American Airlines 1998 Annual Report Download

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AMR CORPORATION 1998 ANNUAL REPORT

Table of contents

  • Page 1
    A M R C O R P O R A T I O N 1 9 9 8 A N N U A L R E P O R T

  • Page 2
    ... Highlights Shareholder Essay Customer Essay Employee Essay The Sabre Group Essay Financial Information Eleven-Y ear Comparative Summary Board of Directors and AMR Officers Management-Divisions and Subsidiaries Corporate Information 1 2 6 8 12 16 20 23 58 60 61 62 C O VER American Airlines' new...

  • Page 3
    ... (basic) From continuing operations Net earnings Earnings per common share (diluted) From continuing operations Net earnings Return on equity Ratio of current assets to current liabilities at year-end Average equivalent number of employees Approximate number of common shareholders of record at year...

  • Page 4
    ... member of the AMR family to our customers and to our shareholders. Our record financial performance was also a function, in part, of a very favorable economic environment enjoyed by AMR's largest business, American Airlines. The continued health of the U.S. economy resulted in strong demand for air...

  • Page 5
    ... it has grown, American Airlines - Sabre's largest customer - has benefited from the group's new-found market efficiencies. 3 Our fourth major objective is to create a corporate culture within AMR that involves and excites every employee in every one of our businesses. Involving and exciting every...

  • Page 6
    ... airline network, investing in new aircraft and the company's managers, it is our duty to reward our shareholders by producing the best financial results possible. However, in any service business, the best way to ensure a satisfactory level of profitability is to attract the largest possible share...

  • Page 7
    ... "Chick" Fisher, III, a member of the transform American into one of the world's leading airlines. We owe him many thanks, and we wish Bob and his wife Jan a retirement filled with smooth sailing and good fortune. For our part, all of us at AMR are working hard to build on our 1998 accomplishments...

  • Page 8
    ...aircraft. • American and Japan Airlines announce a broad codeshare program. • AA Cargo reports record revenue ton miles for the first quarter in Latin American markets. • The Sabre Group wins a 10-year, $165-million information technology outsourcing agreement with Gulf Air. • Commuter World...

  • Page 9
    ... the big-six U.S. carriers. • Travelocity enrolls four millionth member and is rated the Internet's "Best Travel Site" by the People's Voice Award. • American Eagle adds 17th regional jet destination. At San Juan, it opens new $6-million gate facility and wins FAA over-water flight certification...

  • Page 10
    ...year, American's passenger traffic was up 1.8 percent, and the airline's load factor, or percentage of total seats filled, was - at 70.2 percent - up 0.7 points versus the prior year. A stable pricing environment helped American increase its yield - or the average amount collected per passenger mile...

  • Page 11
    ...is the airline's largest expense, and lower prices shaved more than $300 million off the company's fuel bill for the year. AMR's regional carrier, American Eagle, performed well in 1998. Driven in part by the introduction of regional jet service in several key markets, passenger traffic increased by...

  • Page 12
    ...planned capacity growth is to avoid a situation in which too many seats are chasing too few customers, as was the case throughout the airline industry in the early 1990s. A nice side benefit of the 10 early aircraft retirements will be approximately $40 million worth of maintenance savings. American...

  • Page 13
    ... its capital structure. Following the completion of American's pilot contract in 1997, the company repurchased 11.5 million shares of AMR common stock to offset any dilution resulting from the options included in that agreement. This was followed by the repurchase of an additional $500 million worth...

  • Page 14
    ...financial performance our sharehold- ers expect will always be dependent upon our ability to meet the demands of our customers. An important element of providing quality airline service is having world-class aircraft, and both American and American Eagle are in the process of upgrading their fleets...

  • Page 15
    ...industry's best service means having a network that best matches the demands of our airline customers. Despite the overall strength of American and American Eagle's domestic networks, they have been weaker in the West Coast and upper Northeast markets. To rectify this, American announced in November...

  • Page 16
    ... from Chicago, Boston and New York, and to Osaka from DFW. The Boston and New York Power Ports services have been deferred due to a lack of available take-off and landing slots in Tokyo, while the Chicago-Tokyo service began in May and 14 New business class seats on international flights DFW...

  • Page 17
    ... class cabin from 14 to 20 seats on more than 100 Super 80 aircraft deployed in key business markets. Facility enhancements included the introduction of Platinum Service Centers and of new Flagship Lounges for our international customers at several airports. American also opened a new Admirals Club...

