AMR- 10Q- 2012.9.30
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2012.
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From                      to                     .
Commission file number 1-8400.
 
 
AMR Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
75-1825172
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
4333 Amon Carter Blvd.
Fort Worth, Texas
 
76155
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (817) 963-1234
Not Applicable
(Former name, former address and former fiscal year , if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
ý  Large Accelerated Filer    ¨  Accelerated Filer    ¨  Non-accelerated Filer
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $1 par value – 335,271,557 shares as of October 10, 2012.


Table of Contents

INDEX
AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
 
 
 
 
PART I:
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II:
 
 
 
Item 1.
Item 6.
 
 


Table of Contents

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Passenger — American Airlines
$
4,909

 
$
4,816

 
$
14,303

 
$
13,508

— Regional Affiliates
748

 
735

 
2,208

 
2,023

Cargo
156

 
176

 
499

 
532

Other revenues
616

 
649

 
1,908

 
1,960

Total operating revenues
6,429

 
6,376

 
18,918

 
18,023

Expenses
 
 
 
 
 
 
 
Aircraft fuel
2,180

 
2,255

 
6,555

 
6,299

Wages, salaries and benefits
1,783

 
1,776

 
5,342

 
5,262

Other rentals and landing fees
329

 
363

 
990

 
1,070

Maintenance, materials and repairs
347

 
345

 
1,047

 
983

Depreciation and amortization
256

 
273

 
777

 
815

Commissions, booking fees and credit card expense
277

 
285

 
806

 
809

Aircraft rentals
137

 
165

 
410

 
483

Food service
139

 
137

 
394

 
390

Special charges
211

 

 
329

 

Other operating expenses
719

 
738

 
2,164

 
2,182

Total operating expenses
6,378

 
6,337

 
18,814

 
18,293

Operating Income (Loss)
51

 
39

 
104

 
(270
)
Other Income (Expense)
 
 
 
 
 
 
 
Interest income
7

 
6

 
20

 
20

Interest expense (contractual interest expense equals $(180) and $(564) for the three and nine months ended September 30, 2012)
(161
)
 
(211
)
 
(503
)
 
(626
)
Interest capitalized
13

 
11

 
36

 
28

Miscellaneous — net
(11
)
 
(7
)
 
(29
)
 
(36
)
 
(152
)
 
(201
)
 
(476
)
 
(614
)
Income (Loss) Before Reorganization Items, Net
(101
)
 
(162
)
 
(372
)
 
(884
)
Reorganization Items, Net
(137
)
 

 
(1,767
)
 

Income (Loss) Before Income Taxes
(238
)
 
(162
)
 
(2,139
)
 
(884
)
Income tax

 

 

 

Net Loss
$
(238
)
 
$
(162
)
 
$
(2,139
)
 
$
(884
)
Earnings (Loss) Per Share
 
 
 
 
 
 
 
Basic
$
(0.71
)
 
$
(0.48
)
 
$
(6.38
)
 
$
(2.64
)
Diluted
$
(0.71
)
 
$
(0.48
)
 
$
(6.38
)
 
$
(2.64
)
The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In millions)
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Net Earnings (Loss)
$
(238
)
 
$
(162
)
 
$
(2,139
)
 
$
(884
)
Other Comprehensive Income (Loss), Before Tax:
 
 
 
 
 
 
 
Defined benefit pension plans and retiree medical:
 
 
 
 
 
 
 
Amortization of actuarial loss and prior service cost
56

 
33

 
169

 
98

Current year change

 
(3
)
 

 
10

       Benefit plan modifications
1,673

 

 
1,673

 

Derivative financial instruments:
 
 
 
 
 
 
 
Change in fair value
86

 
(142
)
 
29

 
152

Reclassification into earnings
12

 
(57
)
 
(13
)
 
(287
)
Unrealized gain (loss) on investments
 
 
 
 
 
 
 
Net change in value
2

 
(1
)
 
5

 
(1
)
Other Comprehensive Income (Loss) Before Tax
1,829

 
(170
)
 
1,863

 
(28
)
Income tax expense on other comprehensive income

 

 

 

Comprehensive Income (Loss)
$
1,591

 
$
(332
)
 
$
(276
)
 
$
(912
)
The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
 
 
 
 
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Current Assets
 
 
 
Cash
$
508

 
$
283

Short-term investments
3,718

 
3,718

Restricted cash and short-term investments
847

 
738

Receivables, net
1,160

 
902

Inventories, net
596

 
617

Fuel derivative contracts
98

 
97

Other current assets
376

 
402

Total current assets
7,303

 
6,757

Equipment and Property
 
 
 
Flight equipment, net
10,492

 
11,041

Other equipment and property, net
2,066

 
2,126

Purchase deposits for flight equipment
764

 
746

 
13,322

 
13,913

Equipment and Property Under Capital Leases
 
 
 
Flight equipment, net
235

 
323

Other equipment and property, net
63

 
70

 
298

 
393

International slots and route authorities
708

 
708

Domestic slots and airport operating and gate lease rights, less accumulated amortization, net
167

 
186

Other assets
2,129

 
1,891

 
$
23,927

 
$
23,848


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AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)
 
 
 
 
 
September 30,
2012
 
December 31,
2011
Liabilities and Stockholders’ Equity (Deficit)
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
1,283

 
$
1,007

Accrued liabilities
2,029

 
1,882

Air traffic liability
4,730

 
4,223

Current maturities of long-term debt
1,508

 
1,518

Current obligations under capital leases
36

 

Total current liabilities
9,586

 
8,630

Long-term debt, less current maturities
6,097

 
6,702

Obligations under capital leases, less current obligations
392

 

Pension and postretirement benefits
76

 
9,204

Other liabilities, deferred gains and deferred credits
1,658

 
1,580

Liabilities Subject to Compromise
13,493

 
4,843

Stockholders’ Equity (Deficit)
 
 
 
Preferred stock

 

Common stock
341

 
341

Additional paid-in capital
4,477

 
4,465

Treasury stock
(367
)
 
(367
)
Accumulated other comprehensive income (loss)
(2,101
)
 
(3,964
)
Accumulated deficit
(9,725
)
 
(7,586
)
 
(7,375
)
 
(7,111
)
 
$
23,927

 
$
23,848

The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)
 
 
 
 
 
Nine Months Ended
September 30,
 
2012
 
2011
Net Cash Provided by (used for) Operating Activities
$
1,567

 
$
346

Cash Flow from Investing Activities:
 
 
 
Capital expenditures, including aircraft lease deposits
(1,153
)
 
(1,234
)
Net (increase) decrease in short-term investments

 
336

Net (increase) decrease in restricted cash and short-term investments
(109
)
 
(24
)
Proceeds from sale of equipment and property
58

 
(8
)
Net cash used for investing activities
(1,204
)
 
(930
)
Cash Flow from Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(991
)
 
(1,527
)
Proceeds from:
 
 
 
Issuance of debt

 
1,784

Sale leaseback transactions
853

 
463

Other

 

Net cash provided by (used for) financing activities
(138
)
 
720

Net increase (decrease) in cash
225

 
136

Cash at beginning of period
283

 
168

Cash at end of period
$
508

 
$
304

The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
DEBTORS AND DEBTORS IN POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.        Chapter 11 Reorganization
Overview
On November 29, 2011 (the Petition Date), AMR Corporation (AMR or the Company) and certain of the Company’s 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). The Chapter 11 Cases are being jointly administered under the caption “in re AMR Corporation, et al, Case No. 11-15463-SHL.”
The Company and the other Debtors are operating as “debtors in possession” under the jurisdiction of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. In general, as debtors in possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. The Bankruptcy Code enables the Company to continue to operate its business without interruption, and the Bankruptcy Court has granted additional relief covering, among other things, obligations to (i) employees, (ii) taxing authorities, (iii) insurance providers, (iv) independent contractors for improvement projects, (v) foreign vendors, (vi) other airlines pursuant to certain interline agreements, and (vii) certain vendors deemed critical to the Debtors’ operations.
While operating as debtors in possession under Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. The Debtors have not yet prepared or filed with the Bankruptcy Court a plan of reorganization. The Debtors have the exclusive right to file a plan of reorganization through and including December 28, 2012, subject to the ability of third parties to file motions to terminate the Debtors' exclusivity period. If the Debtors file a plan of reorganization on or prior to such date, the Debtors will have an exclusive period to solicit and obtain acceptances for such plan through and including February 28, 2013. On October 16, 2012, the Debtors filed a joint motion with the Creditors' Committee seeking to further extend such exclusivity periods to January 28, 2013 and March 28, 2013, respectively.  There can be no assurance that the Bankruptcy Court will approve the Debtors' motion. The Debtors have the right to seek further extensions of such exclusivity periods, subject to a statutory limit of 18 months from the Petition Date in the case of filing a plan of reorganization, and 20 months from the Petition Date in the case of soliciting and obtaining acceptances. The ultimate plan of reorganization, which would be subject to acceptance by the requisite majorities of empowered creditors under the Bankruptcy Code and approval by the Bankruptcy Court, could materially change the amounts and classifications in the Condensed Consolidated Financial Statements.
The Company’s Chapter 11 Cases followed an extended effort by the Company to restructure its business to strengthen its competitive and financial position. However, the Company’s substantial cost disadvantage compared to its larger competitors, all of which restructured their costs and debt through Chapter 11, became increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges.
No assurance can be given as to the value, if any, that may be ascribed to the Debtors' various prepetition liabilities and other securities. The Company cannot predict what the ultimate value of any of its securities may be or whether holders of any such securities will receive any distribution in the Debtors' reorganization.  However, it is likely that the Company's common stock will have little or no value at the time of the Company's emergence from bankruptcy, and the common stock could be canceled entirely upon the approval of the Bankruptcy Court.  In the event of such cancellation, amounts invested in the Company's common stock will not be recoverable.  Accordingly, the Debtors urge that caution be exercised with respect to existing and future investments in any of these securities (including the Company's common stock) or other Debtor claims.  Trading in the Company's common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and the Company's common stock and such debt securities were delisted by the SEC from the NYSE on January 30, 2012.  On January 5, 2012, the Company's common stock began trading under the symbol “AAMRQ” on the OTCQB marketplace, operated by OTC Markets Group (www.otcmarkets.com).
General Information
Notices to Creditors; Effect of Automatic Stay. The Debtors have notified all known current or potential creditors that the Chapter 11 Cases were filed. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most

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creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a prepetition claim, are enjoined unless and until the Bankruptcy Court lifts the automatic stay as to any such claim. Vendors are being paid for goods furnished and services provided after the Petition Date in the ordinary course of business.
Appointment of Creditors’ Committee. On December 5, 2011, the U.S. Trustee appointed the Creditors’ Committee for the Chapter 11 Cases.

Retiree Medical and Life Insurance Benefits.  On March 23, 2012, the Bankruptcy Court entered a Stipulation and Order providing for the appointment of a committee of retired independent and unionized AMR employees (the Retiree Committee), and on May 3, 2012 appointed five members to the Retiree Committee.  On August 15, 2012, the Company filed a proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired and initiated retiree medical coverage before November 1, 2012.  On September 20, 2012, the Company opened negotiations with the Retiree Committee, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage for former employees who retired and initiated coverage before November 1, 2012.  Those negotiations are continuing.  On September 14, 2012, the Company notified active employees of its plans to modify its subsidized retiree medical coverage on November 1, 2012. 
Rejection of Executory Contracts. Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, agreements relating to aircraft and aircraft engines (collectively, Aircraft Property) and leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions.  The Debtors' rights to assume, assume and assign, or reject unexpired leases of non-residential real estate had been extended by order of the Bankruptcy Court through June 26, 2012. On June 20, 2012, the Bankruptcy Court entered orders granting the Debtors' motions to assume 463 unexpired leases of non-residential real property.  On June 21, 2012 the Bankruptcy Court entered an order extending, by the Debtors' agreement with certain landlords, the date by which the Debtors must assume or reject an additional 88 unexpired leases of non-residential real property.  On July 19, 2012, the Bankruptcy Court entered orders granting the Debtors' motion to assume nine unexpired leases of non-residential real property.  On July 24, 2012 the Bankruptcy Court entered an order further extending, by the Debtors' agreement with certain landlords, the date by which the Debtors must assume or reject 19 unexpired leases of non-residential real property. On August 8, 2012, the Bankruptcy Court entered orders granting the Debtors' motion to assume one unexpired lease of non-residential real property and extending the date by which the Debtors must assume or reject 15 unexpired leases of non-residential real property. On August 22, 2012, the Bankruptcy Court entered orders granting the Debtors' motion to assume three unexpired leases of non-residential real property and extending the date by which the Debtors must assume or reject 12 unexpired leases of non-residential real property.  On September 20, 2012, the Bankruptcy Court entered orders granting the Debtor's motion to assume nine unexpired leases of non-residential real property and extending the date by which the Debtors must assume or reject 34 unexpired leases of non-residential real property.
In general, rejection of an executory contract or unexpired lease is treated as a prepetition breach of the executory contract or unexpired lease in question and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases have the right to file claims against the Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing defaults under such executory contract or unexpired lease.
In accordance with the Bankruptcy Code, as of September 30, 2012, the Company had rejected ten real property leases and filed motions to reject facility agreements supporting special facility revenue bonds at Dallas/Fort Worth International Airport, Fort Worth Alliance Airport and Luis Muñoz Marín International Airport in San Juan, Puerto Rico.
Any description of an executory contract or unexpired lease elsewhere in these Notes or in the report to which these Notes are attached, including where applicable the Debtors’ express termination rights or a quantification of their obligations, must be read in conjunction with, and is qualified by, any rights the Debtors or counterparties have under Section 365 of the Bankruptcy Code.
The Debtors expect that liabilities subject to compromise and resolution in the Chapter 11 Cases will arise in the future as a result of damage claims created by the Debtors’ rejection of various executory contracts and unexpired leases. Due to the uncertain nature of many of the potential rejection claims, the magnitude of such claims is not reasonably estimable at this time. Such claims may be material (see “Liabilities Subject to Compromise” in Note 1 to the Condensed Consolidated Financial Statements).
Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment. Notwithstanding the general discussion above of the impact of the automatic stay, under Section 1110 of the Bankruptcy Code, beginning 60 days after filing a petition under Chapter 11, certain secured parties, lessors and conditional sales vendors may have a right to take possession of certain qualifying Aircraft Property that is leased or subject to a security interest or conditional sale contract, unless the Debtors,

