average of the distances flown on each segment of every route.
(j)
Regional statistics include AMR Eagle, as well as operating and financial results from American's capacity purchase agreements with Chautauqua, ExpressJet, Republic and SkyWest.
(k)
Cargo ton miles - A basic measure of cargo transportation. One cargo ton mile represents one ton of cargo transported one mile.
(l)
Total revenue per available seat mile (RASM) - Total revenues divided by total mainline and regional ASMs.
(m)
Cargo yield per ton mile - Cargo revenues divided by total mainline and regional cargo ton miles.
2013 Compared to 2012
Operating Revenues
The following discussion of operating revenues is for AAG on a standalone basis and excludes the results of US Airways Group for the post-merger period from December 9, 2013 to December 31, 2013 in order to make the year-over-year comparison more meaningful.
Total operating revenues in 2013 were $25.8 billion as compared to $24.9 billion in 2012, an increase of $957 million or 3.8%, which was driven by strong demand for air travel. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues increased 4.5% to $19.6 billion in 2013 as compared to $18.7 billion in 2012. Mainline RPMs increased 1.6%, as mainline capacity, as measured by ASMs, increased 1.2% resulting in a 0.3 point increase in load factor to 83.1%. Mainline passenger yield increased 2.9% to 15.26 cents in 2013 from 14.83 cents in 2012. Mainline PRASM increased 3.3% to 12.68 cents in 2013 from 12.28 cents in 2012.
•
Regional passenger revenues were $2.9 billion which was relatively flat as compared to 2012. Regional RPMs increased 2.5%, as regional capacity, as measured by ASMs, increased 1.8% resulting in a 0.5 point increase in load factor. Regional passenger yield decreased 1.9% to 27.97 cents in 2013 from 28.53 cents in 2012. Regional PRASM decreased 1.3% to 21.15 cents in 2013 from 21.43 cents in 2012.
•
Other revenues were $2.6 billion in 2013, an increase of $92 million, or 3.6%, primarily due to increased revenues associated with the sale of AAdvantage frequent flyer mileage credits and a $31 million special credit related to a change in accounting method resulting from the modification of the Company's AAdvantage miles agreement with Citibank.
We derived approximately 60% of our total passenger revenues from domestic operations and approximately 40% from international operations (flights serving international destinations). Additional information regarding our domestic and international PRASM and capacity, excluding the impact of the Merger, is presented below:
Operating Expenses
The following discussion of operating expenses and mainline operating expenses per ASM is for AAG on a standalone basis and excludes the results of US Airways Group for the post-merger period from December 9, 2013 to December 31, 2013 in order to make the year-over-year comparison more meaningful.
Total operating expenses in 2013 were $24.2 billion as compared to $24.7 billion in 2012, a decrease of $471 million, or 1.9%. The decrease in operating expenses was primarily driven by a $941 million, or 15.1% decrease in salaries, wages and benefits due to the results of voluntary and involuntary terminations in connection with the 2012 restructuring plan as well as effects related to the freezing of American's pension plans in 2012. This decrease was offset in part by a $190 million, or 34.4% increase in aircraft rent as a result of new aircraft deliveries in 2013 as we continue our fleet renewal program, a $69 million, or 6.5% increase in selling expenses due to higher passenger revenues and other operating expenses, which increased $225 million, or 8.4%, primarily due to higher costs associated with outsourced services and enhanced customer product offerings. See detailed explanations below relating to other changes in operating expenses.
Mainline Operating Expenses per ASM:
Our mainline CASM, excluding the results of US Airways Group for the post-merger period, decreased 0.53 cents, or 3.7%, from 14.20 cents in 2012 to 13.67 cents in 2013. Excluding special items, fuel and profit sharing, our mainline CASM decreased 0.40 cents, or 4.5%, from 8.90 cents in 2012 to 8.50 cents in 2013, while mainline capacity increased 1.2%.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the years ended December 31, 2013 and 2012:
(1)
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 excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Significant changes in the components of mainline operating expense per ASM are as follows:
•
Aircraft fuel and related taxes per ASM decreased 2.2% primarily due to a 3.2% decrease in the average price per gallon of fuel, net of the effects of hedging, to $3.10 in 2013 from $3.20 in 2012, which was offset in part by an increase in gallons consumed.
•
Salaries, wages and benefits per ASM decreased 16.2% primarily due to the results of voluntary and involuntary terminations in connection with the 2012 restructuring plan as well as effects related to the freezing of American's pension plan in 2012.
•
Aircraft rent per ASM increased 33.3% as a result of new aircraft deliveries in 2013 as we continue our fleet renewal program.
•
Selling expenses per ASM increased 5.8% as a result of higher commissions and credit card fees related to the increase in passenger revenues.
•
Other operating expenses per ASM increased 7.4% due to increases in outsourced services, costs associated with enhanced customer product offerings.
Regional Operating Expenses:
Total regional expenses increased $84 million, or 2.8%, in 2013 to $3.1 billion from $3.0 billion in 2012. The year-over-year increase was primarily driven by a $44 million, or 4.4%, increase in fuel costs and a $40 million, or 2.0% increase in other costs on a 1.8% increase in capacity. The increase in fuel costs was driven by higher fuel consumption due to the transition from turboprop to regional jet aircraft.
Nonoperating Income (Expense)
The following discussion of interest expense is for AAG on a standalone basis and excludes the results of US Airways Group for the post-merger period from December 9, 2013 to December 31, 2013 in order to make the year-over-year comparison more meaningful.
Interest expense, net of capitalized interest increased $204 million, or 32.3%, to $836 million in 2013 from $632 million in 2012 primarily due to special charges of $157 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan.
Other nonoperating expense, net of $89 million in 2013 consists principally of net foreign currency losses of $56 million. Other nonoperating income in 2012 consisted principally of a $280 million special credit related to the settlement of a commercial dispute partially offset by net foreign currency losses.
Reorganization Items, Net
Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 Cases, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on AAG's Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 (in millions):
(1)
In exchange for employees' contributions to the successful reorganization of the Company, including agreeing to reductions in pay and benefits, the Company 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 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, the Company 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 allows unsecured creditors receiving Preferred Stock a conversion discount of 3.5%. Accordingly, the Company recorded the fair value of such discount upon the confirmation of the Plan by the Bankruptcy Court.
Income Tax Benefit
During 2013, the Company generated a pre-tax loss of approximately $2.2 billion and other comprehensive income before tax of approximately $1.5 billion. In accordance with accounting standards, the Company must record a net zero tax provision which is required to be allocated between operating loss and Accumulated other comprehensive income. Application of this guidance required the recognition of a non-cash income tax benefit of $538 million in operating results, offset by a $538 million charge to other comprehensive income for the year. See Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information regarding the allocation of income tax benefit to Operating income and Accumulated other comprehensive income. The Company recorded a similar non-cash income tax benefit of $569 million in operating results in 2012, offset by a $569 million charge to other comprehensive income for the year, as discussed in Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A.
The Company has evaluated the realization of its deferred tax assets in accordance with the principles provided in ASC 740. In connection with AMR’s fourth quarter 2013 emergence from bankruptcy and related accounting for the acquisition of US Airways, the Company determined that an additional valuation allowance of approximately $214 million is required to reduce the Company’s deferred tax assets to the amount that the Company believes to be more likely than not to be realized. This $214 million results in a charge to tax expense in continuing operations for the period. The Company’s assessment of the realization of its deferred tax assets is based primarily on the future reversal of its existing taxable temporary differences. The Company is not relying on projections of future income for the realization of deferred tax assets. See Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information regarding deferred taxes.
The Company has also recorded an income tax expense credit of approximately $22 million in 2013 resulting from the Company’s anticipated election under Section 3081 of the Housing and Economic Recovery Act of 2008 (as extended by the American Taxpayer Relief Act of 2012), allowing corporations a refund of certain research and alternative minimum tax (AMT) credit carryforwards in lieu of applicable bonus depreciation on certain qualifying capital investments.
2012 Compared to 2011
Operating Revenues
Total operating revenues in 2012 were $24.9 billion as compared to $24.0 billion in 2011, an increase of $876 million or 3.7%, driven by the strong revenue demand environment. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues increased 4.4% to $18.7 billion in 2012 as compared to $17.9 billion in 2011. The benefits of the strong demand environment were offset in part by labor related operational disruptions and disruptions associated with Hurricane Sandy and the early November snowstorm in the Northeast United States, which had an estimated impact on the Company's 2012 passenger revenues of $120 million and $65 million, respectively. Mainline RPMs decreased 0.1%, as mainline capacity, as measured by ASMs, decreased 1.1% resulting in a 0.9 point increase in load factor to 82.8%. Mainline passenger yield increased 4.5% to 14.83 cents in 2012 from 14.19 cents in 2011. Mainline PRASM increased 5.6% to 12.28 cents in 2012 from 11.63 cents in 2011.
•
Regional passenger revenues were $2.9 billion as compared to $2.7 billion in 2011, an increase of $190 million or 7.0%. Regional RPMs increased 3.2%, as regional capacity, as measured by ASMs increased 0.7% resulting in a 1.9 point increase in load factor. Regional passenger yield increased 3.6% to 28.53 cents in 2012 from 27.53 cents in 2011. Regional PRASM increased 6.1% to $21.43 cents in 2012 from $20.19 cents in 2011.
•
Cargo revenues were $675 million in 2012, a decrease of $34 million, or 4.8%, primarily as a result of decreased freight and mail traffic and yields.
•
Other revenues were $2.5 billion in 2012, a decrease of $76 million, or 2.9%, primarily due to decreased revenue associated with the sale of mileage credits in the AAdvantage frequent flyer program and decreases in certain passenger service charge volumes and fees.
We derived approximately 60% of passenger revenues from domestic operations and approximately 40% from international operations (flights serving international destinations). Additional information regarding our domestic and international RASM and capacity is presented below:
Operating Expenses
Total operating expenses in 2012 were $24.7 billion as compared to $25.0 billion in 2011, a decrease of $309 million or 1.2%. The decrease in operating expenses was primarily driven by a $370 million or 48.9% decrease in special items, net. In 2011, we incurred a $725 million charge related to the impairment of certain aircraft and gates. See Note 6 to AAG's Consolidated Financial Statements in Part II, Item 8A for more information relating to special items. See detailed explanations below relating to other changes in operating expenses.
Mainline Operating Expenses per ASM:
Our mainline CASM was relatively flat year-over-year, decreasing 0.05 cents, or 0.4%, from 14.25 cents in 2011 to 14.20 cents in 2012. Excluding special items, fuel and profit sharing, our mainline CASM decreased 0.09 cents, or 1.0%, from 8.99 cents in 2011 to 8.90 cents in 2012, while mainline capacity decreased 1.1%.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the years ended December 31, 2012 and 2011:
(1)
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 excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Significant changes in the components of mainline operating expense per ASM are as follows:
•
Aircraft fuel and related taxes per ASM increased 5.9% primarily due to a 6.3% increase in the average price per gallon of fuel, net of the effects of hedging, to $3.20 in 2012 from $3.01 in 2011.
•
Maintenance, materials and repairs per ASM increased 13.4% primarily due to the timing of materials and repairs expenses.
•
Other rent and landing fees per ASM decreased 7.8% primarily due to the rejection of bonds in connection with the Company's Chapter 11 Cases as described in Note 2 to AAG's Consolidated Financial Statements in Part II, Item 8A.
•
Aircraft rent per ASM decreased 14.3% primarily as a result of the Company's Chapter 11 Cases as described in Note 2 to AAG's Consolidated Financial Statements in Part II, Item 8A.
•
Depreciation and amortization per ASM decreased 6.8% as a result of certain aircraft impairment and obsolescence adjustments recorded in 2011.
Regional Operating Expenses:
Total regional expenses of $3.0 billion were relatively flat and only increased $19 million, or 0.6% as compared to 2011.
Nonoperating Income (Expense)
Interest expense, net of capitalized interest decreased $179 million, or 22.1% to $632 million in 2012 from $811 million in 2011 primarily as a result of the Company's Chapter 11 Cases as described in Note 2 in Part II, Item 8A.
Other nonoperating expense, net of $221 million in 2012 consists principally of a $280 million special credit related to the settlement of a commercial dispute, which was offset in part by foreign currency losses of $41 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, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on AAG's Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 (in millions):
(1)
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to (i) the rejection or modification of financings related to aircraft and (ii) entry of orders treated as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors recorded an estimated claim associated with the rejection or modification of a financing 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.
Income Tax Benefit
During 2012, the Company generated a pre-tax loss of approximately $2.4 billion and other comprehensive income before tax of approximately $1.6 billion. In accordance with accounting standards, the Company's net zero tax provision is required to be allocated between operating loss and accumulated other comprehensive income. Application of this guidance required the recognition of a non-cash income tax benefit of $569 million in operating results, offset by a $569 million charge to other comprehensive income for the year. See Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information regarding the allocation of income tax benefit to Operating income and Accumulated other comprehensive income. The Company did not record a net tax provision (benefit) associated with its net loss for 2011 due to the Company providing a valuation allowance, as discussed in Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A.
American's Results of Operations
In 2013, American recognized operating income of $1.5 billion, which compares to operating income of $82 million in 2012 and constitutes a $1.5 billion improvement that was driven by growth in operating revenues resulting from strong demand for air travel. American's net loss was $1.5 billion in 2013 which compares to a net loss of $1.9 billion in 2012. American's net loss was impacted by the recognition of net special charges of $2.8 billion and $1.7 billion in 2013 and 2012, respectively. To conform to current year presentation, certain operating revenues and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 4 to American's Consolidated Financial Statements in Part II, Item 8B for additional information.
In 2011, American realized an operating loss of $1.2 billion and a net loss of $2.0 billion. American's 2011 net loss was impacted by the recognition of $915 million in net special charges.
The table below presents American's net special charges (in millions):
(1)
In 2013, special charges consisted primarily of a $107 million charge related to American's pilot long-term disability obligation, $47 million in severance and professional fees, $56 million related to employee awards granted in connection with the Merger, a $43 million charge for workers' compensation claims, and a $33 million impairment charge associated with certain Boeing 757 aircraft held for sale. These charges were offset in part by a $67 million gain on the sale of slots at LaGuardia Airport as a result of the settlement reached with the DOJ and a $31 million credit related to a change in accounting method resulting from the modification of American's AAdvantage miles agreement with Citibank.
In 2012, special charges consisted of $386 million of severance and related charges and write-off of leasehold improvements on aircraft and airport facilities that were rejected during the Chapter 11 process.
In 2011, special charges and other items consisted primarily of $725 million related to the impairment of certain aircraft and gates, $31 million of non-cash charges related to certain sale/leaseback transactions, and a $43 million revenue reduction as a result of a decrease in the breakage assumption related to the AAdvantage frequent flyer liability.
(2)
In 2013, special charges consisted of interest charges of $68 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan, 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.
In 2012, special charges consisted of a $280 million benefit resulting from a settlement of a commercial dispute.
(3)
In 2013 and 2012, special charges included, respectively, a $538 million and a $569 million non-cash income tax benefit from continuing operations. American is required to consider all items (including items recorded in other comprehensive income) 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 other comprehensive income. However, while the income tax benefit from continuing operations is reported on the income statement, the income tax expense on other comprehensive income is recorded directly to Accumulated other comprehensive income (loss), which is a component of stockholder's equity. Because the income tax expense on other comprehensive income 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 the Company believes is more likely than not to be realized.
2013 Compared to 2012
Operating Revenues
Total operating revenues in 2013 were $25.8 billion as compared to $24.8 billion in 2012, an increase of $935 million or 3.8%, which was driven by strong demand for air travel. Significant changes in the components of operating revenues are as follows:
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Mainline passenger revenues increased 4.5% to $19.6 billion in 2013 as compared to $18.7 billion in 2012. Mainline RPMs increased 1.6%, as mainline capacity, as measured by ASMs, increased 1.2% resulting in a 0.3 point increase in load factor to 83.1%. Mainline passenger yield increased 2.9% to 15.26 cents in 2013 from 14.83 cents in 2012. Mainline PRASM increased 3.3% to 12.68 cents in 2013 from 12.28 cents in 2012.
•
Regional passenger revenues were $2.9 billion which was relatively flat as compared to 2012. Regional RPMs increased 2.5%, as regional capacity, as measured by ASMs, increased 1.8% resulting in a 0.5 point increase in load factor. Regional passenger yield decreased 1.9% to 27.97 cents in 2013 from 28.53 cents in 2012. Regional PRASM decreased 1.3% to 21.15 cents in 2013 from 21.43 cents in 2012.
•
Other revenues were $2.6 billion in 2013, an increase of $70 million, or 2.8%, primarily due to increased revenues associated with the sale of AAdvantage frequent flyer mileage credits and a $31 million special credit related to a change in accounting method resulting from the modification of American's AAdvantage miles agreement with Citibank.
American derived approximately 60% of its total passenger revenues from domestic operations and approximately 40% from international operations (flights serving international destinations). Additional information regarding American's domestic and international PRASM and capacity is presented below:
Operating Expenses
Total operating expenses in 2013 were $24.2 billion as compared to $24.7 billion in 2012, a decrease of $517 million or 2.1%. The decrease in operating expenses was primarily driven by a $941 million, or 15.2% decrease in salaries, wages and benefits due to the results of voluntary and involuntary terminations in connection with the 2012 restructuring plan, as well as effects related to the freezing of American's pension plan in 2012. This decrease was offset in part by a $189 million, or 34.2% increase in aircraft rent as a result of new aircraft deliveries in 2013 as American continues its fleet renewal program, a $69 million, or 6.5% increase in selling expenses due to higher passenger revenues and a $239 million, or 8.9% increase in other operating expenses primarily due to higher costs associated with outsourced services and enhanced customer product offerings. See detailed explanations below relating to other changes in operating expenses.
Regional Operating Expenses
Total regional expenses increased $25 million, or 0.8%, in 2013 to $3.1 billion from $3.0 billion in 2012. The year-over-year increase was primarily driven by a $42 million, or 4.2%, increase in fuel costs driven by higher fuel consumption due to the transition from turboprop to regional jet aircraft, partially offset by a decrease in other regional expenses.
Nonoperating Income (Expense)
Interest expense, net of capitalized interest increased $67 million, or 10.6% to $700 million in 2013 from $633 million in 2012 primarily due to special charges of $68 million to recognize post-petition interest expense on unsecured obligations pursuant to the Plan.
Other nonoperating expense, net of $84 million in 2013 consists principally of net foreign currency losses of $55 million. Other nonoperating income in 2012 consisted principally of a $280 million special credit related to the settlement of a commercial dispute partially offset by net foreign currency losses.
Reorganization Items, Net
Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 Cases, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on American's Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 (in millions):
(1)
In exchange for employees' contributions to the successful reorganization of the Company, including agreeing to reductions in pay and benefits, the Company 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 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 allows unsecured creditors receiving 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.
Income Tax Benefit
During 2013, American generated a pre-tax loss of approximately $1.9 billion and other comprehensive income before tax of approximately $1.5 billion. In accordance with accounting standards, American must record a net zero tax provision which is required to be allocated between operating loss and accumulated other comprehensive income. Application of this guidance required the recognition of a non-cash income tax benefit of $538 million in operating results, offset by a $538 million charge to other comprehensive income for the year. See Note 10 to American's Consolidated Financial Statements in Part II, Item 8B for additional information regarding the allocation of income tax benefit to Operating income and Accumulated other comprehensive income. American recorded a similar non-cash income tax benefit of $569 million in operating results for 2012, offset by a $569 million charge to other comprehensive income for the year, as discussed in Note 10 to American's Consolidated Financial Statements in Part II, Item 8B.
American has evaluated the realization of its deferred tax assets in accordance with the principles provided in ASC 740. In connection with AMR’s fourth quarter emergence 2013 from bankruptcy and related accounting for the acquisition of US Airways, American determined that an additional valuation allowance of approximately $214 million is required to reduce its deferred tax assets to the amount that it believes to be more likely than not to be realized. This $214 million results in a charge to tax expense in continuing operations for the period. American’s assessment of the realization of its deferred tax assets is based primarily on the future reversal of American's existing taxable temporary differences. American is not relying on projections of
future income for the realization of deferred tax assets. See Note 10 to American's Consolidated Financial Statements in Part II, Item 8B for additional information regarding deferred taxes.
American has also recorded an income tax expense credit of approximately $30 million in 2013 resulting from its anticipated election under Section 3081 of the Housing and Economic Recovery Act of 2008 (as extended by the American Taxpayer Relief Act of 2012), allowing corporations a refund of certain research and alternative minimum tax (AMT) credit carryforwards in lieu of applicable bonus depreciation on certain qualifying capital investments.
2012 Compared to 2011
Operating Revenues
Total operating revenues in 2012 were $24.8 billion as compared to $24.0 billion in 2011, an increase of $868 million or 3.6%, driven by the strong revenue demand environment. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues increased 4.4% to $18.7 billion in 2012 as compared to $17.9 billion in 2011. The benefits of the strong demand environment were offset in part by labor related operational disruptions and disruptions associated with Hurricane Sandy and the early November snowstorm in the Northeast United States, which had an estimated impact on the Company's 2012 passenger revenues of $120 million and $65 million, respectively. Mainline RPMs decreased 0.1%, as mainline capacity, as measured by ASMs, decreased 1.1% resulting in a 0.9 point increase in load factor to 82.8%. Mainline passenger yield increased 4.5% to 14.83 cents in 2012 from 14.19 cents in 2011. Mainline PRASM increased 5.6% to 12.28 cents in 2012 from 11.63 cents in 2011.
•
Regional passenger revenues were $2.9 billion in 2012 as compared to $2.7 billion in 2011, an increase of $190 million or 7.0%. Regional RPMs increased 3.2%, as regional capacity, as measured by ASMs increased 0.7% resulting in a 1.9 point increase in load factor. Regional passenger yield increased 3.6% to 28.53 cents in 2012 from 27.53 cents in 2011. Regional PRASM increased 6.1% to 21.43 cents in 2012 from 20.19 cents in 2011.
•
Cargo revenues were $675 million in 2012, a decrease of $34 million, or 4.8%, primarily as a result of decreased freight and mail traffic and yields.
•
Other revenues were $2.5 billion in 2012, a decrease of $84 million, or 3.3%, primarily due to decreased revenue associated with the sale of mileage credits in the AAdvantage frequent flyer program and decreases in certain passenger service charge volumes and fees.
American derived approximately 60% of passenger revenues from domestic operations and approximately 40% from international operations (flights serving international destinations). Additional information regarding American's domestic and international RASM and capacity is presented below:
Operating Expenses
Total operating expenses in 2012 were $24.7 billion as compared to $25.1 billion in 2011, a decrease of $368 million or 1.5%. The decrease in operating expenses was primarily driven by a $370 million or 48.9% decrease in special items, net. In 2011, American incurred a $725 million charge related to the impairment of certain aircraft and gates. See Note 5 to American's Consolidated Financial Statements in Part II, Item 8B for more information relating to special items. See detailed explanations below relating to other changes in operating expenses.
Regional Operating Expenses:
Total regional expenses decreased $50 million, or 1.6%, in 2012 to $3.0 billion from $3.1 billion in 2011. The year-over-year decrease was primarily driven by a $135 million, or 6.3% decrease in other regional expenses, partially offset by a 6.3% increase in the average price per gallon of fuel to $3.23 in 2012 from $3.04 in 2011.
Nonoperating Income (Expense)
Interest expense, net of capitalized interest decreased $39 million, or 5.8% to $633 million in 2012 from $672 million in 2011 primarily as a result of the Company's Chapter 11 Cases as described in Note 2 to American's Consolidated Financial Statements in Part II, Item 8B.
Other nonoperating expense, net of $223 million in 2012 consisted of a $280 million special credit related to the settlement of a commercial dispute, which was offset in part by foreign currency losses of $41 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, which were filed in November of 2011. The following table summarizes the components included in reorganization items, net on American's Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 (in millions):
(1)
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to (i) the rejection or modification of financings related to aircraft and (ii) entry of orders treated as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors recorded an estimated claim associated with the rejection or modification of a financing 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.
Income Tax Benefit
During 2012, the Company generated a pre-tax loss of approximately $2.5 billion and other comprehensive income before tax of approximately $1.6 billion. In accordance with accounting standards, the Company's net zero tax provision is required to be allocated between operating loss and accumulated other comprehensive income. Application of this guidance required the recognition of a non-cash income tax benefit of $569 million in operating results, offset by a $569 million charge to other comprehensive income for the year. See Note 10 to American's Consolidated Financial Statements in Part II, Item 8B for additional information regarding the allocation of income tax benefit to Operating income and Accumulated other comprehensive income. The Company did not record a net tax provision (benefit) associated with its net loss for 2011 due to the Company providing a valuation allowance, as discussed in Note 10 to American's Consolidated Financial Statements in Part II, Item 8B.
Liquidity and Capital Resources
Cash, Short-Term Investments and Restricted Assets
As of December 31, 2013, AAG's total cash, short-term investments and restricted cash and short-term investments was $10.3 billion, of which $1.0 billion was restricted. This includes American's total cash and short-term investments of $6.7 billion ($702 million restricted) and US Airways Group's cash and short-term investments of $3.6 billion ($333 million restricted). Additional detail is provided in the table below (in millions):
(1)
Our restricted cash and short-term investments related primarily to collateral held to support projected workers compensation obligations.
As of December 31, 2013, approximately $783 million of American's cash and short-term investments balances were held in foreign bank accounts, of which $710 million is held as Venezuela bolivars.
The business environment in Venezuela has been challenging, with economic uncertainty fueled by currency devaluation, high inflation and governmental restrictions, including currency exchange and payment controls, price controls and the possibility of expropriation of property or other resources. As of December 31, 2013, approximately $710 million of our unrestricted cash balance was held as Venezuelan bolivars, valued at a weighted average rate of 6.04 bolivars to the dollar. The period of time to exchange those funds into dollars and repatriate them has been increasing and is presently more than a year. On January 23, 2014, the Venezuelan government issued a regulation to implement a new system for determining the exchange rate based on the result of limited periodic sales of dollars known as Sicad auctions (currently 11.80 to the dollar based on the February 21, 2014 Sicad auction) for repatriation of income from future ticket sales, and introduced new procedures for approval of conversion and repatriation of local currency. The government also enacted a new law effective February 19, 2014 that authorizes additional methods of exchanging Venezuelan bolivars at rates other than the controlled base rate of 6.3 to the dollar or the existing Sicad auction rate, but the regulations necessary to implement the law are still pending and it is not clear at this point whether or how the new methods may impact the pending balances of Venezuelan bolivars held by airlines. We are working with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local currency. Further, the current, devalued rates may have an ongoing adverse effect on our reported results if we are unable to fully adjust prices on flights to and from Venezuela, of which there can be no assurance. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by the Company and can significantly affect the value of our assets 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. 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 on currency risks.
Our unrestricted short-term investment portfolio consists of a variety of what we believe are highly liquid, lower risk instruments including money market funds, government agency investments, repurchase agreements, short-term obligations, corporate obligations, bank notes, certificates of deposit and time deposits. Our objectives for our investment portfolio are (1) the safety of principal, (2) liquidity maintenance, (3) yield maximization and (4) the full investment of all available funds. Our risk management policy further emphasizes superior credit quality (primarily based on short-term ratings by nationally recognized statistical rating organizations) in selecting and maintaining investments in our portfolio and enforce limits on the proportion of funds invested with one issuer, one industry or one type of instrument. We regularly assess the market risks of our portfolio.
Sources and Uses of Cash
AAG
2013 Compared to 2012
Operating Activities
Net cash provided by operating activities was $675 million and $1.3 billion in 2013 and 2012, respectively, a year-over-year decrease of $610 million. This year-over-year decrease was primarily due to the inclusion of US Airways Group's net cash used in operating activities of $327 million, for the post-merger period from December 9, 2013 to December 31, 2013, and our emergence from bankruptcy in 2013 which triggered cash payments for certain liabilities.