  • Page 18
    ... the truest reflection of the quality, value and integrity of the American and American Eagle brands has always been our people. We believe there is an unbreakable chain of cause and effect that links how our employees behave, to how our customers respond, to the company's profitability. And how our...

  • Page 19
    ...earnings, topped $300 million. We realize it takes more than money to create a motivated and enthusiastic workforce, determined to do its very best for the company's customers and shareholders. Recognition for a job well done is also important, and American has a myriad of award programs designed to

  • Page 20
    ... company's plans. Formal communication tools include a daily electronic news bulletin sent to employees, a weekly hotline recorded by Chairman Don Carty, a monthly newspaper mailed to employees' homes and a year-round series of Employee Conferences held at locations throughout the American network...

  • Page 21
    ..., a new Employee Health Clinic was opened at Dallas/Fort Worth International Airport, site of American's biggest hub. At the clinic, American employees can receive on-thespot treatment for injuries and illnesses, free of charge and on a completely confidential basis. 19 American Airlines, American...

  • Page 22
    ... leadership in its electronic travel distribution business and of robust growth in its other principal business, information technology solutions. Since its legal separation from American Airlines, and an initial public offering of just less than 20 percent in 1996, The Sabre Group's revenues have...

  • Page 23
    21 customers, including travel agents, corporations and on-line consumers, can use the Sabre system to make reservations with more than 420 airlines, more than 50 car rental companies and nearly 40,000 hotel properties worldwide. As of the end of 1998, over 40,000 travel agencies in more than 100 ...

  • Page 24
    ... Solutions On the other side of Sabre's business - Information Technology Solutions - the company maintains a leading portfolio of airline software solutions that attracted important new outsourcing clients in 1998. In February, Gulf Air signed a 10-year, $165-million agreement with The Sabre Group...

  • Page 25
    CONTENTS Management' s Discussion and Analysis Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to Consolidated Financial Statements Report of Independent Auditors Report of Management 24 ...

  • Page 26
    ... been allocated to a reporting segment. Additional segment information is included in Note 15 to the consolidated financial statements. American Airlines Jet Operations Revenue passenger miles (millions) Available seat miles (millions) Cargo ton miles (millions) Passenger load factor Breakeven load...

  • Page 27
    ... employee travel TO 1 9 9 8 C O M PA R E D 1 9 9 7 Airline Group revenues of service charges and increased service contracts, primarily related to ramp and consulting services. 1 9 9 7 C O M PA R E D TO $17.4 billion in 1998 were up $546 million, or 3.2 percent, versus 1997. American's passenger...

  • Page 28
    .... American's Jet Operations cost per ASM decreased 0.2 percent to 9.25 cents. Wages, salaries and benefits increased $283 million, or 5.2 percent, due primarily to an increase in the average number of equivalent employees, contractual wage rate and seniority increases that are built into the Company...

  • Page 29
    ... cash payment representing American's share of a multi-carrier travel agency class action litigation settlement. The Sabre Group Year Ended December 31, (dollars in millions) an overall increase in the price per booking charged to associates. Revenues from information technology solutions increased...

  • Page 30
    ... due to an increase in the average number of equivalent employees necessary to support The Sabre Group's revenue growth, and wage and salary increases for existing employees. Subscriber incentive expenses increased in order to maintain and expand The Sabre Group's travel agency subscriber base...

  • Page 31
    ... of The Sabre Group approved an additional stock repurchase program for The Sabre Group, under which The Sabre Group will repurchase, subject to certain business and market conditions, up to one million shares of The Sabre Group's Class A common stock. At December 31, 1998, the Company owned...

  • Page 32
    ...continuity strategy, including plans in the event of Year 2000 failures. In developing the Company's proprietary software analysis, remediation and testing methodology for Year 2000 Readiness, it studied the best practices of the Institute 30 upgrading of certain hardware and software that supports...

  • Page 33
    ...'s businesses as well as software licensed to or operated for third parties by The Sabre Group were designed to properly handle the euro. The Company completed the project in 1998. D A L L A S L O V E F I E L D In 1968, as part of an agreement 31 Company is identifying the most likely Year 2000...

  • Page 34
    ..., increased international flying and the broadest and best-executed set of airline alliances. The third objective is to make The Sabre Group the world's leading provider of information technology for the travel and transportation industries. The fourth objective is to create a corporate culture...