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subject to approval by the Bankruptcy Court, agree to perform under the applicable agreement, and cure any defaults as provided in Section 1110 (other than defaults of a kind specified in Section 365(b)(2) of the Bankruptcy Code). Taking such action does not preclude the Debtors from later rejecting the applicable lease or abandoning the Aircraft Property subject to the related security agreement, or from later seeking to renegotiate the terms of the related financing.
The Debtors may extend the 60-day period by agreement of the relevant financing party, with Bankruptcy Court approval. In the absence of an agreement or cure as described above or such an extension, the financing party may take possession of the Aircraft Property and enforce its contractual rights or remedies to sell, lease or otherwise retain or dispose of such equipment.
The 60-day period under Section 1110 in the Chapter 11 Cases expired on January 27, 2012. In accordance with the Bankruptcy Court’s Order Authorizing the Debtors to (i) Enter into Agreements Under Section 1110(a) of the Bankruptcy Code, (ii) Enter into Stipulations to Extend the Time to Comply with Section 1110 of the Bankruptcy Code and (iii) File Redacted Section 1110(b) Stipulations, dated December 23, 2011, the Debtors have entered into agreements to extend the automatic stay or agreed to perform and cure defaults under financing agreements with respect to certain aircraft in their fleet and other Aircraft Property. With respect to certain Aircraft Property, the Debtors have reached agreements on, or agreements on key aspects of, renegotiated terms of the related financings, and the Debtors are continuing to negotiate terms with respect to certain of their other Aircraft Property financings. The ultimate outcome of these negotiations cannot be predicted with certainty. To the extent the Debtors are unable to reach definitive agreements with Aircraft Property financing parties, those parties may seek to repossess the subject Aircraft Property. The loss of a significant number of aircraft could result in a material adverse effect on the Debtors’ financial and operating performance.
In accordance with Section 1110 of the Bankruptcy Code, as of September 30, 2012, the Company had (i) rejected 40 leases relating to 21 MD-80 aircraft, four Fokker 100 aircraft, seven Boeing 757-200 aircraft and eight spare engines; (ii) relinquished one Airbus A300-600R aircraft that was subject to a mortgage; and (iii) made elections under Section 1110(a) of the Bankruptcy Code to retain 340 aircraft and 87 spare engines, including Boeing 737-800, Boeing 757-200, Boeing 767-300ER, Boeing 777-200ER, Bombardier CRJ-700, and McDonnell Douglas MD-80 aircraft, on the terms provided in the related financing documents. In addition, as of September 30, 2012, the Company had reached agreement on revised economic terms of the financings of 155 aircraft, comprising 83 MD-80 aircraft, nine Boeing 737-800 aircraft, 36 Boeing 757-200 aircraft, 11 Boeing 767-200ER aircraft, 13 Boeing 767-300ER aircraft and 3 Boeing 777-200 aircraft (which agreements are subject to reaching agreement on definitive documentation). Those 155 aircraft are substantially all of the mainline aircraft in the Company's fleet for which it expects to negotiate revised economic terms in the Chapter 11 Cases. In addition, the Company reached an agreement with the lessor to modify the leases of 39 Super ATR aircraft. As of September 30, 201226 of the Super ATR aircraft had been returned to the lessor as allowed under the modified agreement. The remaining 13 Super ATR aircraft are expected to be returned to the lessor during the remainder of 2012 and 2013. Lastly, the Company reached an agreement with the lender with respect to 18 Embraer RJ-135 aircraft pursuant to which the Company surrendered such aircraft to the lender on June 22, 2012, and the lender agreed that all remaining obligations of the Company under the financings of such aircraft would be general pre-petition unsecured damages.
Magnitude of Potential Claims. On February 27, 2012, the Debtors filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. All of the schedules are subject to further amendment or modification.
Bankruptcy Rule 3003(c)(3) requires the Bankruptcy Court to fix the time within which proofs of claim must be filed in a Chapter 11 case pursuant to Section 501 of the Bankruptcy Code. This Bankruptcy Rule also provides that any creditor who asserts a claim against the Debtors that arose prior to the Petition Date and whose claim (i) is not listed on the Debtors' schedules or (ii) is listed on the schedules as disputed, contingent, or unliquidated, must file a proof of claim. On May 4, 2012, the Bankruptcy Court entered an order that established July 16, 2012 at 5:00 p.m. (Eastern Time) as the deadline to file proofs of claim against any Debtor. More information regarding the filing of proofs of claim can be obtained at www.amrcaseinfo.com.
As of October 8, 2012, approximately 13,259 claims totaling about $305.2 billion have been filed with the Bankruptcy Court against the Debtors, and we expect new and amended claims to be filed in the future, including claims amended to assign values to claims originally filed with no designated value. Through the claims resolution process, we expect to identify substantial claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, are without merit, are overstated or for other reasons. As of the date of this filing, the Company has filed with the Bankruptcy Court objections to claims totaling $116.5 billion seeking orders to reduce claims by this amount, and the Company expects to continue this process.
Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.

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Collective Bargaining Agreements. The Bankruptcy Code provides a process for the modification and/or rejection of collective bargaining agreements (CBAs). In particular, Section 1113(c) of the Bankruptcy Code permits a debtor to reject its CBAs if the debtor satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court's approval to reject the CBAs. The Section 1113(c) process requires that a debtor must make proposals to its unions to modify existing CBAs based on the most complete and reliable information available at the time the proposals are made. The proposed modifications must be necessary to permit the reorganization of the debtor and must assure that all the affected parties are treated fairly and equitably. The debtor must provide the unions with all information necessary to evaluate the proposals, and meet at reasonable times and confer in good faith with the unions in an effort to reach mutually agreeable modifications to the CBAs. American Airlines, Inc. (American) commenced the Section 1113(c) process with its unions (APA, APFA and TWU) on February 1, 2012, and has negotiated in good faith with the unions for consensual agreements that achieve the necessary level of labor cost savings. Because consensual agreements had not been reached, and given American's need to restructure its labor costs expeditiously, the Debtors filed a motion with the Bankruptcy Court on March 27, 2012 requesting approval to reject the CBAs. Rejection of the CBAs is appropriate if the Bankruptcy Court finds the Debtors' proposals are necessary for their reorganization, are fair and equitable, and that the unions refused to agree to the proposals without good cause. 
The Court hearing on the Debtors' request to reject the CBAs began on April 23, 2012 with the presentation of the Debtors' case and concluded the week of May 21, 2012.   After the filing of its request to reject its CBAs, American and the unions continued to negotiate in good faith toward consensual agreements. Those negotiations resulted in ratified agreements with all seven TWU-represented groups (Fleet Service Clerks, Dispatchers, Ground School Instructors, Maintenance Control Technicians, Simulator Technicians, Mechanics and Related (M&R), and Stores), all of which have been approved by the Bankruptcy Court. On July 20, 2012, APFA sent American's proposed Last Best and Final Offer (LBFO) to its membership for a ratification vote, and on August 19, 2012 APFA announced the LBFO was ratified by the membership.  This new agreement was approved by the Bankruptcy Court on September 12, 2012. Having secured Court approval of the APFA and all seven TWU agreements, American has begun implementing the terms of all of its new agreements.
On June 27, 2012, the APA Board of Directors voted in favor of sending a tentative agreement it reached with American to its membership for a ratification vote; however, APA announced on August 8, 2012 that its membership did not ratify that agreement.  Subsequently, on August 15, 2012, the Bankruptcy Court issued its decision on the Debtors' request to reject its pilot CBA.  The Bankruptcy Court denied the request, but found that all but two of the numerous 1113 term sheet proposals met all of the standards for contract rejection.  The Bankruptcy Court invited the Debtors to modify the two proposals and renew its motion.  A renewed 1113 motion was filed on August 17, 2012, and a hearing was held on September 4, 2012. The Bankruptcy Court granted the renewed motion and entered an order on September 5, 2012 authorizing American to reject the pilot CBA. In accordance with the Bankruptcy Court's ruling, American began implementing certain terms and conditions of employment for pilots that the Bankruptcy Court determined were fair and necessary for the Debtors' successful restructuring. American and APA are continuing to negotiate in good faith toward a new pilot agreement. The ultimate resolution of the Debtors' agreement with the APA cannot be determined at this time. APA is appealing the Bankruptcy Court's order authorizing American to reject the pilot CBA, and is also appealing a prior decision by the Court rejecting APA's claim that American cannot use the 1113 CBA rejection process to make changes to pilot working conditions because, according to APA, its CBA with American expired by its terms in May 2008.  Relatedly, APA filed a request with the Bankruptcy Court to stay its decision authorizing American to reject the CBA pending the outcome of its appeals, and American has objected to that request. 
American Eagle Airlines, Inc. (together with Executive Airlines, Inc., AMR Eagle) commenced the Section 1113(c) process with its unions on March 21, 2012. On July 27, 2012, AMR Eagle reached a tentative agreement with the Association of Flight Attendants. That tentative agreement was ratified by the flight attendants on September 7, 2012.  On August 8, 2012, AMR Eagle reached an agreement-in-principle with the Air Line Pilots Association.  The ALPA Master Executive Council accepted the terms of the agreement-in-principle on September 12, 2012 and the tentative agreement was ratified by the pilot group on October 8, 2012.  On July 20, 2012, AMR Eagle and the TWU reached a tentative agreement with the Mechanics and Related and Fleet Service Clerks groups.  On August 24, 2012, the TWU announced that the Fleet Service Clerks group ratified its tentative agreement and that the Mechanics and Related group did not ratify its tentative agreement.  Because consensual agreements had not been reached with the TWU represented Mechanics, Ground School Instructors and Dispatchers, AMR Eagle filed a motion with the Bankruptcy Court on September 7, 2012 requesting approval to reject those CBAs. AMR Eagle continued to negotiate in good faith with the TWU with respect to each of those work groups. On October 3, 2012, AMR Eagle and the TWU reached tentative agreements with the Mechanics and Related and the Ground School Instructors groups.  On October 8, 2012, AMR Eagle reached a tentative agreement with the TWU represented Dispatch group.  The tentative agreements for Mechanics, Ground School Instructors and Dispatchers will be sent  to those work groups for a ratification vote.  AMR Eagle anticipates learning the vote results for all three work groups on or about October 26, 2012. Pending the results of those votes, the October 23, 2012 hearing previously scheduled for the Section 1113 motion has been adjourned to a date to be determined. 
Plan of Reorganization. On July 19, 2012, the Bankruptcy Court entered an order pursuant to Section 1121(d) of the Bankruptcy

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Code extending the exclusivity periods during which only the Debtors have the right to file a plan of reorganization and solicit and obtain acceptances of such plan. The date until which the Debtors have to file a plan of reorganization has been extended through and including December 28, 2012. If the Debtors file a plan of reorganization on or prior to such date, the Debtors have an exclusive period to solicit and obtain acceptances for such plan through and including February 28, 2013. On October 16, 2012, the Debtors filed a joint motion with the Creditors' Committee seeking to further extend such exclusivity periods to January 28, 2013 and March 28, 2013, respectively.  There can be no assurance that the Bankruptcy Court will approve the Debtors' motion. The Debtors have the right to seek further extensions of such exclusivity periods, subject to a statutory limit of 18 months from the Petition Date in the case of filing a plan of reorganization, and 20 months from the Petition Date in the case of soliciting and obtaining acceptances. If the Debtors’ exclusivity period lapses, any party in interest may file a plan of reorganization for any of the Debtors. In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective. A plan of reorganization has been accepted by holders of claims against and equity interests in the Debtors if (1) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept the plan and (2) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests has voted to accept the plan.
Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. A class of claims or equity interests that does not receive or retain any property under the plan on account of such claims or interests is deemed to have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be “crammed down” even if the shareowners receive no recovery if the proponent of the plan demonstrates that (1) no class junior to the common stock is receiving or retaining property under the plan and (2) no class of claims or interests senior to the common stock is being paid more than in full.
Availability and Utilization of Net Operating Losses. The availability and utilization of net operating losses (and utilization of alternative minimum tax credits) after the Debtors’ emergence from Chapter 11 is uncertain at this time and will be highly influenced by the composition of the plan of reorganization that is ultimately pursued. On January 27, 2012, the Bankruptcy Court issued a Final Order Establishing Notification Procedures for Substantial Claimholders and Equityholders and Approving Restrictions on Certain Transfers of Interests in the Debtors’ Estates, which restricts trading in the Company’s common stock and claims. The order is intended to prevent certain transfers of the Company’s common stock and certain transfers of claims against the Debtors that could impair the ability of one or more of the Debtors’ estates to use their net operating loss carryovers and certain other tax attributes currently or on a reorganized basis. Any acquisition, disposition, or other transfer of equity or claims on or after November 29, 2011 in violation of the restrictions set forth in the order will be null and void ab initio and/or subject to sanctions as an act in violation of the automatic stay under Sections 105(a) and 362 of the Bankruptcy Code. The order applies to (i) “Substantial Equityholders,” i.e., persons who are, or as a result of a transaction would become, the beneficial owner of approximately 4.5 percent of the outstanding shares of the Company’s common stock and (ii) “Substantial Claimholders,” i.e., persons who are, or as a result of a transaction become, the beneficial owner of unsecured claims in excess of a threshold amount of unsecured claims (initially $190 million of unsecured claims, but which may be subsequently increased or decreased under certain circumstances in connection with the Debtors’ filing of a Chapter 11 plan). In the case of Substantial Equityholders, the order imposes current restrictions with respect to the acquisition or disposition of the Company’s stock, and certain notifications may be required. In the case of Substantial Claimholders, the order imposes a procedure pursuant to which, under certain circumstances, the claims acquired during the Chapter 11 Cases may have to be resold, and certain notifications may be required.
Liabilities Subject to Compromise
The following table summarizes the components of liabilities subject to compromise included on the Condensed Consolidated Balance Sheet as of September 30, 2012:
(in millions)
 
 
 
Long-term debt
$
2,267

Aircraft lease and facility bond related obligations
3,036

Pension and postretirement benefits
7,803

Accounts payable and other accrued liabilities
403

Other
(16
)
Total liabilities subject to compromise
$
13,493


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Long-term debt, including undersecured debt, classified as subject to compromise as of September 30, 2012 consisted of (in millions):
Secured variable and fixed rate indebtedness due through 2023 (effective rates from 1.00% - 13.00% at September 30, 2012)
1,241

6.00%—8.50% special facility revenue bonds due through 2036
186

6.25% senior convertible notes due 2014
460

9.0%—10.20% debentures due through 2021
214

7.88%—10.55% notes due through 2039
166

 
$
2,267

Liabilities subject to compromise refers to prepetition obligations which may be impacted by the Chapter 11 reorganization process. These amounts represent the Debtors’ current estimate of known or potential prepetition obligations to be resolved in connection with the Chapter 11 Cases.
In accordance with ASC 852, substantially all of the Company’s unsecured debt has been classified as liabilities subject to compromise. Additionally, certain of the Company’s undersecured debt instruments have also been classified as liabilities subject to compromise.
As a result of the announcements discussed in Note 8 to the Condensed Consolidated Financial Statements, the Company’s Pension and postretirement benefits liability has been classified as liabilities subject to compromise.
Differences between liabilities the Debtors have estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust amounts as necessary. Such adjustments may be material. In light of the expected number of creditors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known.
Reorganization Items, net
Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 Cases. The following table summarizes the components included in reorganization items, net on the Consolidated Statements of Operations for the three and nine months ended September 30, 2012:
(in millions)
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
Pension and postretirement benefits
$
(66
)
 
$
(66
)
Aircraft financing renegotiations and rejections (1)
133

 
1,247

Treatment of facility bond related obligations (2)

 
399

Professional fees
51

 
168

Other
19

 
19

Total reorganization items, net
137

 
1,767

 
(1)
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to the rejection or modification of financings related to aircraft. The Debtors record an estimated claim associated with the rejection or modification of a financing when the motion is filed with the Bankruptcy Court to reject or modify such financing and the Debtors believe that it is probable the motion will be approved by all parties, and there is sufficient information to estimate the claim. See above, “Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment,” for further information.