Investing Activities
Net cash used in investing activities was $3.8 billion and $1.6 billion in 2013 and 2012, respectively.
Principal investing activities in 2013 included expenditures of $3.1 billion for property and equipment and consisted primarily of the purchases of 31 Boeing 737 aircraft and eight Boeing 777 aircraft and pre-delivery deposits for aircraft on order and $1.2 billion in net purchases of short-term investments. These cash outflows were offset in part by proceeds from the sale of certain property and equipment and a $147 million decrease in restricted cash and short-term investments. Additionally, in connection with the Merger, the Company acquired the $206 million cash balance of US Airways Group.
Principal investing activities in 2012 included expenditures of $1.9 billion for property and equipment and consisted primarily of the purchase of 28 Boeing 737 aircraft and two Boeing 777 aircraft and pre-delivery deposits for aircraft on order and $112 million from an increase in restricted cash and short-term investments. These cash outflows were offset in part by cash proceeds of $306 million from net sales of short-term investments and $123 million in proceeds from the sale of certain property and equipment.
Financing Activities
Net cash provided by financing activities was $3.8 billion and $483 million in 2013 and 2012, respectively.
Principal financing activities in 2013 included proceeds of $6.8 billion and consisted primarily of the issuance of debt of $5.1 billion, including the $1.9 billion Term Loan Facility and proceeds from sale-leaseback transactions of $1.7 billion. These cash inflows were offset in part by debt repayments of $2.9 billion.
Principal financing activities in 2012 included proceeds of $1.8 billion and consisted primarily of $1.5 billion in proceeds from sale-leaseback transactions. These proceeds were offset in part by debt repayments of $1.3 billion.
2012 Compared to 2011
Operating Activities
Net cash provided by operating activities was $1.3 billion and $743 million in 2012 and 2011, respectively, a year-over-year improvement of $542 million. This increase was primarily the result of a stronger revenue environment and cost savings resulting from our Chapter 11 Cases as described in Note 2 to AAG's Consolidated Financial Statements in Part II, Item 8A.
Investing Activities
Net cash used in investing activities was $1.6 billion and $1.3 billion in 2012 and 2011, respectively.
Principal investing activities in 2012 included expenditures of $1.9 billion for property and equipment and consisted primarily of the purchase of 28 Boeing 737 aircraft and two Boeing 777 aircraft and pre-delivery deposits for aircraft on order and $112 million from an increase in restricted cash and short-term investments. These cash outflows were offset in part by cash proceeds of $306 million from net sales of short-term investments and $123 million in proceeds from the sale of certain property and equipment.
Principal investing activities in 2011 included expenditures of $1.6 billion for property and equipment and new aircraft, consisting primarily of the purchase of 15 Boeing 737 aircraft and certain aircraft modifications, including pre-delivery deposits for aircraft on order of $630 million and $288 million from an increase in restricted cash and short-term investments. These cash outflows were partially offset by proceeds from the net sales of short-term investments of $610 million.
Financing Activities
Net cash provided by financing activities was $483 million and $664 million in 2012 and 2011, respectively.
Principal financing activities in 2012 included proceeds of $1.8 billion and consisted primarily of $1.5 billion in proceeds from sale-leaseback transactions. These proceeds were offset in part by debt repayments of $1.3 billion.
Principal financing activities in 2011 included proceeds of $2.6 billion related to the issuance of debt and $703 million related to sale-leaseback transactions. These proceeds were offset by payments on existing debt and capital leases of $2.5 billion.
American
2013 Compared to 2012
Operating Activities
Net cash provided by operating activities was $949 million and $1.2 billion in 2013 and 2012, respectively, a year-over-year decrease of $205 million. This decrease was due principally to emergence from bankruptcy in 2013, which triggered payments for several liabilities.
Investing Activities
Net cash used in investing activities was $4.5 billion and $1.6 billion in 2013 and 2012, respectively.
Principal investing activities in 2013 included expenditures of $3.0 billion for property and equipment and consisted primarily of the purchases of 31 Boeing 737 aircraft and eight Boeing 777 aircraft and pre-delivery deposits for aircraft on order and $1.8 billion in net purchases of short-term investments. These cash outflows were offset in part by $115 million in proceeds from the sale of certain property and equipment and a $148 million decrease in restricted cash and short-term investments.
Principal investing activities in 2012 included expenditures of $1.9 billion for property and equipment and consisted primarily of the purchase of 28 Boeing 737 aircraft and 2 Boeing 777 aircraft and pre-delivery deposits for aircraft on order. These cash outflows were offset in part by cash proceeds of $306 million from net sales of marketable securities and $124 million obtained in the sale of certain property and equipment.
Financing Activities
Net cash provided by financing activities was $3.9 billion and $592 million in 2013 and 2012, respectively.
Principal financing activities in 2013 included proceeds of $6.6 billion and consisted primarily of the issuance of debt of $4.8 billion, including the $1.9 billion Term Loan 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 $2.6 billion.
Principal financing activities in 2012 included proceeds of $1.8 billion and consisted primarily of $1.5 billion in proceeds from sale-leaseback transactions. These proceeds were offset in part by debt repayments of $1.3 billion.
2012 Compared to 2011
Operating Activities
Net cash provided by operating activities was $1.2 billion and $760 million in 2012 and 2011, respectively, a year-over-year improvement of $394 million. This increase was primarily the result of a stronger revenue environment and cost savings resulting from our Chapter 11 Cases as described in Note 2 to AAG's Consolidated Financial Statements in Part II, Item 8B.
Investing Activities
Net cash used in investing activities was $1.6 billion and $1.1 billion in 2012 and 2011, respectively.
Principal investing activities in 2012 included expenditures of $1.9 billion for property and equipment and consisted primarily of the purchase of 28 Boeing 737 aircraft and 2 Boeing 777 aircraft and pre-delivery deposits for aircraft on order. These cash outflows were offset in part by cash proceeds of $306 million from net sales of marketable securities and $124 million obtained in the sale of certain property and equipment.
Principal investing activities in 2011 included expenditures of $1.4 billion for new aircraft consisting of 15 Boeing 737 aircraft and certain aircraft modifications, including pre-delivery deposits for aircraft on order of $630 million and $288 million from an increase in restricted cash and short-term investments. These cash outflows were offset in part by $608 million in proceeds from the sale of short-term investments.
Financing Activities
Net cash provided by financing activities was $592 million and $471 million in 2012 and 2011, respectively.
Principal financing activities in 2012 included proceeds of $1.8 billion and consisted primarily of $1.5 billion in proceeds from sale-leaseback transactions. These proceeds were offset by payments on existing debt and capital leases of $1.3 billion.
Principal financing activities in 2011 included proceeds of $2.4 billion related to the issuance of debt and $703 million related to sale-leaseback transactions. These proceeds were offset by payments on existing debt and capital leases of $2.2 billion and funds transferred from affiliates of $311 million.
Commitments
Significant Indebtedness
As of December 31, 2013, AAG and American had $16.8 billion and $10.8 billion, respectively, in long-term debt and capital leases (including current maturities and before debt discount). Our significant indebtedness includes the following agreements:
Credit Facilities (American)
On June 27, 2013, American and AAG entered into a Credit and Guaranty Agreement (as amended, the Credit Agreement) with certain lenders. The Credit Agreement provides for a $1.9 billion term loan facility (the Term Loan Facility) and a $1.0 billion revolving credit facility (the Revolving Facility and, together with the Term Loan Facility, the Credit Facilities). As of December 31, 2013, American had borrowed $1.9 billion under the Term Loan Facility. The Credit Facilities are secured obligations of American and guaranteed by AAG. The Revolving Facility provides that American may from time to time borrow, repay and reborrow loans thereunder and have letters of credit issued thereunder in an aggregate amount outstanding at any time of up to $1.0 billion. As of December 31, 2013, there were no borrowings outstanding under the Revolving Facility.
Upon consummation of the Merger, US Airways Group and US Airways joined the Credit Facilities as guarantors. Following the joinder, certain minimum dollar-thresholds under the negative and financial covenants in the Credit Facilities were automatically increased. The Term Loan Facility and Revolving Facility mature on June 27, 2019 and June 27, 2018, respectively, unless otherwise extended by the applicable parties. The Term Loan Facility is repayable in quarterly installments in an amount equal to 0.25% of the original principal amount thereof with any unpaid balance due on the maturity date of the Term Loan Facility.
Voluntary prepayments may be made by American at any time, with a premium of 1.00% applicable to certain prepayments made prior to the date that is six months following December 27, 2013. Mandatory prepayments at par of term loans and revolving loans are required to the extent necessary to comply with American's covenants regarding the collateral coverage ratio and certain dispositions of collateral. In addition, if a "change of control" (as defined in the Credit Agreement) occurs, American will, absent an amendment or waiver, be required to repay at par the loans outstanding under the Credit Facilities and terminate the Revolving Facility.
The Credit Facilities bear interest at an index rate plus an applicable index margin or, at American's option, LIBOR (subject to a floor of 0.75%, with respect to the Term Loan) plus an applicable LIBOR margin. The applicable LIBOR margin is 3.00% for borrowings under both the Term Loan Facility and the Revolving Facility. Subject to certain limitations and exceptions, the Credit Facilities are secured by certain collateral, including liens on certain route authorities to operate between certain specified cities, certain take-off and landing rights at certain airports and American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the Credit Facilities as more fully described below in "Collateral Related Covenants".
The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the Credit Facilities may be accelerated and become due and payable immediately. The Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the Credit Facilities) of not less than $2.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional
indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.
Senior Secured Notes (American)
In March 2011, American issued $1.0 billion aggregate principal amount of senior secured notes due 2016 (the Senior Secured Notes) guaranteed on an unsecured basis by AAG. In connection with the closing of the Merger, US Airways and US Airways Group entered into a First Supplemental Indenture, dated as of December 9, 2013, pursuant to which US Airways and US Airways Group became guarantors. The Senior Secured Notes bear interest at a rate of 7.50% per annum, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2011. As is customary for financings of this nature, the indebtedness evidenced by the Senior Secured Notes may be accelerated upon the occurrence of events of default under the related indenture. Subject to certain limitations and exceptions, the Senior Secured Notes are secured by certain route authorities, airport landing and takeoff slots, and rights to use or occupy space in airport terminals, in each case that American uses to operate non-stop services between certain airports and American is required maintain a certain minimum ratio of appraised value of the collateral to the outstanding amounts under the Senior Secured Notes as more fully described below in "Collateral Related Covenants."
American, at its option, may redeem some or all of the Senior Secured Notes at any time on or after March 15, 2013, at specified redemption prices, plus accrued and unpaid interest, if any. In addition, at any time prior to March 15, 2014, American, at its option, may redeem (1) up to 35% of the aggregate principal amount of the Senior Secured Notes with the proceeds of certain equity offerings at a redemption price of 107.5% of their principal amount, plus accrued and unpaid interest, if any, and (2) during any 12-month period, up to 10% of the original aggregate principal amount of the Senior Secured Notes at a redemption price of 103% of their principal amount, plus accrued and unpaid interest, if any. If American sells certain assets or if a "change of control" (as defined in the indenture) occurs, American must offer to repurchase the Senior Secured Notes at prices specified in the indenture.
The indenture for the Senior Secured Notes includes covenants that, among other things, limit the ability of the Company and its subsidiaries to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends. The indenture for the Senior Secured Notes also contains events of default customary for similar financings, including cross-default to certain material indebtedness of American. Upon the occurrence of certain events of default, the Senior Secured Notes may be accelerated and become due and payable.
2013 Citicorp Credit Facility (US Airways)
US Airways Group and certain other subsidiaries of US Airways Group are guarantors of the 2013 Citicorp Credit Facility agreement dated as of May 23, 2013. In connection with the closing of the Merger, AAG and American entered into a joinder to the 2013 Citicorp credit facility loan agreement pursuant to which AAG and American became guarantors under such agreement.
The 2013 Citicorp Credit Facility consists of $1.0 billion of tranche B-1 term loans (Tranche B-1) and $600 million of tranche B-2 term loans (Tranche B-2). Voluntary prepayments may be made by US Airways Group at any time, with a premium of 1.00% applicable to certain prepayments made prior to the date that is six months following January 16, 2014. Mandatory prepayments of the term loans are required to the extent necessary to comply with US Airways Group’s covenants regarding the collateral coverage ratio and certain dispositions of collateral. In addition, under the 2013 Citicorp Credit Facility agreement, if a "change of control" (as defined in the 2013 Citicorp Credit Facility agreement) occurs, US Airways will (absent an amendment or waiver) be required to repay the outstanding loans in full together with accrued interest thereon to the date of such prepayment.
As of the date of this filing, the 2013 Citicorp Credit Facility bears interest at an index rate plus an applicable index margin or, at US Airways' option, LIBOR (subject to a of 0.75%) plus an applicable LIBOR margin. The applicable LIBOR margin is 2.75% for Tranche B-1 and 2.25% for Tranche B-2.
Tranche B-1 and Tranche B-2 mature on May 23, 2019 and November 23, 2016, respectively (unless otherwise extended by the applicable parties), and each is repayable in annual installments to be paid on each anniversary of the closing date in an amount equal to 1.00% of the initial aggregate principal amount of the loans with any unpaid balance due on the maturity date of the respective tranche.
The obligations of US Airways under the 2013 Citicorp Credit Facility are secured by liens on certain route authorities, certain take-off and landing rights at certain airports and certain other assets of US Airways. US Airways is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2013 Citicorp Credit Facility as more fully described below in "Collateral Related Covenants."
The 2013 Citicorp Credit Facility agreement includes affirmative, negative and financial covenants that, among other things, (a) require AAG and its restricted subsidiaries to maintain unrestricted liquidity of not less than $2.0 billion, with not less than $750 million held in accounts subject to control agreements, and (b) restrict the ability of US Airways Group, its subsidiaries party to the 2013 Citicorp Credit Facility, AAG and American to make certain investments, pay dividends and make certain other payments, make certain acquisitions, incur liens on the collateral, dispose of collateral, enter into certain affiliate transactions, enter into certain hedging transactions, and engage in certain business activities, in each case subject to certain exceptions. The 2013 Citicorp Credit Facility agreement contains events of default customary for similar financings, including a cross-default provision to certain other material indebtedness of US Airways and certain of its affiliates. Upon the occurrence of an event of default, the outstanding obligations under the 2013 Citicorp Credit Facility may be accelerated and become due and payable immediately.
See Note 9 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 8 to American's Consolidated Financial Statements in Part II, Item 8B for further information on all indebtedness as of December 31, 2013.
Collateral Related Covenants
Certain of American's and US Airways’ debt financing agreements contain loan to value ratio covenants and require American and US Airways under their respective financing agreements to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, American or US Airways is required, as applicable, to subject additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part, with premium (if any), or pay additional interest on the related indebtedness, as described below.
Specifically, American is required to meet certain collateral coverage tests on a periodic basis on two financing transactions: (1) the Senior Secured Notes and (2) the Credit Facilities, and US Airways is required to meet a collateral coverage test on a periodic basis on the 2013 Citicorp Credit Facility, in each case, as described below:
(1)
With respect to spare parts, one physical appraisal and one desktop appraisal are required in each fiscal year.
As of December 31, 2013, the Company, American and US Airways were in compliance with the most recently completed collateral coverage test for the Senior Secured Notes, Credit Facilities and the 2013 Citicorp Credit Facility, as applicable.
Credit Ratings
The following table details our credit ratings as of December 31, 2013:
*
The credit agency does not rate this category for the respective entity.
A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness. See Note 9 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 8 to American's Consolidated Financial Statements in Part II, Item 8B for further information on all indebtedness as of December 31, 2013.
Aircraft and Engine Purchase Commitments
We have definitive purchase agreements with Airbus, Boeing and other manufacturers for the acquisition of an aggregate of 617 mainline and regional aircraft. We also have agreements for 44 spare engines to be delivered in 2014 and beyond. Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2013 are expected to be as follows (approximately, in millions):
(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 American's purchase deposits with Boeing. The Company's purchase deposits totaled $1.1 billion as of December 31, 2013.
We do not have financing commitments for the following aircraft currently on order and scheduled to be delivered through 2016: sixteen Airbus 320 family aircraft, 10 Boeing 777-300ER aircraft and 18 Boeing 787 aircraft. In addition, we do not have financing commitments in place for the majority of aircraft currently on order and scheduled to be delivered in 2017 and beyond. See Part I, Item 1A, Risk Factors - "We will need to obtain sufficient financing or other capital to operate successfully."
Credit Card Processing and Other Reserves
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Credit card processors have financial risk associated with tickets purchased for travel because, although the processor generally forwards the cash related to the purchase to us soon after the purchase is completed, the air travel generally occurs after that time, and the processor may have liability if we do not ultimately provide the air travel. Our agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a "holdback") equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. We are not currently required to maintain any holdbacks pursuant to these requirements. Certain of our agreements provide that these holdback requirements can be modified at the discretion of the processing companies, up to the estimated liability for future air travel purchased with the respective credit cards, upon the occurrence of specified events, including material adverse changes in our financial condition. The amount that the processing companies may withhold also varies as a result of changes in financial risk due to seasonal fluctuations in ticket volume. Additional holdback requirements will reduce our liquidity in the form of unrestricted cash by the amount of the holdbacks.
Pension Funding Obligation
We are required to make minimum contributions to our defined benefit pension plans under the minimum funding requirements of ERISA, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, the Pension Relief Act of 2010, and the Moving Ahead for Progress in the 21st Century Act of 2012. In 2013 we contributed $489 million to our defined benefit pension plans, which covered minimum contributions for periods prior to our Chapter 11 filing and periods thereafter (see Note 2 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 2 to American's Consolidated Financial Statements in Part II, Item 8A for further information), as well as certain interest and penalty interest due with respect to contributions for pre-petition periods.
American's minimum required contribution to our pension plans for 2014 is $120 million. Currently, our minimum funding obligation for our pension plans is subject to temporary favorable rules that are scheduled to expire at the end of 2017. Upon expiration of these rules, our funding obligations are likely to increase materially.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.
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 8 to AAG's Consolidated Financial Statements included in Part II, Item 8A and Note 7 to American's Consolidated Financial Statements included in Part II, Item 8B of this report.
Special Facility Revenue Bonds
Certain special facility revenue bonds were issued by certain municipalities primarily to purchase equipment and improve airport facilities that are leased by American and accounted for as operating leases. In accordance with various orders of the Bankruptcy Court and/or the Plan, special facility revenue bond claims in connection with the Alliance Airport, Dallas-Fort Worth International Airport, Chicago O'Hare International Airport, Luis Munoz Marin International Airport in San Juan, and certain special revenue bond claims in relation to the John F. Kennedy International Airport were treated as general unsecured claims. In addition, pursuant to the Plan, the agreements with respect to the special facility revenue bonds relating to the Tulsa International Airport have remained in full force and effect, in accordance with their original terms and conditions, and constitute ongoing obligations of American or AAG, as reflected in the particular agreement. Approximately $498 million of the special facility revenue bonds (with total future payments of approximately $715 million as of December 31, 2013) are guaranteed by AAG, American, US Airways Group or US Airways. Approximately $112 million of these special facility revenue bonds contain mandatory tender provisions that require American to make operating lease payments sufficient to repurchase the bonds in 2014. Although American has the right to remarket the bonds, there can be no assurance that these bonds will be successfully remarketed. Any payments to redeem or purchase bonds that are not remarketed would generally reduce existing rent leveling accruals or are considered prepaid facility rentals and would reduce future operating lease commitments.
Pass-Through Trusts
We have financed certain aircraft and engines with pass-through trust certificates, or enhanced equipment trust certificates (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 and US Airways to raise the financing for several aircraft at one time and place such funds in escrow pending the 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 and US Airways.
Each trust covered a set amount of aircraft scheduled to be delivered or refinanced within a specific period of time. At the time of each covered aircraft financing, the relevant trust used the funds in escrow to purchase equipment notes relating to the financed aircraft. The equipment notes were issued, at American or 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. The pass-through trust certificates are not direct obligations of,
nor are they guaranteed by, AAG, American, US Airways Group or US Airways. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American or US Airways and, in certain instances, are guaranteed by AAG or US Airways Group as applicable. As of December 31, 2013, $6.0 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet.
With respect to leveraged leases, American or US Airways evaluated whether the leases had characteristics of a variable interest entity. American or US Airways concluded the leasing entities met the criteria for variable interest entities. American and US Airways generally are 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 or US Airways to absorb decreases in value or entitles American or US Airways to participate in increases in the value of the aircraft. American and US Airways do not provide residual value guarantees to the bondholders or equity participants in the trusts. Each lease does have a fair market value or a fixed price purchase option that allows American or US Airways to purchase the aircraft at or near the end of the lease term; the fixed price approximates an estimate of the aircraft's fair value at the option date. Under this feature, American and US Airways do not participate in any increases in the value of the aircraft. American and US Airways concluded it was not the primary beneficiary under these arrangements. Therefore, American and US Airways account for their EETC leveraged lease financings as operating leases. American and US Airways' total future obligations under these leveraged lease financings are $2.1 billion as of December 31, 2013.
Income Taxes
We experienced a statutory "ownership change" on December 9, 2013 as defined for purposes of Section 382 of the Internal Revenue Code in connection with our emergence from bankruptcy and US Airways Group experienced an ownership change in connection with the Merger. When a company undergoes such an ownership change, Section 382 limits the company’s future ability to utilize any NOL generated before the ownership change and certain subsequently recognized "built-in" losses and deductions, if any, existing as of the date of the ownership change. The general limitation rules for a debtor in a bankruptcy case are liberalized where an ownership change occurs upon emergence from bankruptcy. We anticipate taking advantage of these certain special rules which will permit approximately $9.0 billion of our federal NOL carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. At December 31, 2013, the Company inherited the US Airways Group approximate $1.6 billion of NOLs ($1.4 billion of which is subject to Section 382 limitation due to the ownership change) to reduce the Company’s future taxable income. The majority of American Airlines Group Inc.’s NOLs are expected to be available to reduce federal taxable income in the calendar year 2014. The Company’s ability to utilize any new NOL arising after the ownership change is not affected.
AAG Contractual Obligations
The following table summarizes AAG's obligations and commitments as of December 31, 2013. The table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time.
(1)
Excludes $26 million of unamortized debt discount as of December 31, 2013.
(2)
For variable-rate debt, future interest obligations are estimated using the current rate at December 31, 2013.
(3)
Certain special facility revenue bonds issued by municipalities-which are supported by operating leases executed by American or US Airways-are guaranteed by AAG, US Airways Group, American and/or US Airways. The special facility revenue bonds with mandatory tender provisions discussed above are included in this table based on lease payment terms rather than their mandatory tender provision date. See Note 9 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information.
(4)
See Note 8 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information about the Company's obligations.
(5)
Represents minimum payments under capacity purchase agreements with the Company's 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. See Note 8 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information.
(6)
Includes noncancelable commitments to purchase goods or services, primarily information technology related support. The Company has made estimates as to the timing of certain payments primarily for construction related costs. The actual timing of payments may vary from these estimates. Substantially all of the Company's purchase orders issued for other purchases in the ordinary course of business contain a 30-day cancellation clause that allows the Company to cancel an order with 30 days notice.
(7)
Includes minimum pension contributions based on actuarially determined estimates and other postretirement benefit payments based on estimated payments through 2023. See Note 13 to AAG's Consolidated Financial Statements in Part II, Item 8A.
(8)
Total contractual obligations do not include long-term contracts that represent a variable expense (based on levels of operation) or where short-term cancellation provisions exist.
Capital Raising Activity and Other Possible Actions
In light of AAG’s significant financial commitments related to, among other things, new aircraft and the servicing and amortization of existing debt and equipment leasing arrangements, AAG and its subsidiaries will regularly consider, and enter into negotiations related to, capital raising activity, which may include the entry into leasing transactions and future issuances of secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise. The cash available from operations and these sources, however, may not be sufficient to cover cash contractual obligations because economic factors may reduce the amount of cash generated by operations or increase costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks and 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, aircraft and aircraft engines and parts could decrease the amount of cash available to cover cash contractual obligations. Moreover, the Credit Facilities, the 2013 Citicorp Credit Facility and certain of our other financing arrangements
contain significant minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements.
In the past, the Company has from time to time refinanced, redeemed or repurchased its debt and taken other steps to reduce or otherwise manage the aggregate amount and cost of its debt or lease obligations or otherwise improve its balance sheet. Going forward, depending on market conditions, its cash position and other considerations, the Company may continue to take such actions.
We have reserved shares of AAG Common Stock and Preferred Stock to be distributed to holders of unsecured claims that were not settled prior to emergence and have not yet been resolved.
American Contractual Obligations
The following table summarizes our obligations and commitments as of December 31, 2013. The table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time.
(1)
Amounts represent contractual amounts due.
(2)
For variable-rate debt, future interest obligations are estimated using the current rate at December 31, 2013.
(3)
Certain special facility revenue bonds issued by municipalities-which are supported by operating leases executed by American-are guaranteed by AAG and/or American. The special facility revenue bonds with mandatory tender provisions discussed above are included in this table based on lease payment terms rather than their mandatory tender provision date. See Note 8 to American's Consolidated Financial Statements in Part II, Item 8B for additional information.
(4)
See Note 7 to American's Consolidated Financial Statements in Part II, Item 8B for additional information about American's obligations.
(5)
Represents minimum payments under capacity purchase agreements with American's 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. See Note 7 to American's Consolidated Financial Statements in Part II, Item 8B for additional information.
(6)
Includes noncancelable commitments to purchase goods or services, primarily information technology related support. American has made estimates as to the timing of certain payments primarily for construction related costs. The actual timing of payments may vary from these estimates. Substantially all of American's purchase orders issued for other purchases in the ordinary course of business contain a 30-day cancellation clause that allows American to cancel an order with 30 days notice.
(7)
Includes minimum pension contributions based on actuarially determined estimates and other postretirement benefit payments based on estimated payments through 2023. See Note 12 to American's Consolidated Financial Statements in Part II, Item 8B.
(8)
Total contractual obligations do not include long-term contracts that represent a variable expense (based on levels of operation) or where short-term cancellation provisions exist.
In light of American's significant financial commitments related to, among other things, new aircraft and the servicing and amortization of existing debt and equipment leasing arrangements, American will regularly consider, and enter into negotiations related to, capital raising activity, which may include the entry into leasing transactions and future issuances of secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise. The cash available from operations and these sources, however, may not be sufficient to cover cash contractual obligations because economic factors may reduce the amount of cash generated by operations or increase costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks and 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, aircraft and aircraft engines and parts could decrease the amount of cash available to cover cash contractual obligations. Moreover, American's Credit and Guaranty Agreement 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, American has from time to time refinanced, redeemed or repurchased its debt and taken other steps to reduce or otherwise manage the aggregate amount and cost of its debt or lease obligations or otherwise improve its balance sheet. Going forward, depending on market conditions, its cash position and other considerations, the American 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 4 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 4 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. AAG's air traffic liability was $4.4 billion and $2.8 billion as of December 31, 2013 and 2012, respectively and American's air traffic liability was $3.1 billion and $2.8 billion as of December 31, 2013 and 2012, 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 revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. We and members of the airline industry have consistently applied this accounting method to estimate revenue from forfeited tickets at the date travel was to be provided. 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 domestic take-off and landing rights, 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 4 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, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets and the net book value of the assets exceeds their estimated fair value. 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 and US Airways' 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. We have one consolidated reporting unit.
Goodwill is measured for impairment by initially performing a qualitative screen and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded. As AAG acquired US Airways on December 9, 2013, an impairment test was unnecessary in 2013 as no events or circumstances were identified to indicate the fair value of the reporting unit was less than its carrying amount.