  • Page 35
    ...one world , the global alliance linking American's network TM and frequent flyer program with British Airways, Canadian Airlines, Cathay Pacific and Qantas - and later this year Finnair and Iberia - coupled with the expansion of other code-share alliances, the acquisitions of Reno Air and Business...

  • Page 36
    ... in international bookings, market share gains worldwide, price increases and revenues from new promotional and marketing products. The Company expects an improved operating margin for The Sabre Group in 1999 due to a reduction in its Year 2000 Readiness program activity as the Year 2000 Project...

  • Page 37
    ... of aircraft fuel. In order to provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel storage facilities to support its flight operations. The Company also manages the price risk of fuel costs primarily utilizing fuel swap and fuel option contracts...

  • Page 38
    ...Owned Leased Operating Leased Total Average Age (Years) 36 (At December 31, 1998) Seating Capacity American Aircraft Airbus A300-600R Boeing 727-200 Boeing 757-200 Boeing 767-200 Boeing 767-200 Extended Range Boeing 767-300 Extended Range Fokker 100 McDonnell Douglas DC-10-10 McDonnell Douglas DC...

  • Page 39
    ... Commissions to agents Maintenance, materials and repairs Other rentals and landing fees Food service Aircraft rentals Other operating expenses Total operating expenses Operating Income Other Income (Expense) Interest income Interest expense Interest capitalized Gain on sale of stock by subsidiary...

  • Page 40
    ...240; 1997 - $211) Airport operating and gate lease rights, less accumulated amortization (1998 - $161; 1997 - $143) Prepaid pension cost Other 916 312 304 1,510 3,042 $ 22,303 945 325 382 1,062 2,714 $ 20,859 Total Assets The accompanying notes are an integral part of these financial statements.

  • Page 41
    ... 31, (in millions, except shares and par value) 1998 1997 Liabilities and Stockholders' Equity Current Liabilities Accounts payable Accrued salaries and wages Accrued liabilities Air traffic liability Current maturities of long-term debt Current obligations under capital leases Total current...

  • Page 42
    ...from Financing Activities: Payments on long-term debt and capital lease obligations Repurchase of common stock Proceeds from: Sale-leaseback transactions Issuance of long-term debt Exercise of stock options Sale of stock by subsidiary Net cash used for financing activities Net increase (decrease) in...

  • Page 43
    ...December 31, 1996 Net earnings Adjustment for minimum pension liability, net of tax expense of $13 Total comprehensive income Issuance of 312,140 shares pursuant to stock option, deferred stock and restricted stock incentive plans Issuance of 11,500,000 stock options at $5 below market value at date...

  • Page 44
    ...its estimate of the depreciable lives of certain American aircraft types from 20 to 25 years and increased the residual value from five to 10 percent. Spare parts, materials and supplies relating In addition, the Company will depreciate its new Boeing 737-800s and Boeing 777-200IGW s over a period...

  • Page 45
    ... if the exercise price of the Company's stock option grants is at or above the fair market value of the underlying stock on the date of grant. Revenues from information technology services are recognized in the period earned. Revenues from software license fees for standard software products are...

  • Page 46
    ... agencies that will ultimately supervise the remedial activities and the nature of that supervision. In April 1995, American announced an agreement to sell 12 of its McDonnell Douglas MD-11 aircraft to Federal Express Corporation (FedEx). In addition, in March 1998, the Company exercised its option...

  • Page 47
    ... revenue bonds issued by municipalities. At December 31, 1998, the Company had 187 jet aircraft and 39 turboprop aircraft under operating leases, and 86 jet aircraft and 63 turboprop aircraft under capital leases. The aircraft leases can generally be renewed at rates based on fair market value...

  • Page 48
    .... The related As part of the Company's risk management program, AMR uses a variety of financial instruments, including interest rate swaps, fuel swap and option contracts and currency exchange agreements. The Company does not hold or issue derivative financial instruments for trading purposes.

  • Page 49
    ... convert certain lease obligations into dollar-based obligations. Changes in the value of the agreements due to exchange rate fluctuations fuel swap and option contracts to protect against increases in jet fuel prices. Under the fuel swap agreements, American receives or makes payments based on...

  • Page 50
    ...yen per U.S. dollar. FA I R V A L U E S 48 OF operations. F I N A N C I A L I N S T R U M E N T S The fair val- 7 . IN C O M E TA X ES ues of the Company's long-term debt were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated...