(2)
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to entry of orders treating as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors record an estimated claim associated with the treatment of claims with respect to facility agreements when the applicable motion is filed with the Bankruptcy Court and the Debtors believe that it is

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probable that the motion will be approved, and there is sufficient information to estimate the claim. See above, “Rejection of Executory Contracts,” for further information.
Claims related to reorganization items are reflected in liabilities subject to compromise on the Condensed Consolidated Balance Sheet as of September 30, 2012.
Retirement Benefit Plans
On March 7, 2012, the Company announced that, in working with Creditors' Committee and the Pension Benefit Guarantee Corporation (PBGC), it developed a solution that would allow the Company to pursue a freeze of its defined benefit pension plans for non-pilot employees instead of seeking termination. On September 14, 2012, the Company sent formal legal notice to all defined benefit plan participants and beneficiaries announcing that it was in fact freezing each of the defined benefit pension plans effective November 1, 2012. For eligible non-pilot employees, a replacement benefit will begin under the $uper $aver 401(k) Plan starting November 1, 2012, with the Company matching employee contributions up to 5.5 percent of eligible earnings.

The Company also announced its plans to terminate the Pilot B Plan, a defined contribution plan, on November 30, 2012. The Company continues to work with the APA, PBGC, and U. S. Treasury Department to develop a solution to certain structural aspects of the Pilot A Plan, a defined benefit plan, that would preclude the need to seek a termination of that Plan. As the Company does not yet have a consensual agreement with the APA, details concerning a replacement retirement benefit for pilots are not known at this time.

The Company also announced its plans to modify its subsidized retiree medical coverage effective November 1, 2012. Those who initiate retiree medical coverage on or after November 1, 2012 will go into a new retiree medical program. For those who retire under age 65, two medical options will be available, but the Company will not be subsidizing them. Those who retire at age 65 and over may purchase a guaranteed-issue Medicare supplement plan. Flight attendants and TWU-represented employees will receive a refund of their prefunding contributions within 120 days of November 1, 2012.

On August 15, 2012, the Company filed a proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired and initiated retiree medical coverage before November 1, 2012.  On September 20, 2012, the Company opened negotiations with the Retiree Committee, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage for former employees who retired and initiated coverage before November 1, 2012.  Those negotiations are continuing.

See Note 8 to the Condensed Consolidated Financial Statements for further information on retirement benefits.

2.         Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. The condensed consolidated financial statements include the accounts of AMR and its wholly owned subsidiaries, including (i) its principal subsidiary American and (ii) its regional airline subsidiary, AMR Eagle. The condensed consolidated financial statements also include the accounts of variable interest entities for which the Company is the primary beneficiary. For further information, refer to the consolidated financial statements and footnotes included in AMR’s Annual Report on Form 10-K filed on February 15, 2012 (2011 Form 10-K).
In accordance with GAAP, the Debtors have applied ASC 852 “Reorganizations” (ASC 852), in preparing the Condensed 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, prepetition obligations that may be impacted by the Chapter 11 reorganization process have been classified on the Condensed Consolidated Balance Sheet in liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
Certain of our non-U.S. subsidiaries were not part of the Chapter 11 filings. Since the non-US subsidiaries not part of the bankruptcy filing do not have significant transactions, we do not separately disclose the condensed combined financial statements of the Debtors in accordance with the requirements of reorganization accounting.

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These Condensed Consolidated Financial Statements have also been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, the Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Debtors be unable to continue as a going concern.
As a result of the Chapter 11 Cases, the satisfaction of our liabilities and funding of ongoing operations are subject to uncertainty and, accordingly, there is a substantial doubt of the Company’s ability to continue as a going concern.
The accompanying Condensed Consolidated Financial Statements do not purport to reflect or provide for the consequences of the Chapter 11 Cases, other than as set forth under “liabilities subject to compromise” on the accompanying Condensed Consolidated Balance Sheet and “income (loss) before reorganization items” and “reorganization items, net” on the accompanying Consolidated Statement of Operations (see Note 1 to the Condensed Consolidated Financial Statements). In particular, the financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (3) as to shareowners’ equity accounts, the effect of any changes that may be made to the Debtors’ capitalization; or (4) as to operations, the effect of any changes that may be made to the Debtors’ business.

3.         Commitments, Contingencies and Guarantees
American had total aircraft acquisition commitments as of September 30, 2012 as follows:
 
 
 
Boeing
 
Airbus
 
 
 
 
737  Family1
 
777-200ER
 
777-300ER
 
A320 Family
 
NEO
 
Total
Remainder of 2012
Purchase
9
 

 
2
 

 

 
11
 
Lease

 

 

 

 

 
0
2013
Purchase
25
 

 
8
 

 

 
33
 
Lease
6
 

 

 
20
 

 
26
2014
Purchase
5
 
1
 
4
 

 

 
10
Lease
15
 

 

 
35
 

 
50
2015
Purchase

 
2
 

 

 

 
2
Lease
20
 

 

 
30
 

 
50
2016
Purchase

 
2
 

 

 

 
2
Lease
20
 

 

 
25
 

 
45
2017 and beyond
Purchase

 

 

 

 
130
 
130
Lease
20
 

 

 
20
 

 
40
Total
Purchase
39
 
5
 
14
 
0
 
130
 
188
Lease
81
 
0
 
0
 
130
 
0
 
211
The assumption of agreements related to the Company’s aircraft commitments is subject to collaboration with the Company’s key stakeholders and, in some instances, approval of the Bankruptcy Court. The Company cannot predict what the outcome of these discussions and the Bankruptcy Court process will be.
As of September 30, 2012, and subject to assumption of the related agreements, payments for the above purchase commitments and certain engines will approximate $535 million in the remainder of 2012, $1.9 billion in 2013, $929 million in 2014, $312 million in 2015, $353 million in 2016, and $7.4 billion for 2017 and beyond. These amounts are net of purchase deposits currently held by the manufacturers. American has granted Boeing a security interest in American’s purchase deposits with Boeing. The Company’s purchase deposits totaled $764 million as of September 30, 2012.
As of September 30, 2012, and subject to assumption of the related agreements, total future lease payments for all leased aircraft, including aircraft not yet delivered (but not including any Boeing 787-9 aircraft that may be acquired by American as described below and may be leased), will approximate $168 million in the remainder of 2012, $664 million in 2013, $852 million in 2014, $1.1 billion in 2015, $1.3 billion in 2016, and $12.5 billion in 2017 and beyond.
In 2008, American entered into a purchase agreement with Boeing (subject to certain reconfirmation rights) to acquire 42 Boeing 787-9 aircraft, with the right to acquire an additional 58 Boeing 787-9 aircraft. American’s first Boeing 787-9 aircraft was previously

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scheduled to deliver (subject to reconfirmation rights) in 2014; however, due to production issues such delivery has been delayed. American has selected GE Aviation as the exclusive provider of engines for its expected order of Boeing 787-9 aircraft. The assumption of the agreements related to our Boeing 787-9 aircraft order is subject to collaboration with the Company’s key stakeholders and, in some instances, approval of the Bankruptcy Court. The Company cannot predict what the outcome of discussions with these stakeholders and of the Bankruptcy Court process will be.
In 2010, American and Japan Airlines (JAL) entered into a Joint Business Agreement (JBA) to enhance their scope of cooperation on routes between North America and Asia through adjustments to their respective networks, flight schedules, and other business activities. American and JAL began implementing the JBA on April 1, 2011.  American and JAL entered into a Revenue Sharing Agreement, effective April 1, 2011, as envisaged by the JBA.  Under the agreement, American and JAL share certain revenues of their operations. In addition, American provided JAL 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. In June 2012, American and JAL amended the Revenue Sharing Agreement. Under the amended agreement American's guarantee to JAL of certain minimum incremental revenue commences July 1, 2012 and continues for three years thereafter. The amount required to be paid by the Company under the guarantee in any one of such years may not exceed $100 million, and is reduced if capacity for one of such years is less than a defined base year period capacity. Based on current Trans-Pacific capacity, the guarantee in any one of such years may not exceed approximately $75 million. As of September 30, 2012, based on an expected probability model, American had recorded a guarantee liability that is not material. 
The Company announced the principal terms of a new business plan on February 1, 2012 which contemplates, among other things, significantly reducing positions. The Company currently expects to reduce the number of positions by approximately 10,000. The Company has incurred and may incur additional significant accounting charges, including employee severance charges (see Note 9, Special Charges and Restructuring Activities) related to the new business plan. The business plan will require continued collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. The Company cannot predict whether, or to what extent, the business plan will be implemented.
As a result of the filing of the Chapter 11 Cases, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the Debtors are subject to the automatic stay provisions of Section 362(a) of the Bankruptcy Code, except in such cases where the Bankruptcy Court has entered an order modifying or lifting the automatic stay. Notwithstanding the general application of the automatic stay described above, governmental authorities, both domestic and foreign, may determine to continue actions brought under their regulatory powers. Therefore, the automatic stay may have no effect on certain matters, and the Debtors cannot predict the impact, if any, that its Chapter 11 Cases might have on its commitments and obligations.

4.         Depreciation and Amortization
Accumulated depreciation of owned equipment and property at September 30, 2012 and December 31, 2011 was $10.5 billion and $10.1 billion, respectively. Accumulated amortization of equipment and property under capital leases at September 30, 2012 and December 31, 2011 was $198 million and $448 million, respectively.

5.         Income Taxes
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. The Company’s deferred tax asset valuation allowance increased from $4.1 billion as of December 31, 2011 to $4.9 billion as of September 30, 2012, including the impact of comprehensive income for the nine months ended September 30, 2012 and changes from other adjustments.
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. Due to the significant volatility of items impacting other comprehensive income on a quarterly basis, the Company generally does not record any such tax benefit allocation until all items impacting other comprehensive income are known for the annual period. Thus, any such interim tax benefit allocation may subsequently be subject to reversal.

6.         Indebtedness
Long-term debt classified as not subject to compromise consisted of (in millions):

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September 30, 2012
 
December 31, 2011
Secured variable and fixed rate indebtedness due through 2023 (effective rates from 1.00%—13.00% at September 30, 2012)
$
2,648

 
$
2,952

Enhanced equipment trust certificates due through 2021 (rates from 5.10%—10.375% at September 30, 2012)
1,830

 
1,942

6.00%—8.50% special facility revenue bonds due through 2036
1,318

 
1,436

7.50% senior secured notes due 2016
1,000

 
1,000

AAdvantage Miles advance purchase (net of discount of $56 million) (effective rate 8.3%)
809

 
890

6.25% senior convertible notes due 2014

 

9.0%—10.20% debentures due through 2021

 

7.88%—10.55% notes due through 2039

 

 
7,605

 
8,220

Less current maturities
1,508

 
1,518

Long-term debt, less current maturities
$
6,097

 
$
6,702

The financings listed in the table above are considered not subject to compromise. For information regarding the liabilities subject to compromise, see Note 1 to the Condensed Consolidated Financial Statements.
The Company’s future long-term debt and operating lease payments have changed as its ordered aircraft are delivered and such deliveries have been financed. As of September 30, 2012, maturities of long-term debt (including sinking fund requirements) for the next five years are:
Years Ending December 31
(in millions)
 
Principal Not Subject
to Compromise
 
Principal Subject
to Compromise
 
Total Principal
Amount
Remainder of 2012
 
$
753

 
$
166

 
$
919

2013
 
882

 
192

 
1,074

2014
 
744

 
765

 
1,509

2015
 
645

 
161

 
806

2016
 
1,637

 
226

 
1,863

Principal Subject to Compromise includes payments not made due to the Chapter 11 Proceedings of $157.4 million.
Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of a year as of September 30, 2012, were: remainder of 2012 – $262 million, 2013 – $944 million, 2014 – $881 million, 2015 – $812 million, 2016 – $733 million, and 2017 and beyond – $4.7 billion.
As of September 30, 2012, AMR had issued guarantees covering approximately $1.5 billion of American’s tax-exempt bond debt (and interest thereon) and $4.7 billion of American’s secured debt (and interest thereon). American had issued guarantees covering approximately $842 million of AMR’s unsecured debt (and interest thereon). AMR also guarantees $3.7 million of American’s leases of certain Super ATR aircraft, which are subleased to AMR Eagle.
American has entered into sale-leaseback arrangements with certain leasing companies to finance 35 Boeing 737-800 aircraft scheduled to be delivered from October 2012 through 2014. The financings of each aircraft under these arrangements are subject to certain terms and conditions. These financing commitments are subject to various terms and conditions. In addition, in some instances, they are also subject to collaboration with the Creditors' Committee and other key stakeholders and to the approval of the Bankruptcy Court.
During the first nine months of 2012, American financed 21 Boeing 737-800 aircraft under sale-leaseback arrangements, which are accounted for as operating leases.
Certain of American’s debt financing agreements contain loan to value ratio covenants and require American to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, American 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:

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(1) 10.5% $450 million Senior Secured Notes due 2012 (the 10.5% Notes) and (2) Senior Secured Notes, as described below:
 
10.5% Notes
Senior Secured Notes
Frequency of    
Appraisals
Semi-Annual
(April and October)
Semi-Annual
(June and December,
commencing December 2011)
LTV
Requirement
43%; failure to meet collateral
test requires American to post additional
collateral or pay down indebtedness
 
 
1.5x Collateral valuation to
amount of debt outstanding
(67% LTV); failure to meet
collateral test results in
American paying 2% additional
interest until the ratio is at least
1.5x; additional collateral can be
posted to meet this requirement
LTV as of
Last
Measurement    
Date
47.5%
37.8%
 
 
 
 
Generally, certain route authorities, take-off and landing slots, and rights to airport facilities used by American to operate certain services between the U.S. and London Heathrow, Tokyo Narita/Haneda, and China
Collateral
Description
143 aircraft consisting of:
Type
 
# of
Aircraft
 
 
 
MD-80
 
74

B757-200
 
41

B767-200ER
 
3

B767-300ER
 
25

TOTAL
 
143

At September 30, 2012, the Company was in compliance with the most recently completed collateral coverage tests for the Senior Secured Notes. As of September 30, 2012, American had $41 million of cash collateral posted with respect to the 10.5% notes but was not in compliance with the most recently completed collateral coverage test for that transaction. The Company has not remedied its non-compliance with that test due to the ongoing Chapter 11 Cases. On October 1, 2012, the indebtedness underlying the 2005 Spare Engine EETC with respect to which American was required to comply with the collateral coverage test was paid in full, so American is no longer required to comply with a collateral coverage test for that transaction.
Almost all of the Company’s aircraft assets (including aircraft and aircraft-related assets eligible for the benefits of Section 1110 of the Bankruptcy Code) are encumbered, and the Company has a very limited quantity of assets which could be used as collateral in financing.
The Chapter 11 petitions triggered defaults on substantially all debt obligations of the Debtors. However, under Section 362 of the Bankruptcy Code, the commencement of a Chapter 11 case automatically stays most creditor actions against the Debtors’ estates.
The Debtors cannot predict the impact, if any, that the Chapter 11 Cases might have on these obligations. For further information regarding the Chapter 11 Cases, see Note 1 to the Condensed Consolidated Financial Statements.
7.        Fair Value Measurements
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, primarily 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 nine months ended September 30, 2012.