Our indefinite-lived intangible assets other than goodwill include certain international and domestic take-off and landing rights. Indefinite-lived intangible assets are not amortized but tested for impairment annually on October 1st or more frequently if events or circumstances indicate. Indefinite-lived assets are measured for impairment by initially performing a qualitative screen and, if necessary, then comparing the fair value of the indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible asset is lower than its carrying value, an impairment charge equal to the difference is recorded. The fair values of indefinite-lived intangible assets are primarily based on available market pricing for comparable assets along with estimates of discounted future cash flows, using assumptions based on historical results adjusted to reflect management's best estimate of future market and operating conditions. Changes in industry capacity, demand for air transportation, regulatory considerations such as "open skies" arrangements, and other factors can significantly impact the fair value of our indefinite-lived assets. Based upon our annual testing, there were no impairments of indefinite-lived assets in 2013.
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. Additional changes in the fair values of these assets and liabilities from the current estimated values, as well as changes in other assumptions could significantly impact the reported value of goodwill.
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 includes 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 Dividend Miles frequent flyer program liability was determined based on the weighted average equivalent ticket value of outstanding miles which were expected to be redeemed 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.
Frequent flyer programs
AAG currently operates two frequent traveler programs, American's AAdvantage and US Airways' Dividend Miles. These programs award mileage credits to passengers who fly on American and oneworld carriers and US Airways and Star Alliance carriers, respectively, as well as certain other partner airlines that participate in the programs. Effective March 31, 2014, US Airways will join the oneworld alliance and exit the Star Alliance. At that point, frequent travel reciprocity will be discontinued for many Star Alliance airlines. Mileage credits can also be earned through purchases from other non-airline partners that participate in our respective loyalty programs. Mileage credits can be redeemed for travel on American, US Airways 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 frequent flyer liability incurred when AAdvantage and Dividend Miles members earn mileage credits by flying on American, US Airways 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.
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 statement 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. In addition, we also include in the determination of incremental cost the amount of certain fees related to redemptions expected to be collected from AAdvantage and Dividend Miles members. These redemption fees reduce incremental cost. 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.
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, 2013, the liability for outstanding mileage credits expected to be redeemed for future travel awards for US Airways under the Dividend Miles program was $932 million and is included on the Consolidated Balance Sheets within Frequent flyer liability. This liability will be reduced as miles are redeemed and new miles earned will be recorded as a liability based on the incremental cost method discussed above.
As of December 31, 2013, the liability for outstanding mileage credits for the AAdvantage program was $580 million and is included on the consolidated balance sheets within frequent flyer liability.
American and US Airways also sell frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to 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 our adoption of Accounting Standards Update (ASU) No. 2009-13, "Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements" on January 1, 2011.
During the fourth quarter, American and Citibank amended their current agreement which resulted in a material modification of the terms of the arrangement. Also, in connection with our 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 will apply 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 and US Airways’ brand including access to frequent flyer 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 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 American’s and US Airways’ logo and tradenames along with access to customers lists of AAdvantage and Dividend Miles members. The marketing services are provided 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 the fourth quarter 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, American and US Airways now defer less revenue per mile sold.
For American’s agreements where there has not been a material modification, we continue to apply the residual method.
As of December 31, 2013 and 2012, AAG had $1.5 billion and $1.2 billion, respectively and American had $1.2 billion and $1.2 billion, respectively in deferred revenue from the sale of mileage credits (recorded as Frequent flyer liability on the consolidated balance sheets). For the years ended December 31, 2013, 2012 and 2011, the marketing component of mileage sales recognized at the time of sale in other revenues was approximately $834 million, $725 million and $761 million, respectively.
A change to certain estimates used in the calculation of incremental cost could have a material impact on the liability. A 1% increase or decrease in the percentage of travel awards redeemed on partner airlines would have a $23 million impact on the liability as of December 31, 2013. A 10% increase or decrease in the assumed price per gallon of fuel would have a $21 million impact on the liability as of December 31, 2013.
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 $89 million impact on revenue recognized in 2013.
The number of AAdvantage and Dividend Miles one way travel award redemptions during the year ended December 31, 2013, was approximately 6.1 million and 1.8 million respectively, representing approximately 8.2% and 3.5% of American and US Airways’ total mainline and regional RPMs during that period, respectively. We believe displacement of revenue passengers is minimal given our load factors and our ability to manage frequent flyer seat inventory.
Pensions and retiree medical and other 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 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, starting in 2007 and (iv) the estimated age of pilot retirement (as discussed below). These assumptions as of December 31 were:
(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 the discount rate by 50 basis points as of December 31, 2013 would increase our pension and postretirement benefits obligations by approximately $1.1 billion and $55 million, respectively, and increase (decrease) estimated 2014 pension and postretirement benefit expense by $4 million and $3 million, respectively.
(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, 31% U.S. value stocks, 19% developed international stocks, 10% emerging markets stocks and bonds and 9% 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. We monitor our actual asset allocation and believe that our long-term asset allocation will continue to approximate our target allocation. Our historical annualized ten-year rate of return on plan assets, calculated using a geometric compounding of monthly returns, is approximately 8.9% as of December 31, 2013. Lowering the expected long-term rate of return on plan assets by 50 basis points as of December 31, 2013 would increase estimated 2014 pension expense by approximately $50 million.
(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 2014 postretirement benefits expense by $2 million.
See Note 13 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 12 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.
New Accounting Pronouncements
See Note 5 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 4 to American's Consolidated Financial Statements in Part II, Item 8B for information regarding new accounting pronouncements.
ITEM 7(A).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AAG's Market Risk Sensitive Instruments and Positions
The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions management may take to mitigate our exposure to such changes. Therefore, actual results may differ. We do not hold or issue derivative financial instruments for trading purposes. See Note 10 to AAG's Consolidated Financial Statements in Part II, Item 8A for accounting policies and additional information regarding derivatives.
Aircraft Fuel
The Company's operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in the Company's business. Because of the amount of fuel needed to operate the Company's airline, even a relatively small increase in the price of fuel can have a material adverse aggregate effect on the Company's costs and liquidity. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to December 31, 2013. In order to provide a measure of control over price and supply, we trade and ship fuel and maintain fuel storage facilities to support our flight operations. US Airways Group does not hedge price risk of fuel. American has historically hedged the price risk of fuel costs through the use of hedging contracts, which consist primarily of collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option). Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. Market risk is estimated as a hypothetical 10% increase in the December 31, 2013 and 2012 cost per gallon of fuel. Based on projected 2014 fuel usage, such an increase would result in an increase to American's Aircraft fuel and related taxes of approximately $1.1 billion in 2014, inclusive of the impact of effective fuel hedge instruments outstanding at December 31, 2013, and assumes our fuel hedging program remains effective. Such an increase would have resulted in an increase to American's projected Aircraft fuel and related taxes of approximately $718 million in 2013, inclusive of the impact of fuel hedge instruments outstanding at December 31, 2012.
As of January 2014, the Company had cash flow hedges covering approximately 19% of its estimated consolidated 2014 fuel requirements. Comparatively, as of December 31, 2012, the Company had hedged approximately 21% of its estimated 2013 fuel requirements. The Company's consumption hedged for 2014 is capped at an average price of approximately $2.91 per gallon of jet fuel. One percent of the Company's estimated 2014 fuel requirement is hedged using call spreads with protection capped at an average price of approximately $3.18 per gallon of jet fuel. Eighteen percent of the Company's estimated 2014 fuel requirement is hedged using collars with an average floor price of approximately $2.62 per gallon of jet fuel. The cap and floor prices exclude taxes and transportation costs.
Ineffectiveness is inherent in hedging jet fuel with derivative positions based in crude oil or other crude oil related commodities. We assess, both at the inception of each hedge and on an ongoing basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. In doing so, we use a regression model to determine the correlation of the change in prices of the commodities used to hedge jet fuel (e.g., NYMEX Heating oil) to the change in the price of jet fuel. We also monitor the actual dollar offset of the hedges' market values as compared to hypothetical jet fuel hedges. The fuel hedge contracts are generally deemed to be "highly effective" if the R-squared is greater than 80% and the dollar offset correlation is within 80% to 125%. We discontinue hedge accounting prospectively if we determine that a derivative is no longer expected to be highly effective as a hedge or if we decide to discontinue the hedging relationship.
We have not entered into any fuel hedges since the Effective Date and our current policy is not to do so. Assuming we continue to pursue this policy, once our existing hedge contracts expire or otherwise terminate, we will be fully exposed to fluctuations in fuel prices.
Foreign Currency
We are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. Our largest exposure comes from the British pound, Euro, Canadian dollar, Japanese yen and various Latin American currencies, particularly Venezuela and Argentina. We do not currently have a foreign currency hedge program related to our foreign currency-denominated ticket sales. Due to our foreign-denominated revenues exceeding our foreign-denominated expenses, a uniform 10% relative strengthening in the value of the U.S. dollar from
December 31, 2013 and 2012 levels relative to each of the currencies in which we have foreign currency exposure would result in an increase in our Total non-operating expense, net of approximately $199 million and $164 million, for the years ending December 31, 2013 and 2012, respectively, and does not address any exposure to foreign currency held on our balance sheet.
Interest
Our earnings are also affected by changes in interest rates due to the impact those changes have on our interest income from cash and short-term investments, and our interest expense from variable-rate debt instruments. Our largest exposure with respect to variable rate debt comes from changes in the London Interbank Offered Rate (LIBOR). We had variable rate debt instruments representing approximately 26% and 19% of our total long-term debt at December 31, 2013 and 2012, respectively. If our interest rates average 10% more in 2013 than they did at December 31, 2013, our interest expense would increase by approximately $17 million and interest income from cash and short-term investments would increase by approximately $2 million. In comparison, at December 31, 2012, we estimated that if interest rates averaged 10 percent more in 2012 than they did at December 31, 2012, our interest expense would have increased by approximately $7 million and interest income from cash and short-term investments would have increased by approximately $2 million.
Additional information regarding our debt obligations as of December 31, 2013 is as follows (in millions):
In accordance with ASC 852, the Debtors recorded interest expense only to the extent (1) interest was paid during the Chapter 11 Cases or (2) it was probable that the Bankruptcy Court would allow a claim in respect of such interest. Interest expense AAG recorded on its Consolidated Statements of Operations totaled $856 million and $632 million for the years ended December 31, 2013 and 2012, respectively. AAG's contractual interest expense (including interest expense that is associated with obligations in liabilities subject to compromise) during the years ended December 31, 2013 and 2012 totaled $928 million and $766 million, respectively.
American's Market Risk Sensitive Instruments and Positions
The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions management may take to mitigate American's exposure to such changes. Therefore, actual results may differ. American does not hold or issue derivative financial instruments for trading purposes. See Note 9 to American's Consolidated Financial Statements in Part II, Item 8B for accounting policies and additional information regarding derivatives.
Aircraft Fuel
American's operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in American's business. Because of the amount of fuel needed to operate American, even a relatively small increase in the price of fuel can have a material adverse aggregate effect on American's costs and liquidity. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to December 31, 2013. In order to provide a measure of control over price and supply, American trades and ships fuel and maintains fuel storage facilities to support its flight operations. American has historically hedged the price risk of fuel costs through the use of hedging contracts, which consist primarily of collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option). Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. Market risk is estimated as a hypothetical 10% increase in the December 31, 2013 and 2012 cost per gallon of fuel. Based on projected 2014 fuel usage, such an increase would result in an increase to American's Aircraft fuel and related taxes of approximately $519 million in 2014, inclusive of the impact of effective fuel hedge instruments outstanding at December 31, 2013, and assumes American's fuel hedging program remains effective.
Such an increase would have resulted in an increase to American's projected Aircraft fuel and related taxes of approximately $633 million in 2013, inclusive of the impact of fuel hedge instruments outstanding at December 31, 2012.
As of January 2014, American had cash flow hedges covering approximately 29% of its estimated 2014 fuel requirements. Comparatively, as of December 31, 2012, American had hedged approximately 21% of its estimated 2013 fuel requirements. American's consumption hedged for 2014 is capped at an average price of approximately $2.91 per gallon of jet fuel. One percent of American's estimated 2014 fuel requirement is hedged using call spreads with protection capped at an average price of approximately $3.18 per gallon of jet fuel. Twenty-eight percent of American's estimated 2014 fuel requirement is hedged using collars with an average floor price of approximately $2.62 per gallon of jet fuel. The cap and floor prices exclude taxes and transportation costs.
Ineffectiveness is inherent in hedging jet fuel with derivative positions based in crude oil or other crude oil related commodities. American assess, both at the inception of each hedge and on an ongoing basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. In doing so, American uses a regression model to determine the correlation of the change in prices of the commodities used to hedge jet fuel (e.g., NYMEX Heating oil) to the change in the price of jet fuel. American also monitors the actual dollar offset of the hedges' market values as compared to hypothetical jet fuel hedges. The fuel hedge contracts are generally deemed to be "highly effective" if the R-squared is greater than 80% and the dollar offset correlation is within 80% to 125%. American discontinues hedge accounting prospectively if it determines that a derivative is no longer expected to be highly effective as a hedge or if American decides to discontinue the hedging relationship.
American has not entered into any fuel hedges since the Effective Date and its current policy is not to do so. Assuming American continues to pursue this policy, once its existing hedge contracts expire or otherwise terminate, American will be fully exposed to fluctuations in fuel prices.
Foreign Currency
American is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. American's largest exposure comes from the British pound, Euro, Canadian dollar, Japanese yen and various Latin American currencies, particularly Venezuela and Argentina. American does not currently have a foreign currency hedge program related to its foreign currency-denominated ticket sales. Due to American's foreign-denominated revenues exceeding its foreign-denominated expenses, a uniform 10% strengthening in the value of the U.S. dollar from December 31, 2013 and 2012 levels relative to each of the currencies in which American has foreign currency exposure would result in an increase in its non-operating expense, net of approximately $199 million and $164 million, for the years ending December 31, 2013 and 2012, respectively, and does not address any exposure to foreign currency held on its balance sheet.
Interest
American's earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash and short-term investments, and its interest expense from variable-rate debt instruments. American's largest exposure with respect to variable rate debt comes from changes in the London Interbank Offered Rate (LIBOR). American had variable rate debt instruments representing approximately 26% and 21% of its total long-term debt at December 31, 2013 and 2012, respectively. If American's interest rates average 10% more in 2013 than they did at December 31, 2013, its interest expense would increase by approximately $9 million and interest income from cash and short-term investments would increase by approximately $2 million. In comparison, at December 31, 2012, American estimated that if interest rates averaged 10 percent more in 2012 than they did at December 31, 2012, its interest expense would have increased by approximately $7 million and interest income from cash and short-term investments would have increased by approximately $2 million.
Additional information regarding American's debt obligations as of December 31, 2013 is as follows (in millions):
In accordance with ASC 852, the Debtors recorded interest expense only to the extent (1) interest was paid during the Chapter 11 Cases or (2) it was probable that the Bankruptcy Court would allow a claim in respect of such interest. Interest expense American recorded on its Consolidated Statements of Operations totaled $700 million and $633 million for the years ended December 31, 2013 and 2012, respectively. American's contractual interest expense (including interest expense that is associated with obligations in liabilities subject to compromise) during the years ended December 31, 2013 and 2012 totaled $772 million and $707 million, respectively.
ITEM 8A.
AAG CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
American Airlines Group Inc.
We have audited the accompanying consolidated balance sheets of American Airlines Group Inc. (the Company) (formerly AMR Corporation) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of US Airways Group, Inc., a wholly-owned subsidiary of the Company, which statements reflect consolidated total assets constituting 39% as of December 31, 2013, and total operating revenues constituting 3% for the year ended December 31, 2013, of the related consolidated totals. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for such wholly-owned subsidiary, is based solely on the report of other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Airlines Group Inc. at December 31, 2013 and 2012 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 27, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 27, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
US Airways Group, Inc.:
We have audited the consolidated balance sheet of US Airways Group, Inc. and subsidiaries (the Company) as of December 31, 2013, and the related consolidated statement of operations, comprehensive income, stockholders’ equity, and cash flows for the period from December 9, 2013 to December 31, 2013 (not presented herein). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Airways Group, Inc. and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the period from December 9, 2013 to December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Phoenix, Arizona
February 27, 2014
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in millions, except share amounts)
See accompanying notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Operating Environment
American Airlines Group Inc. (AAG), a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier through its subsidiaries American Airlines, Inc. (American), US Airways Group, Inc. (US Airways Group). A wholly-owned subsidiary AMR Eagle Holding Corporation (AMR Eagle) owns American Eagle Airlines, Inc. (American Eagle). US Airways Group's principal subsidiary is US Airways, Inc. (US Airways) and its wholly-owned regional subsidiaries include Piedmont Airlines, Inc. (Piedmont), and PSA Airlines, Inc. (PSA).
The Company operates the largest airline in the world as measured by revenue passenger miles (RPMs) and available seat miles (ASMs). The Company has hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York City, Philadelphia, Phoenix and Washington, D.C. Together with American Eagle and US Airways Express, the Company operates an average of nearly 6,700 flights per day to 339 destinations in 54 countries. In 2013, the Company had approximately 87 million and 22 million passengers boarding its mainline and regional flights, respectively. As of December 31, 2013, the Company operated 970 mainline jets and is supported by its regional airline subsidiaries and third-party regional carriers operating as American Eagle and US Airways Express under capacity purchase agreements, which operated 519 regional jets and 40 turboprops.
As of December 31, 2013, the Company employed approximately 110,000 active full-time equivalent employees, of which 18,000 were employed by its regional operations. Approximately 73% of employees are covered by CBAs with various labor unions. American's and US Airways' pilots and flight attendants are currently working under the terms of their respective American or US Airways CBAs, as modified by transition agreements reached in connection with the December 2013 merger with US Airways Group, Inc. (the Merger).
2. Emergence From Chapter 11
Overview
On November 29, 2011 (the Petition Date), AMR Corporation (AMR) (renamed American Airlines Group Inc., AAG upon closing of the Merger, AAG and, together with its consolidated subsidiaries, the Company), its principal subsidiary, American Airlines, Inc. (American), and certain of the Company's other direct and indirect domestic subsidiaries (collectively, the Debtors), filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order (the Confirmation Order) approving and confirming the Debtors' fourth amended joint plan of reorganization (as amended, the Plan).
On December 9, 2013 (the Effective Date), the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by that certain Agreement and Plan of Merger (as amended, the Merger Agreement), dated as of February 13, 2013, by and among the Company, AMR Merger Sub, Inc. (Merger Sub) and US Airways Group, Inc. (US Airways Group), pursuant to which Merger Sub merged with and into US Airways Group (the Merger), with US Airways Group surviving as a wholly-owned subsidiary of the Company following the Merger. Pursuant to the Merger Agreement, each share of common stock, par value $0.01 per share, of US Airways Group was converted into the right to receive one share of American Airlines Group common stock (AAG Common Stock), par value $0.01 per share.
From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the U.S. Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.
Plan of Reorganization
The Plan implements the Merger and incorporates a compromise and settlement of certain intercreditor and intercompany claim issues.
Pursuant to the Plan, all shares of AMR Corporation common stock outstanding prior to the Effective Date were canceled. The Restated Certificate of Incorporation, which was approved in connection with the Plan, authorizes the issuance of 1.75 billion new shares of AAG Common Stock, par value $0.01 per share, and 200 million shares of AAG Series A Preferred Stock, par value $0.01 per share. Of the authorized AAG Series A Preferred Stock, approximately 168 million were designated "Series A Convertible Preferred Stock", with a stated value $25.00 per share, and issued in accordance with the Plan. AAG Common Stock and AAG Series A Preferred Stock are listed on the NASDAQ Global Select Market under the symbols "AAL" and "AALCP", respectively, and began trading on December 9, 2013. In addition, pursuant to the Plan and the Merger agreement, up to 40 million shares of AAG common stock was authorized for issuance under the 2013 Incentive Award Plan (the 2013 IAP).
The Plan contains the following provisions relating to the treatment of pre-petition claims against the Debtors and other holders of allowed interests in AMR Corporation:
•
all secured claims against the Debtors have been reinstated;
•
allowed administrative claims, priority claims and convenience claims have been or will be paid in full in cash;
•
other holders of allowed pre-petition unsecured claims, holders of allowed interests and certain employees of AMR received or will receive 72% of AAG Common Stock (on a fully converted basis) authorized to be issued pursuant to the Plan and in connection with the Merger under the following provisions:
◦
all creditors holding general unsecured claims against American that are guaranteed by AAG and general unsecured claims against AAG that are guaranteed by American (Double-Dip Unsecured Claims) were treated the same under the Plan. Holders of Double-Dip Unsecured Claims received, at the Effective Date, their recovery in shares of AAG Series A Preferred Stock with a stated amount equal to the allowed amount of their claims, including post-petition interest at the non-default rate;
◦
all creditors holding Single-Dip Unsecured Claims were treated the same regardless of whether the claim was asserted against the AAG Debtors, the American Debtors, or other Debtors. As used herein, "Single-Dip Unsecured Claims" means the general unsecured claims against the Debtors that are not guaranteed by any other Debtor, other than the claims of the Debtors' labor unions representing mainline workers. Holders of Single-Dip Unsecured Claims received, at the Effective Date, a portion of their recovery in shares of AAG Series A Preferred Stock and a right, subject to the trading price of the Company's common stock during the 120 day period after the Effective Date, to receive their remaining recovery in shares of AAG Common Stock 120 days after the Effective Date;
◦
holders of certain labor-related deemed claims and certain non-management, non-union employees as specified in the Plan received, at the Effective Date, the right to receive an allocation of shares of AAG Common Stock representing 23.6% of the total number of shares of AAG Common Stock ultimately distributed to holders of pre-petition general unsecured creditors against the Debtors. On the Effective Date, pursuant to the Plan, an initial allocation of approximately 39 million shares of AAG Common Stock was made related to these labor and employee groups, of which approximately 27 million shares were distributed on the Effective Date and approximately 13 million shares of which were withheld in connection with the Company making a cash payment of approximately $300 million for certain required withholding taxes;
◦
holders of allowed interests in AMR (primarily holders of AMR common stock existing immediately prior to the Effective Date) received, at the Effective Date, a distribution of approximately 26 million shares of AAG Common Stock representing 3.5% of the total number of shares of AAG Common Stock contemplated for issuance pursuant to the Plan and, will receive additional shares of AAG Common Stock if, among other considerations, the trading price of the Company's common stock at various points during the 120 day period after the Effective Date provides for a full recovery to claimholders and other allowed priority interests; and
◦
holders of disputed claims at the Effective Date, to the extent such disputed claims become allowed Single-Dip Unsecured Claims after the Effective Date, are eligible to receive shares of AAG Common Stock held in reserve (Disputed Claims Reserve), beginning after 120 days after the Effective Date. Disputed claimholders that subsequently become Single-Dip Unsecured Claimholders will receive, subject to the availability of sufficient shares in the Disputed Claims Reserve, the number of shares of AAG Common Stock that the Disputed claimholder would have received had such claimholder been a Single-Dip Unsecured Claimholder as of the Effective Date.
The Plan contemplates the distribution of up to 756 million shares of common stock of which approximately 53 million shares were issued to the Debtors' stakeholders in connection with the Effective Date. In accordance with the Plan, the Company
will issue the remaining shares of AAG Common Stock over the 120 day distribution period and as disputed claims are resolved. In addition, pursuant to the Plan approximately 197 million common shares were distributed to holders of outstanding shares of US Airways Group common stock.
Pursuant to rulings of the Bankruptcy Court, the Plan has established a disputed claim reserve to hold shares of AAG Series A Preferred Stock and AAG Common Stock reserved for issuance to disputed claimholders that ultimately become allowed Single-Dip general unsecured claimholders after emergence. The shares provided for under the Plan are determined based upon a disputed claim reserve amount of approximately $755 million, representing the maximum amount of additional allowable Single-Dip claims under the Plan's provisions. Approximately 16 million shares of AAG Series A Preferred Stock were reserved at the Effective Date for distribution to holders of disputed Single-Dip general unsecured claims whose claims ultimately become allowed. Additional new shares of AAG Common Stock will be distributed into the reserve on or about the 120th day after the Effective Date. As disputed claims are resolved, the claimants receive distributions of shares from the reserve on the same basis as if such distributions had been made on or about the Effective Date. To the extent that any of the reserved shares remain undistributed upon resolution of the remaining disputed claims, such shares will not be returned to the Company but rather will be distributed by priority first, if necessary, to satisfy unsecured claims or labor-related obligations, and then to former AMR shareholders as of the Effective Date.
We are not required to distribute additional shares above the 756 million shares contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay all allowed unsecured claims. However, resolution of disputed claims could have a material effect on Single-Dip creditor recoveries under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.
In addition, as of December 31, 2013, the Company made the following cash disbursements under the Plan:
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$385 million in cash to the Pension plans in connection with missed contributions to the pension plans during Chapter 11 and interest and penalty interest thereon;
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$105 million to holders in partial or full satisfaction of their claims, including to holders of administrative claims, and state and local priority tax claims;
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$196 million in cure payments to holders of secured debt; and
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Approximately $300 million for payroll taxes associated with equity distributions to employees.
Several parties have filed appeals seeking reconsideration of the Confirmation Order. See Note 8 to AAG's Consolidated Financial Statements for more information.
As noted above, the reconciliation process with respect to the remaining claims will take considerable time post-emergence. Included in mandatorily convertible preferred stock and other bankruptcy settlement obligations on the Company's Consolidated Balance Sheet as of December 31, 2013, are the Company's estimates of the amounts of disputed claims that will ultimately become allowed Single-Dip general unsecured claims. As these claims are resolved, or where better information becomes available and is evaluated, we will make adjustments to the liabilities recorded on the Company's Consolidated Financial Statements as appropriate. Any such adjustments could be material to the Company's financial position or results of operations in any given period.
Availability and Utilization of Net Operating Losses
Upon emergence from bankruptcy, the Debtors experienced an "ownership change" as defined in Section 382 of the Internal Revenue Code which could potentially limit the ability to utilize certain tax attributes including the Debtors’ substantial NOLs. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. While the Debtors anticipate taking advantage of certain special rules for federal income tax purposes that would permit approximately $9.0 billion of the federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382, there can be no assurance that these special rules will apply.
Moreover, an ownership change subsequent to the Debtors’ emergence from bankruptcy may further limit or effectively eliminate the ability to utilize the Debtors’ NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on the Debtors’ ability to utilize the NOL Carryforwards, the Restated Certificate of Incorporation contains transfer restrictions applicable to certain substantial shareholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, there can be no assurance that an ownership change will not occur even with these transfer restrictions. A copy of the Restated Certificate of Incorporation was attached as Exhibit 3.1 to a Form 8-K filed on December 9, 2013, by the Company with the Securities and Exchange Commission.
Liabilities Subject to Compromise
Liabilities subject to compromise refers to pre-petition obligations which may be impacted by the Chapter 11 reorganization process. These amounts represent the Debtors' current estimate of known or potential pre-petition obligations to be resolved in connection with the Chapter 11 Cases.
Pursuant to the Plan, allowed pre-petition claims and estimated unresolved pre-petition claims of $5.1 billion were settled in cash, AAG Series A Preferred Stock and other bankruptcy settlement obligations on the Effective Date. The pension and postretirement benefits obligation included below was reinstated and is included in Pension and postretirement benefits in the Company's Consolidated Balance Sheets. Accordingly, there are no Liabilities Subject to Compromise at December 31, 2013.
The following table summarizes the components of liabilities subject to compromise included on the Consolidated Balance Sheet as of December 31, 2012 (in millions):
Long-term debt, including undersecured debt, classified as subject to compromise as of December 31, 2012 consisted of (in millions):
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 in the Chapter 11 Cases. The following table summarizes the components included in reorganization items, net on the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 (in millions):
(1)
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to (i) the rejection or modification of financings related to aircraft and (ii) entry of orders treated as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors recorded an estimated claim associated with the rejection or modification of a financing or facility agreements when the applicable motion was filed with the Bankruptcy Court to reject or modify such financing and the Debtors believed that it was probable the motion would be approved, and there was sufficient information to estimate the claim.