  • Page 51
    ... Pensions Other Total deferred tax liabilities Net deferred tax liability Under the 1998 Long Term Incentive Plan, as amended, officers and key employees of AMR and its subsidiaries may be granted stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights...

  • Page 52
    ... labor agreement reached between American and members of the APA, the Company established the Pilots Stock Option Plan (The Pilot Plan). The Pilot Plan granted members of the APA the option to purchase 11.5 million shares of AMR stock at $41.69 per share, $5 less than the average fair market value...

  • Page 53
    ... of stock awards. The Sabre Group has established the 1996 Long Term Incentive Plan (1996 Plan), whereby its officers and other key employees may be granted stock options and other stock-based awards. Initially, 13 million shares of The Sabre Group's Class A Common Stock (Sabre Common Stock) were...

  • Page 54
    ...Airline pilots and flight engineers also participate in defined contribution plans for which Company contributions are determined as a percentage of participant compensation. In October 1997, American spun off the portion of its defined benefit pension plan applicable to employees of The Sabre Group...

  • Page 55
    ... (in millions): Pension Benefits The following assumptions were used by the Company in the measurement of the benefit obligation as of December 31: 1998 1997 1996 Components of net periodic benefit cost Defined benefit plans: Service cost Interest cost Expected return on assets Amortization of...

  • Page 56
    ...securities: Convertible subordinated debentures Convertible preferred stock Employee options and shares Assumed treasury shares purchased Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted-average shares Basic earnings per share from continuing operations...

  • Page 57
    ...Eagle owns two regional airlines which operate as "American Eagle", and provide connecting service to American. The Sabre Group provides electronic distribution of travel through its Sabre® computer reservations system and information technology solutions to the travel and transportation industries...

  • Page 58
    ... attributes operating revenues by geographic region based upon the origin and destination of each flight segment for the Airline Group and location of customer for The Sabre Group. The Company's tangible assets consist primarily of flight equipment which is mobile across geographic markets and...

  • Page 59
    ..., effective communication of policies and procedures, selection of competent financial managers and development and maintenance of financial planning and reporting systems. Management continually monitors the system for compliance. AMR maintains a strong internal auditing program that independently...

  • Page 60
    ...90 5.59 20,451 2,737 1,790 - $ 22,303 $ 2,436 $ 1,764 - Long-term debt, less current maturities Obligations under capital leases, less current obligations Non-redeemable preferred stock Convertible preferred stock, common stock and other stockholders' equity2 Common shares outstanding at year-end...

  • Page 61
    A M R C O RPO RAT IO N 1995 1994 1993 1992 1991 1990 1989 1988 16,910 15,895 1,015 16,137 15,131 1,006 15,816 15,126 690 14,396 14,421 (25) 12,887 12,882 5 11,720 11,596 124 10,480 9,736 744 8,824 8,018 806 191 162 228 228 (96) (110) (475) (935) (240) (240) (40) (40) 455 455...

  • Page 62
    ..., President and Chief Executive Officer AMR Corporation Chairman, President and Chief Executive Officer American Airlines, Inc. (Air Transportation and Information Systems) Fort Worth, Texas Elected in 1998 Joe M. Rodgers Chairman The JMR Group (Investment Company) Nashville, Tennessee Elected in...

  • Page 63
    ...-Sabre Travel Information Network Arnold J. Grossman Vice PresidentInternational Affairs Jane G. Allen Vice President-Flight Service Arthur J. Torno Vice President-Caribbean and Latin American International Operations Andrew B. Steinberg Senior Vice President, General Counsel and Corporate...

  • Page 64
    ... Paying Agents Chase Manhattan Bank Corporate Trust Securities Window Room 234 - North Building 55 Water Street New York, NY 10041 Citibank, N.A. The AMR Corporation Trading Symbol is AMR. The common stock of AMR Corporation is listed for trading on the New York Stock Exchange. The common stock is...

  • Page 65
    ... stock split. AMR Corporation' s 1998 Annual Report is printed on recycled paper. In order to reduce paper use, as well as to provide more timely and cost-effective information, shareholders can receive financial and other company information by visiting AMR' s Internet site on the World Wide Web...

  • Page 66
    AMR Corporation P.O. Box 619616 Dallas/Fort Worth Airport, Texas 75261-9616 American Airlines' Internet address is http://www.aa.com AMR' s Internet address is http://www.amrcorp.com The Sabre Group' s Internet address is http://www.sabre.com ®