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Assets and liabilities measured at fair value on a recurring basis are summarized below:
(in millions)
Fair Value Measurements as of September 30, 2012
Description
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments 1, 2
 
 
 
 
 
 
 
Money market funds
$
235

 
$
235

 
$

 
$

Government agency investments
580

 

 
580

 

Repurchase investments
293

 

 
293

 

Corporate obligations
1,859

 


 
1,859

 

Bank notes / Certificates of deposit / Time deposits
751

 


 
751

 

 
3,718

 
235

 
3,483

 

Restricted cash and short-term investments 1
847

 
847

 

 

Fuel derivative contracts, net 1
98

 

 
98

 

Total
$
4,663

 
$
1,082

 
$
3,581

 
$

 
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) (OCI) at each measurement date.
2. 
The Company’s short-term investments mature in one year or less except for $100 million of Bank notes/Certificates of deposit/Time deposits, $580 million of U.S. Government agency investments and $363 million of Corporate obligations which have maturity dates exceeding one year.
No significant transfers between Level 1 and Level 2 occurred during the nine months ended September 30, 2012. 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 September 30, 2012, the Company had no exposure to European sovereign debt.
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.
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):
 
September 30, 2012
 
December 31, 2011
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Secured variable and fixed rate indebtedness
$
2,648

 
$
2,568

 
$
2,952

 
$
2,647

Enhanced equipment trust certificates
1,830

 
1,949

 
1,942

 
1,927

6.0%—8.5% special facility revenue bonds
1,318

 
1,332

 
1,436

 
1,230

7.50% senior secured notes
1,000

 
1,001

 
1,000

 
711

AAdvantage Miles advance purchase
809

 
815

 
890

 
902

6.25% senior convertible notes

 

 

 

9.0%—10.20% debentures

 

 

 

7.88%—10.55% notes

 

 

 

 
$
7,605

 
$
7,665

 
$
8,220

 
$
7,417

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):

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September 30, 2012
 
December 31, 2011
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Secured variable and fixed rate indebtedness
$
1,241

 
$
1,024

 
$
1,456

 
$
1,123

Enhanced equipment trust certificates

 

 

 

6.0%—8.5% special facility revenue bonds
186

 
106

 
186

 
37

7.50% senior secured notes

 

 

 

AAdvantage Miles advance purchase

 

 

 

6.25% senior convertible notes
460

 
307

 
460

 
101

9.0%—10.20% debentures
214

 
138

 
214

 
46

7.88%—10.55% notes
166

 
31

 
166

 
34

 
$
2,267

 
$
1,606

 
$
2,482

 
$
1,341

All of the Company’s long term debt classified as subject to compromise is classified as Level 2.

8.        Retirement Benefits
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, and the Pension Relief Act of 2010.
As a result of the Chapter 11 Cases, AMR contributed $6.5 million to its defined benefit pension plans on January 13, 2012 to cover the post-petition period of November 29, 2011 to December 31, 2011. As a result of only contributing the post-petition portion of the required contribution, the PBGC filed a lien against certain assets of the Company’s non-debtor subsidiaries. On April 13, 2012, the Company contributed $86 million to its defined benefit pension plans to cover the post-petition period of January 1, 2012 to March 31, 2012. Additionally, the Company contributed $86 million on July 13, 2012 to its defined benefit pension plans to cover the post-petition period of April 1, 2012 to June 30, 2012. On September 13, 2012, the Company contributed $6.9 million to its defined benefit pension plans, and on October 15, 2012, the Company contributed $86 million to its defined benefit pension plans to cover the post-petition period of July 1, 2012 to September 30, 2012.
On March 7, 2012, the Company announced that, in working with Creditors' Committee and the PBGC, it developed a solution that would allow the Company to pursue a freeze of its defined benefit pension plans for non-pilot employees instead of seeking termination. On September 14, 2012, the Company sent formal legal notice to all defined benefit plan participants and beneficiaries announcing that it was in fact freezing each of the defined benefit pension plans effective November 1, 2012. For eligible non-pilot employees, a replacement benefit will begin under the $uper $aver 401(k) Plan starting November 1, 2012, with the Company matching employee contributions up to 5.5 percent of eligible earnings.

The Company also announced its plans to terminate the Pilot B Plan, a defined contribution plan, on November 30, 2012. The Company continues to work with the APA, PBGC, and U. S. Treasury Department to develop a solution to certain structural aspects of the Pilot A Plan, a defined benefit plan, that would preclude the need to seek a termination of that Plan. As the Company does not yet have a consensual agreement with the APA, details concerning a replacement retirement benefit for pilots are not known this time.

The Company also announced its plans to modify its subsidized retiree medical coverage effective November 1, 2012. Those who initiate retiree medical coverage on or after November 1, 2012 will go into a new retiree medical program. For those who retire under age 65, two medical options will be available, but the Company will not be subsidizing them. Those who retire at age 65 and over may purchase a guaranteed-issue Medicare supplement plan. Flight attendants and TWU-represented employees will receive a refund of their prefunding contributions within 120 days of November 1, 2012.

On August 15, 2012, the Company filed a proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired and initiated retiree medical coverage before November 1, 2012.  On September 20, 2012, the Company opened negotiations with the Retiree Committee, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage for former employees who retired and initiated coverage before November 1, 2012.  Those negotiations are continuing. 

As a result of these announcements, the Company's Pension and postretirement benefits liability has been classified as liabilities subject to compromise as of September 30, 2012.


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Curtailment and Plan Amendment

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 1 to the Condensed Consolidated Financial Statements). The Company updated its significant actuarial assumptions used for the remeasurements including the discount rate, which was lowered to 4.10 percent and 3.80 percent for the defined benefit pension plans and retiree medical plans, respectively. The fair value of pension plan assets and retiree medical plan assets as of the remeasurement date was $8.9 billion and $211 million, respectively.

The remeasurement of the defined benefit plans increased the pension liability to $6.6 billion. The change in the pension liability reflects 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 which decreased its retiree medical and other liability to $1.2 billion. The plan amendment of $1.9 billion 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 8 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.

See Note 1 to the Condensed Consolidated Financial Statements for the breakout of liabilities subject to compromise, including that related to pension and postretirement benefits.

For the third quarter of 2012, net periodic benefit cost for defined benefit pension plans and retiree medical and other benefits reflects expense calculated based upon the revised measurement.
The following tables provide the components of net periodic benefit cost for the three and nine months ended September 30, 2012 and 2011 (in millions):
 
Pension Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
104

 
$
97

 
$
312

 
$
289

Interest cost
191

 
189

 
573

 
568

Expected return on assets
(166
)
 
(165
)
 
(498
)
 
(493
)
Amortization of:
 
 
 
 
 
 
 
Prior service cost
3

 
3

 
10

 
10

Unrecognized net (gain) loss
63

 
39

 
187

 
115

Net periodic benefit cost
$
195

 
$
163

 
$
584

 
$
489

 
Retiree Medical and Other Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
15

 
$
15

 
$
45

 
$
45

Interest cost
38

 
44

 
114

 
132

Expected return on assets
(4
)
 
(5
)
 
(12
)
 
(15
)
Amortization of:
 
 
 
 
 
 
 
Prior service cost
(7
)
 
(7
)
 
(21
)
 
(21
)
Unrecognized net (gain) loss
(2
)
 
(2
)
 
(6
)
 
(6
)
Net periodic benefit cost
$
40

 
$
45

 
$
120

 
$
135


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9.        Special Charges and Restructuring Activities
The Company's business plan as announced on February 1, 2012 contemplates, among other things, significantly reducing the number of positions. Based on ratified and tentative agreements reached with various workgroups we now expect to reduce a total of approximately 10,000 positions. During the second quarter, the Company commenced both voluntary and involuntary employee separations from the Company. Consequently, in the three and nine months ending September 30, 2012, the Company recorded charges of approximately $211 million and $305 million, respectively, for severance related costs associated with the voluntary and involuntary reductions in certain work groups. The severance charges will be paid through the end of 2013. Implementing the Company's business plan will require continued collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. The Company cannot predict whether, or to what extent, its business plan will be implemented. As such, at this time, the Company is not able to reasonably estimate the amount and timing of any additional charges or the portion of these charges that will result in future cash expenditures.
In 2008 and 2009, the Company announced capacity reductions due to unprecedented high fuel costs at that time and the other challenges facing the industry. In connection with these capacity reductions, the Company incurred special charges related to aircraft and certain other charges.
The following table summarizes the components of the Company’s special charges, the remaining accruals for these charges and the capacity reduction related charges (in millions) as of September 30, 2012:
 
Aircraft
Charges
 
Facility Exit
Costs
 
Employee
Charges
 
Total
Remaining accrual at December 31, 2011
$
49

 
$
16

 

 
$
65

Special Charges
11

 
13

 
305

 
329

Non-cash charges
(11
)
 
(13
)
 

 
(24
)
Adjustments
(47
)
 
(11
)
 

 
(58
)
Payments
(2
)
 
(1
)
 
(73
)
 
(76
)
Remaining accrual at September 30, 2012
$

 
$
4

 
$
232

 
$
236



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Table of Contents

10.        Financial Instruments and Risk Management
As part of the Company’s risk management program, it uses a variety of financial instruments, primarily heating oil, jet fuel, and Brent crude option and collar contracts, as cash flow hedges to mitigate commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes. As of September 30, 2012, the Company had fuel derivative contracts outstanding covering 16 million barrels of jet fuel that will be settled over the next 12 months. A deterioration of the Company’s liquidity position and its Chapter 11 filing may negatively affect the Company’s ability to hedge fuel in the future.
For the three and nine months ended September 30, 2012, the Company recognized an increase of approximately $9 million and a decrease of approximately $10 million, respectively, in fuel expense on the accompanying consolidated statements of operations related to its fuel hedging agreements, including the ineffective portion of the hedges. For the three and nine months ended September 30, 2011, the Company recognized a decrease of approximately $31 million and $268 million, respectively, in 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 September 30, 2012 and December 31, 2011, representing the amount the Company would receive upon termination of the agreements (net of settled contract assets), totaled $97 million and $80 million, respectively. As of September 30, 2012, the Company estimates that during the next twelve months it will reclassify from Accumulated other comprehensive income into earnings approximately $47 million in net gains.
The impact of cash flow hedges on the Company’s Condensed Consolidated Financial Statements is depicted below (in millions):
Fair Value of Aircraft Fuel Derivative Instruments (all cash flow hedges)
Asset Derivatives as of
 
Liability Derivatives as of
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair Value
Fuel derivative contracts
 
$
98

 
Fuel derivative contracts
 
$
97

 
Accrued liabilities
 
$

 
Accrued liabilities
 
$
2

Effect of Aircraft Fuel Derivative Instruments on Statements of Operations (all cash flow hedges)
Amount of Gain
(Loss) Recognized in
OCI on Derivative 1
as of September 30
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income 1
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income 1 for the
nine months ended
September 30,
 
Location of Gain
(Loss) Recognized in
Income on
Derivative 2
 
Amount of Gain
(Loss) Recognized in
Income on Derivative 2 for the nine months ended
September 30,
2012
 
2011
 
 
 
2012
 
2011
 
 
 
2012
 
2011
$
29

 
$
152

 
Aircraft Fuel
 
$
13

 
$
287

 
Aircraft Fuel
 
$
(3
)
 
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain
(Loss) Recognized in
OCI on Derivative 1
for the quarter ended September 30
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income 1
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income 1 for the quarter
ended September 30,
 
Location of Gain
(Loss) Recognized in
Income on
Derivative 2
 
Amount of Gain
(Loss) Recognized in
Income on Derivative 2 for the quarter
ended September 30,
2012
 
2011
 
 
 
2012
 
2011
 
 
 
2012
 
2011
$
86

 
$
(142
)
 
Aircraft Fuel
 
$
(12
)
 
$
57

 
Aircraft Fuel
 
$
2

 
$
(26
)

1. 
Effective portion of gain (loss)
2. 
Ineffective portion of gain (loss)
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 its 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 exceed specified mark-to-market thresholds or upon certain changes in credit ratings.
As of September 30, 2012, the Company had posted cash collateral of $2 million (which is included in Other assets).

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11.        Earnings (Loss) Per Share
The following table sets forth the computations of basic and diluted earnings (loss) per share (in millions, except per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net earnings (loss)—numerator for basic earnings (loss) per share
$
(238
)
 
$
(162
)
 
$
(2,139
)
 
$
(884
)
Interest on senior convertible notes

 

 

 

Net earnings (loss) adjusted for interest on senior convertible notes
$
(238
)
 
$
(162
)
 
$
(2,139
)
 
$
(884
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share – weighted-average shares
335

 
335

 
335

 
334

Effect of dilutive securities:
 
 
 
 
 
 
 
Senior convertible notes

 

 

 

Employee options and shares

 

 

 

Assumed treasury shares purchased

 

 

 

Dilutive potential common shares
335

 
335

 
335

 
334

Denominator for diluted earnings (loss) per share—adjusted weighted-average shares
335

 
335

 
335

 
334

Basic earnings (loss) per share
$
(0.71
)
 
$
(0.48
)
 
$
(6.38
)
 
$
(2.64
)
Diluted earnings (loss) per share
$
(0.71
)
 
$
(0.48
)
 
$
(6.38
)
 
$
(2.64
)
The following were excluded from the calculation:
 
 
 
 
 
 
 
Convertible notes, employee stock options and deferred stock because inclusion would be anti-dilutive
46

 
48

 
46

 
53

Employee stock options because the options’ exercise prices were greater than the average market price of shares
23

 
28

 
23

 
18


12. Subsequent Events
  
In connection with preparation of the condensed consolidated financial statements and in accordance U.S. GAAP, the Company evaluated subsequent events after the balance sheet date of September 30, 2012 and determined that no additional disclosure to that presented in this Form 10-Q was necessary.