(2)
Pursuant to the Plan, the Debtors agreed to allow certain post-petition unsecured claims on obligations. As a result, during the year ended December 31, 2013, the Company 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.
(3)
The Plan allows unsecured creditors receiving AAG Series A Preferred Stock a conversion discount of 3.5%. Accordingly, the Company recorded the fair value of such discount upon the confirmation of the Plan by the Bankruptcy Court.
3. Mandatorily Convertible Preferred Stock and Other Bankruptcy Settlement Obligations
As of December 31, 2013, the components of Mandatorily convertible preferred stock and other bankruptcy settlement obligations on the Consolidated Balance Sheet are as follows (in millions):
The AAG Series A Preferred Stock, while outstanding, votes and participates in accordance with the terms of the underlying Certificate of Designation. One quarter of the shares of AAG Series A Preferred Stock initially issued is mandatorily convertible on each of the 30th, 60th, 90th and 120th days after the Effective Date. In addition, subject to certain limitations, holders of AAG Series A Preferred Stock may elect to convert up to an additional 10 million shares of AAG Series A Preferred Stock during each 30-day period following the Effective Date thereby reducing the number of shares to be converted on the 120th day after the Effective Date. The initial stated value of each share of AAG Series A Preferred Stock is $25.00 and accrues dividends at 6.25% per annum, calculated daily, while outstanding. Additionally, AAG Series A Preferred Stock converts to AAG Common Stock based upon the volume weighted average price of the shares of AAG Common Stock on the five trading days immediately preceding the conversion date, at a 3.5% fixed discount, subject to a conversion price floor of $10.875 per share and a conversion price cap of $33.8080 per share, below or above which the conversion rate remains fixed. AAG Series A Preferred Stock embodies an unconditional obligation to transfer a variable number of shares based predominately on a fixed monetary amount known at inception, and, as such, it is not treated as equity, but rather as a liability until such time that it is converted to AAG Common Stock. Accordingly, AAG Series A Preferred Stock outstanding at December 31, 2013 is included within the "Mandatorily convertible preferred stock and other bankruptcy settlement obligations" line on the Company's Consolidated Balance Sheets. Upon conversion of any remaining AAG Series A Preferred Stock on the 120th day after the Effective Date, all AAG Series A Preferred Stock will have been converted to AAG Common Stock and no AAG Series A Preferred Stock will then remain outstanding. As of February 19, 2014, approximately 107 million shares of AAG Series A Preferred Stock had been converted into an aggregate of 95 million shares of AAG Common Stock.
The Company's Single-Dip equity obligations, while outstanding, do not vote or participate in accordance with the terms of the Plan. These equity contract obligations, representing the amount of total Single-Dip unsecured creditor obligations not satisfied through the issuance of AAG Series A Preferred Stock at the Effective Date, represent an unconditional obligation to transfer a variable number of shares based predominantly on a fixed monetary amount known at inception, and, as such, are not treated as equity, but rather as liabilities until the 120th day after emergence. At the 120th day after emergence, the Company will issue a variable amount of AAG Common Stock necessary to satisfy the obligation amount at emergence, plus accrued dividends of 12% per annum, calculated daily, through the 120th day after emergence, based on the volume weighted average price of the shares of AAG Common Stock at a 3.5% discount, as specified in the Plan and, subject to there being a sufficient number of shares remaining for issuance to unsecured creditors under the Plan.
In exchange for employees' contributions to the successful reorganization of the Company, including agreeing to reductions in pay and benefits, the Company 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 fixed percentage of the distributions to be made to general unsecured claimholders. The fair value based on the expected number of shares to be distributed to satisfy this deemed claim was approximately $1.7 billion. On the Effective Date, the Company made an initial distribution of $595 million in common stock and American paid approximately $300 million in cash to cover payroll taxes related to the equity distribution. As of December 31, 2013, the remaining liability to certain AMR labor groups and employees of $849 million is based upon the estimated fair value of the shares expected to be issued in satisfaction of such obligation, measured as if the obligation were settled using the trading price of AAG Common Stock at December 31, 2013. Increases in the trading price of AAG Common Stock after December 31, 2013,
could cause a decrease in the fair value measurement of the remaining obligation, and vice-versa. The Company will record this obligation at fair value primarily through the 120th day after emergence, at which time the obligation will be materially settled.
4. Merger and Related Matters
Description of Transaction
As previously discussed in Note 2, on the Effective Date, the Debtors consummated their reorganization and the Merger pursuant to the Plan. The Merger has been accounted for as a business acquisition using the acquisition method of accounting in accordance with ASC 805, "Business Combinations," with AAG considered the acquirer of US Airways Group. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The acquisition values have also been reflected in US Airways Group's separate-entity financial statements as of December 9, 2013. The excess of the purchase price over the net fair value of assets and liabilities acquired was recorded as goodwill. Goodwill will not be amortized, but will be tested for impairment at least annually.
Slot Divestiture
As a stipulation for the Merger to be approved by the Department of Justice (DOJ), the Company was required to divest certain slots and LaGuardia Airport and Washington Regan National Airport. As of December 31, 2013, the Company recognized a gain of $67 million related to the sale the LaGuardia Airport slots, which has been included in Special items, net in the consolidated statement of operations. The relevant Washington Regan National Airport slots were classified as assets held for sale and included in Prepaid expenses and other on the Consolidated Balance Sheets.
Tax Matters
The Company experienced an "ownership change" in connection with its emergence from bankruptcy which under Section 382 could substantially constrain the use of a company’s NOL carryforwards and other tax attributes. However, the general limitation rules of Section 382 are liberalized where the ownership change occurs upon emergence from bankruptcy. While the Company anticipates taking advantage of these special rules that would permit the utilization of substantially all of the company’s NOL carryforwards, there can be no assurance that those special rules will apply. If the special rules do not apply, our ability to utilize our NOL carryforwards may be subject to limitation. See Note 11 for additional information related to tax matters.
Fair Value of Consideration Transferred
The fair value of the consideration transferred, or the purchase price, was derived as described below based on the outstanding shares of US Airways Group common stock at December 9, 2013, the exchange ratio of one share of AAG Common Stock for each share of US Airways Group common stock, and a price per share of AAG Common Stock of $22.55, which represented the closing price of US Airways Group common stock on December 6, 2013, the last day such shares traded on the New York Stock Exchange. US Airways Group equity awards outstanding at the close of the Merger converted into equity awards with respect to AAG Common Stock. Vested equity awards held by employees of US Airways Group are considered part of the purchase price.
(in millions except per share data)
Allocation of Consideration Transferred
The Merger has been accounted for using the acquisition method of accounting in accordance with ASC 805, "Business Combinations," with AAG treated as the acquirer of US Airways Group for accounting purposes. The acquisition method of
accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The excess of the purchase price over the net fair value of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is not amortized, but is tested for impairment at least annually.
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 included prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The Company 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. The Company 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 logo and tradenames. 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 US Airways’ Dividend Miles frequent flyer program liability was determined based on the equivalent ticket value of outstanding miles which were expected to be redeemed at December 9, 2013. The equivalent ticket value contemplates purchased tickets that have similar restrictions as frequent traveler awards. In accordance with ASC 805, the Company may periodically adjust the value of goodwill to reflect changes that occur as a result of adjustments during the measurement period following the date of acquisition.
Pro-forma Impact of the Merger
The AAG unaudited pro-forma results presented below include the effects of the US Airways acquisition as if it had been consummated as of January 1, 2012. The pro-forma results include the depreciation and amortization associated with the acquired tangible and intangible assets, lease fair value adjustments, elimination of any deferred gains or losses from other comprehensive income and the impact of income changes on profit sharing expense, among others. However, pro-forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro-forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2012.
Reclassifications
Certain prior period amounts have been reclassified between various financial statement line items to conform to the new AAG financial statement presentation. These reclassifications do not impact the historic net income and are comprised principally of the following items:
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Reclassifications between various operating income line items to conform the presentation of Cargo and Other revenues.
•
Reclassifications between various operating expense line items to conform the presentation of regional airline expenses.
•
Reclassifications between other nonoperating income (expense), net and operating expenses to conform the presentation of foreign currency gains and losses.
The following table summarizes the historical and revised financial statement amounts for AAG (in millions).
Additionally, the Company reclassified approximately $292 million from current to noncurrent liabilities as of December 31, 2012.
5. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements as of and for the years ended December 31, 2013, 2012 and 2011 include the accounts of the Company and its wholly-owned subsidiaries. As a result of the Merger, the Consolidated Financial Statements presented include the results of AMR and its wholly-owned subsidiaries, American and AMR Eagle, for periods ended prior to
December 9, 2013 and consolidated results of AAG, which includes American, AMR Eagle and US Airways Group, for periods ending on or after December 9, 2013. Accordingly, the Consolidated Financial Statements for the year ended December 31, 2013 include the accounts of US Airways Group for the 23 days ended December 31, 2013. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation. All significant intercompany transactions have been eliminated.
Chapter 11 Matters
In accordance with GAAP, the Debtors applied ASC 852 "Reorganizations" (ASC 852), in preparing the Consolidated Financial Statements. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred in the Chapter 11 Cases are recorded in Reorganization Items, Net on the accompanying Consolidated Statement of Operations. In addition, pre-petition obligations that may be impacted by the Chapter 11 reorganization process as of December 31, 2012 were classified on the Consolidated Balance Sheet in Liabilities Subject to Compromise.
Certain of AMR's non-U.S. subsidiaries were not part of the Chapter 11 Cases. Since these non-US subsidiaries do not have significant transactions, AAG does not separately disclose the combined financial statements of such non-U.S. subsidiaries in accordance with the requirements of reorganization accounting.
In accordance with ASC 852, AAG did not meet the criteria for and will not adopt "fresh start" accounting as the reorganization value of AMR's assets, as determined based upon an estimate of the fair value of AMR's equity using the trading market price of US Airways Group and the amount of post-petition liabilities as of the Effective Date was greater than total pre-petition liabilities and expected allowed claims. As a result, AAG's assets and liabilities were not adjusted to fair value.
New Accounting Pronouncements
Effective January 1, 2013, the Company adopted revised guidance on the Comprehensive Income topic of the FASB Codification which requires an entity to present, either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income (loss) and the income statement line items affected by the reclassification. The adoption did not have any impact on the Company’s financial position, results of operations or cash flows.
Effective January 1, 2013, the Company adopted revised guidance on Balance Sheet topic of the FASB Codification, which clarifies the scope of disclosures about offsetting assets and liabilities. The clarification applies only to derivatives, repurchase agreements and reverse purchase agreements, and to certain securities borrowing and securities lending transactions, and not to ordinary trade receivables and payables. The adoption did not have any impact on the Company’s financial position, results of operations or cash flows.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the accompanying Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.
Restricted Cash and Short-term Investments
The Company has restricted cash and short-term investments related primarily to collateral held to support projected workers' compensation obligations, credit card processing holdback requirements.
Aircraft fuel, spare parts, and supplies, net
Aircraft fuel, spare parts, and supplies, are recorded at net realizable value based on average costs. These items are expensed when used. An allowance for obsolescence is provided for aircraft spare parts and supplies.
Maintenance, Materials and Repairs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.
Goodwill
Goodwill represents the excess of the purchase price over the net fair value of the assets acquired and liabilities assumed by AAG on December 9, 2013, in connection with the Merger. Goodwill will not be amortized but tested for impairment annually.
Other Intangibles, net
Intangible assets consist primarily of airport take-off and landing rights (Slots), customer relationships, market partners, international route authorities, and tradenames. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In connection with the application of acquisition accounting as of December 9, 2013, the intangible assets acquired from US Airways were measured at fair value using the market and income approaches. The Company utilized the market approach to value airport Slots, when sufficient market information was available, and included prices and other relevant information generated by market transactions involving comparable assets as well as pricing guides and other sources. The Company utilized the income approach to value the customer relationships and marketing agreements, certain international route authorities and the US Airways tradenames. 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 following table provides information relating to the Company's amortized intangible assets as of December 31, 2013 and 2012 (in millions):
Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years to a zero residual value. The customer relationships, marketing agreements and tradenames were identified as intangible assets subject to amortization and will be amortized over approximately nine years, 30 years and 15 months, respectively.
The Company recorded amortization expense related to these intangible assets of approximately $20 million, $25 million, and $27 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company expects to record annual amortization expense for the aforementioned definite-life intangible assets as follows (in millions):
The Company's indefinite-lived assets include certain international route authorities and domestic airport take-off and landing slots. Indefinite-lived assets are not amortized but instead are reviewed for impairment annually and more frequently if events or circumstances indicate that the asset may be impaired. As of December 31, 2013, and 2012, the Company had $1.8 billion and $708 million, respectively, of indefinite-lived intangible assets on its Consolidated Balance Sheet.
Operating Property and Equipment
Operating property and equipment are recorded at cost. Interest expense related to the acquisition of certain property and equipment, including aircraft purchase deposits, is capitalized as an additional cost of the asset. Interest capitalized for the years ended December 31, 2013, 2012 and 2011 was $47 million, $50 million and $40 million, respectively. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated over the estimated useful life of the asset or the modifications, whichever is less. The depreciable lives used for the principal depreciable asset classifications are:
Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally 5% to 10%, except when guaranteed by a third-party for a different amount.
Equipment and property under capital leases are amortized over the term of the leases or, in the case of certain aircraft, over their expected useful lives. Lease terms vary but are generally 16 to 30 years for aircraft and three to 30 years for other leased equipment and property.
The Company records 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 asset are less than the carrying amount of the asset and the net book value of the asset exceeds its 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Passenger Revenue
Passenger ticket sales are initially recorded as a component of Air traffic liability. Revenue derived from ticket sales is recognized at the time service is provided. However, due to various factors, including the complex pricing structure and interline agreements throughout the industry, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized, including breakage. These estimates are generally based upon the evaluation of historical trends, including the use of regression analysis and other methods to model the outcome of future events based on the Company's historical experience, and are recorded at the scheduled time of departure.
The Company purchases capacity, or ASMs, generated by the Company's wholly-owned regional air carriers and the capacity of Air Wisconsin Airlines Corporation (Air Wisconsin), Republic Airways Holdings' subsidiaries Republic Airlines (Republic) and Chautauqua Airlines (Chautauqua), Mesa Airlines, Inc. (Mesa), and SkyWest Airlines, Inc.'s subsidiaries Sky West Airlines (SkyWest) and ExpressJet Airlines (ExpressJet) in certain markets. The Company's wholly-owned regional air carriers and Air Wisconsin, Chautauqua, ExpressJet, Republic, Mesa, and SkyWest operate regional aircraft in these markets as part of either American Eagle carriers or US Airways Express. The Company classifies revenues generated from transportation on these carriers as regional passenger revenues. Liabilities related to tickets sold by the Company for travel on these air carriers are also included in the Company's air traffic liability and are subsequently relieved in the same manner as described above.
Various taxes and fees assessed on the sale of tickets to end customers are collected by the Company as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statement of operations and recorded as a liability until remitted to the appropriate taxing authority.
Frequent Flyer Programs
The Company currently operates two frequent traveler programs, American's AAdvantage and US Airways' Dividend Miles. These programs award mileage credits to passengers who fly on American and oneworld carriers and US Airways and Star Alliance carriers, respectively, as well as certain other partner airlines that participate in the programs. Effective March 31, 2014, US Airways will join the oneworld alliance and exit the Star Alliance. At that point, frequent travel reciprocity will be discontinued for many Star Alliance airlines. Mileage credits can also be earned through purchases from other non-airline partners that participate in our respective loyalty programs. Mileage credits can be redeemed for travel on American, US Airways or other participating partner airlines, in which case the Company pays a fee.
The Company uses the incremental cost method to account for the portion of our frequent flyer liability incurred when AAdvantage and Dividend Miles members earn mileage credits by flying on American, US Airways or its regional affiliates. The Company has an obligation to provide future travel when these mileage credits are redeemed and therefore has recorded a liability for mileage credits outstanding.
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, the Company estimates how many mileage credits will never be redeemed for travel and excludes 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 statement 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. In addition, the Company also includes in the determination of incremental cost the amount of certain fees related to redemptions expected to be collected from AAdvantage and Dividend Miles members. These redemption fees reduce incremental cost. 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.
The Company 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. As of December 31, 2013, the liability for outstanding mileage credits expected to be redeemed for future travel awards for US Airways under the Dividend Miles program was $932 million and is included on the consolidated balance sheets within Frequent flyer liability. This liability will be reduced as miles are redeemed and new miles earned will be recorded as a liability based on the incremental cost method discussed above.
As of December 31, 2013 the liability for outstanding mileage credits for the AAdvantage program was $580 million and is included on the consolidated balance sheets within Frequent flyer liability.
American and US Airways also sell frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to business partners is comprised of two components, transportation and marketing. Historically, American and US Airways 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 our adoption of Accounting Standards Update (ASU) No. 2009-13, "Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements" on January 1, 2011.
During the fourth quarter, American and Citibank amended their current 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, AAG will apply the relative selling price method to determine the values of each deliverable. Under the relative selling price approach, American and US Airways identified five revenue elements for the co-branded credit card agreement with Citibank and Dividend Miles co-branded credit card agreement with Barclays: the transportation component; use of the American and US Airways’ brand including access to frequent flyer 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 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 the Company's business partners and relates primarily to the use of American’s and US Airways’ logo and tradenames along with access to customers lists of AAdvantage and Dividend Miles members. The marketing services are provided 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 the fourth quarter for American’s Citibank modification, American reduced its 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, American and US Airways now defer less revenue per mile sold.
For American’s agreements where there has not been a material modification, it continues to apply the residual method.
As of December 31, 2013 and 2012, the Company had $1.5 billion and $1.2 billion, respectively in deferred revenue from the sale of mileage credits (recorded as Frequent flyer liability on the consolidated balance sheets). For the years ended December 31, 2013, 2012 and 2011, the marketing component of mileage sales recognized at the time of sale in other revenues was approximately $834 million, $725 million and $761 million, respectively.
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.
Selling Expenses
Selling expenses include commissions, credit card fees, computerized reservations systems fees and advertising. Advertising expenses are expensed on a straight-line basis as incurred throughout the year. Advertising expense was $166 million, $153 million and $186 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Deferred Gains and Credits, net
Included within deferred gains and credits, net are amounts deferred and amortized into future periods associated with the adjustment of leases to fair value in connection with the application of acquisition accounting and certain vendor incentives.
Share-based Compensation
The Company accounts for its share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. The fair value of stock options and stock appreciation rights is estimated using a Black-Scholes option pricing model. The fair value of restricted stock units is based on the market price of the underlying shares of common stock on the date of grant. See Note 12 for further discussion of share-based compensation.
Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other nonoperating expense, net in AAG's Consolidated Statements of Operations. Foreign currency losses for 2013, 2012 and 2011 were $56 million, $41 million and $17 million, respectively.
Subsequent Events
In connection with preparation of the Consolidated Financial Statements and in accordance U.S. GAAP, the Company evaluated subsequent events after the balance sheet date of December 31, 2013 and identified items as set forth in Note 20 to AAG's Consolidated Financial Statements.
6. Special Items, Net
The following table summarizes the components of the Company's Special items, net, as of December 31, 2013, 2012 and 2011 (in millions):
(1)
Consists primarily of impairment charges to write-down certain Boeing 757 aircraft and certain related long-lived assets to their estimated fair value in connection with reclassification of these assets to held for sale.
(2)
Consists primarily of a $107 million fair value adjustment to the pilot long-term disability plan and a $43 million charge to benefits expense due to a reorganization related increase in workers' compensation claims in the applicable period including adverse developments on older claims. Charges in 2012 are in connection with voluntary and involuntary employee separations from the Company and were paid through the end of 2013.
(3)
Employee related expenses primarily consist of a $192 million charge resulting from the US Airways Group pilot MOU that became effective upon consummation of the Merger, $58 million in severance to satisfy certain separation agreements resulting from the Merger and professional fees and $56 million related to equity awards granted in connection with the Merger, partially offset by the cancellation of equity awards in connection with the Merger.
(4)
Recognition of a $67 million gain on the sale of slots at LaGuardia and Ronald Regan Washington National Airport as part of the settlement reached with the Department of Justice.
7. Investments and Fair Value Measurements
Short-term investments consisted of (in millions):
Short-term investments at December 31, 2013, by contractual maturity included (in millions):
All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are reflected as a component of Accumulated other comprehensive income (loss).
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company's short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. The Company's fuel derivative contracts, which consist primarily of call options, collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option), are valued using energy and commodity market data which is derived by combining raw inputs with quantitative models and processes to generate forward curves and volatilities. Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. No changes in valuation techniques or inputs occurred during the year ended December 31, 2013.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):
(1)
Unrealized gains or losses on short-term investments, restricted cash and short-term investments and derivatives qualifying for hedge accounting are recorded in Accumulated other comprehensive income (loss) at each measurement date.
(2)
The Company's short-term investments mature in one year or less except for $250 million of Bank notes/Certificates of deposit/Time deposits, $511 million of U.S. Government agency investments and $2.1 billion of Corporate obligations.
A $56 million Level 1 restricted money market security was liquidated in August 2013. The cash proceeds were subsequently reinvested in a Level 2 U.S. Treasury Obligation. The Company's policy regarding the recording of transfers between levels is to reflect any such transfers at the end of the reporting period.
As of December 31, 2013, the Company had no exposure to European sovereign debt.
8. Commitments, Contingencies and Guarantees
Aircraft Acquisition Commitments
AAG had total aircraft acquisition commitments as of December 31, 2013 as follows:
As of December 31, 2013, payments for the above purchase commitments and certain engines, and future lease payments for all leased aircraft, are presented in the table below (in millions):
(1)
These amounts are net of purchase deposits currently held by the manufacturers. The Company's purchase deposits totaled $1.1 billion as of December 31, 2013. American has granted Boeing a security interest in American's purchase deposits with Boeing.
In February 2013, American entered into agreements with Boeing that provide for, among other things, the assumption and restructuring of certain existing aircraft purchase agreements, the entering into of a definitive purchase agreement with respect to Boeing 737 MAX aircraft, the confirmation of the purchase of the Boeing 787 aircraft (which previously had been subject to certain reconfirmation rights) and certain financing commitments. American also entered into an amendment to its agreement with Airbus S.A.S. in January 2013.
In December 2013, American entered into agreements with Bombardier Inc. (Bombardier) and Embraer S.A. (Embraer) under which it plans to acquire 30 Bombardier CRJ900 aircraft to be delivered in 2014 and 2015 and 60 Embraer E175 aircraft to be delivered between 2015 and 2017. The agreement also provides for the option to purchase up to 40 additional CRJ900 aircraft and 90 additional E175 aircraft.
Facility and support commitments
The Company has contracts related to facility construction or improvement projects, primarily at airport locations as well as information technology support. The contractual obligations related to these contracts are presented in the table below (in millions):
Capacity Purchase Agreements with Third-Party Regional Carriers
As of December 31, 2013, the Company's capacity purchase agreements with third-party regional carriers had expiration dates ranging from 2014 to 2025, with rights of American or US Airways, respectively, to extend the respective terms of each agreement.
The Company has entered into agreements with the third-party regional carriers that operate certain of their aircraft using American’s or US Airways’ flight designator codes. American or US Airways, respectively, controls the scheduling, pricing, reservations, ticketing and seat inventories of those aircraft and retains all revenues associated with revenue flights by those aircraft. American or US Airways pays the third-party regional carriers an amount, as defined in the applicable agreement, based on the airlines’ costs of operating those flights and other factors intended to approximate market rates for those services. As of December 31, 2013, the Company's minimum fixed obligations under its capacity purchase agreements with third-party regional airlines were as follows (approximately, in millions):
(1)
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. These obligations also include the portion of the Company's future obligations related to aircraft deemed to be leased in the amount of approximately $317 million in 2014, $289 million in 2015, $220 million in 2016, $186 million in 2017, $143 million in 2018 and $261 million in 2019 and thereafter.
Operating Leases
The Company leases certain aircraft, engines and ground equipment, in addition to the majority of its ground facilities and terminal space. As of December 31, 2013, the Company had 508 aircraft under operating leases, with remaining terms ranging from one month to approximately 14 years. Airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee must pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Some leases also include renewal and purchase options.
As of December 31, 2013, obligations under noncancellable operating leases for future minimum lease payments were as follows (in millions):
(1) As of December 31, 2013, $322 million is included on the accompanying balance sheet in Accrued liabilities and Deferred gains and credits, net relating to rent expense being recorded in advance of future operating lease payments.
Rent expense, excluding landing fees, was $1.7 billion, $1.4 billion and $1.6 billion in 2013, 2012 and 2011, respectively.
Sale-leaseback Arrangements
During 2013, American financed 31 Boeing 737-800 and three 777-300ER aircraft under sale-leaseback arrangements, which are accounted for as operating leases. Gains and losses associated with these sale-leaseback transactions are amortized over the respective remaining lease term and are included in the consolidated balance sheets as deferred gains and prepaid rent, respectively.
American has entered into sale-leaseback arrangements with certain leasing companies to finance 20 Boeing 737-800 scheduled to be delivered beginning in January 2014. The financings of each aircraft under these arrangements are subject to certain terms and conditions.
Off-Balance Sheet Arrangements
Aircraft
AAG has 185 owned aircraft and 144 leased aircraft which were financed 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 the acquisition of flight equipment. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allowed AAG to raise the financing for several aircraft at one time and place such funds in escrow pending the 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 AAG.
Each trust covered a set amount of aircraft scheduled to be delivered or refinanced within a specific period of time. At the time of each covered aircraft financing, the relevant trust used the funds in escrow to purchase equipment notes relating to the financed aircraft. The equipment notes were issued, at AAG's 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, as applicable. In both cases, the equipment notes are secured by a security interest in the aircraft. The pass through trust certificates are not direct obligations of, nor are they guaranteed by, AAG, American or US Airways. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American or US Airways and in certain instances are guaranteed by AAG or US Airways Group, as applicable. As of December 31, 2013, $6.0 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet.
With respect to leveraged leases, AAG evaluated whether the leases had characteristics of a variable interest entity and concluded the leasing entities met the criteria for variable interest entities. AAG 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 AAG to absorb decreases in value or entitles AAG to participate in increases in the value of the aircraft. AAG does not provide residual value guarantees to the bondholders or equity participants in the trusts. Each lease does have a fair market value or a fixed price purchase option that allows AAG to purchase the aircraft 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, AAG does not participate in any increases in the value of the aircraft. AAG concluded it was not the primary beneficiary under these arrangements. Therefore, AAG accounts for its EETC leveraged lease financings as operating leases. AAG's total future obligations under these leveraged lease financings are $2.1 billion as of December 31, 2013, which are included in the future minimum lease payments table above.
Special Facility Revenue Bonds
AAG guarantees 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 AAG. Under such leases, AAG is required to make rental payments through 2035, sufficient to pay maturing principal and interest payments on the related bonds. To the extent these transactions were committed to prior to May 21, 1998, they are accounted for as operating leases. Approximately $498 million of the special facility revenue bonds, with total future payments of approximately $715 million as of December 31, 2013, are guaranteed by AAG, American, US Airways Group or US Airways. Approximately $112 million of these special facility revenue bonds contain mandatory tender provisions that require American to make operating lease payments sufficient to repurchase the bonds in 2014. Although American has the right to remarket the bonds, there can be no assurance that these bonds will be successfully remarketed. Any payments to redeem or purchase bonds that are not remarketed would generally reduce existing rent leveling accruals or are considered prepaid facility rentals and would reduce future operating lease commitments.
Legal Proceedings
Chapter 11 Cases. As previously disclosed, on the Petition Date, November 29, 2011, the Debtors filed voluntary petitions for relief under the Bankruptcy Code. On October 21, 2013, the Bankruptcy Court entered the Confirmation Order approving and confirming the Debtors' Plan. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by the Merger Agreement pursuant to which Merger Sub merged with and into US Airways Group, with US Airways Group surviving as a wholly-owned subsidiary of AAG. From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date, generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.
Pursuant to rulings of the Bankruptcy Court, the Plan has established a disputed claim reserve to hold shares of AAG Series A Preferred Stock and AAG Common Stock reserved for issuance to disputed claimholders that ultimately become allowed Single-Dip general unsecured claimholders after emergence. The shares provided for under the Plan are determined based upon a disputed claim reserve amount of approximately $755 million. As disputed claims are resolved, the claimants receive distributions of shares from the reserve on the same basis as if such distributions had been made on or about the Effective Date. To the extent that any of the reserved shares remain undistributed upon resolution of the remaining disputed claims, such shares will not be returned to AAG but rather will be distributed by priority first, if necessary, to satisfy unsecured claims or labor-related obligations, and then to former AMR shareholders as of the Effective Date. AAG is not required to distribute additional shares above the 756 million shares contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay all allowed unsecured claims. However, resolution of disputed claims could have a material effect on Single-Dip creditor recoveries under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.
There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, post-employee benefits are not vested benefits and thus may be terminated without liability to American. The Bankruptcy Court has not yet ruled on this matter and we cannot predict whether American will receive relief from any of these obligations.
Government Antitrust Actions. On August 13, 2013, the U.S. government, along with the States of Arizona, Florida, Tennessee and Texas, the Commonwealths of Pennsylvania and Virginia, and the District of Columbia (collectively, the plaintiff states), filed a complaint against US Airways Group and AMR in the U.S. District Court for the District of Columbia. The plaintiffs alleged, among other things, that the proposed Merger would substantially lessen competition in violation of Section 7 of the Clayton Act and sought to permanently enjoin the transaction. On September 5, 2013, the plaintiffs filed an amended complaint, adding the State of Michigan as a plaintiff. On October 1, 2013, the State of Texas entered into an agreement with US Airways Group and AMR that resolved that state’s objections to the Merger, and its claims were dismissed with prejudice on October 7, 2013. On November 11, 2013, US Airways and American entered into agreements with the U.S. government and the plaintiff states resolving all claims in the litigation. The agreement with the U.S. government requires the carriers to divest assets at certain airports and remains subject to public comment and court approval. In the agreement with the United States government, among other things, we agreed to divest and not reacquire for ten years certain rights and assets consisting of 52 Slot pairs at Washington Reagan National Airport, and 17 Slot pairs at LaGuardia, in each case together with and associated gates and related ground facilities necessary to operate those Slot pairs, and two gates at each of Boston Logan International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport and Miami International Airport. The agreement with the plaintiff states, which was entered by the court on November 12, 2013, requires our airlines, subject to certain conditions and exceptions, to maintain certain hub operations in a manner generally consistent with historical operations and to continue to provide scheduled daily service to certain specified communities, both for limited periods of time. In addition, we entered into a related settlement with the DOT related to small community service from Washington Reagan National Airport
Merger Class Action. On March 1, 2013, a complaint captioned Plumbers & Steamfitters Local Union No. 248 Pension Fund v. US Airways Group, Inc., et al., No. CV2013-051605, was filed as a putative class action on behalf of the stockholders of US Airways Group in the Superior Court for Maricopa County, Arizona. On July 3, 2013, an amended complaint, captioned Dennis Palkon, et al. v. US Airways Group, Inc., et al., No. CV2013-051605, was filed with the same court. The amended complaint names as defendants US Airways Group and the members of its board of directors, and alleges that the directors failed
to maximize the value of US Airways Group in connection with the Merger and that US Airways Group aided and abetted those breaches of fiduciary duty. The relief sought in the amended complaint includes an injunction against the Merger, or rescission in the event it has been consummated. The court in the above-referenced action denied the plaintiff’s motion for a temporary restraining order that had sought to enjoin the US Airways Group Annual Meeting of Stockholders. The above-referenced action was stayed pending the outcome of the antitrust lawsuit filed by the U.S. government and various states on August 13, 2013 (described above). This stay has now been lifted and a motion to dismiss this action filed by US Airways Group is pending before the court. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
Private Party Antitrust Action. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint names as defendants US Airways Group and US Airways, and alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants, and on October 2, 2013, dismissed the initial California action. The Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On January 10, 2014, the Plaintiffs moved to amend their complaint to add a claim for money damages and to request injunctive relief requiring the carriers to hold separate their assets. Trial is set for June 2014. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
US Airways Sabre Matter. On April 21, 2011, US Airways Inc. filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, Sabre) in Federal District Court for the Southern District of New York. The lawsuit, as amended to date, alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its market power by restricting our ability to distribute our products to our customers. The lawsuit also alleges that these actions have permitted Sabre to charge supracompetitive booking fees and to use technologies that are not as robust and as efficient as alternatives in a competitive market. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. We intend to pursue our claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.
General. The Company and its subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within the control of the Company. Therefore, although the Company will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on the Company are uncertain.
Guarantees and Indemnifications
US Airways assigned to Delta a lease agreement with the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia airport. A portion of the rental payments under the lease are used to repay special revenue bonds issued by the Port Authority. The revenue bonds have a final scheduled maturity in 2015 and had an outstanding principal amount of approximately $43 million at December 31, 2013. Pursuant to the terms of the lease assignment, US Airways is contingently liable for Delta's obligations, as assignee, under the lease agreement in the event Delta fails to perform such obligations including, without limitation, the payment of all rentals and other amounts due under the lease agreement. US Airways has the right to cure any failure by Delta to perform its obligations under the lease agreement and, in addition, US Airways has the right to reoccupy the terminal if it so chooses to cure any such default.
The Company is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks. The Company is not able to estimate the potential amount of any liability resulting from the indemnities. These indemnities are discussed in the following paragraphs.
In its aircraft financing agreements, the Company generally indemnifies the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (or taxes) relate to the negligence of the indemnified parties.
The Company's loan agreements and other London Interbank Offered Rate (LIBOR)-based financing transactions (including certain leveraged aircraft leases) generally obligate the Company to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, the Company's loan agreements, derivative contracts and other financing arrangements typically contain a withholding tax provision that requires the Company to pay additional amounts to the applicable
lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.
These increased cost and withholding tax provisions continue for the entire term of the applicable transaction, and there is no limitation on the maximum additional amounts the Company could be obligated to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default and, in a secured financing transaction, would entitle the lender to foreclose on the collateral to realize the amount due.
In certain transactions, including certain aircraft financing leases and loans and derivative transactions, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances. In such a case, the Company may be required to make a lump sum payment to terminate the relevant transaction.
The Company has general indemnity clauses in many of its airport and other real estate leases where the Company as lessee indemnifies the lessor (and related parties) against liabilities related to the Company's use of the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties. In addition, the Company provides environmental indemnities in many of these leases for contamination related to the Company's use of the leased property.
Under certain contracts with third parties, the Company indemnifies the third-party against legal liability arising out of an action by the third-party, or certain other parties. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined. The Company has liability insurance protecting the Company for some of the obligations it has undertaken under these indemnities.
The Company is involved in certain claims and litigation related to its operations. The Company is also subject to regulatory assessments in the ordinary course of business. The Company establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. In the opinion of management, liabilities, if any, arising from these regulatory matters, claims and litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows, after consideration of available insurance.
Venezuela Cash and Short-term Investments
The business environment in Venezuela has been challenging, with economic uncertainty fueled by currency devaluation, high inflation and governmental restrictions, including currency exchange and payment controls, price controls and the possibility of expropriation of property or other resources. As of December 31, 2013, approximately $710 million of our unrestricted cash balance was held as Venezuelan bolivars, valued at a weighted average rate of 6.04 bolivars to the dollar. The period of time to exchange those funds into dollars and repatriate them has been increasing and is presently more than a year. On January 23, 2014, the Venezuelan government issued a regulation to implement a new system for determining the exchange rate based on the result of limited periodic sales of dollars known as Sicad auctions (currently 11.80 to the dollar based on the February 21, 2014 Sicad auction) for repatriation of income from future ticket sales, and introduced new procedures for approval of conversion and repatriation of local currency. The government also enacted a new law effective February 19, 2014 that authorizes additional methods of exchanging Venezuelan bolivars at rates other than the controlled base rate of 6.3 to the dollar or the existing Sicad auction rate, but the regulations necessary to implement the law are still pending and it is not clear at this point whether or how the new methods may impact the pending balances of Venezuelan bolivars held by airlines. We are working with Venezuelan authorities regarding the timing and exchange rate applicable to the repatriation of funds held in local currency. Further, the current, devalued rates may have an ongoing adverse effect on our reported results if we are unable to fully adjust prices on flights to and from Venezuela, of which there can be no assurance. More generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by the Company and can significantly affect the value of our assets 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. - 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 on currency risks.
Other
In 2010, American and Japan Airlines entered into a JBA under which, amongst other things, American provided Japan Airlines a guarantee of certain minimum incremental revenue resulting from the successful operation of the joint business for the first three years following its implementation, subject to certain terms and conditions. As of December 31, 2013, American reached an agreement with JAL to settle the liability at an amount already recorded.
In the fourth quarter of 2012, the Company entered into a settlement agreement resolving a commercial dispute. The settlement agreement includes two elements which were valued at relative fair value and will be recognized when earned. The Company determined that the settlement includes a litigation gain of $280 million, which was valued using future cash flows and recognized in the fourth quarter of 2012. The settlement also includes an incentive which is contingent upon signing a future contract and will be recognized over the term of the future contract. The contract was signed in January, 2014.
As a result of the Terrorist Attacks and the subsequent liability protections provided for by the Air Transportation Safety and System Stabilization Act (the Stabilization Act), the Company recorded a liability for the Terrorist Attacks claims equal to the related insurance receivable due to American. The Stabilization Act provides that, notwithstanding any other provision of law, liability for all claims, whether compensatory or punitive, arising from the Terrorist Attacks, against any air carrier shall not exceed the liability coverage maintained by the air carrier. As of December 31, 2013, the remaining liability and the amount of the offsetting receivable were each $1.0 billion.
9. Indebtedness and Leases
Long-term debt and capital lease obligations included in the Consolidated Balance Sheets consisted of (in millions):
For information regarding the liabilities subject to compromise as of December 31, 2012, see Note 2 to AAG's Consolidated Financial Statements.
Indebtedness
Secured financings are collateralized by assets, primarily aircraft, engines, simulators, rotable aircraft parts, hangar and maintenance facilities, route authorities and airport Slots. At December 31, 2013, the maturities of long-term debt and capital leases are as follows (in millions):
At December 31, 2013, the Company was operating 28 jet aircraft under capital leases. Leases can generally be renewed at rates based on fair market value at the end of the lease term for a number of additional years.
As of December 31, 2013, AAG had issued guarantees covering approximately $1.3 billion of American's tax-exempt bond debt (and interest thereon) and $4.7 billion of American's secured debt (and interest thereon).
In connection with the Merger and pursuant to the Plan on December 9, 2013, (i) the Company and American entered into a joinder to loan agreement and became co-obligors of US Airways Group's $1.6 billion 2013 Citicorp Credit Facility, (ii) the Company and American entered into a second supplemental indenture that guarantee the payment obligations associated with the US Airways Group's 6.125% Notes, due in 2018 (the 6.125% senior notes) and (iii) the Company entered into a second supplemental indenture which allows for the conversion into AAG Common Stock the US Airways Group's 7.25% Convertible Notes, due in 2014 (the 7.25% notes).
2013-1 EETCs (American)
On March 12, 2013, American closed its private offering of two tranches of enhanced equipment trust certificates (the Series 2013-1A/B EETCs) in the aggregate face amount of $664 million. The Series 2013-1A/B EETCs are comprised of a senior tranche of Class A Certificates with an interest rate of 4.00% per annum and a final expected distribution date of July 15, 2025, and a junior tranche of Class B Certificates with an interest rate of 5.625% per annum and a final expected distribution date of January 15, 2021. The Series 2013-1A/B EETCs represent an interest in the assets of two separate pass through trusts, each of which hold equipment notes issued by American. Interest on the issued and outstanding equipment notes will be payable semiannually on January 15 and July 15 of each year, commencing on July 15, 2013, and principal on such equipment notes is scheduled for payment on January 15 and July 15 of certain years, commencing on January 15, 2014. As of December 31, 2013, the equipment notes are secured by eight currently owned Boeing 737-823 aircraft, one currently owned Boeing 777-223ER aircraft, and four currently owned Boeing 777-323ER aircraft. The certificates were offered in the U.S. to qualified institutional buyers, as defined in, and in reliance on, Rule 144A under the Securities Act of 1933, as amended (the Securities Act).
On June 5, 2013, American closed its private offering of Class C enhanced equipment trust certificates (the Series 2013-1C EETCs) in the aggregate face amount of $120 million. The Series 2013-1C EETCs rank junior to the Series 2013-1A/B EETCs. The Series 2013-1C EETCs were issued with an interest rate of 6.125% per annum and a final expected distribution date of July 15, 2018. The 2013-1C EETCs represent an interest in the assets of a separate pass through trust, which will hold certain equipment notes issued by American. The Series 2013-1C EETCs are secured by the same aircraft securing the Series 2013-1A/B EETCs. The certificates were offered in the U.S. to qualified institutional buyers, as defined in, and in reliance on, Rule 144A under the Securities Act.
2013-2 EETCs (American)
The Company filed a motion with the Bankruptcy Court on October 9, 2012 requesting entry of an order authorizing American to, among other things: (i) obtain post-petition financing in an amount of up to $1.5 billion secured on a first priority basis by, among other things, up to 41 Boeing 737-823 aircraft, 14 Boeing 757-223 aircraft, one Boeing 767-323ER aircraft and 19 Boeing 777-223ER aircraft as part of a new enhanced equipment trust certificate (EETC) financing (the Refinancing EETC) to be offered pursuant to Rule 144A under the Securities Act, and (ii) use cash on hand (including proceeds of the Refinancing EETC) to indefeasibly repay the existing pre-petition obligations secured by such aircraft, as applicable, which are currently financed through, as the case may be, an EETC financing entered into by American in July 2009 (the Series 2009-1 Pass Through Certificates), a secured notes financing entered into by American in July 2009 (the 2009-2 Senior Secured Notes) and an EETC financing entered into by American in October 2011 (the Series 2011-2 Pass Through Certificates and, together with the Series 2009-1 Pass Through Certificates and the 2009-2 Senior Secured Notes, the Existing Financings), in each case without the payment of any make-whole amount or other premium or prepayment penalty.
The Bankruptcy Court approved the motion on January 17, 2013 and entered an order (the EETC Order) to such effect on February 1, 2013. The trustees for the Existing Financings appealed the EETC Order and judgments rendered in certain related adversary proceedings. The appeals (the Appeals) were briefed and oral argument before the United States Court of Appeals for the Second Circuit (the Second Circuit) was heard on June 20, 2013. On September 12, 2013, the Second Circuit fully affirmed the Company's right to repay the Existing Financings without the payment of any make-whole amount or other premium or prepayment penalty. On September 26, 2013, the trustees for the Existing Financings filed a petition for an en banc rehearing of the Appeals by the Second Circuit. On November 18, 2013, the Second Circuit denied such request for rehearing. On February 12, 2014, the trustees for the Existing Financings filed a petition for certiorari to the Supreme Court. American intends to continue to assert vigorously its right to repay the Existing Financings without the payment of any make-whole amounts or other premium or prepayment penalty.
On July 31, 2013, the Company closed its private offering of the Refinancing EETC (the Series 2013-2A EETC) in the aggregate face amount of $1.4 billion with an interest rate of 4.95% per annum and a final expected distribution date of January 15, 2023. In September 2013, American repaid the Existing Financings, including securities tendered to the Company under a tender offer for the Existing Financings that commenced on June 27, 2013, and received the proceeds from the Series 2013-2A EETC. In conjunction with the repayment of the Existing Financings, the Company incurred cash charges of $19 million, included in Interest expense, net of capitalized interest and a charge of $54 million, included in Miscellaneous, net, of which $21 million is cash, related to the premium on tender for the Existing Financings, and $33 million is non-cash, related to the write-off of unamortized issuance costs. The 2013-2A EETC represents an interest in the assets of a separate pass through trust, which will hold certain equipment notes issued by American. The Series 2013-2A EETC is secured by the same aircraft previously used to secure the Existing Financings. The certificates were offered in the U.S. to qualified institutional buyers, as defined in, and in reliance on, Rule 144A under the Securities Act.
On November 27, 2013, American closed its private offering of Class B enhanced equipment trust certificates (the Series 2013-2B EETCs) in the aggregate face amount of $512 million. The Series 2013-2B EETCs rank junior to the Series 2013-2A EETCs. The Series 2013-2B EETCs were issued with an interest rate of 5.60% per annum and a final expected distribution date of July 15, 2020. The 2013-2B EETCs represent an interest in the assets of a separate pass through trust, which will hold certain equipment notes issued by American. The Series 2013-2B EETCs are secured by the same aircraft securing the Series 2013-2A EETCs. The certificates were offered in the U.S. to qualified institutional buyers, as defined in, and in reliance on, Rule 144A under the Securities Act.
On December 20, 2013, American closed its private offering of Class C enhanced equipment trust certificates (the Series 2013-2C EETCs) in the aggregate face amount of $256 million. The Series 2013-2C EETCs generally rank junior to the Series 2013-2A and 2B EETCs. The Series 2013-2C EETCs were issued with an interest rate of 6.00% per annum and a final expected distribution date of January 15, 2017. The 2013-2C EETCs represent an interest in the assets of a separate pass through trust, which will hold certain equipment notes issued by American. The Series 2013-2C EETCs are secured by the same aircraft securing the Series 2013-2A and 2B EETCs. The certificates were offered in the U.S. to qualified institutional buyers, as defined in, and in reliance on, Rule 144A under the Securities Act.
Credit Facilities (American)
On June 27, 2013, American and AAG entered into a Credit and Guaranty Agreement (as amended, the Credit Agreement) with certain lenders. The Credit Agreement provides for a $1.9 billion term loan facility (the Term Loan Facility) and a $1.0 billion revolving credit facility (the Revolving Facility and, together with the Term Loan Facility, the Credit Facilities). As of December 31, 2013, American had borrowed $1.9 billion under the Term Loan Facility. The Credit Facilities are secured obligations of American and guaranteed by AAG. The Revolving Facility provides that American may from time to time borrow, repay and reborrow loans thereunder and have letters of credit issued thereunder in an aggregate amount outstanding at any time of up to $1.0 billion. As of December 31, 2013, there were no borrowings outstanding under the Revolving Facility.
Upon consummation of the Merger, US Airways Group and US Airways joined the Credit Facilities as guarantors. Following the joinder, certain minimum dollar-thresholds under the negative and financial covenants in the Credit Facilities were automatically increased. The Term Loan Facility and Revolving Facility mature on June 27, 2019 and June 27, 2018, respectively, unless otherwise extended by the applicable parties. The Term Loan Facility is repayable in quarterly installments in an amount equal to 0.25% of the original principal amount thereof with any unpaid balance due on the maturity date of the Term Loan Facility.
Voluntary prepayments may be made by American at any time, with a premium of 1.00% applicable to certain prepayments made prior to the date that is six months following December 27, 2013. Mandatory prepayments at par of term loans and revolving loans are required to the extent necessary to comply with American's covenants regarding the collateral
coverage ratio and certain dispositions of collateral. In addition, if a "change of control" (as defined in the Credit Agreement) occurs, American will, absent an amendment or waiver, be required to repay at par the loans outstanding under the Credit Facilities and terminate the Revolving Facility.
The Credit Facilities bear interest at an index rate plus an applicable index margin or, at American's option, LIBOR (subject to a floor of 0.75% with respect to the Term Loan) plus an applicable LIBOR margin. The applicable LIBOR margin is 3.00% for borrowings under both the Term Loan Facility and the Revolving Facility. Subject to certain limitations and exceptions, the Credit Facilities are secured by certain collateral, including liens on certain route authorities to operate between certain specified cities, certain take-off and landing rights at certain airports and American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans under the Credit Facilities as more fully described below in "Collateral Related Covenants".
The Credit Facilities contain events of default customary for similar financings, including cross-acceleration to other material indebtedness. Upon the occurrence of an event of default, the outstanding obligations under the Credit Facilities may be accelerated and become due and payable immediately. The Credit Facilities also include covenants that, among other things, require AAG and its restricted subsidiaries to maintain a minimum aggregate liquidity (as defined in the Credit Agreement) of not less than $2.0 billion and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.
Senior Secured Notes (American)
In March 2011, American issued $1.0 billion aggregate principal amount of senior secured notes due 2016 (the Senior Secured Notes) guaranteed on an unsecured basis by AAG. In connection with the closing of the Merger, US Airways and US Airways Group entered into a First Supplemental Indenture, dated as of December 9, 2013, pursuant to which US Airways and US Airways Group became guarantors. The Senior Secured Notes bear interest at a rate of 7.50% per annum, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2011. As is customary for financings of this nature, the indebtedness evidenced by the Senior Secured Notes may be accelerated upon the occurrence of events of default under the related indenture. Subject to certain limitations and exceptions, the Senior Secured Notes are secured by certain route authorities, airport landing and takeoff slots, and rights to use or occupy space in airport terminals, in each case that American uses to operate non-stop services between certain airports and American is required maintain a certain minimum ratio of appraised value of the collateral to the outstanding amounts under the Senior Secured Notes as more fully described below in "Collateral Related Covenants."
American, at its option, may redeem some or all of the Senior Secured Notes at any time on or after March 15, 2013, at specified redemption prices, plus accrued and unpaid interest, if any. In addition, at any time prior to March 15, 2013, American, at its option, may redeem some or all of the Senior Secured Notes at a redemption price equal to 100% of their principal amount plus a "make-whole" premium and accrued and unpaid interest, if any. In addition, at any time prior to March 15, 2014, American, at its option, may redeem (1) up to 35% of the aggregate principal amount of the Senior Secured Notes with the proceeds of certain equity offerings at a redemption price of 107.5% of their principal amount, plus accrued and unpaid interest, if any, and (2) during any 12-month period, up to 10% of the original aggregate principal amount of the Senior Secured Notes at a redemption price of 103% of their principal amount, plus accrued and unpaid interest, if any. If American sells certain assets or if a "change of control" (as defined in the indenture) occurs, American must offer to repurchase the Senior Secured Notes at prices specified in the indenture.
The indenture for the Senior Secured Notes includes covenants that, among other things, limit the ability of the Company and its subsidiaries to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends. The indenture for the Senior Secured Notes also contains events of default customary for similar financings, including cross-default to certain material indebtedness of American. Upon the occurrence of certain events of default, the Senior Secured Notes may be accelerated and become due and payable.
Senior Convertible Notes (AMR Corporation)
On November 29, 2013, the substantially all holders of AMR Corporation's 6.25% senior convertible notes elected to convert their notes into shares of AMR common stock (as an allowed AMR equity interest). Notes for which conversion was not elected prior to the deadline of November 29, 2013 remain in the pool of general unsecured claims to be settled pursuant to the Plan.
Other Financing Transactions (American)
In June 2013, American remarketed approximately $216 million of Tulsa Municipal Airport Revenue Refunding Bonds Trust Series 2000B, 2001A, and 2001B due June 1, 2035 (Series 2000B) and December 1, 2035 (Series 2001 A&B).
Citibank Advanced Purchase Agreement (American)
In 2009, American entered into an arrangement under which Citibank paid to American $1.0 billion in order to pre-purchase AAdvantage Miles (the Pre-Purchase Miles) under American's AAdvantage frequent flier loyalty program (the Pre-Purchase). Approximately $890 million of the Pre-Purchase proceeds was accounted for as a loan from Citibank with the remaining $110 million recorded as Deferred Revenue in Other liabilities and deferred credits.
To effect the Pre-Purchase, American and Citibank entered into an Amended and Restated AAdvantage Participation Agreement (as so amended and restated, the Amended Participation Agreement). Under the Amended Participation Agreement, American agreed that it would apply in equal monthly installments, over a five year period beginning on January 1, 2012, the Pre-Purchase Miles to Citibank cardholders' AAdvantage accounts.
Pursuant to the Pre-Purchase, Citibank has been granted a first-priority lien on certain of American's AAdvantage program assets. Commencing on December 31, 2011, American has the right to repay in cash, without premium or penalty, any or all of the amounts owed to Citibank that have not already been satisfied by the award of Pre-Purchase Miles to Citibank cardholders' accounts. American is also obligated, in certain circumstances (including certain specified termination events under the Amended Participation Agreement, certain cross defaults and cross acceleration events, and if any Pre-Purchase Miles remain at the end of the term) to repay in cash all outstanding amounts owed Citibank.
The Amended Participation Agreement includes provisions that grant Citibank the right to use Pre-Purchase Miles on an accelerated basis under specified circumstances.
2013 Citicorp Credit Facility (US Airways)
US Airways Group and certain other subsidiaries of US Airways Group are guarantors of the 2013 Citicorp Credit Facility agreement dated as of May 23, 2013. In connection with the closing of the Merger, AAG and American entered into a joinder to the 2013 Citicorp Credit Facility loan agreement pursuant to which AAG and American became guarantors under such agreement.
The 2013 Citicorp Credit Facility consists of $1.0 billion of tranche B-1 term loans (Tranche B-1) and $600 million of tranche B-2 term loans (Tranche B-2). Voluntary prepayments may be made by US Airways Group at any time, with a premium of 1.00% applicable to certain prepayments made prior to the date that is six months following January 16, 2014. Mandatory prepayments of the term loans are required to the extent necessary to comply with US Airways Group’s covenants regarding the collateral coverage ratio and certain dispositions of collateral. In addition, under the 2013 Citicorp Credit Facility agreement, if a "change of control" (as defined in the 2013 Citicorp Credit Facility agreement) occurs, US Airways will (absent an amendment or waiver) be required to repay the outstanding loans in full together with accrued interest thereon to the date of such prepayment.
The 2013 Citicorp Credit Facility agreement bears interest at an index rate plus an applicable index margin or, at US Airways' option, LIBOR (subject to an original floor of 1.00%) plus an applicable LIBOR margin. As of December 31, 2013, the interest rate was 4.00% based on a 3.00% LIBOR margin for Tranche B-1 and 3.25% based on a 2.25% LIBOR margin for Tranche B-2.
In January 2014, US Airways amended the 2013 Citicorp Credit Facility agreement to lower the applicable LIBOR margin from 3.00% to 2.75% for Tranche B-1. In addition, the LIBOR floor was reduced from 1.00% to 0.75% on both Tranche B-1 and Tranche B-2.
Tranche B-1 and Tranche B-2 mature on May 23, 2019 and November 23, 2016, respectively (unless otherwise extended by the applicable parties), and each is repayable in annual installments to be paid on each anniversary of the closing date in an amount equal to 1.00% of the initial aggregate principal amount of the loans with any unpaid balance due on the maturity date of the respective tranche.
The obligations of US Airways under the 2013 Citicorp Credit Facility are secured by liens on certain route authorities, certain take-off and landing rights at certain airports and certain other assets of US Airways. US Airways is required to maintain
a certain minimum ratio of appraised value of the collateral to the outstanding loans under the 2013 Citicorp Credit Facility agreement as more fully described below in "Collateral Related Covenants".
The 2013 Citicorp Credit Facility agreement includes affirmative, negative and financial covenants that, among other things, (a) require AAG and its restricted subsidiaries to maintain unrestricted liquidity of not less than $2.0 billion, with not less than $750 million held in accounts subject to control agreements, and (b) restrict the ability of US Airways Group, its subsidiaries party to the 2013 Citicorp Credit Facility, AAG and American to make certain investments, pay dividends and make certain other payments, make certain acquisitions, incur liens on the collateral, dispose of collateral, enter into certain affiliate transactions, enter into certain hedging transactions, and engage in certain business activities, in each case subject to certain exceptions. The 2013 Citicorp Credit Facility agreement contains events of default customary for similar financings, including a cross default provision to certain other material indebtedness of US Airways and certain of its affiliates. Upon the occurrence of an event of default, the outstanding obligations under the 2013 Citicorp Credit Facility may be accelerated and become due and payable immediately.