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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
Statements in this report contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations or beliefs concerning future events. When used in this document and in documents incorporated herein by reference, the words “expects,” “estimates,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook,” “may,” “will,” “should,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Similarly, statements that describe the Company’s objectives, plans or goals, or actions the Company may take in the future, are forward-looking statements. Forward-looking statements include, without limitation, the Company’s expectations concerning the Chapter 11 Cases; the Company’s operations and financial conditions, including changes in capacity, revenues, and costs; the potential impact of labor unrest; future financing plans and needs; discussions regarding potential consolidation or other strategic alternatives; the amounts of its unencumbered assets and other sources of liquidity; fleet plans; overall economic and industry conditions; plans and objectives for future operations; regulatory approvals and actions; and the impact on the Company of its results of operations in recent years and the sufficiency of its financial resources to absorb that impact. Other forward-looking statements include statements which do not relate solely to historical facts, such as, without limitation, statements which discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Guidance given in this report regarding capacity, fuel consumption, fuel prices, fuel hedging and unit costs are forward-looking statements. Forward-looking statements are subject to a number of factors that could cause the Company’s actual results to differ materially from the Company’s expectations. The following factors, in addition to other possible factors not listed, could cause the Company’s actual results to differ materially from those expressed in forward-looking statements: risks arising from the Chapter 11 Cases, including reorganization risks, liquidity risks, and common stock risks; the materially weakened financial condition of the Company, resulting from its significant losses in recent years; weak demand for air travel resulting from the severe global economic downturn; the potential requirement for the Company to maintain reserves under its credit card processing agreements, which could materially adversely impact the Company’s liquidity; the ability of the Company to generate additional revenues and reduce its costs; continued high and volatile fuel prices and further increases in the price of fuel, and the availability of fuel; the resolution of pending litigation with certain global distribution systems and business discussions with certain on-line travel agents; the Company’s substantial indebtedness and other obligations; the ability of the Company to satisfy certain covenants and conditions in certain of its financing and other agreements; changes in economic and other conditions beyond the Company’s control, and the volatile results of the Company’s operations; the fiercely and increasingly competitive business environment faced by the Company; industry consolidation and alliance changes; competition with reorganized carriers; low fare levels by historical standards and the Company’s reduced pricing power; changes in the Company’s corporate or business strategy; extensive government regulation of the Company’s business; conflicts overseas or terrorist attacks; uncertainties with respect to the Company’s international operations; outbreaks of a disease (such as SARS, avian flu or the H1N1 virus) that affects travel behavior; labor costs that are higher than those of the Company’s competitors; uncertainties with respect to the Company’s relationships with unionized and other employee work groups; higher than normal number of pilot retirements; increased insurance costs and potential reductions of available insurance coverage; the Company’s ability to retain key management personnel; potential failures or disruptions of the Company’s computer, communications or other technology systems; losses and adverse publicity resulting from any accident involving the Company’s aircraft; interruptions or disruptions in service at one or more of the Company’s primary market airports; and the heavy taxation of the airline industry. The Risk Factors contained in the Company’s Securities and Exchange Commission filings, including the 2011 Form 10-K, could cause the Company’s actual results to differ materially from historical results and from those expressed in forward-looking statements.
Chapter 11 Reorganization
Overview
As previously discussed, on November 29, 2011, AMR Corporation (AMR or the Company) and certain of the Company's 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). The Chapter 11 Cases are being jointly administered under the caption “in re AMR Corporation, et al, Case No. 11-15463-SHL.”
The Company and the other Debtors are operating as “debtors in possession” under the jurisdiction of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. In general, as debtors in possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without

23

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the prior approval of the Bankruptcy Court. The Bankruptcy Code enables the Company to continue to operate its business without interruption, and the Bankruptcy Court has granted additional relief covering, among other things, obligations to (i) employees, (ii) taxing authorities, (iii) insurance providers, (iv) independent contractors for improvement projects, (v) foreign vendors, (vi) other airlines pursuant to certain interline agreements, and (vii) certain vendors deemed critical to the Debtors’ operations.
While operating as debtors in possession under Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. The Debtors have not yet prepared or filed with the Bankruptcy Court a plan of reorganization. The Debtors have the exclusive right to file a plan of reorganization through and including December 28, 2012, subject to the ability of third parties to file motions to terminate the Debtors' exclusivity period. If the Debtors file a plan of reorganization on or prior to such date, the Debtors will have an exclusive period to solicit and obtain acceptances for such plan through and including February 28, 2013. On October 16, 2012, the Debtors filed a joint motion with the Creditors' Committee seeking to further extend such exclusivity periods to January 28, 2013 and March 28, 2013, respectively.  There can be no assurance that the Bankruptcy Court will approve the Debtors' motion. The Debtors have the right to seek further extensions of such exclusivity periods, subject to a statutory limit of 18 months from the Petition Date in the case of filing a plan of reorganization, and 20 months from the Petition Date in the case of soliciting and obtaining acceptances. The ultimate plan of reorganization, which would be subject to acceptance by the requisite majorities of empowered creditors under the Bankruptcy Code and approval by the Bankruptcy Court, could materially change the amounts and classifications in the Condensed Consolidated Financial Statements.
The Company’s Chapter 11 Cases followed an extended effort by the Company to restructure its business to strengthen its competitive and financial position. However, the Company’s substantial cost disadvantage compared to its larger competitors, all of which restructured their costs and debt through Chapter 11, became increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges.
No assurance can be given as to the value, if any, that may be ascribed to the Debtors' various prepetition liabilities and other securities. The Company cannot predict what the ultimate value of any of its securities may be or whether holders of any such securities will receive any distribution in the Debtors' reorganization.  However, it is likely that the Company's common stock will have little or no value at the time of the Company's emergence from bankruptcy, and the common stock could be canceled entirely upon the approval of the Bankruptcy Court.  In the event of such cancellation, amounts invested in the Company's common stock will not be recoverable.  Accordingly, the Debtors urge that caution be exercised with respect to existing and future investments in any of these securities (including the Company's common stock) or other Debtor claims.  Trading in the Company's common stock and certain debt securities on the New York Stock Exchange (NYSE) was suspended on January 5, 2012, and the Company's common stock and such debt securities were delisted by the SEC from the NYSE on January 30, 2012.  On January 5, 2012, the Company's common stock began trading under the symbol “AAMRQ” on the OTCQB marketplace, operated by OTC Markets Group (www.otcmarkets.com).
General Information
Notices to Creditors; Effect of Automatic Stay. The Debtors have notified all known current or potential creditors that the Chapter 11 Cases were filed. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a prepetition claim, are enjoined unless and until the Bankruptcy Court lifts the automatic stay as to any such claim. Vendors are being paid for goods furnished and services provided after the Petition Date in the ordinary course of business.
Appointment of Creditors’ Committee. On December 5, 2011, the U.S. Trustee appointed the Creditors’ Committee for the Chapter 11 Cases.

Retiree Medical and Life Insurance Benefits.  On March 23, 2012, the Bankruptcy Court entered a Stipulation and Order providing for the appointment of a committee of retired independent and unionized AMR employees (the Retiree Committee), and on May 3, 2012 appointed five members to the Retiree Committee.  On August 15, 2012, the Company filed a proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired and initiated retiree medical coverage before November 1, 2012.  On September 20, 2012, the Company opened negotiations with the Retiree Committee, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage for former employees who retired and initiated coverage before November 1, 2012.  Those negotiations are continuing.  On September 14, 2012, the Company notified active employees of its plans to modify its subsidized retiree medical coverage on November 1, 2012. 


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Rejection of Executory Contracts. Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, agreements relating to aircraft and aircraft engines (collectively, Aircraft Property) and leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. The Debtors’ rights to assume, assume and assign, or reject unexpired leases of non-residential real estate had been extended by order of the Bankruptcy Court through June 26, 2012.  On June 20, 2012, the Bankruptcy Court entered orders granting the Debtors' motions to assume 463 unexpired leases of non-residential real property.  On June 21, 2012 the Bankruptcy Court entered an order extending, by the Debtors' agreement with certain landlords, the date by which the Debtors must assume or reject an additional 88 unexpired leases of non-residential real property.  On July 19, 2012, the Bankruptcy Court entered orders granting the Debtors' motion to assume nine unexpired leases of non-residential real property.  On July 24, 2012 the Bankruptcy Court entered an order further extending, by the Debtors' agreement with certain landlords, the date by which the Debtors must assume or reject 19 unexpired leases of non-residential real property. On August 8, 2012, the Bankruptcy Court entered orders granting the Debtors' motion to assume one unexpired lease of non-residential real property and extending the date by which the Debtors must assume or reject 15 unexpired leases of non-residential real property. On August 22, 2012, the Bankruptcy Court entered orders granting the Debtors' motion to assume three unexpired leases of non-residential real property and extending the date by which the Debtors must assume or reject 12 unexpired leases of non-residential real property. 
In general, rejection of an executory contract or unexpired lease is treated as a prepetition breach of the executory contract or unexpired lease in question and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases have the right to file claims against the Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing defaults under such executory contract or unexpired lease.
In accordance with the Bankruptcy Code, as of September 30, 2012, the Company had rejected ten real property leases and filed motions to reject facility agreements supporting special facility revenue bonds at Dallas/Fort Worth International Airport, Fort Worth Alliance Airport and Luis Muñoz Marín International Airport in San Juan, Puerto Rico.
Any description of an executory contract or unexpired lease elsewhere in these Notes or in the report to which these Notes are attached, including where applicable the Debtors’ express termination rights or a quantification of their obligations, must be read in conjunction with, and is qualified by, any rights the Debtors or counterparties have under Section 365 of the Bankruptcy Code.
The Debtors expect that liabilities subject to compromise and resolution in the Chapter 11 Cases will arise in the future as a result of damage claims created by the Debtors’ rejection of various executory contracts and unexpired leases. Due to the uncertain nature of many of the potential rejection claims, the magnitude of such claims is not reasonably estimable at this time. Such claims may be material (see “Liabilities Subject to Compromise” in Note 1 to the Condensed Consolidated Financial Statements).
Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment. Notwithstanding the general discussion above of the impact of the automatic stay, under Section 1110 of the Bankruptcy Code, beginning 60 days after filing a petition under Chapter 11, certain secured parties, lessors and conditional sales vendors may have a right to take possession of certain qualifying Aircraft Property that is leased or subject to a security interest or conditional sale contract, unless the Debtors, subject to approval by the Bankruptcy Court, agree to perform under the applicable agreement, and cure any defaults as provided in Section 1110 (other than defaults of a kind specified in Section 365(b)(2) of the Bankruptcy Code). Taking such action does not preclude the Debtors from later rejecting the applicable lease or abandoning the Aircraft Property subject to the related security agreement, or from later seeking to renegotiate the terms of the related financing.
The Debtors may extend the 60-day period by agreement of the relevant financing party, with Bankruptcy Court approval. In the absence of an agreement or cure as described above or such an extension, the financing party may take possession of the Aircraft Property and enforce its contractual rights or remedies to sell, lease or otherwise retain or dispose of such equipment.
The 60-day period under Section 1110 in the Chapter 11 Cases expired on January 27, 2012. In accordance with the Bankruptcy Court’s Order Authorizing the Debtors to (i) Enter into Agreements Under Section 1110(a) of the Bankruptcy Code, (ii) Enter into Stipulations to Extend the Time to Comply with Section 1110 of the Bankruptcy Code and (iii) File Redacted Section 1110(b) Stipulations, dated December 23, 2011, the Debtors have entered into agreements to extend the automatic stay or agreed to perform and cure defaults under financing agreements with respect to certain aircraft in their fleet and other Aircraft Property. With respect to certain Aircraft Property, the Debtors have reached agreements on, or agreements on key aspects of, renegotiated terms of the related financings, and the Debtors are continuing to negotiate terms with respect to certain of their other Aircraft Property financings. The ultimate outcome of these negotiations cannot be predicted with certainty. To the extent the Debtors are unable to reach definitive agreements with Aircraft Property financing parties, those parties may seek to repossess the subject Aircraft

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Property. The loss of a significant number of aircraft could result in a material adverse effect on the Debtors’ financial and operating performance.
In accordance with Section 1110 of the Bankruptcy Code, as of September 30, 2012, the Company had (i) rejected 40 leases relating to 21 MD-80 aircraft, four Fokker 100 aircraft, seven Boeing 757-200 aircraft and eight spare engines; (ii) relinquished one Airbus A300-600R aircraft that was subject to a mortgage; and (iii) made elections under Section 1110(a) of the Bankruptcy Code to retain 340 aircraft and 87 spare engines, including Boeing 737-800, Boeing 757-200, Boeing 767-300ER, Boeing 777-200ER, Bombardier CRJ-700, and McDonnell Douglas MD-80 aircraft, on the terms provided in the related financing documents. In addition, as of September 30, 2012, the Company had reached agreement on revised economic terms of the financings of 155 aircraft, comprising 83 MD-80 aircraft, nine Boeing 737-800 aircraft, 36 Boeing 757-200 aircraft, 11 Boeing 767-200ER aircraft, 13 Boeing 767-300ER aircraft and 3 Boeing 777-200 aircraft (which agreements are subject to reaching agreement on definitive documentation). Those 155 aircraft are substantially all of the mainline aircraft in the Company's fleet for which it expects to negotiate revised economic terms in the Chapter 11 Cases. In addition, the Company reached an agreement with the lessor to modify the leases of 39 Super ATR aircraft. As of September 30, 201226 of the Super ATR aircraft had been returned to the lessor as allowed under the modified agreement. The remaining 13 Super ATR aircraft are expected to be returned to the lessor during the remainder of 2012 and 2013.
Lastly, the Company has entered into a series of agreements with the lender with respect to its 216 Embraer RJ aircraft and certain other interested parties pursuant to which the Company (i) surrendered 18 Embraer RJ 135 aircraft on June22, 2012, (ii) will transfer and lease back its remaining 21 Embraer RJ 135 aircraft on or before December 31, 2012 and (iii) will restructure the mortgage debt encumbering 59 Embraer 140 aircraft and 68 Embraer 145 aircraft in connection with its emergence from bankruptcy. The debt encumbering 50 Embraer 145 aircraft will not be reduced. These agreements remain subject to the approval of the Bankruptcy Court.
Magnitude of Potential Claims. On February 27, 2012, the Debtors filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. All of the schedules are subject to further amendment or modification.
As of October 8, 2012, approximately 13,259 claims totaling about $305.2 billion have been filed with the Bankruptcy Court against the Debtors, and we expect new and amended claims to be filed in the future, including claims amended to assign values to claims originally filed with no designated value. Through the claims resolution process, we expect to identify substantial claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, are without merit, are overstated or for other reasons. As of the date of this filing, the Company has filed with the Bankruptcy Court objections to claims totaling $116.5 billion seeking orders to reduce claims by this amount, and the Company expects to continue this process.
Bankruptcy Rule 3003(c)(3) requires the Bankruptcy Court to fix the time within which proofs of claim must be filed in a Chapter 11 case pursuant to Section 501 of the Bankruptcy Code. This Bankruptcy Rule also provides that any creditor who asserts a claim against the Debtors that arose prior to the Petition Date and whose claim (i) is not listed on the Debtors' schedules or (ii) is listed on the schedules as disputed, contingent, or unliquidated, must file a proof of claim. On May 4, 2012, the Bankruptcy Court entered an order that established July 16, 2012 at 5:00 p.m. (Eastern Time) as the deadline to file proofs of claim against any Debtor. More information regarding the filing of proofs of claim can be obtained at www.amrcaseinfo.com.
Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.
Collective Bargaining Agreements. The Bankruptcy Code provides a process for the modification and/or rejection of collective bargaining agreements (CBAs). In particular, Section 1113(c) of the Bankruptcy Code permits a debtor to reject its CBAs if the debtor satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court's approval to reject the CBAs. The Section 1113(c) process requires that a debtor must make proposals to its unions to modify existing CBAs based on the most complete and reliable information available at the time the proposals are made. The proposed modifications must be necessary to permit the reorganization of the debtor and must assure that all the affected parties are treated fairly and equitably. The debtor must provide the unions with all information necessary to evaluate the proposals, and meet at reasonable times and confer in good faith with the unions in an effort to reach mutually agreeable modifications to the CBAs. American Airlines, Inc. (American) commenced the Section 1113(c) process with its unions (APA, APFA and TWU) on February 1, 2012, and has negotiated in good faith with the unions for consensual agreements that achieve the necessary level of labor cost savings. Because consensual agreements had not been reached, and given American's need to restructure its labor costs expeditiously, the Debtors filed a motion with the Bankruptcy Court on March 27, 2012 requesting approval to reject the CBAs. Rejection of the CBAs is appropriate if the Bankruptcy Court finds the Debtors' proposals are necessary for their reorganization,