2013-1 EETCs (US Airways)
In April 2013, US Airways created two pass-through trusts which issued approximately $820 million aggregate face amount of Series 2013-1 Class A and Class B EETCs in connection with the financing of 18 Airbus aircraft scheduled to be delivered from September 2013 to June 2014. The 2013-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways' condensed balance sheet because the proceeds held by the depository are not US Airways' assets.
As of December 31, 2013, $261 million of the escrowed proceeds from the 2013-1 EETCs have been used to purchase equipment notes issued by US Airways in two series: Series A equipment notes in the amount of $198 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $63 million bearing interest at 5.375% per annum. Interest on the equipment notes is payable semiannually in May and November of each year, and began in November 2013. Principal payments on the equipment notes are scheduled to begin in November 2014. The final payments on the Series A and Series B equipment notes will be due in November 2025 and November 2021, respectively. US Airways' payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used to finance six Airbus aircraft delivered in 2013. The equipment notes are secured by liens on aircraft. The remaining $559 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.
2012-2 EETCs (US Airways)
The net proceeds from the issuance of the 2012-2 EETCs were used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in the amount of $418 million bearing interest at 4.625% per annum, Series B equipment notes in the amount of $128 million bearing interest at 6.75% per annum and Series C equipment notes in the amount of $100 million bearing interest at 5.45% per annum. Interest on the equipment notes is payable semiannually in June and December of each year and began in June 2013 for Series A and Series B, and December 2013 for Series C. Principal payments on the Series A and Series B equipment notes began in December 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in June 2025, June 2021 and June 2018, respectively. US Airways' payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The only principal payments due on the Series C equipment notes are the principal payments that will be due on the final payment date. The net proceeds from the issuance of these equipment notes were used to finance 11 Airbus aircraft delivered from May 2013 through October 2013. The equipment notes are secured by liens on aircraft.
2012-1 EETCs (US Airways)
In the first quarter of 2013, US Airways issued $183 million of equipment notes in three series under its 2012-1 EETCs completed in May 2012: Series A equipment notes in the amount of $111 million bearing interest at 5.90% per annum, Series B equipment notes in the amount of $37 million bearing interest at 8% per annum and Series C equipment notes in the amount of $35 million bearing interest at 9.125% per annum. The equipment notes are secured by liens on aircraft.
Industrial Development Revenue Bonds (US Airways)
The industrial development revenue bonds are due April 2023. Interest at 6.30% is payable semiannually on April 1 and October 1. The bonds are subject to optional redemption prior to the maturity date, in whole or in part, on any interest payment date at a redemption price of 100%.
6.125% Senior Notes (US Airways)
The 6.125% Senior Notes bear interest at a rate of 6.125% per annum, which is payable semi-annually on each June 1 and December 1 and began December 1, 2013. The 6.125% senior notes mature on June 1, 2018 and are fully and unconditionally guaranteed by US Airways. In connection with the closing of the Merger, AAG and American provided a full and unconditional guarantee of the payment obligations of US Airways Group under the 6.125% senior notes. The 6.125% senior notes are general unsecured senior obligations of the Company.
7.25% Convertible Notes (US Airways)
The 7.25% notes bear interest at a rate of 7.25% per annum, which shall be payable semi-annually in arrears on each May 15 and November 15. The 7.25% notes mature on May 15, 2014.
In connection with the closing of the Merger the 7.25% notes have become convertible into cash, shares of AAG Common Stock or a combination thereof at the Company's election. AAG fully and unconditionally guaranteed all of the payment obligations of US Airways Group under the 7.25% notes.
Holders may convert their 7.25% notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date for the 7.25% notes. The initial conversion rate for the 7.25% notes is 218.8184 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $4.57 per share). Such conversion rate is subject to adjustment in certain events.
As the 7.25% notes can be settled in cash upon conversion, for accounting purposes, the 7.25% notes were bifurcated into a debt component that was initially recorded at fair value and an equity component. The following table details the debt and equity components recognized related to the 7.25% notes (in millions):
At December 31, 2013, the remaining period over which the unamortized discount will be recognized is 0.4 years.
At December 31, 2013, the if-converted value of the 7.25% notes exceeded the principal amount by $101 million.
Collateral Related Covenants
Certain of American's and US Airways’ debt financing agreements contain loan to value ratio covenants and require American and US Airways under their respective financing agreements to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, American or US Airways is required, as applicable, to subject additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part, with premium (if any), or pay additional interest on the related indebtedness, as described below.
Specifically, American is required to meet certain collateral coverage tests on a periodic basis on two financing transactions: (1) the Senior Secured Notes and (2) the Credit Facilities, and US Airways is required to meet a collateral coverage test on a periodic basis on the 2013 Citicorp Credit Facility, in each case as described below:
(1)
With respect to spare parts, one physical appraisal and one desktop appraisal are required in each fiscal year.
At December 31, 2013, the Company was in compliance with the most recently completed collateral coverage tests for the Senior Secured Notes, the Credit Facilities and the 2013 Citicorp Credit Facility.
Cash payments for interest, net of capitalized interest, were $713 million, $485 million and $747 million for 2013, 2012 and 2011, respectively.
10. Financial Instruments and Risk Management
Fuel Price Risk Management
As of December 31, 2013, American had fuel derivative contracts outstanding covering 22 million barrels of jet fuel that will be settled over the next eighteen months. The Company does not hold or issue derivative financial instruments for trading purposes. The Company has not entered into any fuel hedges since the Effective Date and its current policy is not to do so.
In accordance with U.S. GAAP, the Company assesses, both at the inception of each hedge and on an ongoing basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Derivatives that meet the requirements are granted special hedge accounting treatment, and the Company’s hedges generally meet these requirements. Accordingly, the Company’s fuel derivative contracts are accounted for as cash flow hedges, and the fair value of the Company’s hedging contracts is recorded in Current Assets or Current Liabilities in the accompanying Consolidated Balance Sheets until the underlying jet fuel is purchased. The Company determines the ineffective portion of its fuel hedge contracts by comparing the cumulative change in the total value of the fuel hedge contract, or group of fuel hedge contracts, to the cumulative change in a hypothetical jet fuel hedge. If the total cumulative change in value of the fuel hedge contract more than offsets the total cumulative change in a hypothetical jet fuel hedge, the difference is considered ineffective and is immediately recognized as a component of Aircraft fuel expense. Effective gains or losses on fuel hedging contracts are deferred in Accumulated other comprehensive income (loss) and are recognized in earnings as a component of Aircraft fuel expense when the underlying jet fuel being hedged is used.
Ineffectiveness is inherent in hedging jet fuel with derivative positions based in crude oil or other crude oil related commodities. The Company assesses, both at the inception of each hedge and on an ongoing basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. In doing so, the
Company uses a regression model to determine the correlation of the change in prices of the commodities used to hedge jet fuel (e.g., NYMEX Heating oil) to the change in the price of jet fuel. The Company also monitors the actual dollar offset of the hedges’ market values as compared to hypothetical jet fuel hedges. The fuel hedge contracts are generally deemed to be "highly effective" if the R-squared is greater than 80% and the dollar offset correlation is within 80% to 125%. The Company discontinues hedge accounting prospectively if it determines that a derivative is no longer expected to be highly effective as a hedge or if it decides to discontinue the hedging relationship. Subsequently, any changes in the fair value of these derivatives are marked to market through earnings in the period of change.
For the years ended December 31, 2013, 2012 and 2011, American recognized net gains/(losses) of approximately $(12) million, $4 million and $341 million, respectively, as a component of Aircraft fuel expense on the accompanying consolidated statements of operations related to its fuel hedging agreements, including the ineffective portion of the hedges. The net fair value of the Company’s fuel hedging agreements at December 31, 2013 and 2012, representing the amount American would receive upon termination of the agreements (net of settled contract assets), totaled $107 million and $62 million, respectively. As of December 31, 2013, American estimates that during the next twelve months it will reclassify from Accumulated other comprehensive income (loss) into earnings approximately $45 million in net gains (based on prices as of December 31, 2013) related to its fuel derivative hedges.
The impact of aircraft fuel derivative instruments (all cash flow hedges) on the Company’s Consolidated Statements of Operations is depicted below (in millions):
(1) Includes the effective portion of hedge gain (loss)
(2) Includes the ineffective portion of hedge gain (loss)
(3) Includes the effective and ineffective portion of hedge gain (loss)
The impact of aircraft fuel derivative instruments (all cash flow hedges) on the Company’s Consolidated Statements of Comprehensive Income is depicted below (in millions):
(1) Includes the effective portion of hedge gain (loss)
While certain of the Company's fuel derivatives are subject to enforceable master netting agreements with its counterparties, the Company does not offset its fuel derivative assets and liabilities in its Consolidated Balance Sheets. Certain of these agreements would also allow for the offsetting of fuel derivatives with interest rate derivatives. The impact of aircraft fuel derivative instruments (all cash flow hedges) on the Company's Consolidated Balance Sheets, and the impact of offsetting aircraft fuel derivative instruments, is depicted below (in millions):
(1)
Fuel derivative assets are included in Fuel derivative contracts on the accompanying Consolidated Balance Sheets.
(2)
Fuel derivative liabilities are included in Accrued liabilities on the accompanying Consolidated Balance Sheets.
(3)
As of December 31, 2013, the Company had posted cash collateral of an immaterial amount.
The Company is also exposed to credit losses in the event of non-performance by counterparties to these financial instruments, and although no assurances can be given, the Company does not expect any of the counterparties to fail to meet their obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date, reduced by the effects of master netting agreements. To manage credit risks, the Company selects counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines, and monitors the market position of the program and its relative market position with each counterparty. The Company also maintains industry-standard security agreements with a number of its counterparties which may require the Company or the counterparty to post collateral if the value of selected instruments exceeds specified mark-to-market thresholds or upon certain changes in credit ratings. The amount of collateral required to be posted from time to time may be substantial.
Fair Values of Financial Instruments
The fair values of the Company’s long-term debt classified as Level 2 were estimated using quoted market prices or discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. All of the Company’s long term debt not classified as subject to compromise is classified as Level 2.
In connection with the Merger, US Airways debt was recorded at fair value using the acquisition method of accounting in accordance with ASC 805, "Business Combinations". See Note 4 to AAG's Consolidated Financial Statements for additional information.
The carrying value and estimated fair values of the Company’s long-term debt, including current maturities, not classified as subject to compromise, were (in millions):
The carrying value and estimated fair value of the Company’s long-term debt, including current maturities, classified as subject to compromise, were (in millions):
All of the Company’s long term debt classified as subject to compromise as of December 31, 2012 is classified as Level 2.
The Company is also party to certain interest rate swap agreements that are accounted for as cash flow hedges. Ineffectiveness for these instruments is required to be measured at each reporting period. The ineffectiveness and fair value associated with all of the Company's interest rate cash flow hedges for all periods presented was not material.
11. Income Taxes
The significant components of the income tax provision (benefit) were (in millions):
The income tax expense (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):
The merger of US Airways into American Airlines Group Inc. closed on December 9, 2013. For the period beginning on December 9, 2013 and ending on December 31, 2013, US Airways Group, Inc. and its subsidiaries are now included in the AAG consolidated federal and state income tax returns.
The Company recorded a net income tax benefit of $346 million which is composed of a $538 million non-cash income tax benefit, a $214 million tax charge for additional valuation allowance, and $22 million income tax credit. The Company recorded a $538 million non-cash income tax benefit from continuing operations during the fourth quarter of 2013. Under current accounting rules, the Company is required to consider all items (including items recorded in other comprehensive income) 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, the Company recorded a tax benefit on the loss from continuing operations for the year, which is exactly offset by income tax expense on other comprehensive income. However, while the income tax benefit from continuing operations is reported on the income statement, the income tax expense on other comprehensive income is recorded directly to accumulated other comprehensive income, which is a component of stockholders' equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations for this item, the Company's year-end net deferred tax position is not impacted by this tax allocation. The Company recorded similar amounts when reporting other comprehensive income in 2009 and 2012. The resulting residual income tax expense will remain in Accumulated other comprehensive income (loss) (AOCI) until all amounts in AOCI that relate to the plan or program that gave rise to the residual income taxes are recognized in the Consolidated Statement of Operations. The Company will reclassify to earnings all residual tax amounts relating to our Pension and Retiree Medical Liability (specifically relating to Pension and OPEB activity) and Derivative Financial Instruments (specifically relating to Fuel Hedging Contracts activity) in the period in which there are no longer any amounts in AOCI associated with those plans or programs. The Company anticipates recognizing a non-cash income tax expense of $313 million in continuing operations during 2015 upon the settlement of the currently outstanding Fuel Hedging Contract arrangements.
The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. In assessing the realizability of the deferred tax assets, management considers
whether it is more likely than not that some portion, or all of the deferred tax assets, will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (primarily reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible. The assessment of realization of deferred tax assets considers those tax planning strategies that management believes to be prudent and feasible strategies the Company would implement, if necessary, to prevent a tax attribute from expiring. During the fourth quarter of 2013, the Company recorded a $214 million tax charge attributable to additional valuation allowance required to reduce deferred tax assets to the amount the Company believes is more likely than not to be realized. US Airways, Group Inc is required under ASC 805, as a result of its merger, to use purchase accounting to establish the fair values of its assets and liabilities. The resulting tax accounting establishes a federal deferred tax liability for its indefinite-lived assets in the amount of $306 million which has been accounted for through goodwill.
A portion of the change in the valuation allowance reflects the recording by the Company in 2013, 2012 and 2011 of an income tax expense (credit) of approximately $(22) million, $0 million and $(25) million, respectively, resulting from the Company’s elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the Housing and Economic Recovery Act of 2008 (as extended by the American Taxpayer Relief Act of 2012), allowing corporations to accelerate utilization of certain research and alternative minimum tax (AMT) credit carryforwards in lieu of applicable bonus depreciation on certain qualifying capital investments.
In addition to the changes in the valuation allowance from operations described in the table above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 14 to AAG's Consolidated Financial Statements. The total increase in the valuation allowance was $602 million, $263 million, and $1.2 billion in 2013, 2012 and 2011, respectively.
The components of AAG's deferred tax assets and liabilities were (in millions):
At December 31, 2013, the Company had available for federal income tax purposes an AMT credit carryforward of approximately $370 million, which is available for an indefinite period, and federal net operating losses of approximately $10.6 billion for regular tax purposes, which will expire, if unused, beginning in 2022. These net operating losses include an unrealized benefit of approximately $762 million related to the implementation of share-based compensation accounting guidance that will be recorded in equity when realized. The Company had available for state income tax purposes net operating losses of $4.7 billion, which expire, if unused, in years 2014 through 2033. The amount that will expire in 2014 is $106 million if not used.
We experienced a statutory "ownership change" on December 9, 2013 as defined for purposes of Section 382 of the Internal Revenue Code in connection with our emergence from bankruptcy and US Airways Group experienced an ownership
change in connection with the Merger. When a company undergoes such an ownership change, Section 382 limits the company’s future ability to utilize any NOL generated before the ownership change and certain subsequently recognized "built-in" losses and deductions, if any, existing as of the date of the ownership change. The general limitation rules for a debtor in a bankruptcy case are liberalized where an ownership change occurs upon emergence from bankruptcy. We anticipate taking advantage of these certain special rules which will permit approximately $9.0 billion of our federal NOL carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. At December 31, 2013, the Company inherited the US Airways Group approximate $1.6 billion of NOLs ($1.4 billion of which is subject to Section 382 limitation due to the ownership change) to reduce the Company’s future taxable income. The majority of American Airlines Group Inc.’s NOLs are expected to be available to reduce federal taxable income in the calendar year 2014. The Company’s ability to utilize any new NOL arising after the ownership change is not affected.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s 2004 through 2012 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and the Company is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. The Company believes that the effect of any additional assessment(s) will be immaterial to its Consolidated Financial Statements.
Cash payments for income taxes were $12 million, $6 million and $1 million for 2013, 2012 and 2011, respectively.
Under special tax rules (the Section 382 Limitation), cumulative stock ownership changes among material shareholders exceeding 50% during a rolling 3-year period can potentially limit a company’s future use of net operating losses and tax credits. See Part I - Item 1A. Risk Factors - "Our ability to utilize our net operating losses (NOL) carryforwards may be limited."
The Company has an unrecognized tax benefit of approximately $6 million, which did not change during the twelve months ended December 31, 2013. Changes in the unrecognized tax benefit have no impact on the effective tax rate due to the existence of the valuation allowance. Accrued interest on tax positions is recorded as a component of interest expense but was not significant at December 31, 2013.
The reconciliation of the beginning and ending amounts of unrecognized tax benefit are (in millions):
The Company estimates that the unrecognized tax benefit will not significantly change within the next twelve months.
12. Share Based Compensation
In December 2013, the Board of Directors of AAG approved the 2013 AAG Incentive Award Plan (the 2013 Plan). Awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right. The 2013 Plan authorizes the grant of awards for the issuance of 40 million shares plus any shares underlying awards granted under the 2013 Plan, or any pre-existing US Airways Group plan, that are forfeited, terminate or are cash settled (in whole or in part) without a payment being made in the form of shares. In addition, any shares that are available for issuance under the US Airways Group 2011 Incentive Award Plan (the 2011 Plan) as of the effective date of the Merger may be used for awards under the 2013 Plan; provided, that awards using such available shares under the 2011 Plan shall not be made after the date awards or grants could have been made under 2011 Plan and shall only be made to individuals who were not providing services to AAG prior to the Merger. Award granted under the 2013 Plan upon the assumption of, or in substitution for, outstanding awards in connection with a corporate transaction, such as a merger, will not reduce the shares authorized for issuance under the 2013 Plan.
In addition, pursuant to the Plan, and as approved by the Bankruptcy Court, certain officers, directors and employees received share-based incentive awards, Alignment and Equity Incentive, related to the Merger and future service. Awards issued in conjunction with the Plan are discussed in more detail below.
All outstanding US Airways Group equity awards were converted into equity awards with respect to AAG Common Stock using an exchange ratio of 1 to 1 and had a fair value of approximately $141 million at the Merger which was included in the purchase price. These awards have the same terms and conditions as were applicable to such equity awards immediately prior to the merger closing date.
In 2013, share-based compensation expense of $42 million, related to the Merger, was recorded under Special items, net and $50 million was recorded under Salaries, wages and benefits. In 2012 and 2011 the total charge for share-based compensation expense, included in Salaries, wages, and benefits expense, was $29 million and $40 million, respectively.
Restricted Stock Unit (RSU) Awards
As of December 31, 2013, the Company has outstanding restricted stock unit awards with service conditions (time vested) and performance conditions. The grant-date fair value of restricted stock unit awards is equal to the market price of the underlying shares of common stock on the date of grant. For time vested awards, the expense is recognized on a straight-line basis over the vesting period for the entire award. For awards with performance conditions, the expense is recognized based on the expected achievement at each reporting period. Stock-settled restricted stock unit awards (RSUs) are classified as equity awards as the vesting results in the issuance of shares of AAG Common Stock. Cash-settled restricted stock unit awards (CRSUs) are classified as liability awards as the vesting results in payment of cash by the Company.
Alignment Awards
On December 9, 2013, alignment awards were granted in the form of RSUs and are expected to be settled in AAG Common Stock subject to potential NOL restrictions. The awards were provided to legacy AMR employees in order to align interests and create parity with peers at US Airways and one-third of the awards vested on the Company's emergence from bankruptcy. The remaining awards vest equally on the one and two year anniversary of emergence. Employees terminated in connection with the Merger fully vest in their awards on the termination date. Compensation expenses recorded in connection with these awards have been and will be charged to Merger related expenses.
Activity during 2013 for the alignment awards is presented below:
As of December 31, 2013, there was $47 million of total unrecognized compensation cost related to the alignment awards that is expected to be recognized over a weighted average period of 1.9 years. The total fair value of awards settled during the year ended December 31, 2013 was $31 million.
Equity Incentive Awards
Equity incentive awards granted pursuant to the Plan have a vesting commencement date of April 10, 2013 and were granted in the form of RSUs that are expected to be settled in AAG Common Stock subject to potential NOL restrictions. Vesting dates are April 2014, April 2015 and April 2016 with pro-rata vesting based on the number of days served from April 10, 2013. In addition, as mentioned above, AAG assumed the outstanding equity awards of US Airways at the Merger Effective Date. Generally these awards vest over a three year period. Related expense has been and will be charged to Salaries, Wages and benefits.
Activity during 2013 for equity incentive awards is presented below:
As of December 31, 2013, there was $92 million of total unrecognized compensation cost related to equity incentive share awards that is expected to be recognized over a weighted average period of 1.3 years. The total fair value of equity incentive RSUs vested during the 23 day period ending December 31, 2013 was less than a million.
Merger Equity Grant
The Merger Equity Grant was granted on the Effective Date to certain officers and directors and employees in the form of RSUs and will be settled in equity for domestic employees and in cash for international employees. Each restricted stock unit award granted will vest, subject to the executive’s continued employment, with respect to (i) 50% of the restricted stock units on December 16, 2015; (ii) 25% of the restricted stock units on the earlier to occur of (a) December 16, 2015, if the Company is issued a Single Operating Certificate prior to or on that date or (b) the date on which the Company is issued a Single Operating Certificate, provided that such date is prior to or on December 9, 2016; and (iii) 25% of the restricted stock units on the date the board of directors or compensation committee of the board of directors determines that the Company has achieved at least $1 billion in net synergies with respect to fiscal year 2015 or 2016. Compensation expenses recorded in connection with these awards have been and will be charged to Merger related expenses.
As of December 31, 2013, there was $362 million of total unrecognized compensation cost related to the Merger RSUs. These costs are expected to be recognized over a weighted average period of 1.9 years.
Cash-settled restricted stock
CRSU award activity during 2013 for all plans is as follows (shares in thousands):
As of December 31, 2013, the liability related to CRSUs was $6 million, which will continue to be remeasured at fair value at each reporting date until all awards are vested. As of December 31, 2013, the total unrecognized compensation expense for CRSUs was $10 million and is expected to be recognized over a weighted average period of 1.5 years.
US Airways Stock Options and Stock Appreciation Rights
Stock options and stock appreciation rights are granted with an exercise price equal to the underlying common stock’s fair value at the date of each grant. Stock options and stock appreciation rights have service conditions, become exercisable over a three-year vesting period and expire if unexercised at the end of their term, which ranges from seven to ten years. Stock options and stock-settled stock appreciation rights (SARs) are classified as equity awards as the exercise results in the issuance of shares of AAG Common Stock. Cash-settled stock appreciation rights (CSARs) are classified as liability awards as the exercise results in payment of cash by the Company.
Stock option and SAR award activity for all plans effective with the Merger date is as follows:
CSAR award activity for all plans effective with the Merger Date is as follows:
The fair value of stock options and stock appreciation rights is determined at the grant date using a Black-Scholes option pricing model, which requires several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the award at the time of grant. The dividend yield is assumed to be zero as the Company does not pay dividends. The volatility is based on the historical volatility of the Company’s common stock over a time period equal to the expected term of the award. The expected term of the award is based on the historical experience of the Company. Stock options and stock appreciation rights are expensed on a straight-line basis over the vesting period for the entire award. There were no stock options or stock appreciation rights granted subsequent to the Merger closing date.
As of December 31, 2013, there were $22 million of total unrecognized compensation costs related to SARs. These costs are expected to be recognized over a weighted average period of 0.7 years. The total intrinsic value of stock options and SARs exercised during the 23 day period ending December 31, 2013 was $0.5 million.
As of December 31, 2013, the weighted average fair value of outstanding CSARs was $19.11 per share and the related liability was $52 million. These CSARs will continue to be remeasured at fair value at each reporting date until all awards are settled. As of December 31, 2013, the total unrecognized compensation expense for CSARs was $2 million and is expected to be recognized over a weighted average period of 0.3 years. Total cash paid for CSARs exercised during the during the 23 day period ending December 31, 2013 was $0.5 million.
AMR Incentive Awards
Prior to the Petition Date, AMR adopted certain plans which provided for the issuance of common stock in connection with the exercise of stock options and other share-based awards. AMR granted stock compensation under three plans: the 1998 Long Term Incentive Plan (the 1998 Plan), the 2003 Employee Stock Incentive Plan (the 2003 Plan) and the 2009 Long Term Incentive Plan (the 2009 Plan). Collectively, the 1998 Plan and the 2009 Plan are referred to as the LTIP Plans. No awards were made under AMR's plans in 2012 or 2013. AMR had share-based incentive awards including stock options/stock appreciation rights granted under the LTIP Plans and the 2003 Plan, performance share awards granted under the LTIP plans and based upon a requisite service period and contingently issuable based upon the AMR's relative stock price performance compared to certain of its competitors over a three year period, deferred share awards granted under the LTIP plans and based solely on a requisite service period and career equity awards granted to certain employees of AMR vesting upon the retirement of those individuals. Deferred share and career equity awards totaling 5,899,500 shares vested in AMR common stock pursuant to the Plan. These plan participants become holders of interest in AMR Corporation and will receive distributions of AAG common stock in accordance with the Plan (See Note 2 to AAG's Consolidated Financial Statements for information regarding the Plan). All remaining outstanding awards were canceled in accordance with the Plan upon emergence from Chapter 11.
Activity of all previous AMR awards is as follows:
13. Retirement Benefits
The Company sponsors defined benefit and defined contribution pension plans for eligible employees. The defined benefit plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. The Company uses a December 31 measurement date for all of its defined benefit plans. In addition, the Company provides certain postemployment benefits to its employees. These benefits include disability-related and workers' compensation benefits for certain employees. The Company accrues for the cost of such benefit expenses once an appropriate triggering event has occurred.
Year End Information
The following table provides a reconciliation of the changes in the pension and retiree medical and other benefit obligations and fair value of assets for the years ended December 31, 2013 and 2012, and a statement of funded status as of December 31, 2013 and 2012 (in millions):
The following tables provide the components of net periodic benefit cost for the years ended December 31, 2013, 2012 and 2011 (in millions):
The estimated amount of unrecognized net loss for the defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Income (Loss) into net periodic benefit cost over the next fiscal year is $46 million.
The estimated amount of unrecognized net gain for the retiree medical and other postretirement plans that will be amortized from Accumulated Other Comprehensive Income (Loss) into net periodic benefit cost over the next fiscal year is $8 million.
As of December 31, 2013, the Company's estimate of the long-term rate of return on plan assets was 8.00% based on the target asset allocation. Expected returns on longer duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management, currency overlay and securities lending programs. The Company's annualized ten-year rate of return on plan assets as of December 31, 2013, was approximately 8.93%.
The objectives of the Company's investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers.
Based on these investment objectives, a long-term strategic asset allocation has been established. This strategic allocation seeks to balance the potential benefit of improving funded position with the potential risk that the funded position would decline. The current strategic target asset allocation is as follows:
Each asset class is actively managed and, historically, the plans' assets have produced returns, net of management fees, in excess of the expected rate of return over the last ten years. Public equity and emerging market fixed income securities are used to provide diversification and are expected to generate higher returns over the long-term than longer duration U.S. bonds. Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long-term, while reducing year-over-year volatility. Longer duration U.S. bonds are used to partially hedge the assets from declines in interest rates. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long-term. Additionally, the Company engages currency overlay managers in an attempt to increase returns by protecting non-U.S. dollar denominated assets from a rise in the relative value of the U.S. dollar. The Company also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis. These programs are subject to market risk.
Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market are valued at the last bid price. The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the
general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. The 103-12 investment trust is valued at net asset value which is determined by the issuer at the end of each month and is based on the aggregate fair value of trust assets less liabilities, divided by the number of units outstanding. No changes in valuation techniques or inputs occurred during the period.