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are fair and equitable, and that the unions refused to agree to the proposals without good cause. 
The Court hearing on the Debtors' request to reject the CBAs began on April 23, 2012 with the presentation of the Debtors' case and concluded the week of May 21, 2012.   After the filing of its request to reject its CBAs, American and the unions continued to negotiate in good faith toward consensual agreements. Those negotiations resulted in ratified agreements with all seven TWU-represented groups (Fleet Service Clerks, Dispatchers, Ground School Instructors, Maintenance Control Technicians, Simulator Technicians, Mechanics and Related (M&R), and Stores), all of which have been approved by the Bankruptcy Court. On July 20, 2012, APFA sent American's proposed Last Best and Final Offer (LBFO) to its membership for a ratification vote, and on August 19, 2012 APFA announced the LBFO was ratified by the membership.  This new agreement was approved by the Bankruptcy Court on September 12, 2012. Having secured Court approval of the APFA and all seven TWU agreements, American has begun implementing the terms of all of its new agreements.
On June 27, 2012, the APA Board of Directors voted in favor of sending a tentative agreement it reached with American to its membership for a ratification vote; however, APA announced on August 8, 2012 that its membership did not ratify that agreement.  Subsequently, on August 15, 2012, the Bankruptcy Court issued its decision on the Debtors' request to reject its pilot CBA.  The Bankruptcy Court denied the request, but found that all but two of the numerous 1113 term sheet proposals met all of the standards for contract rejection.  The Bankruptcy Court invited the Debtors to modify the two proposals and renew its motion.  A renewed 1113 motion was filed on August 17, 2012, and a hearing was held on September 4, 2012. The Bankruptcy Court granted the renewed motion and entered an order on September 5, 2012 authorizing American to reject the pilot CBA. In accordance with the Bankruptcy Court's ruling, American began implementing certain terms and conditions of employment for pilots that the Bankruptcy Court determined were fair and necessary for the Debtors' successful restructuring. American and APA are continuing to negotiate in good faith toward a new pilot agreement. The ultimate resolution of the Debtors' agreement with the APA cannot be determined at this time. APA is appealing the Bankruptcy Court's order authorizing American to reject the pilot CBA, and is also appealing a prior decision by the Court rejecting APA's claim that American cannot use the 1113 CBA rejection process to make changes to pilot working conditions because, according to APA, its CBA with American expired by its terms in May 2008.  Relatedly, APA filed a request with the Bankruptcy Court to stay its decision authorizing American to reject the CBA pending the outcome of its appeals, and American has objected to that request. 
AMR Eagle commenced the Section 1113(c) process with its unions on March 21, 2012. On July 27, 2012, AMR Eagle reached a tentative agreement with the Association of Flight Attendants. That tentative agreement was ratified by the flight attendants on September 7, 2012.  On August 8, 2012, AMR Eagle reached an agreement-in-principle with the Air Line Pilots Association.  The ALPA Master Executive Council accepted the terms of the agreement-in-principle on September 12, 2012 and the tentative agreement was ratified by the pilot group on October 8, 2012.  On July 20, 2012, AMR Eagle and the TWU reached a tentative agreement with the Mechanics and Related and Fleet Service Clerks groups.  On August 24, 2012, the TWU announced that the Fleet Service Clerks group ratified its tentative agreement and that the Mechanics and Related group did not ratify its tentative agreement.  Because consensual agreements had not been reached with the TWU represented Mechanics, Ground School Instructors and Dispatchers, AMR Eagle filed a motion with the Bankruptcy Court on September 7, 2012 requesting approval to reject those CBAs. AMR Eagle continued to negotiate in good faith with the TWU with respect to each of those work groups. On October 3, 2012, AMR Eagle and the TWU reached tentative agreements with the Mechanics and Related and the Ground School Instructors groups.  On October 8, 2012, AMR Eagle reached a tentative agreement with the TWU represented Dispatch group.  The tentative agreements for Mechanics, Ground School Instructors and Dispatchers will be sent  to those work groups for a ratification vote.  AMR Eagle anticipates learning the vote results for all three work groups on or about October 26, 2012. Pending the results of those votes, the October 23, 2012 hearing previously scheduled for the Section 1113 motion has been adjourned to a date to be determined. 
Plan of Reorganization. On July 19, 2012, the Bankruptcy Court entered an order pursuant to Section 1121(d) of the Bankruptcy Code extending the exclusivity periods during which only the Debtors have the right to file a plan of reorganization and solicit and obtain acceptances of such plan. The date until which the Debtors have to file a plan of reorganization has been extended through and including December 28, 2012. If the Debtors file a plan of reorganization on or prior to such date, the Debtors have an exclusive period to solicit and obtain acceptances for such plan through and including February 28, 2013. On October 16, 2012, the Debtors filed a joint motion with the Creditors' Committee seeking to further extend such exclusivity periods to January 28, 2013 and March 28, 2013, respectively.  There can be no assurance that the Bankruptcy Court will approve the Debtors' motion. The Debtors have the right to seek further extensions of such exclusivity periods, subject to a statutory limit of 18 months from the Petition Date in the case of filing a plan of reorganization, and 20 months from the Petition Date in the case of soliciting and obtaining acceptances. If the Debtors’ exclusivity period lapses, any party in interest may file a plan of reorganization for any of the Debtors. In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective. A plan of reorganization has been accepted by holders of claims against and equity interests in the Debtors if (1) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept

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the plan and (2) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests has voted to accept the plan.
Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. A class of claims or equity interests that does not receive or retain any property under the plan on account of such claims or interests is deemed to have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be “crammed down” even if the shareowners receive no recovery if the proponent of the plan demonstrates that (1) no class junior to the common stock is receiving or retaining property under the plan and (2) no class of claims or interests senior to the common stock is being paid more than in full.
Availability and Utilization of Net Operating Losses. The availability and utilization of net operating losses (and utilization of alternative minimum tax credits) after the Debtors’ emergence from Chapter 11 is uncertain at this time and will be highly influenced by the composition of the plan of reorganization that is ultimately pursued. On January 27, 2012, the Bankruptcy Court issued a Final Order Establishing Notification Procedures for Substantial Claimholders and Equityholders and Approving Restrictions on Certain Transfers of Interests in the Debtors’ Estates, which restricts trading in the Company’s common stock and claims. The order is intended to prevent certain transfers of the Company’s common stock and certain transfers of claims against the Debtors that could impair the ability of one or more of the Debtors’ estates to use their net operating loss carryovers and certain other tax attributes currently or on a reorganized basis. Any acquisition, disposition, or other transfer of equity or claims on or after November 29, 2011 in violation of the restrictions set forth in the order will be null and void ab initio and/or subject to sanctions as an act in violation of the automatic stay under Sections 105(a) and 362 of the Bankruptcy Code. The order applies to (i) “Substantial Equityholders,” i.e., persons who are, or as a result of a transaction would become, the beneficial owner of approximately 4.5 percent of the outstanding shares of the Company’s common stock and (ii) “Substantial Claimholders,” i.e., persons who are, or as a result of a transaction become, the beneficial owner of unsecured claims in excess of a threshold amount of unsecured claims (initially $190 million of unsecured claims, but which may be subsequently increased or decreased under certain circumstances in connection with the Debtors’ filing of a Chapter 11 plan). In the case of Substantial Equityholders, the order imposes current restrictions with respect to the acquisition or disposition of the Company’s stock, and certain notifications may be required. In the case of Substantial Claimholders, the order imposes a procedure pursuant to which, under certain circumstances, the claims acquired during the Chapter 11 Cases may have to be resold, and certain notifications may be required.
Liabilities Subject to Compromise. The Debtors have incurred and will continue to incur significant costs associated with their reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Debtors’ results of operations. Claims related to reorganization items are reflected in liabilities subject to compromise on the Condensed Consolidated Balance Sheet as of September 30, 2012. For additional information, see Note 1 to the Condensed Consolidated Financial Statements.
Further Information. For further information regarding the Chapter 11 Cases, see Note 1 to the Condensed Consolidated Financial Statements. Additional information about the Company’s Chapter 11 filing is also available on the Internet at aa.com/restructuring. Court filings and claims information are available at amrcaseinfo.com. Information on these websites is not incorporated by reference or deemed included in this report or in any of the Company's Securities and Exchange Act filings.



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Business Plan
On February 1, 2012, we announced the principal terms of a new business plan that is designed to transform the Company and restore it to industry leadership, profitability and growth. The chief components of this business plan include targets of approximately $2 billion in annual cost savings and $1 billion in revenue enhancement by 2017. Management expects that the additional cash flow generated from these improvements will enable us to renew American’s fleet and to invest several hundred million dollars per year in ongoing improvements in products and services to deliver a world-class travel experience for our customers. The improved cash flow is also expected to enable us to become financially stronger in the years after we emerge from the restructuring process.
We expect that implementing the business plan will require collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. As noted above under “Chapter 11 Proceedings—Overview”, we will be required to seek Bankruptcy Court approval in order to implement any action that we take in connection with the business plan that is out of the ordinary course of business. We intend to utilize the Chapter 11 restructuring process to realize savings over the next six years by restructuring debt, leases and certain other agreements, grounding older planes, improving supplier contract terms and undertaking other initiatives.
The business plan has been designed to build on initiatives already in place that reduced costs over the past several years, including major changes in American’s route structure, network, capacity and fleet. The business plan contemplates significant reductions in both non-labor and labor costs, including reducing positions by approximately 10,000 based on ratified and tentative agreements reached with the various workgroups, outsourcing a portion of American’s aircraft maintenance work (including seeking the closure of our Fort Worth Alliance Airport maintenance base) and certain airport fleet service clerk work.
The business plan as formulated in February 2012 contemplated the termination of American's defined benefit pension plans. On March 7, 2012, the Company announced that, in working with Creditors' Committee and the PBGC, it developed a solution that would allow the Company to pursue a freeze of its defined benefit pension plans for non-pilot employees instead of seeking termination. On September 14, 2012, the Company sent formal legal notice to all defined benefit plan participants and beneficiaries announcing that it was in fact freezing each of the defined benefit pension plans effective November 1, 2012. For eligible non-pilot employees, a replacement benefit will begin under the $uper $aver 401(k) Plan starting November 1, 2012, with the Company matching employee contributions up to 5.5 percent of eligible earnings.
The Company also announced its plans to terminate the Pilot B Plan, a defined contribution plan, on November 30, 2012. The Company continues to work with the APA, PBGC, and U. S. Treasury Department to develop a solution to certain structural aspects of the Pilot A Plan, a defined benefit plan, that would preclude the need to seek a termination of that Plan. As the Company does not yet have a consensual agreement with the APA, details concerning a replacement retirement benefit for pilots are not known at this time.

The business plan as formulated in February 2012 contemplated discontinuing subsidized retiree medical coverage for current employees. The Company announced its plans to modify its subsidized retiree medical coverage effective November 1, 2012. Those who initiate retiree medical coverage on or after November 1, 2012 will go into a new retiree medical program. For those who retire under age 65, two medical options will be available, but the Company will not be subsidizing them. Those who retire at age 65 and over may purchase a guaranteed-issue Medicare supplement plan. Flight attendants and TWU-represented employees will receive a refund of their prefunding contributions within 120 days of November 1, 2012.

On August 15, 2012, the Company filed a proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired and initiated retiree medical coverage before November 1, 2012.  On September 20, 2012, the Company opened negotiations with the Retiree Committee, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage for former employees who retired and initiated coverage before November 1, 2012.  Those negotiations are continuing. 

As our restructuring efforts move forward, we will continue to realize increasingly greater cost savings in the coming quarters, and we are on track to achieve our targeted savings.
Many of our competitors took similar actions when they went through the bankruptcy process. We hope to implement any as yet unresolved cost reductions and other changes consensually; however, there can be no assurance that we will be able to do so. In certain circumstances described under “Chapter 11 Proceedings – General Information” above, we may be able, by complying with various provisions of the Bankruptcy Code and with Bankruptcy Court approval, to reject executory contracts and unexpired leases, collective bargaining agreements and financing agreements with respect to American’s Aircraft Property.
Our business plan also targets approximately $1 billion in annual revenue enhancements by 2017 by renewing and optimizing

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American’s fleet, building network scale and alliances, and modernizing American’s brand, products and services. With the aircraft commitments discussed in Note 3 to the Condensed Consolidated Financial Statements, we anticipate that American’s mainline jet fleet will be the youngest in North America by 2017. We expect that this new fleet will permit more profitable flying due to markedly improved fuel and maintenance costs and enhanced versatility to better match aircraft size to the markets American serves. We intend to build network scale and alliances by increasing departures across American’s five key markets – Dallas/Fort Worth, Chicago, Miami, Los Angeles and New York – by approximately 20% over the next five years and by increasing international flying. Finally, we plan to invest several hundred million dollars annually to enhance the customer experience and attract high-value customers.
Additionally, to ensure that employee performance is rewarded and aligned with successful operations after we emerge from the Chapter 11 process, the Company expects that most employees will participate in a profit sharing plan which, beginning with the first dollar of pre-tax income, would pay awards totaling 5% of all pre-tax income.
The implementation of our business plan, as noted above, will require collaboration with the Creditors’ Committee, various economic stakeholders and union representatives, and in some instances, approval of the Bankruptcy Court. We cannot at this point predict whether discussions with these groups will be successful or whether the Creditors’ Committee or others will support our positions regarding the elements of the business plan. Further, there can be no assurance that we will be able to implement the business plan successfully and return the Company to profitability.