The fair value of the Company's pension plan assets at December 31, 2013 and 2012, by asset category, are as follows (in millions):
a)
Holdings are diversified as follows: 19% United Kingdom, 10% Japan, 11% France, 7% Switzerland, 6% Germany, 5% Netherlands, 6% Republic of Korea, 15% emerging markets and the remaining 21% with no concentration greater than 5% in any one country.
b)
There are no significant concentrations of holdings by company or industry.
c)
Includes approximately 76% investments in corporate debt with a Standard and Poor's (S&P) rating lower than A and 24% investments in corporate debt with an S&P rating A or higher. Holdings include 80% U.S. companies, 17% international companies and 3% emerging market companies.
d)
Includes approximately 72% investments in U.S. domestic government securities and 28% in emerging market government securities. There are no significant foreign currency risks within this classification.
e)
Includes limited partnerships that invest primarily in U.S. (92%) and European (8%) buyout opportunities of a range of privately held companies. The Master Trust does not have the right to redeem its limited partnership investment at its net asset value. Instead, the Master Trust receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next one to ten years. Additionally, the Master Trust has future funding commitments of approximately $376 million over the next ten years.
f)
Investment includes 74% in an emerging market 103-12 investment trust with investments in emerging country equity securities, 14% in Canadian segregated balanced value, income growth and diversified pooled funds and 12% in a common/
collective trust investing in securities of smaller companies located outside the U.S., including developing markets. Requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
g)
Investment includes mutual funds invested 49% in equity securities of large-cap, mid-cap and small-cap US companies, 30% in US treasuries and corporate bonds and 21% in equity securities of international companies.
a)
Holdings are diversified as follows: 20% United Kingdom, 9% Japan, 9% France, 8% Switzerland, 8% Germany, 5% Netherlands, 5% Republic of Korea, 15% emerging markets and the remaining 21% with no concentration greater than 5% in any one country.
b)
There are no significant concentrations of holdings by company or industry.
c)
Includes approximately 79% investments in corporate debt with a Standard and Poor's (S&P) rating lower than A and 21% investments in corporate debt with an S&P rating A or higher. Holdings include 81% U.S. companies, 16% international companies and 3% emerging market companies.
d)
Includes approximately 88% investments in U.S. domestic government securities and 12% in emerging market government securities. There are no significant foreign currency risks within this classification.
e)
Includes limited partnerships that invest primarily in U.S. (92%) and European (8%) buyout opportunities of a range of privately held companies. The Master Trust does not have the right to redeem its limited partnership investment at its net asset value. Instead, the Master Trust receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next one to ten years. Additionally, the Master Trust has future funding commitments of approximately $331 million over the next ten years.
f)
Investment includes 74% in an emerging market 103-12 investment trust with investments in emerging country equity securities, 14% in Canadian segregated balanced value, income growth and diversified pooled funds and 12% in a common/collective trust investing in securities of smaller companies located outside the U.S., including developing markets. Requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
Not included in the above tables are receivables and payables for foreign currency forward contracts and futures contracts which net to approximately $7 million and collateral held on loaned securities and the obligation to return collateral on loaned securities which effectively net to zero.
Changes in fair value measurements of Level 3 investments during the year ended December 31, 2013, were as follows (in millions):
Changes in fair value measurements of Level 3 investments during the year ended December 31, 2012, were as follows (in millions):
The fair value of the Company's other postretirement benefit plan assets at December 31, 2013 by asset category, were as follows (in millions):
The fair value of the Company's other postretirement benefit plan assets at December 31, 2012 by asset category, were as follows (in millions):
Investments in the AMR Class shares of the mutual funds managed by American Beacon Advisors, Inc (ABA) are valued by quoted prices on the active market, which is fair value and represents the net asset value of the shares of such funds as of the close of business at the end of the period. AMR Class shares are offered without a sales charge to participants and have the lowest expense ratio among the Beacon Funds. Purchases are restricted to retirement benefit plans of ABA and AMR and its affiliates, resulting in a fair value classification of Level 2. Investments include approximately 27% of investments in non-U.S. common stocks in 2013 and approximately 28% of investments in non-U.S. common stocks in 2012. Net asset value is based on the fair market value of the funds' underlying assets and liabilities at the date of determination.
A one percentage point change in the assumed health care cost trend rates would have the following effects (in millions):
The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of ERISA, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, the Pension Relief Act of 2010, and the Moving Ahead for Progress in the 21st Century Act of 2012. In 2013 the Company contributed $489 million to its defined benefit pension plans, which covered minimum contributions for periods prior to the Company’s Chapter 11 filing and periods thereafter (see Note 2 to AAG's Consolidated Financial Statements for further information), as well as certain interest and penalty interest due with respect to contributions for pre-petition periods. On January 15, 2014, the Company contributed an additional $34 million to its defined benefit pension plans representing the final quarterly contribution for the 2013 plan year.
The Company's minimum required contribution to its pension plans for 2014 is $120 million. Currently, American's minimum funding obligation for its pension plans is subject to temporary favorable rules that are scheduled to expire at the end of 2017. Upon expiration of these rules, American's funding obligations are likely to increase materially.
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (in millions):
Modifications to Retirement and Life Insurance Benefits
Effective November 1, 2012, the Company's defined benefit pension plans were frozen and eligible employees began to receive a replacement benefit under the $uper $aver 401(k) Plan. The Company matches employee contributions up to 5.5% of eligible earnings and, with the ratification of a new CBA by pilots on December 7, 2012, pilots receive contributions of 14% under the same plan.
In December 2012, the Pilot A Plan, a defined benefit plan, was amended to remove the lump-sum option and the installment option forms of benefit effective December 31, 2012. A small group of American pilots is appealing the Bankruptcy Court's decision authorizing American to eliminate the lump sum option and installment option forms of benefit. This is the same group of pilots that is appealing the Bankruptcy Court's decisions authorizing American to reject the pilot CBA and approve the new pilot CBA. All of these appeals have been consolidated, and are pending in the U.S. District Court for the Southern District of New York.
The Pilot B Plan, a defined contribution plan, was terminated on November 30, 2012. With the exception of a small residual balance to cover final plan expenses, we expect all remaining funds, which represent a small group of uncashed distribution checks, to be distributed by the end of second quarter 2014.
On July 6, 2012, the Company commenced an adversary proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired before November 1, 2012 and were eligible for certain retiree medical coverage. The Court held a hearing on January 23, 2013 and has not ruled on this matter as of the date of this report. The Company has been negotiating with the retiree committee since July 2012, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage.
As a result of the modifications to the retirement benefits as discussed above, a portion of the pension and postretirement benefits liability, primarily relating to retiree medical and other benefits, was classified as liabilities subject to compromise as of December 31, 2012. This amount was reinstated upon emergence since there was no resolution in the Chapter 11 Cases. See Note 2 to AAG's Consolidated Financial Statements for the breakout of liabilities subject to compromise, including that related to pension and postretirement benefits.
Curtailment and Plan Amendment in the Third Quarter of 2012
In accordance with ASC 715 "Retirement Benefits" (ASC 715), in the third quarter of 2012, the Company remeasured its defined benefit pension and retiree medical plans as a result of modifications to its retirement plans and reductions in certain work groups (see above and Note 2 to AAG's Consolidated Financial Statements). The Company updated its significant actuarial assumptions used for the remeasurements including the discount rate, which was lowered to 4.10% and 3.80% for the defined benefit pension plans and retiree medical plans, respectively.
The remeasurement of the defined benefit plans resulted in an actuarial loss of $1.9 billion offset by a curtailment gain of $1.8 billion. In addition, a loss of $58 million, representing unamortized prior service cost as of the remeasurement date of the frozen defined benefit plans, is included as a component of reorganization items, net.
Further, as a result of modifications to its retiree medical plans, the Company recognized a negative plan amendment of $1.9 billion, which is included as a component of actuarial gain arising in current year in other comprehensive income and will be amortized over the future service life of the active plan participants for whom the benefit was eliminated, or approximately eight years. In addition, a net credit of $124 million, representing unamortized prior service credits of $157 million offset by a curtailment loss of $33 million, is included as a component of reorganization items, net.
14. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive income (loss) are as follows (in millions):
As of December 31, 2013, the Company estimates that during the next twelve months it will reclassify from Accumulated Other Comprehensive Income (Loss) into earnings approximately $45 million in net gains (based on prices as of December 31, 2013) related to its fuel derivative hedges.
Reclassifications out of Accumulated Other Comprehensive Income (Loss) for the years ended December 31, 2013 and 2012 are as follows (in millions):
The Company recognized a $538 million non-cash income tax benefit, offset by a $538 million charge to other comprehensive income, during the fourth quarter of 2013 related to gains in other comprehensive income. Also, the Company recognized a $569 million non-cash income tax benefit, offset by a $569 million charge to other comprehensive income, during the fourth quarter of 2012 related to gains in other comprehensive income. See Note 11 to AAG's Consolidated Financial Statements for further information.
Amounts allocated to other comprehensive income for income taxes as further described in Note 11 will remain in Accumulated Other Comprehensive Income (Loss) until the Company ceases all related activities, such as termination of the pension plan.
15. Segment Reporting
The Company's operations of American, US Airways, AMR Eagle, Piedmont and PSA are treated as an integrated route network and the route scheduling system maximizes the operating results of the Company. The Company's chief operating decision maker makes resource allocation decisions to maximize the Company's consolidated financial results. Based on the way the Company treats the network and the manner in which resource allocation decisions are made, the Company has only one operating segment for financial reporting purposes consisting of the operations of American, US Airways, AMR Eagle, Piedmont and PSA.
Revenues from other segments are below the quantitative threshold for determining reportable segments and consist primarily of revenues from Americas Ground Services, Inc. The difference between the financial information of the Company's one reportable segment and the financial information included in the accompanying consolidated statements of operations and balance sheets as a result of these entities is not material.
The Company's operating revenues by geographic region (as defined by DOT) are summarized below (in millions):
The Company attributes operating revenues by geographic region based upon the origin and destination of each flight segment. The Company's tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.
16. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 2013 and 2012 (in millions, except per share amounts):
(1) To conform to current year presentation, certain operating revenue and expenses in prior years have been reclassified. As a result, prior year amounts may not agree to the amounts previously reported. See Note 4 for additional information.
(2)
The Company’s weighted average diluted shares outstanding for all quarters presented include the weighted effect of shares outstanding for both the pre and post-merger periods. The shares outstanding for the pre-merger periods (January 1, 2012 through December 8, 2013) consist only of the AMR common stock formerly traded under the symbol: "AAMRQ". In accordance with GAAP, these former AAMRQ shares have been adjusted for all periods presented to retrospectively reflect the two initial distributions made to date pursuant to the Company’s Plan, whereby holders of AAMRQ received shares of AAG Common Stock on the Effective Date, January 9, 2014 and February 10, 2014. The shares outstanding for the 23 day post-merger period (December 9, 2013 through December 31, 2013) include the full amount of shares to be issued pursuant to the Plan over the 120 day distribution period adjusted for the approximate 13 million shares withheld by the Company in satisfaction of employee tax obligations.
Former AAMRQ holders as of the Effective Date have and may in the future receive additional distributions based on the trading price of AAL common stock during the remaining 120 day period after the effective date and the total amount of allowed claims, in accordance with the terms of the Plan. Accordingly, the Company’s common shares outstanding and related GAAP basic and diluted EPS reported herein for all periods presented may change in the future, including amounts reported herein, to reflect additional retrospective adjustments for future common stock distributions to former holders of AAMRQ.
The Company's fourth quarter 2013 performance reflects restructuring charges consisting of $1.7 billion related to labor-related claims, a $74 million accrual adjustment to the disputed claim reserve and a $218 million adjustment to claims related to the 3.5% premium (see Note 2 to AAG's Consolidated Financial Statements for additional information); merger-related charges include $192 million related to US Airways' pilot MOU that became effective upon the close of the Merger, $80 million
related to professional fees and fees for US Airways to exit the Star Alliance, $58 million in severance to satisfy certain separation agreements resulting from the Merger, $56 million related to employee awards granted in connection with the merger, partially offset by a $67 million gain on the sale of slots at LaGuardia Airport as a result of the settlement reached with the DOJ; and special items including $107 million resulting from modifications and changes in assumptions for the pilot long-term disability plan in connection with the Chapter 11 process and $33 million to write down permanently grounded aircraft, partially offset by a gain related to the modification of our agreement with Citibank related to American's frequent flyer program.
The Company's fourth quarter 2012 performance reflects restructuring charges and special items consisting of $361 million of severance related charges and write-off of leasehold improvements on aircraft and at airport facilities that were rejected during the Chapter 11 process and a $280 million benefit from a settlement of a commercial dispute. The second and third quarters of 2012 reflect $106 million and $211 million of such items, respectively.
17. Regional Expenses
Regional expenses associated with the Company's wholly-owned regional airline, the wholly-owned regional airlines of US Airways Group and third-party regional carriers operating as American Eagle or US Airways Express are classified as regional expenses on the consolidated statements of operations. Regional expenses consist of the following (in millions):
18. Earnings (Loss) Per Share
Pursuant to the Plan, all shares of our common stock outstanding prior to the Effective Date were canceled and the issuance of 756 million new shares of American Airlines Group Inc. common stock was authorized to satisfy allowed unsecured claims, labor-related deemed claims, and former AMR Corporation shareholder interests; to consummate the Merger; and to issue shares pursuant to the AAG Incentive Plans. As of the Effective Date, a combination of AAG Series A Preferred Stock and other bankruptcy settlement obligations were issued or placed into effect to satisfy allowed unsecured claims, labor-related deemed claims, and former AMR Corporation shareholder interests. As of December 31, 2013, approximately 261 million shares were issued by the Company primarily to consummate the Merger, distribute a specified number of initial shares to holders of labor-related deemed claims and former AMR Corporation shareholder interests, and to issue shares pursuant to the AAG Incentive Plans. Additionally, as of the Effective Date, the Company paid approximately $300 million in cash for employee withholding taxes in lieu of issuing shares which reduced the total number of shares to be issued pursuant to the Plan by approximately 13 million.
As of December 31, 2013, approximately 463 million shares remain to be distributed pursuant to the Plan upon the conversion of AAG Series A Preferred Stock and to satisfy other bankruptcy settlement obligations related to allowed unsecured claims, including disputed claims, labor-related deemed claims and legacy AMR common stock shareholders. After the issuances of AAG Common Stock upon conversion of AAG Series A Preferred Stock and after the issuance of AAG Common Stock to satisfy the claim-related other bankruptcy settlement obligations, to the extent that any shares of AAG Common Stock remain undistributed, such shares will not be returned to us but rather will be distributed pro-rata to former AMR Corporation shareholders as of the Effective Date. Therefore approximately 743 million shares will have been distributed, however, the Company may on future distributions to employees remit cash for employee withholding taxes in lieu of distributing shares. Accordingly, as of the Effective Date, although undistributed shares are not yet issued and outstanding, all conditions of distribution except the
passage of time have been met and such shares are considered issued and are included in our calculation of weighted average shares outstanding for both basic and diluted earnings per share.
The cancellation of all shares of our common stock outstanding prior to the Effective Date and subsequent issuance of, pursuant to the Plan, AAG Common Stock to former AMR Corporation shareholder interests, represents a share exchange with the Company's owners that is accounted for as a reverse stock split applicable to all financial statement periods prior to the Effective Date. Accordingly, weighted average shares outstanding for all periods presented prior to the Effective Date include only the weighted average of common shares previously outstanding (traded as AAMRQ) which have been retroactively adjusted to reflect the reverse stock split. The retroactive adjustment for periods prior to the Effective Date has been made at a rate of 0.3735 shares of AAG Common Stock for each previously held share of AAMRQ, based upon all distributions to former AMR Corporation shareholder interests that have been made on or since the Effective Date, including those made on December 9, 2013, January 9, 2014, and February 10th, 2014. The shares outstanding for the 23 day post-merger period (December 9, 2013 through December 31, 2013) include the full amount of shares to be issued pursuant to the Plan over the 120 day distribution period adjusted for the approximately 13 million shares withheld by the Company in satisfaction of employee tax obligations.
Former AAMRQ holders as of the effective date have and may in the future receive additional distributions based on the trading price of AAL common stock during the remaining 120 day period after the effective date and the total amount of allowed claims, in accordance with the terms of the Plan. Further stock splits will occur as additional shares of AAG Common Stock are distributed to former AMR Corporation shareholders. Accordingly, the Company's common shares outstanding and related basic and diluted earnings per share reported herein for all periods presented may change in the future.
The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions, except per share amounts in thousands):
(1)
The year ended December 31, 2013 does not include the impact of post-petition interest recorded in first quarter of 2013. If such amounts were included, results would have been anti-dilutive and conversion would not have been assumed.
19. Stockholders' Equity
Common Stock
Pursuant to the Plan, all securities of AMR Corporation outstanding prior to December 9, 2013 were canceled. In connection with our emergence from bankruptcy, the Company began issuing shares of AAG Common Stock, par value $0.01 per share, pursuant to the Plan. The AAG Common Stock is subject to the terms of our Certificate of Incorporation, which supersedes the Certificate of Incorporation in effect prior to the Effective Date.
The New Certificate authorizes us to issue a total of 1.75 billion shares of common stock. The Plan contemplates the issuance of up to 756 million shares of AAG Common Stock, consisting of 212 million shares to holders of US Airways Group common stock and other equity interests immediately prior to the Merger, up to 544 million shares to holders of allowed general, unsecured claims and holders of AMR equity interests immediately prior to emergence, and certain non-contract, non-management employees. The Plan also contemplates the issuance of up to 40 million shares of common stock to certain officers and directors under the 2013 Incentive Award Program (2013 IAP). For additional information regarding the distribution of new common stock under the Plan, see Note 2 to AAG's Consolidated Financial Statements.
The table below presents activity for the AAG Common Stock for the year ended December 31, 2013 (in thousands):
Holders of AAG common stock are entitled to one vote per share on all matters submitted to a vote of common shareholders, except that voting rights of non-U.S. citizens are limited to the extent that the shares of common stock held by such non-U.S. persons would otherwise be entitled to more than 24.9% of the aggregate votes of all outstanding equity securities of US Airways Group.
20. Subsequent Events
Conversions of shares of AAG Series A Preferred Stock into shares of AAG Common Stock subsequent to the reporting date, as of February 19, 2014, in accordance with the related optional and mandatory conversion provisions, are presented in the table below (in thousands).
On January 14, 2014, American Eagle Airlines, Inc., AAG's wholly-owned regional subsidiary, announced its intent to change its corporate name to Envoy beginning Spring of 2014.
In January 2014, US Airways amended the 2013 Citicorp Credit Facility to lower the applicable LIBOR margin from 3.00% to 2.75% for Tranche B-1. In addition, the LIBOR floor was reduced from 1.00% to 0.75% on both Tranche B-1 and Tranche B-2.
ITEM 8B.
AMERICAN CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited the accompanying consolidated balance sheets of American Airlines, Inc. (American) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of American's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Airlines, Inc. at December 31, 2013 and 2012 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 27, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 27, 2014
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except shares and par value)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
See accompanying notes to Consolidated Financial Statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(in millions, except share amounts)
See accompanying notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Operating Environment
American Airlines, Inc. (American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier. American is a wholly-owned subsidiary of American Airlines Group Inc. (AAG or the Company; formerly AMR Corporation), which owns all of American's outstanding common stock, par value $1.00 per share.
Prior to the Merger, as discussed below, American operated the third largest airline in the U.S. as measured by revenue passenger miles (RPMs) and available seat miles (ASMs). American operates in five primary domestic markets: Chicago, Dallas/Fort Worth, Los Angeles, Miami, and New York City. American operates nearly 1,811 flights per day to 166 destinations in 50 countries. In 2013, American had approximately 87 million passengers boarding its flights. As of December 31, 2013, American operated 627 mainline jets. American is supported by AAG's wholly-owned regional airline subsidiary and third-party regional carriers operating as American Eagle under capacity purchase agreements.
As of December 31, 2013, American employed approximately 60,000 active full-time equivalent employees, of which approximately 69.2% are covered by CBAs with various labor unions. American's pilots and flight attendants are currently working under the terms of their respective CBAs, as modified by transition agreements reached in connection with the Merger in December 2013.
2. Emergence From Chapter 11
Overview
On November 29, 2011 (the Petition Date), AMR Corporation (renamed American Airlines Group Inc., AAG, the Company), its principal subsidiary, American Airlines, Inc. (American), and certain of the Company's other direct and indirect domestic subsidiaries (collectively, the Debtors), filed voluntary petitions for relief (the Chapter 11 Cases) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order (the Confirmation Order) approving and confirming the Debtors' fourth amended joint plan of reorganization (as amended, the Plan).
On December 9, 2013 (the Effective Date), the Debtors consummated their reorganization pursuant to the Plan, principally through the transactions contemplated by that certain Agreement and Plan of Merger (as amended, the Merger Agreement), dated as of February 13, 2013, by and among the Company, AMR Merger Sub, Inc. (Merger Sub) and US Airways Group, Inc. (US Airways Group), pursuant to which Merger Sub merged with and into US Airways Group (the Merger), with US Airways Group surviving as a wholly-owned subsidiary of the Company following the Merger. Pursuant to the Merger Agreement, each share of common stock, par value $0.01 per share, of US Airways Group was converted into the right to receive one share of American Airlines Group common stock (AAG Common Stock), par value $0.01 per share.
From the Petition Date through the Effective Date, pursuant to automatic stay provisions under the Bankruptcy Code and orders granted by the Bankruptcy Court, all actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date as well as all pending litigation against the Debtors generally were stayed. Following the Effective Date, actions to enforce or otherwise effect repayment of liabilities preceding the Petition Date generally have been permanently enjoined. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. However, certain pending litigation related to pre-petition liabilities may proceed in courts other than the U.S. Bankruptcy Court to the extent the parties to such litigation have obtained relief from the permanent injunction.
Plan of Reorganization
The Plan implements the Merger and incorporates a compromise and settlement of certain intercreditor and intercompany claim issues.
Pursuant to the Plan, all shares of AMR Corporation common stock outstanding prior to the Effective Date were canceled. The Restated Certificate of Incorporation, which was approved in connection with the Plan, authorizes the issuance of 1.75 billion new shares of AAG Common Stock, par value $0.01 per share, and 200 million shares of AAG Series A Preferred Stock, par value $0.01 per share. Of the authorized AAG Series A Preferred Stock, approximately 168 million were designated "Series A Convertible Preferred Stock", with a stated value $25.00 per share, and issued in accordance with the Plan. AAG Common Stock and AAG Series A Preferred Stock are listed on the NASDAQ Global Select Market under the symbols "AAL"
and "AALCP", respectively, and began trading on December 9, 2013. In addition, pursuant to the Plan, up to 40 million shares of AAG Common Stock was authorized for issuance under the 2013 Incentive Award Plan (the 2013 IAP).
The Plan contains the following provisions relating to the treatment of pre-petition claims against the Debtors and other holders of allowed interests in the Debtors including AMR Corporation and American:
•
all secured claims against the Debtors have been reinstated;
•
allowed administrative claims, priority claims and convenience claims have been or will be paid in full in cash;
•
other holders of allowed pre-petition unsecured claims, holders of allowed interests and certain employees of AMR received or will receive 72% of AAG Common Stock (on a fully converted basis) authorized to be issued pursuant to the Plan and in connection with the Merger under the following provisions:
◦
all creditors holding general unsecured claims against American that are guaranteed by AAG and general unsecured claims against AAG that are guaranteed by American (Double-Dip Unsecured Claims) were treated the same under the Plan. Holders of Double-Dip Unsecured Claims received, at the Effective Date, their recovery in shares of AAG Series A Preferred Stock with a stated amount equal to the allowed amount of their claims, including post-petition interest at the non-default rate;
◦
all creditors holding Single-Dip Unsecured Claims were treated the same regardless of whether the claim was asserted against the AAG Debtors, the American Debtors, or other Debtors. As used herein, "Single-Dip Unsecured Claims" means the general unsecured claims against the Debtors that are not guaranteed by any other Debtor, other than the claims of the Debtors' labor unions. Holders of Single-Dip Unsecured Claims received, at the Effective Date, a portion of their recovery in shares of AAG Series A Preferred Stock and a right, subject to the trading price of the Company's common stock during the 120 day period after the Effective Date, to receive their remaining recovery in shares of AAG Common Stock 120 days after the Effective Date;
◦
holders of certain labor-related deemed claims and certain non-management, non-union employees as specified in the Plan received, at the Effective Date, the right to receive an allocation of shares of AAG Common Stock representing 23.6% of the total number of shares of AAG Common Stock ultimately distributed to holders of pre-petition general unsecured creditors against the Debtors. On the Effective Date, pursuant to the Plan, an initial allocation of approximately 39 million shares of AAG Common Stock was made related to these labor and employee groups, of which approximately 27 million shares were distributed on the Effective Date and approximately 13 million shares of which were withheld in connection with the Company making a cash payment of approximately $300 million for certain required withholding taxes;
◦
holders of allowed interests in AMR Corporation (primarily holders of AMR Corporation common stock existing immediately prior to the Effective Date) received, at the Effective Date, a distribution of approximately 26 million shares of AAG Common Stock representing 3.5% of the total number of shares of AAG Common Stock contemplated for issuance pursuant to the Plan and, will receive additional shares of AAG Common Stock if, among other considerations, the trading price of the Company's common stock at various points during the 120 day period after the Effective Date provides for a full recovery to claimholders and other allowed priority interests; and
◦
holders of disputed claims at the Effective Date, to the extent such disputed claims become allowed Single-Dip Unsecured Claims after the Effective Date, are eligible to receive shares of AAG Common Stock held in reserve (Disputed Claims Reserve), beginning after 120 days after the Effective Date. Disputed claimholders that subsequently become Single-Dip Unsecured Claimholders will receive, subject to the availability of sufficient shares in the Disputed Claims Reserve, the number of shares of AAG Common Stock that the Disputed claimholder would have received had such claimholder been a Single-Dip Unsecured Claimholder as of the Effective Date.
The Plan contemplates the distribution of up to 756 million shares of common stock of which approximately 53 million shares were issued to the Debtors' stakeholders in connection with the Effective Date. In accordance with the Plan, the Company will issue the remaining shares of AAG Common Stock over the 120 day distribution period and as disputed claims are resolved. In addition, pursuant to the Plan approximately 197 million common shares were distributed to holders of outstanding shares of US Airways Group common stock.
Pursuant to rulings of the Bankruptcy Court, the Plan has established a disputed claim reserve to hold shares of AAG Series A Preferred Stock and AAG Common Stock reserved for issuance to disputed claimholders that ultimately become allowed Single-Dip general unsecured claimholders after emergence. The shares provided for under the Plan are determined based upon a disputed claim reserve amount of approximately $755 million, representing the maximum amount of additional allowable Single-Dip claims under the Plan's provisions. Approximately 16 million shares of AAG Series A Preferred Stock have been
reserved at the Effective Date for distribution to holders of disputed Single-Dip general unsecured claims whose claims ultimately become allowed. Additional new shares of AAG Common Stock will be distributed into the reserve on or about the 120th day after the Effective Date. As disputed claims are resolved, the claimants receive distributions of shares from the reserve on the same basis as if such distributions had been made on or about the Effective Date. To the extent that any of the reserved shares remain undistributed upon resolution of the remaining disputed claims, such shares will not be returned to AAG but rather will be distributed by priority first, if necessary, to satisfy unsecured claims or labor-related obligations, and then to former AMR shareholders as of the Effective Date.
AAG is not required to distribute additional shares above the 756 million shares contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay all allowed unsecured claims. However, resolution of disputed claims could have a material effect on Single-Dip creditor recoveries under the Plan and the amount of additional share distributions, if any, that are made to former AMR shareholders as the total number of shares of AAG Common Stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan.