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GDS Discussion
Over the past several years, American has been developing a direct connection technology, designed to distribute its fare content and bookings capability directly to travel agents in order to achieve greater efficiencies, cost savings, and technological advances in the distribution of our services. Historically, approximately 60% of American’s bookings are booked through travel agencies, which typically use one or more global distribution systems, or “GDSs”, to view fare content from American and other industry participants. American is currently in litigation with two of the GDSs, Sabre and Travelport, and with Orbitz, a large online travel agency that is affiliated with Travelport. In that litigation, American alleges, among other things, that the one or more of the defendants (1) engaged in anticompetitive business practices to preserve GDS monopoly power in the distribution of airlines services through travel agencies; (2) conspired with each other to preserve the existing GDS business model; (3) engaged in numerous actions intended to punish American for supporting a competitive alternative to the GDSs, including biasing displays against American’s services and imposed large price increases; (4) organized, supported, and monitored a boycott of American services among travel agencies; and (5) interfered with American’s contractual relationships, including an obligation owed by Orbitz to cooperatively work with American to receive American’s content through a direct connect.
On November 1, 2010, after Orbitz refused to receive American’s content through American’s newest version of direct connect, American notified Orbitz that it intended to terminate its contracts and agency relationship. On November 5, 2010, Travelport, the GDS used by Orbitz, filed a lawsuit against American seeking a ruling that a notice of termination delivered by American to Orbitz breached American’s content distribution agreement with Travelport, and Travelport subsequently obtained a preliminary injunction which precluded American from terminating its relationship with Orbitz prior to September 1, 2011. On December 3, 2010, Travelport doubled the booking fees it charges American for some international point-of-sale bookings through Travelport, and made it more difficult for travel agents to find American’s fares on the Travelport system display. We believe these actions violate our agreement with Travelport. In response, American filed counterclaims against Travelport for breach of contract, and announced that it would charge travel agencies for bookings through Travelport in an effort to offset the booking fee increase. That surcharge was never implemented. American and Travelport subsequently entered into a short term extension of its agreement, which also provides that neither American nor Orbitz will terminate their agency relationship during the term of this short term extension. There can be no assurance that we will ultimately prevail in the lawsuit filed by Travelport or on our counterclaims, or that American, Travelport, and Orbitz will enter into acceptable long term agreements The litigation initiated by Travelport in response to American’s decision to terminate Orbitz is currently stayed as a result of the Chapter 11 filing. We will vigorously pursue our counterclaims and rights in the litigation.
On January 1, 2011, Expedia discontinued selling American tickets on its website. Prior to that date, approximately 5.4% of American’s passenger revenue, on an annualized basis, was booked through Expedia. On April 4, 2011, American and Expedia entered into a new agreement which returned American’s fares to Expedia’s web site, and Expedia agreed to transition its American bookings to American’s direct connect via integration services provided by a GDS.
In late 2010, and in direct response to the perceived threat of American’s direct connect, Sabre began biasing its display against American. On January 5, 2011, Sabre instituted pervasive and massive bias against American throughout its system, making it substantially more difficult for travel agents to find American’s fares on the Sabre system display. Sabre also doubled the fees it charges American for bookings through its GDS, and purported to terminate its agreement with American, effective July 2011. Sabre alleges that our contract allowed it to take these actions in response to statements that American made in the press concerning our direct connection technology. Sabre is the largest non-direct source of American’s bookings. In 2010, over $7 billion of American’s passenger revenues were generated from bookings made through the Sabre GDS. In response to Sabre’s actions, on January 10, 2011, American filed a lawsuit against Sabre in Texas state court on several grounds. The court temporarily enjoined Sabre from “biasing” or making it more difficult to find American’s fares on the Sabre GDS, and set a preliminary injunction hearing for February 14, 2011. On January 23, 2011, American and Sabre entered into a Stand Down Agreement that suspended the litigation until June 1, 2011 and vacated the February 14 hearing date. During this period, Sabre agreed (1) not to take any actions to bias the display of American’s services; (2) to return to the pricing in effect on January 4, 2011; and (3) withdraw its notice of termination of certain parts of the agreement. Following the expiration of this Stand Down Agreement, American filed new antitrust claims in both federal and Texas state courts, and Sabre has filed breach of contract and antitrust claims against American. Travelport has also filed antitrust claims against American. On August 29, 2011, Sabre and American entered into an agreement that extended their agreement, subject to certain pricing and other adjustments, during the period in which American’s Texas state court claims are pending. The state court trial against Sabre began on October 9, 2012. There can be no assurance that we will ultimately prevail in the lawsuits against Sabre or that we will enter into acceptable long term agreements.
While we believe that some of the bookings through Orbitz, Travelport, and Sabre have transitioned or will transition to other distribution channels, such as other travel agencies, metasearch sites and American’s AA.com web site, it is not possible at this time to estimate what the ultimate impact would be to our business if we are unsuccessful in resolving one or more of these matters. If as a result of these matters it becomes more difficult for our customers to find and book flights on American, we could be put at a competitive disadvantage against our competitors and this may result in lower bookings. If we are unable to sell American

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inventory through any or all of these channels, our level of bookings, business and results of operations could be materially adversely affected. We also believe the actions taken by Travelport and Sabre described above are not permitted by the applicable contracts. We intend to vigorously pursue our claims and defenses in the lawsuits described above, but there can be no assurance of the outcome of any such lawsuit.
Contingencies
The Company has certain contingencies resulting from litigation and claims incident to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the information currently available, the views of legal counsel, the nature of contingencies to which the Company is subject and prior experience, that the ultimate disposition of the litigation (except as noted in “Legal Proceedings” in Part II, item 1) and claims will not materially affect the Company’s consolidated financial position or results of operations. When appropriate, the Company accrues for these contingencies based on its assessments of the likely outcomes of the related matters. The amounts of these contingencies could increase or decrease in the near term, based on revisions to those assessments.
As a result of the Chapter 11 Cases, virtually all material prepetition pending litigation against the Company is stayed. However, the Company has entered into a stipulation with Sabre to permit the Sabre related litigation to proceed.
Other Events
On December 7, 2011, the Communications Workers of America (CWA) filed an application with the National Mediation Board (NMB) requesting an election to be represented by the CWA among American's passenger service employee group.  On February 14, 2012, before the NMB completed its analysis of whether the CWA had submitted a sufficient showing of interest to permit an NMB-authorized election, a new law was enacted that increased the minimum required showing of interest from 35 percent to 50 percent.  On April 19, 2012, the NMB issued its final determination on the list of eligible voters in the group, and authorized an election based on the 35 percent showing of interest.  On April 23, 2012, American filed a request with the NMB asking it to reconsider its decision to order an election in light of the new law.  On May 2, 2012, American filed a lawsuit in a Fort Worth federal district court, asking the court to declare that the new law prohibits the NMB from ordering an election unless the union has submitted a showing of interest of at least 50 percent.  On May 3, 2012, the NMB, by a vote of 2-1, rejected American's April 23 reconsideration request. 
On June 6, 2012, while the court litigation was pending, the NMB issued a determination that it would proceed with the election, and that the election process would commence on June 14, 2012, with the mailing of election notices.  American filed a request for and was granted a temporary restraining order, prohibiting the NMB from proceeding with the election.  On June 21, 2012, a hearing was held on the merits of American's legal claim and the Company's request for permanent injunctive relief.   On June 22, 2012, the court issued a decision in American's favor on the merits of its claim, declaring that the new 50 percent standard governs the NMB's conduct with respect to the CWA's election application.  The court also permanently enjoined the NMB from proceeding with any of its pre-election processes unless it determines the CWA's application is supported by a showing of interest of at least fifty percent.  On June 25, 2012, the NMB filed a notice of appeal indicating its intent to appeal this decision to the Fifth Circuit U.S. Court of Appeals, and on October 3, 2012, a panel of the court issued a decision to vacate the district court's June 22, 2012 decision and remand the matter to that court with instructions to dismiss the Company's complaint.  The panel's ruling will become effective with its issuance of a mandate.  On October 9, 2012, American asked the full Fifth Circuit Court of Appeals to reconsider the panel's ruling.   If the panel's ruling is not overturned and the Company's complaint is dismissed, the NMB may proceed with the election to determine if CWA will represent American's passenger service employee group.   
On August 31, 2012, AMR and US Airways Group, Inc. announced the two parties signed agreements to exchange confidential information. Other parties have also signed confidentiality agreements with AMR, which permit for the confidential exchange of information and discussion between AMR and those parties. The Company is in close collaboration with the Creditors' Committee to work in good faith to evaluate a potential combination. There can be no assurance that any transaction will take place.
American has experienced some labor related operational disruption resulting in the cancellation or delay of a substantial number of flights. In an effort to reduce the impacts of the disruption, in mid-September 2012, American reduced its capacity by approximately one percent, and such capacity reduction is scheduled to extend through mid-November 2012.  This situation may continue to have an adverse impact on the Company, and it is too early to estimate the impact.





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Financial Highlights
The Company recorded a consolidated net loss of $238 million in the third quarter of 2012 compared to a net loss of $162 million in the same period last year. The Company’s consolidated net loss reflects $137 million of charges to reorganization items and $211 million of severance related costs, offset by higher operating revenues. Consolidated passenger revenue increased by $106 million to $5.7 billion for the third quarter of 2012 compared to the same period last year driven by a strong yield environment and increased international load factors. Cargo and other revenues decreased by $53 million to $772 million for the third quarter of 2012 compared to the same period last year. Mainline passenger unit revenues increased 4.5 percent in the third quarter of 2012 due to a 3.7 percent increase in passenger yield year-over-year. This also reflects an increase in load factor of approximately 0.6 points compared to the third quarter of 2011.
Operating expenses increased $41 million during the third quarter primarily due to special charges of $211 million for severance related cost associated with the planned reduction of employees in certain work groups, offset by lower fuel expense and decreased aircraft and facility rent as leases are modified during the Chapter 11 restructuring process. Charges to reorganization items, net, of $137 million for the third quarter of 2012 are primarily from estimated claims associated with restructuring the financing arrangements for certain aircraft.

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LIQUIDITY AND CAPITAL RESOURCES
The matters described herein, to the extent that they relate to future events or expectations, may be significantly affected by the Chapter 11 Cases. Those proceedings will involve, or may result in, various restrictions on our activities, limitations on financing, the need to consult with the Creditors’ Committee and other key stakeholders and to obtain Bankruptcy Court approval for various matters, and uncertainty as to relationships with vendors, suppliers, customers, labor and others with whom we may conduct or seek to conduct business. The Debtors cannot predict the impact, if any, that its Chapter 11 Cases might have on these obligations. For further information regarding the Chapter 11 Cases, see Note 1 to the Condensed Consolidated Financial Statements.
Cash, Short-Term Investments and Restricted Assets
At September 30, 2012, the Company had $4.2 billion in unrestricted cash and short-term investments and $847 million in restricted cash and short-term investments, both at fair value, versus $4.0 billion in unrestricted cash and short-term investments and $738 million in restricted cash and short-term investments at December 31, 2011.
The Company’s unrestricted short-term investment portfolio consists of a variety of what the Company believes are highly liquid, lower risk instruments including money market funds, government agency investments, repurchase investments, short-term obligations, corporate obligations, bank notes, certificates of deposit and time deposits. AMR’s objectives for its investment portfolio are (1) the safety of principal, (2) liquidity maintenance, (3) yield maximization, and (4) the full investment of all available funds. The Company’s 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 its portfolio and enforces limits on the proportion of funds invested with one issuer, one industry, or one type of instrument. The Company regularly assesses the market risks of its portfolio, and believes that its established policies and business practices adequately limit those risks. As a result, the Company does not anticipate any material adverse impact from these risks.
Significant Indebtedness and Future Financing
Indebtedness and obtaining sufficient financing are significant risks to the Company as discussed more fully in the Risk Factors included under Item 1A of the 2011 Form 10-K.
The Chapter 11 petitions triggered defaults on substantially all debt obligations of the Debtors. However, under Section 362 of the Bankruptcy Code, the commencement of a Chapter 11 case automatically stays most creditor actions against the Debtors’ estates.
The Company has financing commitments that, subject to certain conditions, cover all of the aircraft scheduled to be delivered to it through 2016, except four Boeing 737 aircraft for which it is currently seeking to arrange financing, and 16 widebody aircraft that it expects to finance at a later date. These financing commitments are subject to various terms and conditions. In addition, in some instances, they are also subject to collaboration with the Creditors' Committee and other key stakeholders and to the approval of the Bankruptcy Court. The Company cannot predict what the outcome of these discussions and the Bankruptcy Court process will be.
In the remainder of 2012, including liabilities subject to compromise, the Company will be contractually required to make approximately $919 million of principal payments on long-term debt and approximately $11 million in principal payments on capital leases, and the Company expects to spend approximately $690 million on capital expenditures, including aircraft commitments.

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 postpetition 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 (each, an Aircraft and, collectively, the Aircraft) as part of a new enhanced equipment trust certificate (EETC) financing (the New EETC) to be offered pursuant to Rule 144A under the Securities Act of 1933 as amended, and (ii) use cash on hand (including proceeds of the New EETC) to indefeasibly repay the existing prepetition obligations secured by the 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 “13.0% 2009-2 Senior Secured Notes”) and an EETC financing entered into by American in October 2011 (the “Series 2011-2 Pass Through Certificates”), in each case without the payment of any make-whole amount or other premium or prepayment penalty.

Subject to, among other things, the entry of such an order by the Bankruptcy Court, American expects the New EETC structure to be substantially similar to the structure of the Series 2011-2 Pass Through Certificates, other than the economic terms (such as the interest rate) and certain terms and conditions to be in effect during its current Chapter 11 bankruptcy case.



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As discussed above under “Chapter 11 Reorganization”, we intend to use the benefits afforded by the Bankruptcy Code to restructure the terms of much of our indebtedness. We cannot predict at this time the outcome of our efforts to restructure our indebtedness. It is possible that holders of our unsecured indebtedness may lose all or a substantial portion of their investment in our unsecured indebtedness upon the implementation of any plan of reorganization that is ultimately accepted by the requisite number of creditors and approved by the Bankruptcy Court.
See Note 3 to the Condensed Consolidated Financial Statements for a schedule of the Company’s aircraft commitments and payments.
Credit Ratings
AMR’s and American’s credit ratings are significantly below investment grade. The outcome of the Chapter 11 Cases, which cannot be determined at this time, could further increase the Company’s borrowing or other costs and further restrict the availability of future financing.
Credit Card Processing and Other Reserves
American has agreements with a number of credit card companies and processors to accept credit cards for the sale of air travel and other services. Under certain of these agreements, the credit card processor may hold back a reserve from American’s credit card receivables following the occurrence of certain events, including the failure of American to maintain certain levels of liquidity (as specified in each agreement).
Under such agreements, the amount of the reserve that may be required generally is based on the processor’s exposure to the Company under the applicable agreement and, in the case a reserve is required because of AMR’s failure to maintain a certain level of liquidity, the amount of such liquidity. As of September 30, 2012, the Company was not required to maintain any reserve under such agreements. If circumstances were to occur that would allow the credit card processor to require the Company to maintain a reserve, the Company’s liquidity would be negatively impacted.
Pension Funding Obligation
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, and the Pension Relief Act of 2010.
As a result of the Chapter 11 Cases, AMR contributed $6.5 million to its defined benefit pension plans on January 13, 2012 to cover the post-petition period of November 29, 2011 to December 31, 2011. As a result of only contributing the post-petition portion of the required contribution, the PBGC filed a lien against certain assets of the Company’s non-debtor subsidiaries. On April 13, 2012, the Company contributed $86 million to its defined benefit pension plans to cover the post-petition period of January 1, 2012 to March 31, 2012. Additionally, the Company contributed $86 million on July 13, 2012 to its defined benefit pension plans to cover the post-petition period of April 1, 2012 to June 30, 2012. On September 13, 2012, the Company contributed $6.9 million to its defined benefit pension plans, and on October 15, 2012, the Company contributed $86 million to its defined benefit pension plans to cover the post-petition period of July 1, 2012 to September 30, 2012. The Company's 2012 contributions to its defined benefit pension plans are subject to the Chapter 11 Cases, as discussed above.
Cash Flow Activity
At September 30, 2012, the Company had $4.2 billion in unrestricted cash and short-term investments, which is an increase of $225 million from the balance as of December 31, 2011. Net cash provided by operating activities in the nine month period ended September 30, 2012 was $1.6 billion, as compared to $346 million over the same period in 2011. The increase is primarily the result of a stronger year over year revenue environment and the Company’s Chapter 11 Cases as described in Note 1 to the Condensed Consolidated Financial Statements.
The Company made debt and capital lease payments of $991 million and invested $1,153 million in capital expenditures in the first nine months of 2012. Capital expenditures primarily consisted of new aircraft and certain aircraft modifications.

The Company 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.
Due to the current value of the Company’s derivative contracts, some agreements with counterparties require collateral to be deposited by the counterparty or the Company. As of September 30, 2012, the cash collateral from AMR held by counterparties was $2 million as compared to cash collateral held by AMR from counterparties of $0.5 million at December 31, 2011. Cash held by counterparties at September 30, 2012 is included in Other assets. Cash held at December 31, 2011 from counterparties is included in short-term investments. As a result of movements in fuel prices, the cash collateral amounts held by AMR or the

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counterparties to such contracts, as the case may be, can vary significantly.
Certain of the Company’s debt financing agreements contain loan to value ratio covenants and require the Company to periodically appraise the collateral. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, the Company may be required to subject additional qualifying collateral (which in some cases may include cash collateral) or, in the alternative, to pay down such financing, in whole or in part, with premium (if any). See Note 6 to the Condensed Consolidated Financial Statements for further information.
War-Risk Insurance
The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines through September 30, 2013, covering losses to employees, passengers, third parties and aircraft. If the U.S. government were to cease providing such insurance in whole or in part, it is likely that the Company could obtain comparable coverage in the commercial market, but the Company would incur substantially higher premiums and more restrictive terms. There can be no assurance that comparable war-risk coverage will be available in the commercial market. If the Company is unable to obtain adequate war-risk coverage at commercially reasonable rates, the Company would be adversely affected.


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RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2012 and 2011
REVENUES
The Company’s revenues increased approximately $53 million, or 0.8 percent, to $6.4 billion in the third quarter of 2012 from the same period last year driven by a strong yield environment and increased international load factors. American’s passenger revenues increased by 1.9 percent, or $93 million, on 2.5 percent lower capacity of 39.0 billion available seat miles (ASM). American’s passenger load factor increased 0.6 points while passenger yield increased by 3.7 percent to 14.7 cents. This resulted in an increase in passenger revenue per available seat mile (RASM) of 4.5 percent to 12.6 cents. American derived approximately 60 percent of its passenger revenues from domestic operations and approximately 40 percent from international operations (flights serving international destinations). Following is additional information regarding American’s domestic and international RASM and capacity:
 
Three Months Ended September 30, 2012
 
RASM
(cents)
 
Y-O-Y
Change
 
ASMs
(billions)
 
Y-O-Y
Change
DOT Domestic
12.20

 
3.8
%
 
22.7

 
(3.3
)%
International
13.16

 
5.3

 
16.3

 
(1.3
)
DOT Latin America
14.68

 
4.0

 
7.4

 
1.8

DOT Atlantic
12.01

 
2.9

 
6.5

 
(3.1
)
DOT Pacific
11.55

 
15.9

 
2.3

 
(5.7
)
The Company’s Regional Affiliates include two wholly owned subsidiaries, American Eagle Airlines, Inc. and Executive Airlines, Inc., and an independent carrier with which American has a capacity purchase agreement, Chautauqua Airlines, Inc. (Chautauqua).
Regional Affiliates’ passenger revenues, which are based on industry standard proration agreements for flights connecting to American flights, increased $13 million, or 1.8 percent, to $748 million as a result of higher yield and increased traffic. Regional Affiliates’ traffic increased 0.6 percent to 2.6 billion revenue passenger miles (RPMs), on a capacity decrease of 0.8 percent to 3.5 billion ASMs, resulting in a 1.1 point increase in passenger load factor to 76.4 percent.
Cargo revenues decreased 11.2 percent, or $20 million, to $156 million primarily as a result of decreased freight and mail yields.
Other revenues decreased 5.1 percent, or $33 million, to $616 million due to fewer third party ground handling contracts and lower ancillary revenues.
OPERATING EXPENSES
The Company’s total operating expenses increased 0.7 percent, or $41 million, to $6.4 billion in the third quarter of 2012 compared to the same period in 2011. American’s mainline operating expenses per ASM increased 3.8 percent to 14.5 cents. The increase in operating expense was largely due to charges of approximately $211 million for severance related cost associated with the planned reduction of employees in certain work groups. Other increases in operating expenses were largely offset by decreased aircraft and facility rent as leases are modified during the Chapter 11 restructuring process.
 
(in millions)
Operating Expenses
Three Months
Ended September 30, 2012
 
Change from
2011
 
Percentage
Change
 
Aircraft fuel
$
2,180

 
$
(75
)
 
(3.3
)%
(a)
Wages, salaries and benefits
1,783

 
7

 
0.4

  
Other rentals and landing fees
329

 
(34
)
 
(9.4
)
(b)
Maintenance, materials and repairs
347

 
2

 
0.7

 
Depreciation and amortization
256

 
(17
)
 
(6.5
)
 
Commissions, booking fees and credit card expense
277

 
(8
)
 
(2.7
)
  
Aircraft rentals
137

 
(28
)
 
(16.7
)
(c)
Food service
139

 
2

 
1.6

  
Special charges
211

 
211

 

(d)
Other operating expenses
719

 
(19
)
 
(2.6
)
 
Total operating expenses
$
6,378

 
$
41

 
0.7
 %
 

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(a)
Aircraft Fuel decreased as a result of lower price per gallon of 1.4% and decreased consumption as a result of reduced capacity.
(b)
Other rentals and landing fees decreased primarily as a result of the Company’s Chapter 11 Cases as described in Note 1 to the Condensed Consolidated Financial Statements.
(c)
Aircraft rental expense decreased primarily as a result of the Company’s Chapter 11 Cases as described in Note 1 to the Condensed Consolidated Financial Statements.
(d)
Special charges consist of $211 million of severance related charges.
OTHER INCOME (EXPENSE)
Other income (expense) consists of interest income and expense, interest capitalized and miscellaneous—net.
An increase in returns on short-term investment balances caused an increase in interest income of $0.4 million, or 6.7 percent, to $7 million for the third quarter 2012 compared to the same period last year. Interest expense decreased $50 million, or 23.8 percent, to $161 million primarily as a result of the Company’s Chapter 11 Cases as described in Note 1 to the Condensed Consolidated Financial Statements.
REORGANIZATION ITEMS, NET
Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred as a direct result of the Chapter 11 Cases. The following table summarizes the components included in reorganization items, net on the Consolidated Statements of Operations for the three months ended September 30, 2012:
(in millions)
 
Pension and postretirement benefits
$
(66
)
Aircraft financing renegotiations and rejections (1)
133

Treatment of facility bond related obligations(2)

Professional fees
51

Other
19

Total reorganization items, net
$
137

 
(1) 
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to the rejection or modification of financings related to aircraft. The Debtors record an estimated claim associated with the rejection or modification of a financing when the motion is filed with the Bankruptcy Court to reject or modify such financing and the Debtors believe that it is probable the motion will be approved by all parties, and there is sufficient information to estimate the claim. See above, “Special Protection Applicable to Leases and Secured Financing of Aircraft and Aircraft Equipment,” for further information.

(2) 
Amounts include allowed claims (claims approved by the Bankruptcy Court) and estimated allowed claims relating to entry of orders treating as unsecured claims with respect to facility agreements supporting certain issuances of special facility revenue bonds. The Debtors record an estimated claim associated with the treatment of claims with respect to facility agreements when the applicable motion is filed with the Bankruptcy Court and the Debtors believe that it is probable that the motion will be approved, and there is sufficient information to estimate the claim. See above, “Rejection of Executory Contracts,” for further information.
Claims related to reorganization items are reflected in liabilities subject to compromise on the Condensed Consolidated Balance Sheet as of September 30, 2012.
INCOME TAX
The Company did not record a net tax provision (benefit) associated with its net loss for the three months ended September 30, 2012 or September 30, 2011 due to the Company providing a valuation allowance, as discussed in Note 5 to the Condensed Consolidated Financial Statements.

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OPERATING STATISTICS
The following table provides statistical information for American and Regional Affiliates for the three months ended September 30, 2012 and 2011.
 
Three Months Ended September 30,
 
2012
 
2011
American Airlines, Inc. Mainline Jet Operations
 
 
 
Revenue passenger miles (millions)
33,302

 
33,898

Available seat miles (millions)
38,955

 
39,936

Cargo ton miles (millions)
425

 
444

Passenger load factor
85.5
%
 
84.9
%
Passenger revenue yield per passenger mile (cents)
14.74

 
14.21

Passenger revenue per available seat mile (cents)
12.60

 
12.06

Cargo revenue yield per ton mile (cents)
36.71

 
39.54

Operating expenses per available seat mile, excluding Regional Affiliates (cents) (*)
14.45

 
13.93

Fuel consumption (gallons, in millions)
618

 
635

Fuel price per gallon (dollars)
3.11

 
3.15

Operating aircraft at period-end
603

 
616

Regional Affiliates
 
 
 
Revenue passenger miles (millions)
2,649

 
2,634

Available seat miles (millions)
3,468

 
3,497

Passenger load factor
76.4
%
 
75.3
%
(*)Excludes $764 million and $800 million of expense incurred related to Regional Affiliates in 2012 and 2011, respectively.
Operating aircraft at September 30, 2012, included:
American Airlines Aircraft
 
AMR Eagle Aircraft
 
Boeing 737-800
186

Bombardier CRJ-700
47

Boeing 757-200
106

Embraer RJ-135
21

Boeing 767-200 Extended Range
15

Embraer RJ-140
59

Boeing 767-300 Extended Range
58

Embraer RJ-145
118

Boeing 777-200 Extended Range
47

Super ATR
13

McDonnell Douglas MD-80
191

Total
258

Total
603

 
 
The average aircraft age for American’s and AMR Eagle’s aircraft is 14.9 years and 10.1 years, respectively.
Almost all of the Company’s owned aircraft are encumbered by liens granted in connection with financing transactions entered into by the Company.
Of the operating aircraft listed above, four Boeing 757-200 aircraft, one McDonnell Douglas MD-80 aircraft, and one Boeing 767-200 Extended Range aircraft were in temporary storage as of September 30, 2012.
Owned and leased aircraft not operated by the Company at September 30, 2012, included:
American Airlines Aircraft
 
AMR Eagle Aircraft
 
Boeing 737-800
1

Saab 340B
41

Boeing 757-200
5

Total
41

McDonnell Douglas MD-80
44

 
 
Total
50

 
 
All operating aircraft, including those operated by AMR Eagle, are owned or leased by American as of September 30, 2012.


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For the Nine Months Ended September 30, 2012 and 2011
REVENUES
The Company’s revenues increased approximately $895 million, or 5.0 percent, to $18.9 billion in the first nine months of 2012 from the same period last year driven by a strong yield environment and increased load factors. American’s passenger revenues increased by 5.9 percent, or $795 million, on capacity reduction of 1.6 percent to 115.2 billion available seat miles (ASM). American’s passenger load factor increased 1.3 points while passenger yield increased by 5.9 percent to 14.9 cents. This resulted in an increase in passenger revenue per available seat mile (RASM) of 7.6 percent to 12.4 cents. American derived approximately 60 percent of its passenger revenues from domestic operations and approximately 40 percent from international operations (flights serving international destinations). Following is additional information regarding American’s domestic and international RASM and capacity:
 
Nine Months Ended September 30, 2012
 
RASM
(cents)
 
Y-O-Y
Change
 
ASMs
(billions)
 
Y-O-Y
Change
DOT Domestic
12.30

 
7.3
%
 
67.9

 
(2.2
)%
International
12.59

 
8.0

 
47.3

 
(0.6
)
DOT Latin America
14.10

 
7.2

 
23.2

 
2.8

DOT Atlantic
11.36

 
6.5

 
17.2

 
(5.8
)
DOT Pacific
10.58

 
13.3

 
6.9

 
2.0

Regional Affiliates’ passenger revenues, which are based on industry standard proration agreements for flights connecting to American flights, increased $185 million, or 9.1 percent, to $2.2 billion as a result of higher yield and increased traffic. Regional Affiliates’ traffic increased 4.8 percent to 7.7 billion revenue passenger miles (RPMs), on a capacity increase of 1.8 percent to 10.2 billion ASMs, resulting in a 2.1 point increase in passenger load factor to 75.2 percent.
Cargo revenues decreased 6.2 percent, or $33 million, to $499 million primarily as a result of decreased freight and mail yields.
Other revenues decreased 2.7 percent, or $52 million, to $1.9 billion primarily as a result of insurance proceeds related to casualty events in the first quarter of 2011 and fewer third party ground handling contracts.
OPERATING EXPENSES
The Company’s total operating expenses increased 2.9 percent, or $521 million, to $18.8 billion in the first nine months of 2012 compared to the same period in 2011. American’s mainline operating expenses per ASM increased 4.9 percent to 14.4 cents. The increase in operating expense was largely due to a year-over-year increase in fuel prices from $3.01 per gallon in the first nine months of 2011 to $3.19 per gallon in the first nine months of 2012, including the impact of fuel hedging. Fuel expense was the Company’s largest single expense category in the first nine months of 2012 and the price increase resulted in $379 million in incremental year-over-year fuel expense in the first nine months of 2012 (based on the year-over-year increase in the average price per gallon multiplied by gallons consumed, inclusive of the impact of fuel hedging). Further increases in fuel prices and/or disruptions in the supply of fuel would further materially adversely affect the Company’s financial condition and results of operations. The Company also incurred charges of $305 million for severance related costs associated with planned reductions in certain work groups. Other increases in operating expenses were largely offset by decreased aircraft and facility rent as leases are modified during the Chapter 11 restructuring process.
 

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Table of Contents

(in millions)
Operating Expenses
Nine Months
Ended September 
30, 2012
 
Change from
2011
 
Percentage
Change
 
Aircraft fuel
$
6,555

 
$
256

 
4.1
 %
(a) 
Wages, salaries and benefits
5,342

 
80

 
1.5

(b)
Other rentals and landing fees
990

 
(80
)