In addition, as of December 31, 2013, American made the following cash disbursements under the Plan:
•
$385 million in cash to the Pension plans in connection with missed contributions to the pension plans during Chapter 11 and interest and penalty interest thereon;
•
$105 million to holders in partial or full satisfaction of their claims, including to holders of administrative claims, and state and local priority tax claims;
•
$196 million in cure payments to holders of secured debt; and
•
Approximately $300 million for payroll taxes associated with equity distributions to employees
Several parties have filed appeals seeking reconsideration of the Confirmation Order. See Note 7 to American's Consolidated Financial Statements for more information.
As noted above, the reconciliation process with respect to the remaining claims will take considerable additional time post emergence. Included in Claim and other bankruptcy settlement obligations on American's Consolidated Balance Sheet as of December 31, 2013, are American's estimates of the amounts of disputed claims that will ultimately become allowed Single-Dip general unsecured claims. As these claims are resolved, or where better information becomes available and is evaluated, AAG will make adjustments to the liabilities recorded in American's Consolidated Financial Statements as appropriate. Any such adjustments could be material to American's financial position or results of operations in any given period.
Availability and Utilization of Net Operating Losses
Upon emergence from bankruptcy, the Company experienced an "ownership change" as defined in Section 382 of the Internal Revenue Code which could potentially limit the ability to utilize certain tax attributes including the Company’s substantial NOLs. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. While the Company anticipates taking advantage of certain special rules for federal income tax purposes that would permit approximately $9.5 billion of the federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382, there can be no assurance that these special rules will apply.
Moreover, an ownership change subsequent to the Company’s emergence from bankruptcy may further limit or effectively eliminate the ability to utilize the Company’s NOL Carryforwards and other tax attributes. To reduce the risk of a potential adverse effect on the Company’s ability to utilize the NOL Carryforwards, the Restated Certificate of Incorporation contains transfer restrictions applicable to certain substantial shareholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, there can be no assurance that an ownership change will not occur even with these transfer restrictions. A copy of the Restated Certificate of Incorporation was attached as Exhibit 3.1 to a Form 8-K filed on December 9, 2013 by the Company with the Securities and Exchange Commission.
Liabilities Subject to Compromise
Liabilities subject to compromise refers to pre-petition obligations which may be impacted by the Chapter 11 reorganization process. These amounts represent the Debtors' current estimate of known or potential pre-petition obligations to be resolved in connection with the Chapter 11 Cases.
Pursuant to the Plan, American's allowed pre-petition claims and estimated unresolved pre-petition claims of $4.6 billion were settled in cash, AAG Series A Preferred Stock and other bankruptcy settlement obligations on the Effective Date. The pension and postretirement benefits obligation included below was reinstated and is included in "Pension and postretirement
benefits" in American's Consolidated Balance Sheets. Accordingly there are no Liabilities Subject to Compromise at December 31, 2013.
The following table summarizes the components of liabilities subject to compromise included on the Consolidated Balance Sheet as of December 31, 2012 (in millions):
(1)
As a result of the modifications to the retirement benefits as discussed in Note 12 to American's Consolidated Financial Statements, a portion of the pension and postretirement benefits liability, primarily relating to retiree medical and other benefits, was classified as liabilities subject to compromise.
Long-term debt, including undersecured debt, classified as subject to compromise as of December 31, 2012 consisted of (in millions):
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 in the Chapter 11 Cases. The following table summarizes the components included in reorganization items, net on the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 (in millions):
(1)
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to (i) the rejection or modification of financings related to aircraft and (ii) entry of orders treated as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. American recorded an estimated claim associated with the rejection or modification of a financing or facility agreements when the applicable motion was filed with the Bankruptcy Court to reject or modify such financing and the Debtors believed that it was probable the motion would be approved, and there was sufficient information to estimate the claim.
(2)
Pursuant to the Plan, the Debtors agreed to allow certain post-petition unsecured claims on obligations. As a result, during the 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.
(3)
The Plan allows unsecured creditors receiving 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.
3. Bankruptcy Settlement Obligations
As of December 31, 2013, the components of "Claims and other bankruptcy settlement obligations" on American's Consolidated Balance Sheet are as follows (in millions):
As a mechanism for satisfying Double-Dip Unsecured Claims and a portion of Single-Dip Unsecured Claims, the Plan of Reorganization provided that such claimholders receive the mandatorily convertible AAG Series A Preferred Stock. AAG's Series A Preferred Stock, while outstanding, votes and participates in accordance with the terms of the underlying Certificate of Designation. One quarter of the shares of AAG Series A Preferred Stock is mandatorily convertible on each of the 30th, 60th, 90th and 120th days after the Effective Date. In addition, subject to certain limitations, holders of AAG Series A Preferred Stock may elect to convert up to 10 million shares of AAG Series A Preferred Stock during each 30-day period following the Effective Date thereby reducing the number of AAG Series A Preferred Stock to be converted on the 120th day after the Effective Date. The initial stated value of each share of AAG Series A Preferred Stock is $25.00 and accrues dividends at 6.25% per annum, calculated daily, while outstanding. Additionally, AAG Series A Preferred Stock converts to AAG Common Stock based upon the volume weighted average price of the shares of AAG Common Stock on the five trading days immediately preceding the conversion date, at a 3.5% fixed discount, subject to a conversion price floor of $10.875 per share and a conversion price cap of $33.8080 per share, below or above which the conversion rate remains fixed. AAG Series A Preferred Stock embodies an unconditional obligation to transfer a variable number of shares based predominately on a fixed monetary amount known at inception, and, as such, it is not treated as equity of AAG, but rather as a liability until such time that it is converted to AAG Common Stock. Accordingly, American has reflected the amount of its claims satisfied through the issuance of the AAG Series A Preferred Stock as a liability included within the "Bankruptcy settlement obligations" line on American’s Consolidated Balance Sheets and will reflect such obligations as a liability until such time where they are satisfied through the issuance of AAG Common Stock. Upon the satisfaction of these bankruptcy settlement obligations with AAG Common Stock, the Company will record an increase in additional paid-in capital through an intercompany equity transfer while derecognizing the related bankruptcy settlement obligation at that time. As of February 19, 2014, approximately 107 million shares of AAG Series A Preferred Stock had been converted into an aggregate of 95 million shares of AAG Common Stock.
The Single-Dip equity obligations, while outstanding, do not vote or participate in accordance with the terms of the Plan. These equity contract obligations, representing the amount of total Single-Dip unsecured creditor obligations not satisfied through the issuance of AAG Series A Preferred Stock at the Effective Date, represent an unconditional obligation to transfer a variable number of shares of AAG Common Stock based predominantly on a fixed monetary amount known at inception, and, as such, are not treated as equity, but rather as liabilities until the 120th day after emergence. At the 120th day after emergence, AAG will issue a variable amount of AAG Common Stock necessary to satisfy the obligation amount at emergence, plus accrued dividends of 12% per annum, calculated daily, through the 120th day after emergence, based on the volume weighted average price of the shares of AAG Common Stock, at a 3.5% discount, as specified in the Plan and subject to there being a sufficient number of shares remaining for issuance to unsecured creditors under the Plan.
In exchange for employees' contributions to the successful reorganization of AAG, including agreeing to reductions in pay and benefits, AAG and 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 fixed percentage of the distributions to be made to general unsecured claimholders. The fair value based on the expected number of shares to be distributed to satisfy this deemed claim was approximately $1.7 billion. On the Effective Date, AAG made an initial distribution of $595 million in common stock and American paid approximately $300 million in cash to cover payroll taxes related to the equity distribution. As of December 31, 2013, the remaining liability to certain American labor groups and employees of $849 million is based upon the estimated fair value of the shares of AAG Common Stock expected to be issued in satisfaction of such obligation, measured as if the obligation were settled using the trading price of AAG Common Stock at December 31, 2013. Increases in the trading price of AAG Common Stock after December 31, 2013, could cause a decrease in the fair value measurement of the remaining obligation, and vice-versa. American will record this obligation at fair value primarily through the 120th day after emergence, at which time the obligation will be materially settled.
4. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements as of and for the years ended December 31, 2013, 2012 and 2011 include the accounts of American. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation. All significant intercompany transactions have been eliminated.
Chapter 11 Matters
In accordance with GAAP, the Debtors applied ASC 852 "Reorganizations" (ASC 852), in preparing the Consolidated Financial Statements. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred in the Chapter 11 Cases are recorded in Reorganization Items, Net on the accompanying Consolidated Statement of Operations. In addition, pre-petition obligations that may be impacted by the Chapter 11 reorganization process as of December 31, 2012 were classified on the Consolidated Balance Sheet in Liabilities Subject to Compromise.
Certain of American's non-U.S. subsidiaries are not part of the Chapter 11 Cases. Since these non-US subsidiaries do not have significant transactions, American does not separately disclose the combined financial statements of such non-U.S. subsidiaries in accordance with the requirements of reorganization accounting.
In accordance with ASC 852, American did not meet the criteria for and will not adopt "fresh start" accounting as the reorganization value of American's assets, as determined based upon an estimate of the fair value of AMR's equity using the trading market price of US Airways Group, the amount of post-petition liabilities as of the Effective Date was significantly greater than the total pre-petition liabilities and expected allowed claims. As a result, our assets and liabilities were not adjusted to fair value; but rather liabilities compromised by the Plan are stated at present values of amounts to be paid.
Reclassifications
Certain prior period amounts have been reclassified between various financial statement line items to conform to the new AAG financial statement presentation. These reclassifications do not impact the historic net income and are comprised principally of the following items:
•
Reclassifications between various operating income line items to confirm the presentation of Cargo and Other revenues.
•
Reclassifications between various operating expense line items to conform the presentation of regional airline expenses.
•
Reclassifications between other nonoperating income (expense), net and operating expenses to conform the presentation of foreign currency gains and losses.
The following table summarizes the historical and revised financial statement amounts for American (in millions).
Additionally, the Company reclassified approximately $292 million from current to noncurrent liabilities as of December 31, 2012.
New Accounting Pronouncements
Effective January 1, 2013, American adopted revised guidance on the Comprehensive Income topic of the FASB Codification which requires an entity to present either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income (loss) and the income statement line items affected by the reclassification. The adoption did not have any impact on American’s financial position, results of operations or cash flows.
Effective January 1, 2013, American adopted revised guidance on Balance Sheet topic of the FASB Codification, which clarifies the scope of disclosures about offsetting assets and liabilities. The clarification applies only to derivatives, repurchase agreements and reverse purchase agreements, and to certain securities borrowing and securities lending transactions, and not to ordinary trade receivables and payables. The adoption did not have any impact on the American’s financial position, results of operations or cash flows.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.
Restricted and Short-term Investments
American has restricted cash and short-term investments related primarily to collateral held to support projected workers' compensation obligations and funds held for certain tax obligations.
Aircraft fuel, spare parts, and supplies, net
Aircraft fuel, spare parts, and supplies, are recorded at net realizable value based on average costs. These items are expensed when used. An allowance for obsolescence is provided for aircraft spare parts and supplies.
Maintenance, Materials and Repairs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.
Other Intangibles, net
Intangible assets consist primarily of airport take-off and landing rights (Slots). Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Indefinite-lived intangible assets (route acquisition costs and international Slots) are tested for impairment annually on December 31, rather than amortized, or when a triggering event occurs, in accordance with U.S. GAAP. Such triggering events may include significant changes to the Company's network or capacity, or the implementation of open skies agreements in countries where the Company operates flights.
As there is minimal market activity for the valuation of routes and international Slots, the Company measures fair value with inputs using the income approach. The income approach uses valuation techniques, such as future cash flows, to convert future amounts to a single present discounted amount. The inputs utilized for these valuations are unobservable and reflect the Company's assumptions about market participants and what they would use to value the routes and accordingly are considered Level 3 in the fair value hierarchy. The Company's unobservable inputs are developed based on the best information available as of December 31, 2013.
The following table provides information relating to the Company's amortized intangible assets as of December 31, 2013 and 2012 (in millions):
Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years to a zero residual value. The Dividend Miles customer relationships, marketing agreements and trademarks were identified as intangible assets subject to amortization and will be amortized over approximately 9 years, 30 years and 15 months, respectively.
American recorded amortization expense related to these intangible assets of approximately $18 million, $25 million, and $27 million for the years ended December 31, 2013, 2012 and 2011, respectively. American expects to record annual amortization expense for the aforementioned definite-life intangible assets as follows (in millions):
The Company's indefinite-lived assets include certain international route authorities and domestic airport take-off and landing slots. Indefinite-lived assets are not amortized but instead are reviewed for impairment annually and more frequently if events or circumstances indicate that the asset may be impaired. As of December 31, 2013, and 2012, the Company had $755 million and $708 million, respectively, of indefinite-lived intangible assets on its Consolidated Balance Sheet.
Equipment and Property
Property and equipment are recorded at cost. Interest expense related to the acquisition of certain property and equipment, including aircraft purchase deposits, is capitalized as an additional cost of the asset. Interest capitalized for the years ended December 31, 2013, 2012 and 2011 was $47 million, $50 million and $40 million, respectively. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated over the estimated useful life of the asset or the modifications, whichever is less. The depreciable lives used for the principal depreciable asset classifications are:
Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally 5% to 10%, except when guaranteed by a third-party for a different amount.
Equipment and property under capital leases are amortized over the term of the leases or, in the case of certain aircraft, over their expected useful lives. Lease terms vary but are generally 16 to 30 years for aircraft and three to 30 years for other leased equipment and property.
The Company records 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 asset are less than the carrying amount of the asset and the net book value of the asset exceeds its 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Passenger Revenue
Passenger ticket sales are initially recorded as a component of Air traffic liability. Revenue derived from ticket sales is recognized at the time service is provided. However, due to various factors, including the complex pricing structure and interline agreements throughout the industry, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized, including breakage. These estimates are generally based upon the evaluation of historical trends, including the use of regression analysis and other methods to model the outcome of future events based on American's historical experience, and are recorded at the scheduled time of departure.
American purchases capacity, or ASMs, generated by the Company's wholly-owned regional air carriers and the capacity of Republic Airways Holdings' subsidiaries Republic Airlines (Republic) and Chautauqua Airlines (Chautauqua), and SkyWest Airlines, Inc.'s subsidiaries Sky West Airlines (SkyWest) and ExpressJet Airlines (ExpressJet) in certain markets. American's wholly-owned regional air carriers and Chautauqua, ExpressJet, Republic, and SkyWest operate regional aircraft in these markets as part of American Eagle carriers. American classifies revenues generated from transportation on these carriers as regional passenger revenues. Liabilities related to tickets sold by American for travel on these air carriers are also included in American's air traffic liability and are subsequently relieved in the same manner as described above
Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statement of operations and recorded as a liability until remitted to the appropriate taxing authority.
Frequent Flyer Programs
American currently operates the AAdvantage frequent flyer program. 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 programs. Mileage credits can also be earned through purchases from other non-airline partners that participate in American's loyalty program. Mileage credits can be redeemed for travel on American, US Airways or other participating partner airlines, in which case American pays a fee.
American uses the incremental cost method to account for the portion of our frequent flyer liability incurred when AAdvantage members earn mileage credits by flying on American or its regional affiliates. The Company has an obligation to provide future travel when these mileage credits are redeemed and therefore has recorded a liability for mileage credits outstanding.
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, American estimates how many mileage credits will never be redeemed for travel and excludes 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 statement 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. In addition, American also includes in the determination of incremental cost the amount of certain fees related to redemptions expected to be collected from AAdvantage members. These redemption fees reduce incremental cost. 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, 2013 the liability for outstanding mileage credits for the AAdvantage program was $580 million and is included on the consolidated balance sheets within frequent flyer liability.
American also sells frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to business partners is comprised of two components, transportation and marketing. Historically, American has 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 our adoption of Accounting Standards Update (ASU) No. 2009-13, "Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements" on January 1, 2011.
During the fourth quarter, American and Citibank amended their current AAdvantage co-branded credit card agreement which resulted in a material modification of the terms of the arrangement. Therefore, subsequent to the amendment of the arrangement, American will apply the relative selling price method to determine the values of each deliverable. Under the relative selling price approach, American identified five revenue elements for the co-branded credit card agreements with Citibank: the transportation component; use of the American’s brand including access to frequent flyer 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 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 American's business partners and relates primarily to the use of American’s logo and tradename along with access to customers lists of AAdvantage members. The marketing services are provided 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 the fourth quarter for American’s Citibank modification, American reduced its 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, American now defers less revenue per mile sold.
For American’s agreements where there has not been a material modification, it continues to apply the residual method.
As of December 31, 2013 and 2012, American had $1.2 billion in deferred revenue from the sale of mileage credits (recorded as Frequent flyer liability on the consolidated balance sheets). For the years ended December 31, 2013, 2012 and 2011, the marketing component of mileage sales recognized at the time of sale in other revenues was approximately $816 million, $725 million and $761 million, respectively.
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.
Selling Expenses
Selling expenses include commissions, credit card fees, computerized reservations systems fees and advertising. Advertising expenses are expensed on a straight-line basis as incurred throughout the year. Advertising expense was $166 million, $153 million and $186 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Share-based Compensation
The Company accounts for its share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. The fair value of stock options and stock appreciation rights is estimated using a Black-Scholes option pricing model. The fair value of restricted stock units is based on the market price of the underlying shares of common stock on the date of grant. See Note 11 for further discussion of share-based compensation.
Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other nonoperating expense, net in American's consolidated statements of operations. Foreign currency losses for 2013, 2012 and 2011 were $55 million, $41 million and $17 million, respectively.
Subsequent Events
In connection with preparation of the Consolidated Financial Statements and in accordance U.S. GAAP, the Company evaluated subsequent events after the balance sheet date of December 31, 2013 and identified items as set forth in Note 17 to American's Consolidated Financial Statements.
5. Special Items, Net
The following table summarizes the components of American's Special items, net, as of December 31, 2013, 2012 and 2011 (in millions):
(1)
Consists primarily of impairment charges to write-down certain Boeing 757 aircraft and certain related long-lived assets to their estimated fair value in connection with reclassification of these assets to held for sale.
(2)
Consists primarily of charges resulting from a $107 million fair value adjustment to the pilot long-term disability plan and a $43 million charge to benefits expense due to a reorganization related increase in workers' compensation claims in the applicable period including adverse developments on older claims. Charges in 2012 are in connection with voluntary and involuntary employee separations from American and were paid through the end of 2013.
(3)
Employee related expenses consist of $47 million in severance to satisfy certain separation agreements resulting from the Merger and professional fees and $56 million related to equity awards granted in connection with the Merger, partially offset by the cancellation of equity awards in connection with the Merger.
(4)
Recognition of a $67 million gain on the sale of slots at LaGuardia and Ronald Regan Washington National Airport as part of the settlement reached with the Department of Justice.
See Note 4 to AAG's Consolidated Financial Statements in Part II, Item 8A for information on the Merger Agreement.
6. Investments and Fair Value Measurements
Short-term investments consisted of (in millions):
Short-term investments at December 31, 2013, by contractual maturity included (in millions):
All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are reflected as a component of Accumulated other comprehensive income (loss).
American utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. American's short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. American's fuel derivative contracts, which consist primarily of call options, collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option), are valued using energy and commodity market data which is derived by combining raw inputs with quantitative models and processes to generate forward curves and volatilities. Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. No changes in valuation techniques or inputs occurred during the year ended December 31, 2013.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):
(1)
Unrealized gains or losses on short-term investments, restricted cash and short-term investments and derivatives qualifying for hedge accounting are recorded in Accumulated other comprehensive income (loss) at each measurement date.
(2)
American's short-term investments mature in one year or less except for $250 million of Bank notes/Certificates of deposit/Time deposits, $511 million of U.S. Government agency investments and $2.1 billion of Corporate obligations.
A $56 million Level 1 restricted money market security was liquidated in August 2013. The cash proceeds were subsequently reinvested in a Level 2 U.S. Treasury Obligation. American's policy regarding the recording of transfers between levels is to reflect any such transfers at the end of the reporting period.
As of December 31, 2013, American had no exposure to European sovereign debt.
7. Commitments, Contingencies and Guarantees
Aircraft Acquisition Commitments
American had total aircraft acquisition commitments as of December 31, 2013 as follows:
As of December 31, 2013, payments for the above purchase commitments and certain engines, and future lease payments for all leased aircraft are presented in the table below (in millions):
(1)
These amounts are net of purchase deposits currently held by the manufacturers. American's purchase deposits totaled $847 million as of December 31, 2013. American has granted Boeing a security interest in American's purchase deposits with Boeing.
In February 2013, American entered into agreements with Boeing that provide for, among other things, the assumption and restructuring of certain existing aircraft purchase agreements, the entering into of a definitive purchase agreement with respect to Boeing 737 MAX aircraft, the confirmation of the purchase of the Boeing 787 aircraft (which previously had been subject to certain reconfirmation rights) and certain financing commitments. American also entered into an amendment to its agreement with Airbus S.A.S. in January 2013.
In December 2013, American entered into agreements with Bombardier Inc. (Bombardier) and Embraer S.A. (Embraer) under which it plans to acquire 30 Bombardier CRJ900 aircraft to be delivered in 2014 and 2015 and 60 Embraer E175 aircraft to be delivered between 2015 and 2017. The agreement also provides for the option to purchase up to 40 additional CRJ900 aircraft and 90 additional E175 aircraft.
Facility and support commitments
American has contracts related to facility construction or improvement projects, primarily at airport locations as well as information technology support. The contractual obligations related to these contracts are presented in the table below (in millions):
Capacity Purchase Agreements with Third-Party Regional Carriers
As of December 31, 2013, American's capacity purchase agreements with third-party regional carriers had expiration dates ranging from 2014 to 2025, with rights of American to extend the respective terms of each agreement. See Part I, Item 2.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the AAG's and American’s disclosure controls and procedures as of December 31, 2013. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that AAG's and American’s disclosure controls and procedures were effective as of December 31, 2013. During the quarter ending on December 31, 2013, AAG acquired US Airways Group. Other than the addition of US Airways Group's internal control over financial reporting and any related changes in control to integrate US Airways Group into AAG, there was no change in AAG’s or American's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, AAG's and American's internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Management of AAG and American is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. AAG’s and American’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. AAG’s and American’s internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of AAG or American, respectively;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of AAG or American are being made only in accordance with authorizations of management and directors of AAG or American, respectively; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of AAG’s or America’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of AAG’s and American’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992 Framework).
Based on our assessment and those criteria, management concludes that AAG and American maintained effective internal control over financial reporting as of December 31, 2013.
AAG’s and American's independent registered public accounting firm has issued an audit report on the effectiveness of AAG’s and American's internal control over financial reporting. That report has been included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
American Airlines Group Inc.
We have audited American Airlines Group Inc.’s (the Company) (formerly AMR Corporation) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying "Management's Report on Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We did not audit the effectiveness of internal control over financial reporting of US Airways Group, Inc., a wholly-owned subsidiary whose financial statements reflect total assets and operating revenues consisting of 39% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2013. The effectiveness of US Airways Group, Inc.’s internal control over financial reporting, inclusive of controls over the accounting for the Company’s business combination with US Airways Group, Inc., was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of US Airways Group, Inc.’s internal control over financial reporting, is based solely on the report of the other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based upon the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of other auditors provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, based on our audit and the report of other auditors, American Airlines Group Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2013 of the Company and our report dated February 27, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 27, 2014
The Board of Directors and Stockholder
American Airlines, Inc.
We have audited American Airlines, Inc.’s (the Company) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying "Management’s Report on Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based upon the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, American Airlines, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 2013 of the Company and our report dated February 27, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 27, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
US Airways Group, Inc:
We have audited US Airways Group, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, US Airways Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of US Airways Group, Inc. and subsidiaries as of December 31, 2013, and the related consolidated statement of operations, comprehensive income, stockholders’ equity, and cash flows for the period from December 9, 2013 to December 31, 2013, and our report dated February 27, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Phoenix, Arizona
February 27, 2014
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
The AAG 2014 Annual Meeting of Stockholders (the 2014 Annual Meeting) will be held on June 4, 2014, at a place and time to be specified in the Proxy Statement. Stockholder proposals to be considered for inclusion in AAG’s proxy materials for the 2014 Annual Meeting in accordance with Rule 14a-8 under the Exchange Act of 1934, as amended, must be received by AAG by March 10, 2014 and must comply with the applicable rules and regulations of the Securities and Exchange Commission. In order for a stockholder to present any other proposal at the 2014 Annual Meeting, a stockholder’s notice complying with the requirements set forth in the Company’s Amended and Restated Bylaws must be delivered to, or mailed and received at, the principal executive offices of the Company not later than March 10, 2014.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as stated below, the information required by this Item will be set forth under the captions "Proposal 1 - Election of Directors," "Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Information About Our Board of Directors and Corporate Governance" in American Airlines Group Inc.’s Proxy Statement for the 2014 Annual Meeting of Stockholders of American Airlines Group Inc. (the Proxy Statement) and is incorporated by reference into this Annual Report on Form 10-K.
American Airlines Group and American have adopted Standards of Business Conduct (the Ethics Standards) within the meaning of Item 406(b) of Regulation S-K. The Ethics Standards apply to all officers and employees of American Airlines Group Inc. and its subsidiaries, including American except for the employees, officers and members of the Board of Directors of US Airways Group, Inc. and its wholly-owned subsidiaries, who are governed by the US Airways Group Code of Business Conduct and Ethics (the US Airways Group Code). The Ethics Standards are available on our website at www.aa.com. If we make substantive amendments to the Ethics Standards or the US Airways Group Code or grant any waiver, including any implicit waiver, to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K in accordance with applicable rules and regulations.
Except as stated below, the information required by this Item will be set forth in the Proxy Statement under the captions "Information About Our Board of Directors and Corporate Governance," "Director Compensation," "Compensation Discussion and Analysis," "Executive Compensation" and "Compensation Committee Report" and is incorporated by reference into this Annual Report on Form 10-K.
During 2013, the executive officers of AAG and American were the same persons and the information regarding such persons called for by Item 11
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as stated below, the information required by this Item will be set forth in the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" and is incorporated by reference into this Annual Report on Form 10-K.
All of the outstanding shares of common stock of American, consisting of 1,000 shares, par value $1.00 per share, are owned beneficially and of record by AAG.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in the Proxy Statement under the captions "Certain Relationships and Related Party Transactions" and "Information About Our Board of Directors and Corporate Governance" and is incorporated by reference into this Annual Report on Form 10-K.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be set forth in the Proxy Statement under the caption "Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm" and is incorporated by reference into this Annual Report on Form 10-K.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements
Schedules not included have been omitted because they are not applicable or because the required information is included in the Consolidated Financial Statements or notes thereto.
Exhibits
The exhibits listed in the Exhibit Index following the signature pages to this report are filed as part of, or incorporated by reference into, this report.
Exhibits required to be filed by Item 601 of Regulation S-K: Where the amount of securities authorized to be issued under any of our long-term debt agreements does not exceed 10 percent of our assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S-K, in lieu of filing such as an exhibit, we hereby agree to furnish to the Commission upon request a copy of any agreement with respect to such long-term debt.
EXHIBIT INDEX
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Pursuant to Item 601(b)(2) of Regulation S-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted. Such exhibits and schedules are described in the referenced agreement. AAG and American hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules.
*
Confidential treatment has been granted with respect to certain portions of this agreement.
**
Confidential treatment has been requested with respect to certain portions of this agreement.
†
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
American Airlines Group Inc.
By:
/s/ W. Douglas Parker
W. Douglas Parker
Chief Executive Officer
(Principal Executive Officer)
Date: February 27, 2014
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
American Airlines, Inc.
By:
/s/ W. Douglas Parker
W. Douglas Parker
Chief Executive Officer
(Principal Executive Officer)
Date: February 27, 2014
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints W. Douglas Parker and Derek J. Kerr and each or any of them, his or her true and lawful attorneys and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Registrants’ Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of American Airlines Group Inc. and in the capacities and on the dates noted:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of American Airlines, Inc. and in the capacities and on the dates noted:
Schedule II - Valuation and Qualifying Accounts and Reserves
(in millions)
American Airlines Group
American Airlines